National Submits 1,100 Page Proposal for Approval of
Chinese Drywall Warranty
On March 3rd, National Construction Warranty submitted a comprehensive 1,100 page study to its administrator and underwriter, Residential Warranty Corporation and Western Pacific Mutual Insurance Company, a Risk Retention Group. The warranty proposal was the result of an eight month study of the Chinese drywall (CDW) problem along with the market potential and risk assessment data necessary for warranty consideration.
Within the warranty submission documents was National’s projection of the number of homes likely to contain toxic drywall, along with cost projections for repairing the affected homes. National projects that anywhere from 230,000 up to 320,000 homes may contain at least some Chinese drywall. A much larger number of homes damaged by hurricanes Katrina, Wilma, and Rita may be affected versus a relatively small number of 27,000 to 58,000 new homes built from 2006 through 2008 that may contain CDW. Many hurricane-damaged homes will contain only small amounts of the tainted board, but no minimum amount has been established to deem the home free of CDW’s harmful effects.
National’s estimates were based on data collected from FEMA, U.S. Census Bureau, Department of Homeland Security, HUD, SBA, and the National Home Builders Association. Costing data was based primarily on the 2009 CCI data. National’s estimate for the total cost to repair these homes is $12.96 billion. This is in line with published estimates by Towers Perrin, a Stamford, Connecticut-based consulting firm, which pegged the economic losses between $15 billion and $25 billion, including 40% to 50% for legal costs. The National Association of Home Builders estimated the total cost to be lower, around $8 billion, exclusive of legal fees.
The proposed protocols for both inspecting and remediating homes with CDW was included in National’s warranty proposal. The inspection protocol relies primarily on XRF (x-ray florescence) technology, a method endorsed by the Consumer Products Safety Commission (CPSC), the leading government agency working on the CDW issue.
National’s proposed warranty remediation protocol requires complete removal of nearly all contents down to the framing of the home, including all insulation, wiring, HVAC components, exposed copper plumbing, and any other control element within the home (security systems, cable, networking, etc.). Proper treatment of the interior shell for prevention of residual off-gassing is also required, and can be accomplished using a variety of recommended options.
No remediation protocol has been published by the CPSC or any other government agency, but National expects that any forthcoming remediation recommendations will be very similar to those required by National. The National Association of Home Builders (NAHB) plans to release their remediation recommendations by June 2010, but released their outline of remediation on March 18th. The NAHB recommendations are substantially consistent with those recommended by National.
National is hopeful that a limited remediation protocol will be available in the future for homes containing relatively small amounts of localized CDW. However, there is currently not enough remediation data available to determine if limited or localized remediation is practical. National is currently collecting data in hopes of determining if limited remediation is possible, and expects to make a determination by the fourth quarter of 2010.
The proposed warranty would have a ten-year term and a limit of $100,000, with the ability to purchase multiple warranties on the same property, possibly up to $500,000 per home. Other details of the warranty will not be available until after regulatory approval. Final warranty pricing will not be released until after regulatory approval, and is expected to be around 3% of the average home remediation cost. Clearance warranties useful for marketing homes without CDW are expected to cost under $900 for basic coverage. National expects the warranty approval process to take up to four months, which would possibly allow release of the various warranty products in June of 2010.