Florida Insurance Commissioner Chairs December 7 NAIC Chinese Drywall Hearing

Florida Insurance Commissioner Kevin McCarty chaired a public hearing held by the National Association of Insurance Commissioners (“NAIC”) Catastrophe Insurance Working Group of the Property and Casualty Insurance Committee on December 7, 2009 as part of the NAIC 2009 Winter Meeting in San Francisco.

The purpose of the hearing was to gather information regarding any implications to regulators and insurers that may arise as result of the alleged defective Chinese drywall installed in homes across the nation. 

To view the hearing notice, click here.  To view the materials discussed during the hearing, click here.

The hearing focused on the following issues:

• The scope of the problem and what jurisdictions are involved;
• Whether the complaints that have been filed with the United States Consumer Product Safety Commission (“CPSC”) constitutes a complete inventory of the problem;
• Whether homeowners’ insurance policies provide coverage for property damage claims related to the installation of defective Chinese drywall;
• Whether homeowners’ insurance policies provide coverage for health claims related to the installation of defective Chinese drywall;
• To what extent product liability or construction defect insurance coverage is available for the installation of defective Chinese drywall; and
• What the health implications are for defective Chinese drywall and who will be held responsible for the costs associated with health-related claims.

The following is a brief recap of discussions that took place during the hearing.

NAIC Regulatory Division Director Eric Nordman reported the following facts about Chinese drywall (which can be viewed on page nine of the meeting materials packet):

• Over 550 million pounds of Chinese drywall was imported to the United States between 2004 and 2007 and subsequently may have been installed in over 100,000 homes nationwide. The CPSC has recorded over 2,091 reports of defective drywall in 32 states.
• The most common reported problem suggesting the presence of Chinese drywall in a home is the smell of rotten eggs.
  • Resulting property damage claims have included air conditioning equipment failure; pipe, coil and wire corrosion; damage to furniture, fixtures and jewelry. 
  • Bodily injury claims have included respiratory problems such as sinus infections; headaches, persistent cough and bloody noses; asthma attacks and fatigue.
• Claim costs are estimated to include home repairs ($8 to $10 billion), health-related costs (which can be substantial) and legal fees ($5 to $10 billion).
  • Estimated indirect costs, such as loss of use and diminished home values ($2 to $5 billion), are also a factor.
  • To date, the estimated total cost for Chinese drywall claims could be from $15 to $25 billion.

Mr. Nordman reported that, in a highly unusual development since the hearing announcement on November 13, property owners affected by Chinese drywall have sent a number of letters to the NAIC that contain very personal complaints about problems related to Chinese drywall.  The affected homeowners, who are seeking remedies, shared stories that include being forced to abandon their property due to health issues and details on corrosion and strong odors that presumably exist because of the presence of Chinese drywall. 

It was noted that the CPSC was invited to participate in this hearing, but cited the late notice as its reason for not attending.

According to a November 23 CPSC press statement (pages 11-13 of the meeting materials packet), CPSC studies show a strong correlation for homes that contain Chinese drywall and the presence of hydrogen sulfide and corroded metals. 

Mississippi Commissioner of Insurance Mike Chaney said that he believes his state filed the first state Chinese drywall insurance claim.

Property and Casualty Insurers Association of America Director of Policy and Analysis David Kodama gave a presentation on the “causation riddle,” a term signifying that there has been no demonstrated “causation” between Chinese drywall and reported related health and corrosion problems. 

During the presentation, Mr. Kodama acknowledged that damage associated with Chinese drywall will likely not be covered under homeowners’ insurance policies.  

Using the analogy of toxic mold-related claims to illustrate his points, he said that it is essential to remember that an insurance policy is a legal contract and not a construction warranty.  Because a “correlation,” but not causation, of damage from Chinese drywall has been found, Mr. Kodama said that progress toward a solution only will occur once the “various links in the chain of causation” concerning Chinese drywall problems are identified.

United Policyholders co-founder and Executive Director Amy Bach discussed the effects of Chinese drywall on both residential and commercial properties and policyholders.  The estimated cost to remediate homes with Chinese drywall is around $100,000–or one-third of the cost of a home. 

Ms. Bach offered the following suggestions:

• Property owners immediately should commence the safe removal of Chinese drywall and begin taking immediate mitigation measures. Then, if at all, reimbursement should be sought under an insurance policy, or an action should be filed against the various entities in the Chinese drywall chain of distribution.
• Regulators should work with insurance carriers on a protocol for addressing claims for properties affected with Chinese drywall.

Florida Insurance Commissioner Kevin McCarty said it was “indisputable” that the Chinese drywall utilized to rebuild homes that were affected by the 2004/2005 hurricanes is “defective.”

Charles Miller of the Insurance Law Center testified on the matter, during which he identified two main questions regarding the insurance industry’s approach to Chinese drywall claims:

1. Are insurers properly applying the policies to the claims; and
2. Are insurers properly investigating the claims?

Mr. Miller also posed the question of what role insurance regulators can take to ensure that insurers are properly investigating claims and applying the terms of policies.

He added that the pollution and latent defect exclusions are important provisions in homeowners insurance policies.

The hearing was then adjourned.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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