In Florida, Louisiana and other Southern states, the Chinese Drywall situation is causing concern in the construction industry and among homeowners.
A few months ago, we began posting about the Chinese Drywall problem and how it may affect builders on the Construction Law Monitor (tag: Chinese Drywall). As the situation grew in scope, however, we decided to launch an entire blog on the subject: The Chinese Drywall Blog.
While most news reports about the imported drywall problem has focused on filed class actions in Louisiana and Florida, the problem is a bit more complex. Notably, because the Chinese Drywall claims present an interesting distinction to other class actions.
The difference presents builders, construction attorneys and homeowners with complex and difficult decisions about who will be ultimately liable for the damages, and how to pursue liability.
Over the next few days, we’ll examine the decisions facing Builders, Homeowners and Construction Attorneys. Today, we’re looking at the decisions facing Builders.
The Builder
Builders who have installed or supplied Chinese Drywall to a home or business face possible breach of contract and warranty claims, and even claims based on negligence or tort.
When examining whether its GL policy will indemnify it from imported drywall caused damages, builders worry about the applicability of policy pollution exclusions.
With these issues in mind, the builder is now faced with the following questions:
- Making Insurance Claims: If the builder knows that it has installed Chinese Drywall, is it required to put its insurer on notice of the potential liability? Many have suggested that they are required to do this, regardless of whether a claim has been made against the builder. And even if they are not required by the terms of an insurance policy, perhaps they should.Many insurance policies have strict requirements that an insured notify the company of any claims or potential claims within a short timeframe. Builders who choose not to do this, decide to roll the dice, or simply forget about the obligation, may later have their claim denied on this basis.
- Remedying the problem. Are builders responsible to replace the defective drywall, and compensate homeowners for damages?Unfortunately, under contractual and warranty theories, the answer is likely YES. And as builders may imagine, remedying a Chinese Drywall problem is substantially more involved than remedying something like a broken faucet.
Contaminated drywall is causing problems to the drywall itself, building contents, electrical wiring, HVAC systems and even the building elements. A “call-back” could require a builder to virtually rebuild a property.
With the requirement to remedy the problem persisting…what does a builder do?
- Builder Options: Builders faced with Chinese Drywall claims can (a) file insurance claims against their insurer; (b) file suit against their suppliers and installers; and (c) file suit against drywall manufacturers.Lennar Co. – a nationwide homebuilder – is perhaps the most prominent builder caught installing Chinese Drywall. They have done all of the above with respect to Chinese Drywall claims received, and have even offered to replace any defective drywall and compensate customers for time away from home.
The next and final question for builders is…what if they can’t and don’t repair the problem immediately? Will this affect their position?
- The Duty to Mitigate. Builders, like everyone else, have the duty to mitigate their losses. The question is, therefore, how does this duty apply to Chinese Drywall claims?Well, let’s look from two perspectives.
First, Chinese Drywall damages could (and likely will) get progressively worse if left unattended to. Therefore, if a builder receives a ‘call-back’ or complaint related to Chinese Drywall, will his insurer hold it liable if the builder fails to take steps to prevent the problem from getting worse (i.e. tear out the drywall)?
Second, what if the builder doesn’t get a complaint…but knows it installed Chinese Drywall in a home. Since the drywall may cause health problems, is the builder liable for not mitigating losses if it fails to inform the homeowner that their home may be contaminated? What if the drywall does cause serious health effects with prolonged exposure and the builder keeps quiet?
Next post: Choices for Construction Lawyers.