Chinese Drywall Coverage Litigation Working its Way Through Courts

The Insurance and Reinsurance Report has posted an informative update on the status of several pending lawsuits over coverage for Chinese drywall issues in both homeowner’s and CGL policies.  Having been involved in considerable EIFS litigation several years ago (with a few stragglers still around), I am paying attention to this to see how it compares.  Although I see some similarities, there are some marked differences as well.

First, both products obviously are componants that are incorporated into a structure, and arguably are intended to have the same useful life of the structure.  The Alabama Supreme Court has held that such componants are not “products” within the meaning of the Alabama Extended Manufacturers Liability Doctorine (AEMLD).  In Keck v Dryvit Systems, Inc., 830 So.2d 1 (Ala. 2002), the Court held:

The owner of a house or of any building should reasonably expect that many components will have the same useful life as the house or building itself and will not need to be replaced over the life of the building. Such components include, by way of example, an exterior brick wall, a staircase, or a fireplace. There are also certain components of a house or a building the purchaser reasonably expects to wear out and to require replacement in the course of normal and ordinary usage, such as roof shingles, a dishwasher, a furnace, or a hot-water heater. Whether an item that is incorporated into real property may be considered a “product” for purposes of the AEMLD is determined by whether the item is a part of the structural integrity of the house or building that is reasonably expected to last for the useful life of the house or building. If it is, then the item cannot be considered a “product” for purposes of the AEMLD. However, if the item is attached or incorporated into real property and, yet its very function and nature clearly makes it an item that one would reasonably expect to repair or to replace during the useful life of the realty, the item may be considered a “product” for purposes of the AEMLD. For instance, although paint, when applied to the structure of a wall, becomes incorporated into the surface of the wall, paint is a structural improvement that does not have the same useful life as the wall itself or the building to which the wall is attached; one would expect to have to repaint a wall to maintain the quality of the first application. Therefore, paint would be considered a product for purposes of the AEMLD.

In Keck, the Court held that EIFS was intended to last for the useful life of the structure, and was not subject to the AEMLD.  Moreover, the Court held that it was not a “good” under the Uniform Commercial Code, and therefore was not subject to the rules concerning warranties of merchantability.  Arguably, drywall would meet the Keck test as well, and would therefore not be calssified as a “product” or a “good.”

It is also questionable whether a builder or installer would be held liable for negligence regarding the installation of chinese drywall.  In my opinion, this is the central difference between drywall and EIFS litigation.  In regard to EIFS, the negligence theories against builders and installers often revolved around agruments that the system was improperly installed, and that installation led to problems with moisture intrusion, termites, etc.  Conversely, it’s at least my understanding that the drywall issues concern the product itself, and not its installation.

There are some potential issues for building owners on this point, as generally, a builder is not liable for latent defects in building materials that are used and “he is not liable to the owner for the latent defect or liable for the amount of damage to the building caused by such defect.” 13 Am. Jur. 2d, Building and Construction Contracts § 27 (1997); Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 235 So.2d 548 (Fla. Ct. App.1970).

The law is clear that a builder is not liable for latent defects in building materials that are
used and “he is not liable to the owner for the latent defect or liable for the amount of damage to
the building caused by such defect.” 13 Am. Jur. 2d, Building and Construction Contracts § 27
(1997); Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 235 So.2d 548 (Fla. Ct. App.1970).

Unless a building owner is able to show that the builder or installer had knowledge of the problems associated with Chinese drywall, he or she may have problems with holding those entities accountable.

21 Responses to Chinese Drywall Coverage Litigation Working its Way Through Courts

  1. bradley says:

    It’s an unfortunate problem. I’m afraid the only thing you could prove is that the builder/developer didn’t have the homeowner’s best interest in mind.

    I mean… Chinese drywall that’s dirt cheap, even at the peak of demand or during the shortage from Katrina? Sounds like a material that’s tip-top.

    • bhamdefenseatty says:

      Theres no doubt its an unfortunate problem. Cost could be an issue. I’m not aware of the cost difference between Chinese and American drywall, but if a homeowner can establish that it was so cheap that builders should have known it was an inferior product, that could be an argument against them. I’m interested to see how it all shakes out.

  2. Ed Bailey says:

    I agree with Mr. Little. Builders and Remodeling Contractors typically buy their materials from wholesale suppliers, not directly from China. Wholesale suppliers generally require specific information about what they are buying. I don’t think that the EPA even requires a material safety data sheet when drywall is delivered to jobsites. The product installer can observe obvious flaws but is not likely to discover toxicity in Chinese dryway materials. Liability for substandard materials because of how much they cost may be a factor. I just wonder how many Chinese products have been purchased by the afffected homeowners. Are they liable if a guest to their home is adversely impacted by one of those products? As long as the suppliers and installers have followed generally accepted construction procedures, I don’t think they should be held accountable.

  3. Tom Trauger says:

    This link states that due to a shortage they imported Chinese drywall
    http://www.nbc-2.com/Articles/readarticle.asp?articleid=24416&z=3
    not because of price

    OSHA does require an MSDS for drywall and one should be available on the job site at all times. However if you look at the ingredients/composition of drywall it would be difficult to pinpoint exactly what is causing the release of sulfur which mixed with moisture produces and acidic material.
    http://www.lafarge-na.com/wps/wcm/resources/file/ebc274003c08488/DrywallMSDS5.pdf

    It looks like the drywall is defective and in my opinion is a product liability issue. The builder installed it properly, the supplier stated that it was drywall. The manufacturer is liable.

  4. bradley says:

    I wonder how the commercial cases will play out. A different kind of project oversight involving the same suppliers and import brokers.

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  7. Brad says:

    I have chinese drywall in a brand new house I purchased in 2007. It has been a living HELL. My central ac failed because of the corrosion in less than a year from it’s installation date. Did I mention I live in Mobile Alabama. Many of my appliances failed, my electrical is failing. It Has caused Head aches memory loss, bleeding sinuses, fatigue and constant congestion. We can not afford to move and incur rental costs while keeping our mortgage current. The Alabama supreme court in it’s infinite chritian wisdom is saying that no one has any liability because dry wall is not a product. Well I have a mortgage of 150,000 and my house is worth $000000. Not marketable. We will have to walk away from this house and ruin our credit. We are in our late 50’s and will not be able to recover from this. By the way We have over 40,000 in expenses and attorney fees. Alabama is the only backward state that is defending manufacturers ans suppliers and not the damaged party. The result of this that every defective product will be dumped into Alabama because there is no chance of any legal action to suceed in these courts. Good Job republicans. You can this to your proud list such as being in the wosrt 5 public school rating in the United States. Do not for get also the most over weight children and diabetes afflictions.

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