All About Chinese Drywall And Hazard Insurance

Chinese Drywall: Are You Covered For Hazard Loss?
Ronald R. Reitz, CPPA


At a hazard insurance claims panel held during the recent USFN Conference in New Orleans, the issue of Chinese Drywall came up. Specifically, the insurance carrier representatives on the panel were asked whether Chinese Drywall is covered under their LPI or REO hazard insurance policies and how they handle such claims.

For those of you unfamiliar with the Chinese Drywall problem, here is a brief primer: During the construction boom following Hurricanes Katrina, Rita and Wilma, building supplies were in high demand leading many contractors to seek offshore suppliers. Drywall was one of those building materials in short supply and a considerable amount was imported from China between 2004 and 2007.

Many homeowners who moved into these new and repaired homes that were built using Chinese Drywall in Florida, Louisiana, North Carolina and Virginia began to notice strange odors such as the smell of rotten eggs. They also noticed their appliances, air conditioning, copper pipes and electronic equipment were beginning to fail as metal components were decomposing.

Additionally, residents were complaining of headaches, respiratory problems, nosebleeds and other ailments. These occurrences have since been tied to the use of Chinese Drywall. The source of the problem has been linked to the gypsum used in the drywall. It is believed the gypsum came from a mine with sulfur contamination or the material may have been mixed with fly ash from fossil fuel boilers that contained sulfur and other dangerous materials.

In addition to the discussion at the USFN, I have received numerous inquiries about coverage under the hazard policy for damages caused by Chinese Drywall "" which I believe is a separate question.

Let"s start with the basics: Not all damage is covered under a hazard insurance policy. This is a common misconception mortgage servicers and untrained claims recovery providers often share. In order for damage to be covered under the hazard insurance policy, there must first be direct, physical damage to the property. So, my first response to the USFN question was "What is the direct physical damage?" The presence of Chinese Drywall in a dwelling is not a trigger for coverage under a hazard insurance policy.

However, if there is damage to the various appliances, electronics, air conditioning and other components, then this damage may arguably be covered as an ensuing loss. In order for ensuing damage to be covered, the cause of the loss must be identified. It is not my intent to explain all of the complexities of the coverages but suffice it to say this is a complex issue and it varies from state to state.

Recent reports are showing that Chinese Drywall was not just limited to Florida homes as originally suspected. A recent government study is already reporting that many other states may have used Chinese drywall to varying degrees. As the breadth of the potential problems grow, we are likely to see insurers positions on this issue vary.

Some insurers will argue that certain exclusions may apply "" and they may be correct. However, arguments can be made that certain damage is covered under a hazard insurance policy. It is very important that mortgage servicers or their public insurance adjusters be well versed in property insurance policies and prepared to identify where coverage may apply.

Mortgage servicers need to remember that simply because a property contains Chinese Drywall is not enough of a reason to file a claim. The first trigger is for the property to have direct, physical damage caused by a covered cause of loss. Be sure you have properly identified the covered damages prior to filing a claim. The issue of coverage can be complex and is often determined by the state the property is located in. An alternative solution would be to call a public insurance adjusting company and discuss your claim with them.