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In the past few years, U.S. consumers have become increasingly skeptical of Chinese imports owing to scandals surrounding melamine-tainted pet food and lead paint on toys. Now homeowners are alleging problems from Chinese-imported drywall in their homes which, if proven true, create another nightmarish scenario that already is spurring class action litigation.

In reports filed with the Consumer Product Safety Commission (CPSC), owners of homes believed to contain the drywall blame it for corroding metals in the household–which could lead to leaking Freon from corroded coils on air conditioning units or electrical shorts due to corroded wiring–and health problems including irritated skin and eyes, nosebleeds and respiratory problems. And the rub is that it's not a matter of simply disposing of the product–homeowners literally live within the product.

So it should come as no surprise that, even as hard science on the problem drywall remains scarce to nonexistent, the lawsuits have been flying since reports began surfacing in late 2008. Homeowners across the country already have filed an estimated several hundred claims, concentrated in Florida and Louisiana, where most of the bad drywall is believed to have landed. And despite the flurry of litigation activity, all indications are that it has only just begun. The scope of the parties that homeowners are targeting means the suits will take many permutations. Potential defendants include the Chinese manufacturers, the German company that owns them, distributors, suppliers, contractors, subcontractors and insurers.

“I'm going after everyone in the food chain,” declares Daniel Becnel, a veteran trial lawyer in New Orleans representing more than 100 families with Chinese drywall claims.

“The insurance companies are saying it's pollution exclusion; the general contractors are saying, 'It's my subcontractor'; the subcontractor blames the distributor,” Becnel says. “And on and on–you're going to see nothing but one suit after another.”

Scientific Shortcomings

On June 15, a judicial panel consolidated 10 federal lawsuits, mostly class actions, against the Chinese manufacturers into a multidistrict litigation (MDL) in New Orleans before U.S. District Judge Eldon Fallon. Becnel, who represents plaintiffs in one of those class actions and fought for a New Orleans venue, says this bodes well for timely resolution of the federal drywall cases, likely a global settlement. He's faced Fallon before, including in the massive Vioxx MDL that resulted in a global settlement.

Fallon displays “unprecedented talent,” Becnel says. “From the inception of the [Vioxx] case up until when people got their money was less than three years. That's unheard of.”

But while plaintiffs lawyers are getting the ball rolling, the defense side is still waiting for the proof.

“The litigation here is really ahead of the science,” says Stephen Mysliwiec, a partner at DLA Piper. “The government and private companies are still trying to determine what the cause of the problem is–exactly what chemicals in the drywall are causing the problem, how those chemicals got there, how one identifies a bad panel of drywall and, finally, what has to be done to repair the defective drywall.”

Efforts are currently underway to determine the answers to such questions, most notably a collaboration between the CPSC, the Centers for Disease Control and Prevention/Agency for Toxic Substances and Disease Registry (CDC/ATSDR), the Environmental Protection Agency (EPA) and numerous state health departments including Florida's and Louisiana's. Mysliwiec says AQSIQ, China's product safety authority, has been working with the CPSC for several years now on defective products issues.

“It will take a good six months or more for the various agency investigations to play out and for any kind of scientific reports to make sense of this thing and to emerge,” says John Sweeney, a lawyer at Womble Carlyle Sandridge & Rice. “Only once we get some scientific foundation for the allegations or the defense are we going to be able to see if this is a big deal.”

The lack of information has some lawmakers up in arms. Although the CPSC launched its investigation in March, some say it's not doing enough. Sen. Bill Nelson, D-Fla., has co-sponsored Senate legislation (currently in committee; a House version also has been introduced) that would require an in-depth study and a ban on certain drywall. He also demanded the resignation of CPSC Chairwoman Nancy Nord in a letter to President Obama.

Off Target

Another potential litigation speed bump will be for the plaintiffs targeting the Chinese manufacturers to get to those foreign companies. Doing so is “harder–big-time harder,” says Becnel, who has succeeded in bringing actions against Chinese companies in the past.

“It's possible to serve complaints [on Chinese defendants] in these lawsuits, but it's an arduous and expensive process,” Mysliwiec says. “Second, even if they are properly served, a judgment from an American court may not be enforceable against a Chinese company in China.”

While some homeowners have filed individual suits, the majority of the homeowner suits, and by far the most publicized, are the class actions, and many of them are product liability suits against the Chinese manufacturers. Construction lawyer Scott Wolfe Jr. questions if this is the most effective remedy for homeowners to pursue. Suing the builder, he says, would be a better way for homeowners to benefit quickly. Then the builder would undertake the lengthy process of suing the manufacturer.

“We're seeing so far that generally homeowners seem to have gone straight to suing the large manufacturers, without really resulting in their homes being fixed,” says Wolfe, a member of Wolfe Law Group. “The claims against the builder are real and there, and if it wasn't for these class actions, that's what everyone would be doing. The fact they're not is kind of odd, and every day they wait is another day these claims they do have grow closer to their expiration.”

Wolfe suspects that as the class actions are prolonged and frustrations mount, plaintiffs might start looking to the builder or their homeowners' policies for other remedies.

Pollution Exclusions

The insurance battles will be a fight in their own right–both regarding home-owners' policies and general corporate liability policies.

At least one Florida couple has targeted their homeowners' insurance provider in a lawsuit. In a complaint filed March 30, Keith Baker and Linda Leri say American Home Assurance Co. (a subsidiary of AIG) wrongfully denied their claims for damages because their policies include a “pollution or contamination” exclusion. Baker and Leri say Chinese drywall does not fall under the exclusion's definition.

Pollution exclusions are emerging as a key issue in insurance litigation surrounding Chinese drywall. Although their details vary by policy, they are standard in corporate general liability and homeowners' coverage. Generally they state that the insurer is not responsible for injuries or losses caused by pollutants.

“If the reason this Chinese drywall is causing problems is because of some gas fume it's giving off, then it's going to look a lot more like pollution where it qualifies for the pollution exclusion,” Wolfe says. “But if it's something that is more like a defective material, then we might be getting closer to something the insurance would be required to cover.”

Due to the dearth of scientific analysis of the drywall, the pollution exclusion question remains very open. Courts have gone both ways on similar issues. Any decision on Chinese drywall would depend on the jurisdiction, the specific exclusionary clause and the yet-to-be-determined cause of the losses. And depending on the policy, other exclusions could come into play. In insurance circles, some are even discussing a “drywall exclusion.”

“I think it will depend on the jurisdictions where they write business and whether it's an admitted or nonadmitted carrier,” says Daniel Gerber, chairman of Goldberg Segalla's global insurance services practice group. “If some carriers try to add foreign drywall exclusions, you may see some pushback legislatively as well.”

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In the past few years, U.S. consumers have become increasingly skeptical of Chinese imports owing to scandals surrounding melamine-tainted pet food and lead paint on toys. Now homeowners are alleging problems from Chinese-imported drywall in their homes which, if proven true, create another nightmarish scenario that already is spurring class action litigation.

In reports filed with the Consumer Product Safety Commission (CPSC), owners of homes believed to contain the drywall blame it for corroding metals in the household–which could lead to leaking Freon from corroded coils on air conditioning units or electrical shorts due to corroded wiring–and health problems including irritated skin and eyes, nosebleeds and respiratory problems. And the rub is that it's not a matter of simply disposing of the product–homeowners literally live within the product.

So it should come as no surprise that, even as hard science on the problem drywall remains scarce to nonexistent, the lawsuits have been flying since reports began surfacing in late 2008. Homeowners across the country already have filed an estimated several hundred claims, concentrated in Florida and Louisiana, where most of the bad drywall is believed to have landed. And despite the flurry of litigation activity, all indications are that it has only just begun. The scope of the parties that homeowners are targeting means the suits will take many permutations. Potential defendants include the Chinese manufacturers, the German company that owns them, distributors, suppliers, contractors, subcontractors and insurers.

“I'm going after everyone in the food chain,” declares Daniel Becnel, a veteran trial lawyer in New Orleans representing more than 100 families with Chinese drywall claims.

“The insurance companies are saying it's pollution exclusion; the general contractors are saying, 'It's my subcontractor'; the subcontractor blames the distributor,” Becnel says. “And on and on–you're going to see nothing but one suit after another.”

Scientific Shortcomings

On June 15, a judicial panel consolidated 10 federal lawsuits, mostly class actions, against the Chinese manufacturers into a multidistrict litigation (MDL) in New Orleans before U.S. District Judge Eldon Fallon. Becnel, who represents plaintiffs in one of those class actions and fought for a New Orleans venue, says this bodes well for timely resolution of the federal drywall cases, likely a global settlement. He's faced Fallon before, including in the massive Vioxx MDL that resulted in a global settlement.

Fallon displays “unprecedented talent,” Becnel says. “From the inception of the [Vioxx] case up until when people got their money was less than three years. That's unheard of.”

But while plaintiffs lawyers are getting the ball rolling, the defense side is still waiting for the proof.

“The litigation here is really ahead of the science,” says Stephen Mysliwiec, a partner at DLA Piper. “The government and private companies are still trying to determine what the cause of the problem is–exactly what chemicals in the drywall are causing the problem, how those chemicals got there, how one identifies a bad panel of drywall and, finally, what has to be done to repair the defective drywall.”

Efforts are currently underway to determine the answers to such questions, most notably a collaboration between the CPSC, the Centers for Disease Control and Prevention/Agency for Toxic Substances and Disease Registry (CDC/ATSDR), the Environmental Protection Agency (EPA) and numerous state health departments including Florida's and Louisiana's. Mysliwiec says AQSIQ, China's product safety authority, has been working with the CPSC for several years now on defective products issues.

“It will take a good six months or more for the various agency investigations to play out and for any kind of scientific reports to make sense of this thing and to emerge,” says John Sweeney, a lawyer at Womble Carlyle Sandridge & Rice. “Only once we get some scientific foundation for the allegations or the defense are we going to be able to see if this is a big deal.”

The lack of information has some lawmakers up in arms. Although the CPSC launched its investigation in March, some say it's not doing enough. Sen. Bill Nelson, D-Fla., has co-sponsored Senate legislation (currently in committee; a House version also has been introduced) that would require an in-depth study and a ban on certain drywall. He also demanded the resignation of CPSC Chairwoman Nancy Nord in a letter to President Obama.

Off Target

Another potential litigation speed bump will be for the plaintiffs targeting the Chinese manufacturers to get to those foreign companies. Doing so is “harder–big-time harder,” says Becnel, who has succeeded in bringing actions against Chinese companies in the past.

“It's possible to serve complaints [on Chinese defendants] in these lawsuits, but it's an arduous and expensive process,” Mysliwiec says. “Second, even if they are properly served, a judgment from an American court may not be enforceable against a Chinese company in China.”

While some homeowners have filed individual suits, the majority of the homeowner suits, and by far the most publicized, are the class actions, and many of them are product liability suits against the Chinese manufacturers. Construction lawyer Scott Wolfe Jr. questions if this is the most effective remedy for homeowners to pursue. Suing the builder, he says, would be a better way for homeowners to benefit quickly. Then the builder would undertake the lengthy process of suing the manufacturer.

“We're seeing so far that generally homeowners seem to have gone straight to suing the large manufacturers, without really resulting in their homes being fixed,” says Wolfe, a member of Wolfe Law Group. “The claims against the builder are real and there, and if it wasn't for these class actions, that's what everyone would be doing. The fact they're not is kind of odd, and every day they wait is another day these claims they do have grow closer to their expiration.”

Wolfe suspects that as the class actions are prolonged and frustrations mount, plaintiffs might start looking to the builder or their homeowners' policies for other remedies.

Pollution Exclusions

The insurance battles will be a fight in their own right–both regarding home-owners' policies and general corporate liability policies.

At least one Florida couple has targeted their homeowners' insurance provider in a lawsuit. In a complaint filed March 30, Keith Baker and Linda Leri say American Home Assurance Co. (a subsidiary of AIG) wrongfully denied their claims for damages because their policies include a “pollution or contamination” exclusion. Baker and Leri say Chinese drywall does not fall under the exclusion's definition.

Pollution exclusions are emerging as a key issue in insurance litigation surrounding Chinese drywall. Although their details vary by policy, they are standard in corporate general liability and homeowners' coverage. Generally they state that the insurer is not responsible for injuries or losses caused by pollutants.

“If the reason this Chinese drywall is causing problems is because of some gas fume it's giving off, then it's going to look a lot more like pollution where it qualifies for the pollution exclusion,” Wolfe says. “But if it's something that is more like a defective material, then we might be getting closer to something the insurance would be required to cover.”

Due to the dearth of scientific analysis of the drywall, the pollution exclusion question remains very open. Courts have gone both ways on similar issues. Any decision on Chinese drywall would depend on the jurisdiction, the specific exclusionary clause and the yet-to-be-determined cause of the losses. And depending on the policy, other exclusions could come into play. In insurance circles, some are even discussing a “drywall exclusion.”

“I think it will depend on the jurisdictions where they write business and whether it's an admitted or nonadmitted carrier,” says Daniel Gerber, chairman of Goldberg Segalla's global insurance services practice group. “If some carriers try to add foreign drywall exclusions, you may see some pushback legislatively as well.”