In the last few months, the problem of Chinese-made drywall in homes has been big in the news. Recently, the U.S. Department of Housing (HUD) and the U.S. Consumer Product Safety Commission (CPSC) urged consumers to begin the complete removal of all Chinese manufactured drywall in their homes.
This is due to the fact that the drywall contains a high amount of sulphur, which is dangerous to the inhabitants and the rest of the structure. But it is not only the drywall that has to go. The gas released form the drywall is highly corrosive, so it is also recommend replacing “all electrical and metal based components.”
This means all new HVAC components, gas service pipes, electrical wiring, sprinkler systems, smoke detection alarms; the list goes on and on. Scores of homeowners have filed suit in upwards of 20 states. Many of these are class action, against not only the Chinese manufacturers but the U.S. based wholesalers who distributed the material and the contractors who installed it. Standing squarely in the middle of it all is the commercial insurance market.
Though a majority of the affected homes are located in south-eastern states, California contractors and other business owners stand to learn from these problems and should take note.
What happens now is some of the most complicated and expensive litigation the U.S. legal system has seen in a very long time. To be sure, bringing suit against foreign manufacturers within our system is a complicated and difficult process; but that is not the larger problem here. The larger problem will be the reoccurring question of whether the above mentioned sulphuric gases are “pollutants” as defined by typical commercial general liability (CGL) insurance policies.
These gases are indeed likely to be treated as “pollutants” and, in most cases, subject to the pollution exclusion common in most CGL policies today. Therefore, it is likely that the contractors who have been brought into these suits will have no insurance coverage for the lawsuits or the legal expenses associated with their defense. You do not need to be a math whiz to grasp that this will mean millions of dollars in of out-of-pocket expenses for these companies.
It is understandable why drywall contractors and distributors would not have pollution coverage in place. It is doubtful they could ever imagine themselves at risk for an environmental or pollution related claim. Too often, the perceived need for such policies is only associated with the most obvious industries. Recyclers, fuel hauling companies, chemical processors and distributors to name a few.
In terms of insurance as a risk management tool, however, it is most effective when it protects against those least obvious and unexpected hazards. The take away here is that contractors of all disciplines can create or worsen a pollution situation when providing service. They often work in areas at risk of pollution more than they know. Not in your profession? Not on your jobsite? Tell that to the drywall contractors. Here is just one example of a recent court ruling.
A plumbing and HVAC contractor was called to a home to replace a faulty, natural gas model water heater. As we well know, water heaters are required to be banded to the wall for added stability. A few days after the completion of the job, the band securing the water heater to the wall broke, causing the appliance to lean slightly. This small movement punctured the gas line and natural gas began to slowly leak into the home.
As a result, the elderly couple inhabiting the home died of asphyxia. Naturally, the family estate filed a lawsuit against the contractor who had installed the water heater. In turn, the contractor turned to its general liability insurance company and filed a claim. The contractor had been a client of that same company for more than 25 years. At first glance, it seems like a clear case of faulty workmanship.
The contractor is at fault and the liability policy is in place for exactly such a claim. What actually happened, however, was much different. The insurance company took the position that they were not obligated to defend the contractor against the claim. According to the insurer’s defense the true cause of the untimely death of the couple was not the work completed, but the presence of natural gas.
Moreover, this gas was a “pollutant” and the insurance policy in question clearly excluded bodily injury caused by pollutants. After a long process of rulings and appeals, the high court sided with the insurance company and the contractor was ordered to pay the costs of the suit filed. The contractor also had no insurance coverage for the hefty legal fees arising from this particular matter.
The above scenario could be modified and applied to many types of contractors, technicians and maintenance professionals. It could also pertain to lead, mold, asbestos, toxic compounds and various other materials used in day-to-day contracting and sub-contracting jobs. We have seen a recent surge in court rulings of this very nature, setting a precedent of what will and will not be covered by general liability insurance policies.
So if this is the problem, what is the solution? There are commercial liability policies available that now provide a cost effective solution by combining pollution and general liabilities into one policy. Often, the cost is comparable to a traditional general liability policy but, obviously, the coverage is broader. A good risk management program should thoroughly consider a number of options in terms of coverage and affordability.
A savvy risk manager or insurance broker can secure these options for a business owner’s review at policy renewal time. At the very least, it should be reviewed, explained and the pros and cons of putting such coverage in place should be discussed. Doing so offers contractors a business-critical solution to minimize loss for liabilities when sudden or gradual pollution conditions become a job-related issue. That potential loss, though infrequent, can be severe and is typically left uncovered by standard general liability leaving them out-of-pocket for any and all expenses.