Insurance Coverage for Mold Arising Out of Defective Workmanship
February 2001
The proliferation of indoor mold and mildew
problems—and resulting lawsuits—have sent many contractors scrambling for coverage
under their insurance policies. This article discusses case law surrounding
the issue, including whether mold is considered a "pollutant" and whether cleanup
is covered under the CGL policy.
by Patrick
J. Wielinski
Cokinos, Bosien &
Young
One of the latest waves of claims to hit the construction industry is a convergence
of both toxic tort and construction defect. Often known as "sick building syndrome,"
these claims involve the contamination of the interior of building structures
by mold, the infestation of which can severely damage the building, as well
as cause bodily injury and sickness to its occupants. When the infestation of
the indoor environment of the building by mold is caused by excess water and
infiltration due to construction defects, major litigation can arise. This litigation
presents unique coverage issues in addition to those which already surround
insurance coverage for construction defects.
Since the presence of mold often releases spores into the internal environment,
these claims raise unique issues with respect to the applicability of the pollution
exclusion to the bodily injury or property damage arising out of the mold. Courts
seem hesitant to apply the standard Insurance Services Office, Inc. (ISO), pollution
exclusion to such damage or injury largely on the theory that mold may not constitute
the type of "pollutant" to which the exclusion is directed. Nor is indoor contamination
regarded as the type of environmental dispersal or release to which the exclusion
traditionally applies.
Many mold claims are limited to bodily injury. However, the cleanup of the
mold infestation and the repairs necessary to accomplish the cleanup, as well
as to prevent future excess moisture in the building, will likely generate a
companion property damage claim. With regard to bodily injury, the pollution
exclusion in the standard commercial general liability (CGL) policy issued to
a contractor will potentially affect the availability of coverage. As to property
damage issues, it is likely that the pollution exclusion will have less effect.
In that connection, exclusion f.(1) of the CGL policy states that the insurance
does not apply to:
"Bodily Injury" or "Property Damage" arising out of the actual, alleged,
or threatened discharge, dispersal, release, or escape of pollutants ...
* * *
Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant,
including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.
Waste includes materials to be recycled, reconditioned, or reclaimed.
There are two major issues with regard to applicability of the pollution
exclusion to a mold claim. First, whether mold constitutes a "pollutant" as
defined in either ISO exclusion. The other significant issue is whether the
manner in which the exposure to the mold spores caused the alleged injury constitutes
a discharge, dispersal, release, or escape under the exclusion.
Case Law Construing the Pollution Exclusion
One of the earliest cases addressing these issues is Leverence v USF&G, 462 NW2d 218 (Wis App 1990).
In that case, occupants of homes built by the insured contractor filed suit
alleging that their homes retained excessive moisture within their exterior
walls, promoting the growth of mold, mildew, fungus, spores, and other toxins
that caused a continuing health risk and adversely affected the value of their
homes. They alleged the defective design of the walls and roofs and inappropriately
selected building materials resulted in the excessive moisture, seeking recovery
for both bodily injury and property damage.
One of the issues raised by the insurance company to deny coverage was the
pollution exclusion contained in its policy. The insurer argued that the exclusion
was broad enough to include the home environment contaminated with the mold
and moisture. In rejecting that argument, the court relied on the trial court's
determination that the alleged cause of the bodily injury and property damage
was exposure to water vapor trapped in the walls, which in turn caused the growth
of microorganisms. It stated that, "No contaminants were released, but rather
formed over time as a result of environmental conditions."
In a later case, Donald v Urban Land Interests, Inc.,
564 NW2d 728 (Wis 1997), the Wisconsin Supreme Court held that the pollution
exclusion did not apply in a "sick building" claim where an inadequate air exchange
ventilation system in an office building caused an excessive accumulation of
carbon dioxide in the work area. The resultant poor air quality caused the plaintiffs
to sustain headaches, sinus problems, eye irritation, extreme fatigue, etc.
Relying on cases involving paint peeling off the wall, asbestos particles
escaping during the removal of insulation, or paint drifting off the mark during
a spray-painting job, the court held that the reasonable policyholder would
not characterize such routine incidents as pollution. As in such cases, the
court held that the pollution exclusion was ambiguous when applied to injuries
resulting from the breathing of carbon dioxide, "an everyday activity gone slightly,
but not surprisingly, awry."
Due to its ruling that the exclusion was ambiguous, the court specifically
stated that it did not consider whether there had been a discharge or dispersal
under the pollution exclusion clause, as had the court in Leverence v USF&G. Therefore, the court did not
directly address the distinction made in Leverence between "exposure to" and "dispersal of" contaminants.
That issue was more fully discussed by the Wisconsin Supreme Court in Peace v Djukic Enterprises, Inc., 596 NW2d 429
(Wis 1999). That claim involved injuries to a plaintiff's child from ingesting
lead paint in an apartment owned by the insured. The court ruled that the pollution
exclusion denied coverage for bodily injury from the ingestion of lead in paint
that chips, flakes, breaks down into dust, or fumes. When the pollutant, lead,
once contained, begins to disperse, discharge, or escape from the containment
of the painted surface, it falls within the plain language of the pollution
exclusion.
The court distinguished Donaldson v Urban & Land
Interests as simply a "sick building" case involving exhaled carbon dioxide,
which is universally present and generally harmless in all but the most unusual
circumstances. The same cannot be said for lead paint chips, finer flakes, and
dust. They are widely, if not universally understood to be dangerous and capable
of producing lead poisoning. The toxic effects of lead have been recognized
for centuries, and reasonable owners of rental property understand their obligation
to deal with the problem of lead paint.
While mold spores are live organisms, as opposed to man-made chemicals, nevertheless,
the analogy to lead is powerful. The mold grows in the plenums, ductwork, and
walls of buildings, flaking out or otherwise eventually dispersing into the
air, like lead flakes from paint.
In the course of its determination, the Peace v Djukic court applied Employers Casualty Co. v St. Paul Fire
& Marine Co., 44 Cal App 4th 545, 52 Cal Rptr 2D 17 (Cal App 2d Dist
1996), as to what constitutes dispersal or release for purposes of a pollution
exclusion. In that case, the California Court of Appeals stated as follows.
Words in an insurance policy are to be given their ordinary and popular
meanings. Therefore, we look to the ordinary meanings of discharge, dispersal,
release and escape. Discharge is a release, emission or issuance (Webster's
New Collegiate Dict. (9th ed. 1984) p. 360). Dispersal is a scattering,
spreading, or distribution. (Id. at
p. 365). Release is a liberation, freeing or permitting to escape. (Id.
at p. 994). Escape is a leaking or overflow. (Id.
at p. 424). These terms taken together constitute a comprehensive description
of the processes by which pollutants may cause injury to persons or property.
Because the Employers Casualty Co. case involved
the inhalation of sulphur dioxide fumes in the workplace as the result of welding
certain materials, the court considered the applicability of the pollution exclusion,
and it noted the fact that under the terms of the exclusion, discharge, dispersal,
release, or escape did not require a discharge of the pollutants into the environment
or outside the area of their intended use. It stated that the plain language
of the exclusion militates against any such restrictive environmental construction
in that it expressly refers to discharge, dispersal, release, or escape at a
site.
Under this analysis, it may be that the presence of the allegedly toxic mold
spores within buildings constitutes the type of release or dispersal of a pollutant
as contemplated by the pollution exclusion. Based on the symptoms of victims
of mold inhalation, airborne mold spores may constitute irritants or contaminants.
Even though they are not traditional chemical or hazardous substances manufactured
or produced as a result of industrial operations, the language in the definition
of "pollutants" could be construed to include this type of organic contamination
which results from defective construction work.
Nevertheless, many courts have been hesitant to classify airborne mold, fungi,
or other organisms as "pollutants" under standard pollution exclusions. An example
of such a case is Stillman v Charter Oak Fire Insurance
Co., No. 1949-CV-Highsmith (SD Fla June 18, 1993). In that case, molds,
fungi, and yeasts were released into the air of an office building and former
bank employees sued the owner of the building, alleging various health impairments
resulting from the negligent design, maintenance, installation and repair of
the heating, ventilating, and air-conditioning (HVAC) system. The plaintiffs
alleged that the owner failed to prevent recirculation of stale air and did
not make fresh air available when the HVAC system released contaminants, including
the molds, fungi, and yeasts into the air.
The owner tendered its defense to its CGL insurer that denied coverage based
on, among other things, the pollution exclusion. The parties filed cross-motions
for summary judgment on the issue, and the trial court found the policy to be
ambiguous since it did not define "pollutant." In the absence of a definition,
the term was to be interpreted according to its popular meaning, and broadly
defined, it could include naturally occurring substances, such as dust which
causes adverse reactions in people. It could also be defined narrowly to include
only such things as nuclear waste. Therefore, the court concluded it was ambiguous.
The court also looked at varying interpretations of the term "pollutant"
by different courts, one of which held that pollutants include toxic or harmful
materials recognized as such by governmental regulators, including the Environmental
Protection Agency (EPA). Since the EPA has classified biological organisms,
such as mold, to be indoor air pollutants, they could constitute "pollutants"
under the pollution exclusion.
On the other hand, other courts have adopted a common-sense approach and
have held that the pollution exclusion does not apply to substances that are
commonly present in the environment. This would include fungi and molds. Based
on these varying interpretations, the court in Stillman determined that the
policy was ambiguous. Nevertheless, many cases have held that the mere fact
that courts disagree as to the meaning of terms in an insurance policy does
not render the policy ambiguous.
Be that as it may, the summary judgment granted in favor of the insured by
the trial court in Stillman was reversed by the
Eleventh Circuit in Stillman v Travelers, 88
F3d 911 (11th Cir 1996). The summary judgment was reversed on procedural grounds
since the trial court had granted summary judgment in favor of the insured based
only on its finding that the pollution exclusion did not apply to the claim.
However, the insurer had asserted other grounds for denial of the claim, none
of which were ruled on by the trial court, so that its ruling on the applicability
of the pollution exclusion was a partial summary judgment. Nevertheless, the
trial court's determination as to the ambiguity of the pollution exclusion as
it applies to mold remains intact, with the case being remanded for a ruling
on the other bases asserted by the insurance company for denial of the claim.
Bodily Injury versus Property Damage
The analysis above is directed primarily to the bodily injury claims arising
out of exposure to harmful mold and organisms in the air inside sick buildings.
In addition, property damage cases are being filed nationwide as a result of
allegedly mold infested buildings. An early case of that type that has already
made its way through the appellate courts is Centex-Rooney
Construction Co., Inc. v Martin County, Florida, 706 S2d 20 (Fla App
1998).
In that case, the county sued its construction manager for dampness that
promoted mold growth and excessive humidity through a courthouse. The source
of the water infiltration, among other things, was the exterior insulation finish
system (EIFS). The concerns over the indoor air quality led to evacuation of
portions of the building. On appeal as to issues of the scientific basis for
the expert opinion supporting the verdict, the court affirmed a $14 million
verdict against the construction manager. The damages were awarded for the costs
of repairing the courthouse to prevent future water infiltration. Insurance
issues were not the subject of the lawsuit.
These types of cases allege that the source of the moisture giving rise to
the mold problem include faulty HVAC and mechanical systems, leaking windows,
curtain walls, EFIS, and any other defects that result in wet and damp building
materials which in turn serve as a breeding ground for mold, mildew, and other
organisms. The water damage to the building itself (which provides a breeding
ground for the mold) constitutes the potentially covered property damage forming
the basis of the CGL insurance claim. That damage should usually be unrelated
to the mold and most likely would have to be repaired regardless of the presence
of a "pollutant" within the building.
Conclusion
The long and the short of it is that the water damage to the building is
usually not a result of pollution, so that it is not a release, discharge, or
dispersal of a pollutant. As such, the pollution exclusion in the CGL policy
should not apply. Therefore, coverage for repairing the alleged building defects,
in the event they are sought from the insured contractor, will need to be evaluated
pursuant to the traditional analysis of property damage claims involving defective
work under the CGL policy.
Nevertheless, it is possible that an action against the insured contractor
could be framed, at least in part, as a "cleanup" of "pollution" of the mold
contamination. In that event, the clause of the pollution exclusion stating
that the insurance does not apply to property damage arising out of any request,
demand, or order that the insured or others "test for, monitor, clean up, remove,
contain, treat, detoxify, or neutralize, or in any way respond to or assess
the effects of pollutants" could arguably be invoked. However, the argument
for applicability of the cleanup provision of the standard pollution clause
should suffer from the same weakness as the argument for applying the general
provision of the exclusion: the repairs are made for the purpose of curing the
moisture problem, that is, the actual property damage. Elimination of the alleged
pollutant, the mold, is a collateral benefit.
As can be seen, there are many issues to be decided as to the coverage available
to an insured contractor for indoor mold and mildew problems. These issues are
sure to be addressed by the courts in light of the proliferation of these problems
and lawsuits seeking redress for them. If past experience with court treatment
of the pollution exclusion is any indication, the results should be interesting
and controversial.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.