McCarter and English on Chinese Drywall Litigation Continues

  By Nicholas Insua, Jason Alexander & Michael Smith, Attorneys, McCarter & English, LLP

In their commentary, "Update: Chinese Drywall Litigation Continues," Nicholas Insua, Jason Alexander & Michael Smith of McCarter & English, LLP, first note that  the housing boom of the mid-2000s created a shortage of American-manufactured drywall.  Builders filled the excess demand largely with drywall manufactured in China- an action whose consequences are still being felt around the nation.  The Chinese-manufactured drywall contained excessive amounts of hydrogen sulfide, which, when installed, allegedly damaged metal fixtures and wiring, caused a rotten-egg smell, and led to health problems such as headaches, persistent coughs, and bloody noses.  These allegations set off a series of lawsuits between homeowners, builders, suppliers, and their respective insurers.

The commentary points out that intervening years have brought some clarity to the Chinese drywall situation.  The Consumer Products Safety Commission was assigned to lead the governmental response, and has conducted and released the findings of several studies.  "Most importantly, an early CPSC study identified a strong correlation between complaint homes and the presence of hydrogen sulfide, with an attendant rise in corrosion to silver and copper wiring and fixtures."  In another study, the CPSC also identified the largest manufacturers of allegedly contaminated drywall.  The federal government also responded to the problem with various pieces of legislation.  Of these, the most impactful may be a federal tax break for homeowners affected by the Chinese-manufactured drywall.

In the courts, several key insurance coverage decisions have helped resolve much of what was initially an enormous amount of litigation.  Chinese drywall cases initiated in federal courts were consolidated into a Multidistrict Litigation action, conducted by Judge Eldon Fallon of the Eastern District of Louisiana.  The commentary focuses on that litigation. In a major decision, Judge Fallon determined that at least two exclusions in a standard homeowners' policy precluded coverage for Chinese drywall related damages.  Indeed, "[p]ractically speaking, Judge Fallon's homeowners' policy decision likely will foreclose coverage for homeowners around the nation."  Contractors and suppliers have also sought coverage from their insurers, with a mixed bag of results largely dependent on the relevant state's insurance contract interpretation common law.

The commentary notes that ongoing litigation notwithstanding, probably the biggest news in the Chinese drywall saga came with a recent settlement offer from the German company Knauf.  Knauf, whose subsidiary was the largest single manufacturer of allegedly contaminated drywall, has offered affected homeowners a three-prong settlement that allows for remediation or a cash-out option, and includes a provision for attorney fees.  The total value of the settlement is expected to reach $600 million to $1 billion.  Thus, the commentary concludes that for the many affected homeowners, it appears help may be on the way.

Mr. Insua is a Partner, Mr. Alexander is an Associate, and Mr. Smith is a Law Clerk in the Insurance Coverage Practice Group of McCarter & English, LLP. The views contained herein are those of the authors only and do not necessarily reflect the views of McCarter & English, LLP, or its clients.

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