About the Author
Laura Wagner, Vice President of the Construction Practice in the Environmental division of XL Insurance, has over 17 years of experience in the insurance industry working with construction companies on their pollution and professional liability exposures. Her responsibilities include developing and guiding the execution of an underwriting and risk control business plan that provide profitable risk transfer and risk management solutions to the construction industry. In addition, she is responsible for mentoring new construction underwriters and works as a referral underwriter on large construction accounts. Laura.Wagner@xlgroup.com
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REDUCING YOUR RISK FROM CHINESE DRYWALL
By Laura Wagner, Construction Practice Leader, Environmental Risk Control
Defective building materials have long been the source of costly liabilities, litigation and insurance claims for contractors and homeowners. Today, however, the current building product at the center of courtroom debate is drywall products imported from China – said to emit a sulfurous smell, similar to rotting eggs, and the hydrogen sulfide leaching out of the drywall that has been blamed for corroding copper wires, among other problems.
In all likelihood, liability for any of the problems associated with Chinese drywall will not be established unless and until the cause of the problems associated with the product can be identified. Until that time, it is critical to develop a prevention and response program moving forward.
As a first step, rather than rushing to perform expensive inspections, contractors should determine if they were involved in any projects that used Chinese drywall. They can do this by:
- Identifying whether any formal complaints have been received and if so, determining what might have accounted for any problems.
- Determining if their drywall suppliers have received any complaints.
- Reviewing warranty calls/call-back records for reports of problems that could be attributed to Chinese drywall.
- Obtaining and reviewing any documentation (such as bills of lading, purchase orders, etc) that could reveal the origin of the drywall utilized, especially for projects that occurred between 2003 and 2007.
- Reviewing specifications of projects during that time, along with company documentation of compliance with those specifications.
HAVE A PLAN
New imports of drywall from China have decreased dramatically to a very low volume and the customs and Border Patrol is notifying Consumer Product Safety Commission (CPSC) if any new materials are presented for clearance. However, contractors are still wise to develop standardized risk management procedures to address exposures and manage their own risks.
The development of a written program is also an important step in managing this exposure. The program may specify that the contractor will use only US-manufactured products, screen manufacturers, suppliers and distributors, and include a verification and implementation process for documents. Other elements to consider:
- Material Safety Data Sheets: Obtain the drywall MSDS from the supplier and maintain on file. They should specify that the product can contain no corrosive, contaminated, or potentially harmful materials. Specify the composition of the drywall materials to be used.
- Recycled Material Use: Specify that no recycled materials be used to protect against the use of recycled Chinese drywall. Specify that no recycled materials be used or, if used, that they contain no corrosive, contaminated, or potentially harmful products. Random testing and verification can also be required of the supplier or manufacturer.
- Relabeling: Specify that the products used cannot have been relabeled as to their origins, manufacturer, or ASTM compliance.
- Inspection: Once drywall is delivered to the project, a visual inspection should be conducted to verify that it meets project and drywall policy specifications. The inspection may be conducted internally or as a part of a third-party QA/QC protocol, and documentation maintained within the project file.
- Post-construction Protocol: Develop a post-construction program/protocol that includes providing education to occupants and an annual inspection (during the warranty period) to check for signs of corrosion/odor. If it is determined that Chinese drywall may have been used, a contractor may consider taking steps to mitigate damage, which may include the following:
- Alert property owners and other impacted parties
- Notify all insurance carriers
- Review applicable warranty laws to investigate your company's responsibility to repair damaged items
- Develop company strategy with respect to response/remediation/repair protocols
- Consult with an attorney to determine your obligation to mitigate losses and to initiate legal action against others, if appropriate
- Contractual Protection: Add contractual language which requires testing/composition verification, and delineates penalties for failure to comply with specifications to agreements with drywall suppliers/manufacturers.
- Remediation: If remediation is to be performed, a post-remediation verification program must be created that will document conditions upon completion and ensure that the problem will not recur upon repair. The program should address, at a minimum, the following:
- Document/videotape all items removed/repaired during the process.
- Dispose of removed drywall in an approved landfill; currently, new requirements are being enacted in many locations due to the high sulfur content of the drywall.
- Test for any other hazardous substances such as asbestos, radium, etc. which could potentially be present in the drywall prior to removal.
- Verify removal of impacted materials by a third-party QA/QC inspection.
There are more questions than answers with respect to the issue of Chinese made drywall. The investigation continues as to the cause of the problem and the source of the contamination. While no legal decisions have been made regarding coverage, liability, damages, or applicable standards, contractors need to manage their potential risks and take the necessary precautions to avoid the use of questionable drywall.
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INsight is an XL Insurance publication. Copyright 2011. All rights reserved.
"XL Insurance" is a registered trademark of XL Group plc and the global brand used by its insurance company subsidiaries. Coverages are underwritten by Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Insurance Company of New York Inc., XL Select Insurance Company, XL Specialty Insurance Company, XL Insurance Switzerland, XL Insurance (Bermuda) Ltd, XL Insurance Argentina S.A., XL Insurance, Mexico S.A. de C.V., and XL Insurance Company Ltd. Coverage placed with Lloyd’s Syndicate 1209 are managed by XL London Market Ltd and supported by an XL corporate member at Lloyd’s. Lloyd’s ratings are independent of XL Group plc. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions.
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