December 10, 2009

Chinese Drywall Woes:

It smells bad and it ruins anything made of copper or silver. The gases given off by wallboard imported from China may also sicken homeowners and their families. Some say the affected homes will have to be gutted or bulldozed. But others say a simple solution is possible, if the focus is shifted to how the foul odor is produced.

They say that copper must have a Ph.D. in economics, because of the way its price moves in lock step with the peaks and valleys of the gross national product. We're also beginning to suspect that it may have advanced degrees in consumer product safety, international relations, and warranty management, based on the central role it's taking in the so-called Chinese drywall controversy.

Copper, praised not only for its electrical conductivity but also for the ease at which it can be fashioned into pots, pans, pipes and wires, is an essential element in the fields of plumbing, cooking, electrical power, consumer electronics, and computing, just to name a few. Chinese drywall, they say, emits gases that can corrode copper and can render the machines that depend on it useless.

Drywall, also known as sheetrock, or plasterboard, or wallboard, is basically a half-inch-thick sheet of wet gypsum (calcium sulfate) that's pressed between two sheets of cardboard and is then left to dry. The sheets are typically four feet wide by eight feet tall, and are cut to size and then nailed onto wooden studs, forming the walls and ceilings of most new homes. Tape and spackle covers the nail heads, and then paint is applied.

Demolition or Remediation?

In the old days, wet gypsum (also known as plaster of Paris, named after the location of a major gypsum mine) was spread across wooden slats, which was then left to dry. But this dry method (hence the name drywall) is said to be faster and cheaper. However, if the worst predictions come true, some of the houses that used Chinese drywall may be effectively "totaled," costing more to repair than they would to rebuild.

What's come to be known as Chinese drywall refers primarily to wallboard made by Knauf Plasterboard Tianjin Co. Ltd., one of five subsidiaries the German-headquartered parent company Knauf Gips KG has in China. Although Chinese regulators have said they find no problem with the materials, American regulators have found a link between Knauf's exports and corroded copper, as well as a possible health hazard and perhaps even a fire hazard.

Notice the chemical name for gypsum is calcium sulfate. The problem with Chinese drywall is that it allegedly gives off a gas called hydrogen sulfide, which is unpleasant because it smells like rotten eggs, is destructive because it combines with water vapor in the air to form sulfuric acid, and is harmful because the acid corrodes metals and burns human tissue. It's produced by bacteria that basically eat sulfur and belch hydrogen sulfide. But those bacteria don't really become a problem unless the sulfur is located in a climate with both high heat and high humidity (think of swamps and large intestines).

Lawyering Up

We won't get too deeply into the scientific, legal or health arguments, except to say that it has been alleged that Knauf's wallboard contained impurities that made it emit more hydrogen sulfide gas than is typical of a substance made primarily from calcium sulfate. Whether that's because of where the gypsum was mined (in Tianjin, China, a major city near Beijing), or what was added to it later (sulfur-laden coal dust is a common allegation), is a question we'll leave to the lawyers to answer. In addition, some are now suggesting that the problem affects more than just this one manufacturer, though the facts are hard to separate from opinions.

The sulfur compounds attack metals such as copper, silver, lead and zinc. The sulfur compounds, besides turning copper black -- which is more or less their signature calling card -- also reduce the metal's conductivity. For instance, when it corrodes electrical wiring and fixtures, the lights in the home can begin to flicker. It can also cause smoke detectors to fail, and perhaps could even cause natural gas pipes to leak. More common are reports of air conditioning coil failures, as well as unexplained failures of appliances such as refrigerators and microwave ovens. And then there are numerous reports of upper respiratory problems, headaches, nosebleeds, and rashes, which the victims allege are caused by the sulfur compounds.

Traditionally, supplies of gypsum have been found locally in numerous countries, so exportation of large quantities was unusual. But in the U.S., domestic suppliers were hard-pressed to keep up with demand, first during the past decade's home construction boom and then later in the wake of all the storm damage caused by the hurricanes of 2005. And where did those storms do the most damage? Along the Gulf Coast of the United States, home of high heat and high humidity. Think of the storm tracks of hurricanes Katrina in New Orleans, Dennis and Wilma in Florida, and Rita in Texas, and you basically have a map of the areas most in need of emergency drywall shipments.

Shipping records suggest that somewhere between 300 million and 500 million pounds of wallboard was imported from China since 2004. That's roughly 1% to 1.7% of the annual U.S. production of 300 million tons of wallboard. Each new home uses roughly seven tons of wallboard, so one could use the back of an envelope to surmise that Chinese drywall was used to construct somewhere between 21,000 and 36,000 new homes.

However, stocks of domestic and imported wallboards were regularly mixed and intermingled, and not all the wallboards were used in new construction. Some went into remodeling jobs, and some went towards storm repairs. So there could be Chinese drywall in up to 100,000 homes. In addition, some experts now say the problem goes back further than five years, and affects more wallboard manufacturers than initially thought. So estimates now suggest that up to 250,000 homes could be affected.

Government Work

The U.S. Consumer Product Safety Commission, the Environmental Protection Agency, the Department of Housing and Urban Development, the Agency for Toxic Substance and Disease Registry, and the Centers for Disease Control and Prevention are in various stages of investigation into the problem. One preliminary study found a "strong association" between the drywall and the corrosion. Another found a "nexus between the drywall and reported health symptoms." But no product recall has been ordered, and no evacuation orders have been issued. And the studies continue.

In a recent issue of the Cape Coral Daily Breeze, Florida Lieutenant Governor Jeff Kottkamp revealed that his home contains Chinese drywall. Speaking at an awareness rally in the Southwestern Florida town, he told attendees that he was working with his state's Department of Health to get some answers on whether or not there are long-term health problems related the problem.

"The preliminary tests seem to suggest the answer to that is no," he said at the rally. "However, I think as both Lieutenant Governor and a father, I'd like to have a little bit more concrete answers, as these people would, on that issue. The next issue is -- what is the solution? We need to have a process in place so these people have help and know that this will be over some day. That's the next thing I'm pushing."

"What seems to be lacking in my view is the lack of urgency," he added. "We know there at least 30,000 homes in Florida, at least 100,000 homes in America and I don't know if that's high or low." But it is affecting at least that many families, Kottkamp said.

Lawsuits Multiply

Some of those families are now filing class action lawsuits against their homebuilders, remodelers, and wallboard installers, alleging there was a defect in the construction, namely, the emission of sulfur compounds by the Chinese drywall. Several of these cases were combined into one great big case in the U.S. District Court for the Eastern District of Louisiana, where it is known as Multi District Litigation Docket Number 2047, or MDL-2047.

In late August, Crawford & Company was appointed by the U.S. District Court for the Eastern District of Louisiana to make impartial inspections of at least 15 homes in Florida, eight in Louisiana, and seven in other states, which are alleged to be affected by Chinese drywall off-gassing. Over the past decade, Crawford has conducted more than a million home inspections on behalf of one or both sides in various class action lawsuits related to allegations of building product defects.

In the selected homes, Crawford's inspectors looked for the presence of drywall imported from China, and attempted to determine the brand name on the wallboards. And they looked for evidence of off-gassing, such as a rotten egg odor in the home and/or the blackening of exposed copper products such as electrical wiring and the tubing in the HVAC system's air handler.

There is now a well-defined "Threshold Inspection Protocol" that will help to guide future inspectors through their task, so they can then report their findings back to the court. First, the protocol says, they must look for the presence of Chinese-manufactured drywall, must collect samples of the wallboard, and must document the markings on them in order to help the court ascertain the manufacturers, suppliers, installers, and contractors involved. Then they must look for impacts the drywall may or may not have had on wiring, plumbing, HVAC, and appliances.

Real Estate Industry Reactions

Some of the homebuilders are also filing their own lawsuits. Lennar Corp., for instance, filed suit in January against eight of its wallboard suppliers, 12 installers, and two manufacturers -- Taishan Gypsum Co. and Knauf Plasterboard Tianjin. Lennar also set aside some $54.5 million in additional warranty accruals, and said it expects to receive an additional $33.6 million from insurance companies, to deal with what it estimates will be the complete removal and replacement of defective Chinese drywall in the 500 affected homes. Cost is expected to be upwards of $100,000 per home.

"As of August 31, 2009, the company identified approximately 500 homes delivered in Florida primarily during its 2006 and 2007 fiscal years that are confirmed to have defective Chinese drywall and resulting damage," Lennar stated in its most recent quarterly financial report. "This represents a small percentage of homes the company delivered in Florida (2.6%) and nationally (0.6%) during those fiscal years in the aggregate."

"Based on its efforts to date, the company has not identified defective Chinese drywall in homes delivered by the company outside of Florida," the statement added. "The company is continuing its investigation of homes delivered during the relevant time period in order to determine whether there are additional homes, not yet inspected, with defective Chinese drywall and resulting damage. If the outcome of the company�s inspections identifies more homes than the company has estimated to have defective Chinese drywall, it might require an increase in the company�s warranty reserve in the future."

Realtors are also beginning to react to the Chinese drywall problem. For instance, the Sarasota Association of Realtors is distributing a Chinese drywall disclosure form, which becomes an addendum to the home sales contract. In it, the seller must disclose whether or not they have any knowledge of the existence of Chinese drywall in their property, and whether or not any reports or records are available that can be passed on to the buyer. The buyer must then acknowledge the seller's disclosure, receipt of the reports and records, and must then elect to either conduct a risk assessment/inspection for the presence of Chinese drywall (at their own expense), or to waive that opportunity.

Drywall Warranty Expected

Christopher Burton

Home warranty companies are also stepping up. Christopher Burton, CEO of National Construction Warranty Corp., said his company is putting together a proposed warranty program that could help smooth the resale process in areas affected by the problem. Basically, the warranty will guarantee to the home buyer that the building either never contained Chinese drywall or has been remediated so that it no longer contains Chinese drywall, and more importantly, does not have the off-gassing problems associated with Chinese drywall.

"There are two different warranty products that we're looking at," Burton said. "One is a clearance warranty that assures the homeowner that their home has been tested to a certain protocol and does not have Chinese drywall or any of the effects of Chinese drywall. The second is a remediation clearance warranty that would be based on the home being modified to a certain standard and then the warranty put in place to assure the homeowners there is no Chinese drywall and/or off-gassing or ill effects from the off-gassing."

Burton said he expects that if all goes well, his company will be able to put the warranty program together within four months. It will define a set of standards and protocols to be followed by the contractors doing the remediation work, and will define how the inspectors will then go in and certify the premises to be Chinese drywall-free. He said he's now traveling extensively, trying to explain the program to all those involved in the problem and hopefully, its solution.

The warranty will be sold to the home owners/sellers, who can then transfer it to the buyers. Much like a traditional home warranty, it will provide peace of mind to the buyer, but only in the narrow sense that they aren't buying a Chinese drywall headache, both literally and figuratively. National Construction Warranty will operate the call center. Residential Warranty Company LLC will function as the administrator. Western Pacific Mutual Insurance Company, a Risk Retention Group (rated A- (Excellent) by A.M. Best), will function as the underwriter.

Red-Lining the Whole Gulf Coast?

Still to come is a reaction by the makers of all the appliances, electronics, and computers allegedly damaged by the defective drywall, not to mention all the home warranty and extended warranty administrators who also may have paid for repairs or replacements over the past five years. Some say there are subdivisions in South Florida where the HVAC repairmen basically never leave the neighborhood, because of all the work they keep getting, day after day. One wonders if the computer technicians and TV repairmen are also inexplicably extra busy in those areas.

Thomas Martin, president of America's Watchdog and the operator of the Chinese Drywall Complaint Center web site, said he thinks this is going to affect the warranty industry for many years to come. Martin predicts that the manufacturers of electronics and appliances, and the sellers of extended warranties, service contracts and home warranties, are going to have to deny all claims caused by Chinese drywall in certain southeastern states. Some might rewrite their terms and conditions to make those exclusions explicit. Otherwise, they're going to be replacing units that were damaged but weren't defective.

"We think the triggers for Chinese drywall are really high thresholds of heat combined with really high thresholds of humidity," Martin said. And those thresholds are really exceeded only along the Gulf Coast and perhaps parts of the very southern Atlantic Coast. That doesn't mean Chinese drywall isn't present in northern and western states. It just means that it's not giving off the same amount of fumes, and those fumes aren't combining with water vapor in the air and corroding metal.

"From a warranty standpoint, we're going to have to isolate this just to the Southeast, because we have no proof that outside of the U.S. Southeast, people are really having problems," he said. But in areas such as South Florida, it's not only the copper wiring in the wall that's corroding. It's also attacking the copper tubing used in the HVAC systems and in the refrigerators, not to mention all the copper circuitry on the inside of home computers, televisions, microwaves, and other electronics.

Personal Injury Lawsuits?

Besides its effects on metals such as copper, silver, lead and zinc, Martin worries what these sulfur compounds are doing to the lungs of people who live in the homes. "The bigger question, really, is what about the health issues? If the appliances -- let's say the air conditioning coils -- are frequently failing in houses that have Chinese drywall, what's that doing to someone's health?" One homeowner in southeastern Texas, Martin said, called him just this week to report that not only was he feeling sick, but even the bugs in his house seemed to be dying.

Martin also noted that the effects of exposure build over time, and by the time a failure occurs and a repair or replacement is needed, those one-year warranties on the appliances, the electronics, and the new homes themselves have likely expired. But even if the failures occurred within 90 days, it's not certain whether an appliance maker or a TV manufacturer would be liable for what amounts to environmental damage. It's not all that different from smoking cigarettes next to your computer or spraying a flat screen with the garden hose (although those kinds of damage are intentional).

And then, of course, there's the question of who did the damage, and what kind of recourse is available to the victim(s). By the time all the product liability and personal injury lawsuits have been sorted out, this problem might have become as costly as tobacco and as complex as asbestos. But that's for the courts to figure out.

Insurance companies are also now denying claims and declining to renew policies in the affected neighborhoods, Martin added. However, years ago, in the wake of environmental catastrophes such as Love Canal, many modified their policies to cover only damages caused by sudden and accidental pollution events, such as what might occur during a train derailment. In contrast, living on top of a landfill or next to a smokestack might cause damage to people and property, but it would no longer be covered by insurance.

The solution to this problem, Martin said, may be the worst alternative of all. "The houses, at least in the Southeast, we think will have to be bulldozed," he said. If the house can't be insured, it probably can't be mortgaged. And if it can't be financed, it may be difficult for anyone to purchase. And in a depressed resale market, it might cost more to repair than replace. Plus, the stigma of having to disclose that a home merely once contained Chinese drywall makes it unlikely for the affected home to attract many offers.

A Possible Cure?

Keith Walker

In contrast, Keith Walker, the managing partner of CleanSeal International LP, said his company can treat the problem and effectively end the off-gassing at a cost that's a fraction of the replacement cost of the drywall (or the value of the home). A wall coating that the company initially developed to fight mold, bacteria, and other organic pollution sources seems to also effectively stop the off-gassing of sulfur compounds, he said.

"Our product has been around for about five years now," he said. "Earlier this year, we became aware of this Chinese drywall -- the off-gassing from Chinese drywall. And we were asked to look into it, to see if our product would work. And, quite frankly, I had questions as to whether or not we could do anything."

Walker said the company obtained some Chinese drywall samples, and also some domestic wallboard to use as a control case, and took them to an independent lab that applied the CleanSeal coating to both. Before application, the Chinese drywall was emitting around four to six parts per million of hydrogen sulfide (anything over 3 ppm results in a "rotten eggs" smell, he added). After application, he said, the off-gassing level dropped to zero parts per million, even after the humidity levels in the testing chamber were increased to 70%.

"It creates a barrier," Walker said. But it's not just a barrier or an encapsulant, he added. CleanSeal seems to actually prevent the production of hydrogen sulfide, by attacking the bacteria that naturally produce it. In other words, in a Chinese drywall home, the same sulfate-reducing bacteria that give swamps and bean-eaters their unique smell are working on the contents of the wallboard, and are giving off hydrogen sulfide as a by-product. But then CleanSeal stops the "digestion" process, and the sulfur stays in the wallboard, odorless and harmless. "When we spray it on there, it will basically arrest that off-gassing," he said, some 70 to 100 hours after application.

In round numbers, the cost of treating a 2,500-square-foot home will be in the range of $10,000 to $20,000, Walker said. That includes the cost of adding a $1,500 air purification device called the AtmosAir, which must be attached to the HVAC system's air handler to capture any hydrogen sulfide still in the home. In fact, he said, customers are told to buy and install the AtmosAir system as soon as possible, to take the sulfur out of the air even before the CleanSeal treatment begins.

Lifetime Warranty, Fully Insured

CleanSeal's lifetime warranty, which initially covered mold, bacteria and other organic pollutants, has now been broadened to cover hydrogen sulfide emissions, Walker said. All along, he added, the warranty was backed by insurance, and that additional level of protection continues to the present day.

Walker declined to name the carrier, except to say that it's rated A++ (Superior) by A.M. Best, and that the policy's current liability limitation is in excess of $100 million. CleanSeal also has its own $3 million warranty reserve, but has yet to tap into it, let alone file a claim with its insurance company.

"In the five years that we've been doing treatments for all the various things that we've done," he said, "we've never had a claim. We've never even had a call about a claim, or about a defect of our product, in that entire time. Not ever."

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