A putative class of Florida homeowners recently filed suit against a company that manufactured drywall in China, alleging the material used in their homes emits sulfur compounds that damaged heating and electrical wiring, and created health risks. See Allen v. Knauf Plasterboard Tianjin, No. 09-CV-54-FtM-99 DNF (M.D. Fla., complaint filed 1/30/09). This is just the latest potentially significant suit arising over products made in China. Plaintiffs allege that defendants manufactured drywall that contained fly ash from Chinese coal-fired power plants, causing the product to emit sulfur compounds that create odor and corrode copper in air conditioning units and wiring in homes. At least one home builder has also brought claims over the drywall issues.

Plaintiffs’ attorneys claim that as much as 10 million square feet of such drywall was used in Florida homes due to shortages of American-made drywall between 2004 and 2006. The complaint asserted causes of action including negligence and negligence per se, strict liability, breach of express and implied warranties, fraudulent misrepresentation, and violation of Florida’s deceptive and unfair trade practices act. Defendants dispute the allegations and note that any low levels of sulfur compounds present in the air in homes are not a health risk

Regardless of the merits of the case, and clearly such claims are typically inappropriate for class certification because of the individual issues that will be presented by evidence surrounding injury and causation, there is a growing volume of cases over alleged defects in products made in China. Such litigation can also raise insurance coverage disputes. Coverage litigation has erupted concerning the recent heparin drug contamination allegations, for example. What importers tell their insurers about their source of supply; whether subsidiaries are covered; whether importers here are in de facto joint ventures with Chinese suppliers; and similar questions may be front and center in coverage disputes when this type of products litigation hits. Insurance companies seem to be increasingly playing the card that insureds needed to disclose the details of their manufacturing suppliers. The recent China dairy product scandal may have insurers arguing that product defects are the result of intentional, criminal behavior, rather than negligence.

With the Consumer Product Safety Improvement Act of 2008 seeking to place importers on the hook for defects, U.S. companies may be in the market for more coverage. At the same time, Chinese exporters have not felt the need to buy insurance as they feel judgment-proof in U.S. courts. However, importers may want to consider requiring their suppliers to purchase such insurance as part of the bargaining.