Policy Modifications and Endorsements Relating to Liability Insurance Coverage for Mold

March 2002

The wave of mold litigation and media attention has resulted in coverage changes that attempt to eliminate coverage for mold or similar sick building exposures. Pat Wielinski explains what insureds should be on the lookout for.

by Patrick J. Wielinski
Cokinos, Bosien & Young

Mold, mildew and sick building syndrome exposures have been a fact of life for contractors, owners, and occupiers of modern buildings and employers for quite some time. Many parties, particularly owners and contractors, deal with mold as part and parcel of water damage claims. Now that it is a subject of considerable media attention mold cannot be ignored, whether the contaminated building is a single-family home, multi-family residential complex, commercial office building, or a public facility. Moreover, the increased attention has resulted in a raft of bodily injury claims, despite ongoing disagreement in the scientific community as to the effect of mold on health.

The wave of mold litigation has obviously caused concern for the insurance industry. For example, one of the most notorious debates that has been somewhat uncustomarily played out in the media is the revision of Texas homeowners insurance policy forms by the Texas State Department of Insurance. That revision is a response to claims that have increased dramatically, both in number and severity, against homeowners' insurers. Mold is also of great concern to commercial property insurers providing first-party coverage for owners of commercial, industrial, and public buildings, as well as landlords.

Of course, the first-party losses of homeowners and property insurers often translate into third-party claims against the responsible party via subrogation. In response, third-party insurers revised and endorsed commercial general liability (CGL) insurance policies, as well as pollution legal liability (PLL) insurance policies to address mold issues. In general, it is likely that approval or use of these policy forms in the various states will not generate the notoriety that revisions in personal lines, such as homeowners policies, have generated in states like Texas. Also, it is safe to say that any, if not most, insureds will be faced with addressing insurers' efforts to exclude mold coverage on their next renewal, if they have not been faced with that situation already.

Existing Policy Forms

The current litigation involving mold bears many similarities to asbestos litigation in earlier decades. That litigation led the insurance industry to promulgate absolute asbestos exclusions and endorsements that are attached to most liability insurance policies. The insurance industry's response to mold claims is substantially similar.

Due to the nature of mold claims, that is, the fact that they involve water infiltration or excess humidity in enclosed buildings, they usually involve some sort of allegation of construction or maintenance defect. As such, they typically involve several groups of exclusions. The pollution exclusion may be involved, both for allegations of bodily injury and property damage. As to the allegations of construction defect itself, and resulting property damage from the mold and cleanup costs, the so-called business risk or work product exclusions are also invoked.

Both the terms "business risk" and "work product" are something of a misnomer. Those terms are not usually used in standard liability insurance forms, such as the Insurance Services Office, Inc. (ISO), CGL policy form. Rather, they refer to somewhat nebulous underwriting concepts, such as the hesitancy of insurers to cover the business risks or defective work or products of their insureds.

Pollution Exclusion

Superficially, mold claims are similar to environmental or other toxic tort claims. However, issues have arisen as to whether an infestation of mold in an indoor environment constitutes the type of discharge, dispersal, or release of pollutants intended to be excluded under a pollution exclusion originally developed in response to widespread industrial environmental contamination.

A companion issue is whether microorganisms such as mold and their mycotoxins constitute the type of industrial chemicals and substances generally regarded as pollutants under the standard pollution exclusion. Finally, the current pollution exclusion promulgated by ISO in 1986 does not apply to products-completed operations exposures. To date, there appears to be no definitive appellate opinion which addresses the applicability of the pollution exclusion to mold claims, either in the bodily injury or property damage context.

"Business Risk" Issues

Defects in buildings typically involve application of standard policy exclusions that deny coverage to contractors for property damage arising out of defective workmanship, but not damage caused by defective work to a third-party's property. These exclusions, Exclusions j(5), j(6), k, l, m, and n of the CGL form, are often referred to as the "business risk" or "work product" exclusions. In addition, "owned, occupied or rented" property exclusions such as Exclusion j(1) of the CGL form, may also apply to coverage for building owners or landlords as to repair the property damage or clean up of mold in their buildings.

In many states, there is an ebb and flow as to the scope of coverage provided for defective workmanship or products incorporated into buildings, and often a disagreement among the courts. The hotly litigated coverage issues surrounding defective work or products add another layer of complexity to mold claims that are the result of building defects.

Modification of CGL Policies

Due to the uncertainties as to the applicability of the pollution exclusion and "business risk" exclusions to these types of claims, the insurance industry is adding endorsements to liability policies to absolutely exclude, or to severely reduce the coverage available for mold claims to commercial insureds.

ISO, the industry organization that promulgates standard CGL forms, has recently filed new exclusion endorsements for attachment to CGL policy forms. The "Fungi or Bacteria Exclusion Endorsement," (CG 21 27 04 02) expressly excludes cleanup and remediation costs and personal injury. It applies to both course of construction and completed-operations exposures. An obvious problem for insured building owners or contractors may be the exclusion's broad application to "cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of" mold. Generally, repairs of water damage to buildings or construction include not only repair of the defect or condition causing the water infiltration or humidity, but also the mold itself. It is unclear what effect this exclusion will have on those types of repairs of water damage where mold is involved.

ISO has also promulgated a "Limited Fungi or Bacteria Coverage Endorsement" (CG 24 25 04 02), which provides a separate, and presumably smaller, aggregate limit for a "fungi or bacteria incident" resulting in bodily injury or property damage.

These endorsements have been filed with state regulators, and are expected to be implemented in various states in April, May, and June 2002. As part of the filing, ISO has included endorsements to be used with its standard umbrella liability form, as well as with owners and contractors protective liability and products/completed operations liability coverage forms. These other endorsements are substantially similar to those discussed above.

Of course, there are many manuscript endorsements in use. They use varying terminology, and exclude coverage for "pathogenic organisms," or "moisture-related deterioration." Some examples of these manuscript endorsements are as follows:

Pathogenic Organisms Exclusion This insurance does not apply to: 'Bodily Injury' [or] 'Property Damage' . . . arising out of any 'pathogenic organisms', regardless of any other cause or event that contributed concurrently or in any sequence to that injury or damage. 'Pathogen [sic] organisms' means any bacteria, yeasts, mildew, virus, fungi, mold or their spores, mycotoxins or other metabolic products.

The following exclusion is added to Section 2. Exclusions in Section 1.A. BODILY DAMAGE AND PROPERTY DAMAGE LIABILITY. This insurance does not apply to "bodily injury" or "property damage" that is within the definition of the "products-completed operations hazard" and that either consists of, is caused by, arises out of, or is aggravated by "moisture related deterioration." This exclusion applies even if causes other than "moisture related deterioration" add to or contribute, directly, indirectly, or in any manner or sequence to the "bodily injury" or "property damage." This exclusion does not apply if the "bodily injury" or "property damage" consists of, is caused by, or arises out of any of the following: The "collapse" of any building or structure. Water escaping from within leaking or bursting pipes, plumbing fixtures, appliances, or equipment located within a building or structure. The presence or entry of liquid or frozen water into the occupied spaces of a building. "Moisture related deterioration" means: Mold, mildew, fungi, or their spores, scent or byproducts. Rot, decay, corrosion, or other gradual deterioration, delamination, adhesive or cohesive failure, weakening, or deformation of wood products or other material caused by continuous and/or prolonged and/or repeated contact with water or moisture. This definition applies even if the water and/or moisture also contains chemical elements other than water "Collapse" means the abrupt falling-in, abrupt loss of shape, or abrupt flattening into a mass of rubble of a building or structure.

While the terminology may vary somewhat, the result of these endorsements appears to be the same: the exclusion of mold claims from CGL insurance coverage.

Pollution Legal Liability (PLL) Policies

In addition, insurers are addressing coverage for mold under pollution legal liability (PLL) and other pollution policies, such as contractors pollution liability (CPL) policies, expressly extending the definition of "pollutant" to include fungi or bacterial matter which produces the release of spores or the splitting of cells, including mold, mildew and viruses. However, underwriting considerations may dictate that such coverage be provided only through a relatively small sublimit. Alternatively, in order to obtain a higher sublimit, an additional premium may be charged on a case-by-case basis. Still other insurers may not offer such coverage or enhancements at all.

The tendency appears to be that insurers issuing both CGL and PLL policies to the same insured will attempt to absolutely exclude mold and mildew exposures from the CGL, and attempt to isolate them in a PLL-type policy. This may allow insurers to provide more control over available sublimits, as well as to adjust deductibles, which are more common in PLL policies. Moreover, since PLL policies are usually written on a claims-made basis, avoidance of long tail Montrose-type losses may be accomplished.

An example of one insurer's language adding mold exposures to the definition of "pollutants" to be covered under a PLL policy is as follows:

Pollution Conditions means the discharge, dispersal, release or escape of any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, medical waste, and waste materials into or upon land, or any structure on land, the atmosphere or any watercourse or body of water, including groundwater, provided such conditions are not naturally present in the environment in the amounts and concentrations discovered. Pollution Conditions shall include Microbial Matter in any structure on land and the atmosphere contained within that structure. Microbial Matter means fungi or bacterial matter which reproduces through the release of spores or the splitting of cells, including but not limited to, mold, mildew and viruses, whether or not Microbial Matter is living.

Conclusion

Endorsements or revisions to liability policies will most likely eliminate coverage for mold or similar sick building exposures. Insureds should be on the lookout for such endorsements to their policies at the time of renewal. While coverage may be available, the amount and premium will surely require intense negotiation.

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