NEW YORK—Commercial insurers could face significant property damage claims and litigation costs stemming from defective Chinese drywall, Moody's Investors Service said Tuesday.

Property damage and litigation costs emerging from the issues surrounding Chinese drywall likely will be managed within insurance companies' earnings, Moody's said in a report. While the legal process concerning Chinese drywall still is in its early stages, New York-based Moody's said property damage losses and litigation costs for insurers could be “significant.”

According to Moody's report, “Chinese Drywall Exposure Manageable for U.S. P&C Insurers,” ultimate liabilities for Chinese drywall claims for the property/casualty sector will be driven by upcoming bellwether trials and how the courts interpret commercial policy coverage and exclusions; and more conclusive testing by the Consumer Product Safety Commission on the link between Chinese drywall and health effects.

Moody's said insured losses from Chinese drywall will “probably be covered within insurers' earnings, rather than affecting capital.”

“Until the industry and legislative tests and studies are completed, and until courts make some preliminary or precedent rulings, cost estimate reliability will be limited,” New York-based Moody's Analyst Enrico Leo said in a statement. “Rulings on two bellwether trials are expected in the near-term, which will provide more insight in this regard.”

Moody's cited two trials in Louisiana—Germano et al. vs. Taishan Gypsum Co. Ltd. et al. and the Hernandez family vs. Knauf Gips—that began last week. They are among more than 2,100 complaints filed nationwide in federal courts regarding the alleged faulty drywall.

About 500 million pounds of tainted drywall was imported into the United States between 2004 and 2007, when the housing market peaked and the Southeast was rebuilding after Hurricane Katrina. The drywall was traced to Chinese subsidiaries of German manufacturer Knauf Plasterboard Tianjin Co. Ltd.

Additional lawsuits have been filed against different parties, including drywall manufacturers, contractors and suppliers. According to Moody's, commercial insurers face liability for property damage and potential claims under the products liability portion of commercial general liability policies. Liability also could emerge for bodily injury if the CPSC establishes a link between Chinese drywall and health problems.

Consumers reported experiencing noxious odors from the drywall and the corrosion of metal appliances and wires within the home. They also reported short-term health problems such as upper respiratory illnesses allegedly due to the drywall.

Some insurance companies already responded by placing specific policy exclusions for Chinese drywall, while others have stopped offering coverage to contractors in certain areas, Moody's said in the report.

Moody's added that other insurers have not changed their underwriting guidelines at all because they think their exposures are manageable.