Mold: The Newest Environmental Hazard

September 2001

Obtaining insurance coverage for mold-related problems is difficult, with most insurers relying on pollution exclusions and/or newly added mold exclusions to deny coverage. Kevin Shane and Alan Bressler explain the basics of the problem and offer coverage solutions.

by J. Kevin Shane and Alan Bressler
Marsh & McLennan, Inc.

Over the past decade, the frequency of mold litigation has skyrocketed. Unfortunately, obtaining insurance coverage for these claims has not been easy. General liability and property insurers frequently invoke a variety of policy defenses and exclusions, including, increasingly, the pollution and contamination exclusions and newly added mold exclusions. As a result, insureds are turning to specialized pollution insurers to procure desired coverages, but these policies also present some difficulties and do not always provide a complete solution. This article provides a brief overview of potential issues in this area.

Mold: The Next Environmental Peril?

Prior to 1990, mold-related claims were virtually nonexistent. Over the past decade, however, these claims that were largely confined to California have sprung up across the country in significant numbers. Not surprisingly, mainstream media has caught wind of the apparent problem and featured stories in numerous national television programs, as well as in countless newspapers and magazines. This visibility has raised awareness of the issue, resulting in additional suits seeking higher damages and generating more widespread publicity. And so another litigation cycle is born.

Consider the following:

• In 1992 employees of a Florida courthouse were evacuated. Approximately 80 percent of the nearly 600 employees complained of respiratory problems. Alleging that construction defects facilitated growth of mold to which employees had been exposed, the county sued the general contractor, subcontractors, architects, and engineers. The county recovered approximately $13 million and $29.9 million in an out-of-court settlement and a suit against its builders risk insurer, respectively. Further, some of county employees and spouses sued the defendants, again, and recovered approximately $8.8 million.
• In 1997 a city contractor caused raw sewage to back up into a Southern California home. The lawsuit filed by the family against the city alleged that personal injuries such as brain damage and respiratory infections had been sustained. Medical examinations confirmed the presence of mold antibodies in family members' bloodstreams, and the city settled with the family for approximately $600,000.
• In 1997 a newly opened motel was quickly closed because of flooding caused by ruptured plumbing. During the ensuing investigation, the owner discovered mold in the building as well as construction defects. After several rounds of mediation and more than 3 years since the flooding occurred, the suits were settled for $6.7 million.
• In 1999 the owner of a single-family home sued his insurer after numerous water leaks in his house resulted in mold growth. The father allegedly suffers from memory loss, and the son—who sustained scarred lung tissue—suffers from chronic asthma and memory loss. (The insurer responded to the water claims, but allegedly did not warn its insureds of the danger posed by the mold or take measures to protect its insureds from exposure to the mold.) Damages of $100 million were sought. A grand jury investigation was initiated to determine if criminal charges would be filed against the insurer.
• In 1999 approximately 125 families sued two New York apartment owners, alleging that mold and fungus contamination caused by water leaks had resulted in personal injuries ranging from chronic fatigue syndrome to wrongful death. The plaintiffs sought a staggering $8 billion in damages.
• In 2000 a class-action lawsuit was brought by Toronto parents against a local school board for exposing children to "toxic mold." Many of the children exposed to the mold have allegedly sustained personal injuries, and plaintiffs are seeking upwards of $1 billion.
• In 2000 an employee of a California biotechnology company sued his employer for injuries allegedly caused by the employer's failure to remediate mold in the employee's work area. The employee asserts that the exposure has resulted in a variety of personal injuries, and is seeking damages of $2 million.

One notable characteristic from these claim descriptions is the variety of entities defending themselves in mold-related lawsuits. Clearly, property owners and managers should be concerned about this increasingly problematic exposure. However, architects and engineers have also been sued—and have lost. Contractors and subcontractors of different sorts have been sued—and have lost.

Insurance companies have been sued based on two general principles: first, for bad faith when denying coverage for mold-related claims; and, second, insurers for not alerting or protecting insureds from mold-related problems, suggesting insurers have such a duty.

Another characteristic of these mold claims is their great cost. Mold cases are expensive for several reasons, including the following.

• High Investigation Costs. Building inspections to determine the cause, type, and extent of mold can cost upwards of $1 million.
• Large Number of Claimants. The sheer number of persons actually exposed and those claiming to be so results in a large number of plaintiffs, regardless of the actual physical manifestation of symptoms.
• Complex Subject Matter. As is true of all complex subject matter, conveying a message to a jury is a slow, painstaking, and costly process that must be carefully managed to ensure jury members hear and understand each side's argument.
• Use of Expert Witnesses. Expensive witnesses, including industrial hygienists, engineers, epidemiologists, oncologists, and neurologists, may be required by both plaintiffs' and defendants' counsel to support litigation. One commentator noted that incurring $250,000 for expert witnesses to support litigation is fairly common.
• High Remediation Expense. The cost to remediate a mold problem can be substantial, up to $150 per square foot, or more than 10 times the cost to simply remove and replace the construction materials. In certain cases, the only viable option is to raze the structure and rebuild.
• Punitive Damages. In cases where fraudulent concealment or battery is alleged, the plaintiff(s) will almost certainly bring a demand for punitive damages, despite the difficulty in proving same.

Historically, plaintiffs have brought suit based on numerous theories including, but not limited to, negligence, strict liability, implied and express contracts, constructive eviction, breach of contract, and nuisance.

What Is Mold?

Molds are simple, microscopic fungi that grow on the surface and crevices of objects, such as wood, carpeting, and cellulose-based objects, such as drop-down ceiling panels and drywall. More than 100,000 species of mold exist naturally in the environment, each at its own ambient level, depending on the locale.

Mold and people have mixed for thousands of years, and most individuals have developed a tolerance to mold exposure, so day-to-day activities proceed uninhibited. The overwhelming majority of molds have little negative impact, if any, on human health. While it may not be possible to identify specific individuals who may be vulnerable to molds, health officials believe that seniors, small children, infants, and those with compromised immune systems are most susceptible to mold-related symptoms.

In situations where there is a reaction, typical symptoms may include headaches, rashes, and respiratory tract and eye irritation. However, many commentators contend that more extreme symptoms exist, including complete immune system failure, loss of cognitive memory, brain damage, and even death. Only a small number of molds are suspected of having the potential to negatively affect human health if touched, inhaled, or ingested. These molds include arimonium, aspergillis, penicilium, fusarium, trichoderma, and stachybotrys chartarum. The ability of molds such as stachybotrys to release mycotoxins is the suspected reason for the most extreme symptoms of mold exposure.

Mycotoxins, or toxins released by mold, include aflatoxins, trichothecenes, and volatile organic compounds (VOCs). While the often extreme adverse health affects caused by exposure to any of these toxins is fairly well documented, the conditions under which molds release toxins is relatively limited and not well understood.

This has caused many to jump to the extreme, declaring that, "no molds are good for you," discounting the pervasiveness of mold in the environment, and the benign or beneficial nature of many molds.

Mechanisms of Growth and Control

Mold can exist where the following three criteria are satisfied:

1. temperate climate (typically above 70 degrees Fahrenheit);
2. existence of nutrient source such as wood, paper, or other cellulose- or carbon-based material; and
3. moisture is present (high humidity rather than pooled or running/dripping water is sufficient).

When these criteria are satisfied, mold growth can begin within 48 hours. Once mold growth begins, the problem becomes more complicated.

Moisture is required for growth and, when removed, causes mold to stop growing and die. Unfortunately, simply killing mold, either by removing the moisture or spraying with a substance such as bleach, does not eliminate the potential exposure. It is precisely when mold dries out that spore release becomes most vigorous, and it is often this airborne exposure, much like asbestos, that allegedly causes health problems.

This quandary makes responding to a mold problem so difficult: killing the mold without proper controls allows spore dispersal resulting in both immediate and long-term problems. Thus, mold outbreaks should be handled in a deliberate manner with extensive controls similar to those used in handling toxic waste or asbestos. Achieving complete removal of mold from drywall, ceiling panels, and ventilation systems has proven difficult at best because spore-producing mold bodies remain in cracks and crevices and cannot be removed by simple cleaning. Experts increasingly contend that the only means of remediation is complete removal and replacement of all contaminated material.

Although the ease and speed with which mold grows and the extreme difficulty of removing it may seem to present insurmountable problems, it's important to remember that only some molds present problems.

Molds have always been present. Are we not just more conscious of molds and looking to affix blame for those ailments that defy explanation? Additional time, epidemiological studies and money will probably settle this question. But with so many people exposed around the world, and the complexity and spiraling trend of claim frequency and severity, this is an issue that should be closely examined from a risk management perspective. In particular, are there ways to reduce the chance that one will encounter a mold problem and, if you find yourself defending against a mold claim, does insurance exist that will the defense and indemnification expenses?

Do General Liability Policies Cover Mold?

The most appropriate answer to this question is, "It depends." It depends on how a claim is brought, the jurisdiction in which the claim is made, and the specific policy's language.

Insurers often cite the "absolute" pollution exclusion as a basis for denying coverage for mold-related claims. However, unlike "traditional" concepts of pollution, several jurisdictions have held that this exclusion does not apply to indoor pollution in general or mold in particular. Specifically, courts have held that the exclusion pertains to "industrial type" pollution that adversely affects the outdoor environment and which is tied to a release or discharge of such pollution. Conversely, mold, as one court held, simply grows in place and is, therefore, not the subject of this pollution exclusion.

The general liability policy presents other potential hurdles for an insured seeking coverage. One of the most important of these is the owned property exclusion, which precludes coverage for property damage to property (real and personal) owned, rented, or occupied by the insured. It is also important to note that general liability underwriters are considering adding mold and fungi exclusions to these policies.

Do Property Policies Cover Mold?

Standard property forms provide coverage for physical damage resulting from fortuitous external perils. The typical form covers "all perils," subject to an extensive list of exclusions designed, in part, to preclude coverage for damage considered to be the result of poor maintenance or inevitable processes, such as rust, or wear and tear. The interaction of perils and exclusions, and the rules of causation imposed by state law, are often quite complex but generally look to the "efficient" or "most important" cause to determine the application of coverage and exclusions

Exclusions typically found in property policies include a number of perils arguably relevant to mold. These include wear and tear, dampness or dryness of atmosphere, changes in temperature, wet and dry rot, inherent vice, latent defect, contamination and negligence. A few policies include specific exclusions for mold and fungus, although these were likely inserted to deal with food products rather than buildings and structures.

The presence of these exclusions can present significant obstacles to coverage, but it is important to look at each case carefully. For example, if mold growth occurs as the result of water leakage or flooding that would be covered under the policy, it may be possible to argue that the mold growth is part of the flood damage and therefore is covered. By contrast, if the mold growth occurs as the result of dampness due to poor housekeeping or regional high humidity, the analysis may reach a different conclusion.

Where Can You Find Insurance for Mold Claims?

While general liability and property underwriters take a step back to figure out what they are dealing with, pollution underwriters have historically indicated that, generally speaking, mold and other indoor air quality claims are covered under pollution liability policies.

Besides the obvious intent to cover pollution problems in general, many pollution policies contain language that appears to go directly to the crux of the issue. For example, consider the following definition of "Pollution Condition" from a leading pollution underwriter:

Pollution Condition means "means the discharge, dispersal, release, seepage, migration, or escape of smoke, vapors, soot, fumes, ... or other irritants, contaminants or pollutants into or upon land, or structures thereupon, the atmosphere, or any watercourse or body of water including groundwater."

But as more is learned about this developing issue, even pollution underwriters have begun to express concerns and add mold exclusions to their policies. Fortunately, it does not appear that mold exclusions are being added to all pollution policies in all situations. With aggressive marketing and satisfactory responses to underwriters' questions, pollution policies providing varying degrees of coverage have been obtained.

It is important to note, however, that even those pollution policies lacking a mold exclusion present several language problems. Insureds opting to rely on a pollution policy to treat this exposure are advised to review and, if deemed appropriate, seek to amend the following language shortcomings to obtain a pollution policy that more clearly affirms coverage rather than relying on the policy's silence:

• Mold as a Pollution Condition. The definition of "Pollution Condition" requires discharge, dispersal, release, seepage, migration, or escape. Although airborne spores fall within this definition, the mere existence of mold may not. The definitions do not clearly contemplate this biological formation or growth of a pollution condition. While the typical definition of a pollution condition or remediation expense does provide broad language, in no case does it make clear that mold is contemplated.
• Environmental Regulations. At present, while many states and cities are considering codifying a standard, there are no legal or regulatory standards governing mold. The only definitive statement regarding mold remediation is provided in New York City's Guidelines on Assessment and Remediation of Fungi in Indoor Environments, and even these lack the weight of a statute or regulation. As such, it may prove difficult to trigger a pollution policy based on a "discovery" trigger, leaving insureds to rely solely on pollution policies' "claims" triggers.
• Extent of Cleanup. Complicating matters, if the policy is triggered, to what extent does the problem get remediated and in accord with what technique? Currently, the generally accepted opinion is that all traces of mold should be removed, but will the insurer agree? This approach is contradictory to remediation approach in soil or groundwater where it is common to leave residual contamination in place, often at high levels. Will insurers agree to cover the expense incurred to remediate in accord with asbestos-like containment precautions, or will drywall, for example, simply be pulled out and disposed in the dumpster? Finally, will insurers agree to conduct air monitoring both during and following mold remediation to ensure the problem does not recur at some point in the future?
• Restoration Costs. How do the costs to reconstruct walls, flooring, HVAC systems, ceilings, and other structures, as well as the costs to replace personal property and improvements, get covered? Arguably, the pertinent definitions that apply to cleanup costs and remediation expenses fall short of providing clear coverage for the inevitable expenses that occur as a result of having to remove an entire wall's drywall—eliminating the mold, but leaving no wall!
• Naturally Occurring. Mold and fungus are naturally occurring and, in certain cases, might prompt a claim adjuster to preclude coverage based on language in many pollution policies stating that the coverage does not apply to "naturally occurring substances." Remember that when a claim occurs, it is handled by a claim adjuster who may interpret "naturally occurring" to apply to mold.
• Toxic Mold Only. Certain underwriters have indicated that clarifying language will be added to affirm coverage for mold-related issues, but only if the mold is confirmed to be both toxic and airborne. It is not clear what constitutes a toxic mold and may not be for some time, which is exacerbated by the fact that the expense to confirm an airborne release is quite high.

Some commentators argue that such changes are not necessary if "clear" policy language is not a particular insured's ultimate concern. For those seeking clarity, there are sound ways to amend the pollution policy language to ensure that coverage will be provided to the greatest extent possible. It may not be possible to obtain all requested language changes, but underwriters have been open to entertaining such requests and have made certain of these changes in previously placed policies.

The Next Asbestos?

Will mold be the next asbestos? It's simply too early to tell. There is still much to learn about mold's impact on human health and to what extent and how remediation should take place. However, given the trends in mold-related litigation and the reluctance of both general liability and property underwriters to cover these claims, it makes sense for risk managers and CFOs to consider procuring a properly structured pollution liability policy to provide a more viable source of protection should the unfortunate occur.

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This article was written by J. Kevin Shane and edited by Alan Bressler.

Kevin Shane, ARM, CPCU, CSP, is a senior vice president at Marsh & McLennan, Inc., and is the firm's Los Angeles Environmental Practice Leader. Marsh provides environmental risk management and consulting services to middle-market and multinational companies. Services include insurance product negotiation and language manuscripting, alternative risk financing techniques such as finite risk programs and special purpose vehicles, environmental claims consulting and advocacy, risk quantification and characterization, and environmental risk control/management. Prior to joining Marsh he was a pollution underwriter with AIG Environmental and, prior to that, a consultant with Converse Environmental West. Mr. Shane earned an MS in industrial hygiene with an emphasis on environmental engineering in 1992 from the University of Southern California, an MA in international relations in 1990 from California State University at San Bernardino, and a BS in both chemistry and biology in 1988 from the University of California at Irvine. Mr. Shane can be reached by e-mail at kevin.shane@marsh.com

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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.