P/C Insurers Can Handle Chinese Drywall Costs, Says Moody’s

Property/casualty insurers are expected to continue to handle costs for defective Chinese drywall claims in the normal course of business, according to a rating analyst with Moody’s Investors Service.

Losses from Chinese drywall will probably be covered within insurers’ earnings, rather than affecting capital, said Moody’s Investors Services analyst Enrico Leo in a new report. However, the ultimate cost to insurers won’t be known for awhile.

The potential liability for claims will reside with companies that have large geographic concentrations in Florida and/or Louisiana and large market positions in the manufacturer, supplier, contractor and homeowners and condominium classes of business.

While any claims should be manageable, Leo said property damage and litigation defense costs could be significant while bodily injury claims are more elusive and are dependent on further Consumer Product Safety Commission testing.

In “Chinese Drywall Exposure Manageable for U.S. P&C Insurers,” Leo said future studies and court rulings will help to provide a clearer picture of insurers’ share of the total cost.

Consumers have reported noxious odors from the drywall, as well as corrosion of metal items inside the home and short-term health problems.

There have been lawsuits filed against drywall manufacturers, home builders, product installers, suppliers and distributors, but insurers’ payments related to Chinese drywall have been minimal, according to Moody’s.

Although it is early in the legal process, commercial insurers could face liability for property damage and potential claims under the products liability portion of the commercial general liability (CGL) policy. In terms of construction defect liability, Moody’s Leo said he believes most insurers have modified their policies in order to address past construction defect claims, thereby reducing exposure to Chinese drywall liability.

Homeowners have filed many claims; however, personal insurers are generally denying coverage based on the standard pollution exclusion in the homeowners’ policy.

Some companies have already responded to the emerging issue by placing specific policy exclusions for Chinese drywall, while others have stopped offering coverage to contractors in certain geographic areas.

“Until industry and legislative tests and studies are completed, and until courts make some preliminary or precedent rulings, cost-estimate reliability will be limited,” the analyst said.

He expects the litigation process to be a long one in which insurers will incur considerable legal expenses to defend their insureds.

There are several cases now in the courts.

In one, the trustee for the WCI Chinese Drywall Trust filed suit in January against 14 insurance companies in U.S. District Court, Eastern District of Louisiana. More than 700 homeowners could seek recovery through the trust.

Louisiana Attorney General Buddy Caldwell filed suit in Orleans Parish against German drywall manufacturer Knauf Gips KG entities, other international and domestic manufacturers, distributors, importers of alleged toxic Chinese drywall. Several builders were also named in the lawsuit. Caldwell’s lawsuit alleges the state has and will continue to suffer economic loss because of the defendants’ toxic Chinese drywall.

Topics Lawsuits Carriers Claims Louisiana Homeowners China Property Casualty Manufacturing