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October 2010
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Toxic Drywall Update

The latest chapter in the Toxic Drywall Saga has Knauf Plasterboard Tianjin, the major producer of the toxic drywall is stepping up to repair up to 300 homes as part of a settlement with a number of owners. Or at least the guy without a chair when this tune stopped. This is so not close to being over….

“The homes will be repaired according to a protocol developed by U.S. District Court Judge Eldon E. Fallon, who is presiding over the litigation in New Orleans. It requires, among other things, that all the drywall be removed, along with the wiring, the air-conditioning system and other components – a procedure that will effectively gut the interiors of the houses. One of the program’s goals is to settle on a cost for the work. Homeowners who have paid to fix their homes themselves have often spent more than $100,000.”
Source:Pro Publica

Also contributing to the repair settlement is Interior Exterior Building Supply(one of the drywall suppliers in LA.), and several insurance carriers.
This is an interesting development, but being the glass half empty sort of guy that I am, I see a few issues.

First, we have the demo work ripping down the drywall, removing the electrical, including the A/C, and even though it is not specifically mentioned, any copper plumbing and or underfloor heating systems. These procedures will remediate the apparent damage, but I haven’t seen any mention of testing the frames for secondary absorption of the out-gassing byproducts in wood framing and/or removal(which would basically require a bulldozer and a lot more dumpsters to just knock the houses down and starting over) or some type of sealant that could trap any toxic vapors in the wood. Also no mentioned but of concern is the cabinetry, especially cabinets whose boxes are particleboard. Carpet is an issue as well. Not to mention your major appliances.

Second, the settlement is going to do 30 homes initially to establish a ‘cost basis’ for repair. Here is where it will get interesting. Insurance companies do not make money by paying claims. By establishing a ‘cost basis’, by taking the cost of a series of repairs and adding them up, and dividing by the number of repairs, they hope to assign a dollar value that they will want to pay for repairs. If your house falls inside this ‘cost basis’, great. But if your house does not, it will get ugly.

Let me take a moment to outline a couple of things that insurance companies do. I will use auto body repairs to demonstrate. When you have an accident and your car is towed to the bodyshop, two things happen. The bodyshop uses a software program to prepare an estimate of the damage and the repair costs. The bodyshop and the insurance company both use the same software. Almost. An Adjuster who is the insurance company representative, checks the estimate, negotiates with the shop and signs off on the repair so that your car can be fixed.
There are differences based on the version used by each party. In the case of the body shop being a Direct Repair Facility, the estimate is created by an insurance company representative, and the car is delivered to the shop for repair. The difference between an Independent shop and a DRP is that in exchange for priority in work assignments, any number of concessions are made, usually being in the labor rate paid for repairs.

Here is where the plot thickens. The estimate is solely based on visual inspection without tear down. Tear down happens when the bodyshop removes the bent and damaged sheetmetal and other parts to determine how extensive the damage is, and what will be required to bring the car back to pre-accident condition. In other words if your car has a dent in the door, chances are that fixing it will solve the claim. In the case of a front end collision where the hood is jammed shut and the doors are jammed closed, the true cost of repairs cannot be measured. Teardown creates another estimate called the Supplement. Note that your car has not been repaired yet. This is the insurance dance.

The Supplement is added to the Estimate to gauge the total repair cost. Now in the case of car repair, the insurance company uses a percentage of ACV,(Actual Cash Value, which is an aggregate number of actual sale prices of the same vehicle nationwide) as the threshold for deciding whether or not to repair the vehicle. It doesn’t matter that you first got laid in this car, or your first born was conceived therein, some choices are made in providing you insurance, and one of them is that the insurance company gets a large say in how far they will go. Say for argument, 80% of ACV is the Total Loss theshold. If the repair estimate and supplement cost is above this dollar amount, the insurance company can choose not to repair the car,(It’s in your Policy) declaring it a Total Loss, writing you a check for the ACV, take your title, and going home. If you are still making payments, and the value of your car is not great, you will be without wheels and still have a car payment.

In the case of auto repair to save money the insurance company will require the shop to look for LKQ parts. LKQ stands for Like,Kind and Quality. In the case of brand new cars, in most cases this means Manufacturer Factory Parts. Which are spendy. Aftermarket Parts (produced by independent companies. most notably sheetmetal) are classified as LKQ, although there has been years of debate over finish, quality and suitability. In the case of older cars, this is where auto salvage/wrecking yards come into play. If you need a front end for your 2000 whatever, the factory is only required by law to produce and stock parts for 7 years. An salvage yard buys cars and dismantles and or cuts them up and can sell a front end from another 2000 whatever that was bought because it was hit in the rear and the front end is good. Recycling, Save the planet, etc.

Now if you are bummed out thinking about this and how it relates to toxic drywall houses, I have one more little thing to add. Betterment. Betterment is the difference between the value of what was damaged and the value of it’s replacement. The best example of this are tires. Your tires have 30K miles on them and two need to be replaced to repair your ride. You got tires that were good for 60k miles. So you have used 50% of their value. The insurance company buys you two new tires, which cost a little more than your originals. This difference in price between the new tires and the 50% value of your old tires is called a betterment and this cost is passed on to you. The insurance company to the bodyshop will be light by the betterment amount, and this is over and above your deductible. You will need to come up with this money to get your car.

To Recap: Remember these terms: Estimate, Supplement, ACV, Total Loss, LKQ, Betterment.

Third, the concept of making you whole, or returning you to a semblance of life before the drywall from hell turned your life into shit, is the end game of every homeowner affected, and should be the top priority of everybody involved in making the necessary repairs.

I can think of a lot of things that can go wrong with the repair rather than replacement of these homes. Like property values, or resale.