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Mold and Fungi Insurance Claims

August 2004

"Mold is gold," according to some in the claims industry. The growth of these claims has been exponential, with more than 10,000 mold claims currently pending in the United States, particularly in Florida, California, Texas, and Arizona. Is mold a real health threat? Are remediators actually able to solve the problem? These and other questions remain unresolved.

by Barry Zalma
Barry Zalma Inc.

When insureds, public insurance adjusters, and plaintiffs' lawyers speak of claims against insurance companies claiming damage by mold, they often say, "Mold is gold." Mold claims are a growth industry. The number of claims for damage by mold has increased by more than 1,000 percent in some areas. Mold claims appear in both wet areas, like Houston, as well as in dry areas, like Phoenix.

On February 12, 2004, the Wall Street Journal led its "Personal Journal" section with an article entitled: "Forget Plastics. The Future Is in Mold." Michelle Higgins, writing for the Journal, concluded that, since there are no federal or state regulations that control mold companies, mold inspectors and remediation companies have sprouted like mushrooms in a dark, warm basement. None of these companies requires licenses or certification to operate.

The new industry—mold remediation—is trying to create standards. For example, the Institute of Inspection, Cleaning and Restoration, has issued a mold remediation Certification Standard (IICRC S520), as has the U.S. Occupational Safety and Health Administration (OSHA). No local, state, or federal agency, however, has imposed standards or required licensing of mold inspection or remediation companies.

Insurers were not prepared to deal with claims of damage from mold. In addition, there is no scientific standard for the amount of mold, if any, that is toxic to humans. As a result, litigation has exploded in every state (but concentrated in Texas, California, Florida, and Arizona) with more than 10,000 pending lawsuits.

Five years ago, there were no mold-removal companies. Today, estimates indicate there are between 10,000 and 20,000 mold-removal companies in the United States according information the Wall Street Journal obtained from the Indoor Air Quality Association.

Insurers, and their claims personnel, who are not prepared to deal with the constant growth of mold claims will pay hundreds of thousands of dollars to resolve a claim from a leaking water pipe that settled 5 years before for $1,500.

What Is Mold?

Mold and fungi exist everywhere. The spores they release as part of their reproductive process are claimed to cause illness and injury to humans and destroy property containing cellulose. Wood, paper, and the paper coverings of drywall are all vulnerable to mold. Mold growth can destroy, by slow rot, buildings designed to withstand major earthquakes. As a result, litigation claiming injury due to fungal or mold contamination is a growing industry.

The term "mold" is a layman's term for microscopic filamentous fungi. Mold is the microscopic version of the mushroom. Mold is everywhere. It is a living thing that is neither animal nor what is usually considered a plant. It grows naturally outdoors. The spores, which molds create to reproduce, are present in the air. When mold moves indoors, it grows rapidly in environments that contain an excessive amount of moisture.

Many molds are benign. Some are wonderful and tasty, like mushrooms and the fungi that convert milk to cheese. Other molds, called mycotoxins, produce toxins that can be harmful to human health. Mycotoxins can be absorbed into the human body through the intestinal lining, airway paths, and skin. Human exposure to mold can be dangerous.

Mycologists have estimated that there are hundreds of thousands of species of mold, each having its own preference for moisture, temperature, and food source. Mold grows on all plants, animal matter, and in soil. Spores are blown about by the wind and are almost always found in indoor and outdoor air. They are a normal component of house dust.

Mold spores are hardened containers sufficient to create new mold creatures. When the spores bump into dry walls, they simply rebound and continue floating. When they bump into wet walls, however, they stick.

The main body of the mold can't handle everything it absorbs. Much of the nourishment absorbed by the mold is poisonous. To solve this problem, they spray out the excess, releasing it as a gas. At any moment during the day, there will be freshly landed molds on the walls of every home in the country excreting carbon dioxide, hydrogen cyanide, ethanol fumes, various alcohols, and much else.

Concentrations are generally too low to detect (except with special equipment). When the mold levels are high enough to produce this odor, they are likely visible. Enormous colonies of mold will appear as an unpleasant fur-like growth on walls, floors, or ceilings. Even when the density is too low to see, many thousands of separately plugged-in mold individuals exist on a home's inner walls.

Mold typically grows on organic materials that remain moist for more than 24 hours. Materials exposed to high humidity can become moist enough to support mold growth. Good housekeeping requires, therefore, a reduction in humidity and the drying out of any moisture that might exist in organic compounds that could support mold growth. If proper maintenance is not followed, the volatile organic compounds released by some molds that are toxic and associated with Sick Building Syndrome (SBS) may grow and cause injury.

Molds are extremely hearty living things. They can be anywhere and they are difficult to kill until they grow into colonies large enough to be seen by the human eye.

The Ubiquitous Problem

When mold grows in moist organic materials, building occupants may begin to notice odors and suffer from a variety of health problems associated with mold exposure. Molds produce allergens, irritants, and in some cases, toxins that endanger humans and animals. Some toxic molds such as aspergillus, cladosporium, penicillium, stachybotrys, and trichoderma produce mycotoxins capable of causing severe health problems. Mold spores and fragments can produce allergic reactions in sensitive individuals regardless of whether the mold is dead or alive. Repeated exposure to mold or mold spores may cause previously nonsensitive individuals to become sensitive.

Mold has been documented to weaken people's immune systems, leading to a variety of infections and problems. People with weak immune systems (i.e., immune-compromised or immune-suppressed individuals) are more vulnerable to infections by molds (as well as more vulnerable than healthy persons to mold toxins). Healthy individuals are usually not vulnerable to opportunistic infections from airborne mold exposure. However, molds can cause common skin diseases, such as athlete's foot as well as other infections, such as yeast infections.

The National Institute for Occupational Safety and Health (NIOSH) prefers the term "Indoor Air Quality" (IAQ) rather than SBS. If 20 percent of the workforce has symptoms—including watering eyes, hoarseness, headaches, dry itchy skin, dizziness, nausea, heart palpitations, miscarriages, shortness of breath, nosebleeds, chronic fatigue, mental fogginess, tremors, swelling of legs or ankles, and cancer—the building may be labeled a "sick building." The telling factor is if the symptoms ease when workers are at home or on vacation.

The Science of Mold and Fungi

The Center for Legal Policy of the Manhattan Institute published a paper on July 17, 2003, titled "The Growing Hazard of Mold Litigation." The authors of the Center's article found that one of the triggers of the thousands of mold-related lawsuits was a study from the Centers for Disease Control and Prevention (CDC). The CDC scientists took samples and concluded that molds, including stachybotrys chartarum, could be at fault for illnesses suffered by a small group of children. [Cliff Hutchinson and Robert Powell, A New Plague—Mold Litigation: How Junk Science and Hysteria Built an Industry, published by the U.S. Chamber Institute for Legal Reform.]

Publicity arising from the CDC's 1995 Cleveland report caused the CDC to form two expert panels to reexamine the initial findings. The CDC convened a panel of outside experts and an internal working group, including epidemiologists and an industrial hygienist, to evaluate the Cleveland study. The working group issued a report on June 17, 1999, which was dramatic in its scientific indictment of the initial study. The Cleveland researchers apparently misdiagnosed the illness of the affected infants and made numerous statistical and survey errors. Regardless, the 1995 report is still cited in court as evidence that molds are toxic.

In "Update: Pulmonary Hemorrhage/Hemosiderosis Among Infants—Cleveland, Ohio, 1993-1996," 49(09) Morbidity & Mortality Weekly Report 180 (March 10, 2000), the CDC published a further report in 2000, concluding that an association between stachybotrys and pulmonary hemorrhage in infants "was not proven." The update noted, with some concern, that the earlier findings had been cited in health guidelines, congressional testimony, and the popular media. Lawyers, plaintiffs, insurers, and courts ignored the scientific evidence and continued to allow evidence based on the 1995 study. More studies are ongoing, attempting to justify court judgments that supported major jury verdicts.

The Ballard-Allison Case

Melinda Ballard, the plaintiff who recovered $32 million (later reduced to $4 million) from Farmers Insurance Exchange (FIE) because of a mold problem, is the founder of Policyholders of America, an organization designed to help people recover from their insurers. This case should be studied as a model of how not to investigate and adjust a claim of damage resulting from mold.

The Texas Court of Appeals, Third District, at Austin, reversed much of the trial court's opinion in Ronald Allison/Fire Insurance Exchange v Fire Insurance Exchange, A Member of the Farmers Insurance Group/Mary Melinda Ballard and Ronald Allison, et al., 98 SW3d 227 (Tex App, Dist 3, 2002), and explained the factual background that resulted in an improper and excessive judgment against FIE and why there was no bad faith.

In 1990 Ms. Ballard and her husband Mr. Allison, bought a large house in Dripping Springs, Texas, for $275,000 at a foreclosure sale. The main house was approximately 7,400 square feet and had serious physical problems. She insured the house with FIE, a member insurer of the Farmers Insurance Group, for $313,000 on the house and $187,800 for the contents. Court records indicate that Ms. Ballard was in constant contact with FIE's claims department, making claims for water leaks and damages caused by leaking plumbing.

As the plumbing failed in different parts of her home, Ms. Ballard was able to use the insurance claims money (all legitimately obtained) to remodel her house. As a person who was knowledgeable about insurance (see www.policyholdersofamerica.org), Ms. Ballard recovered money sufficient to indemnify most of her original losses.

By the time litigation began, Ballard had become dissatisfied with the services provided to her by FIE. The last series of claims were assigned to an inexperienced adjuster, Theresa McConnell, whose claims handling errors, admitted to at trial, resulted in verdict against FIE for more than $32 million. The Texas Court of Appeal reversed the punitive damages but allowed Ballard to keep over $4 million in compensatory damages.

  • Ballard's suit was, in fact, not a "mold" suit but a "bad faith" suit. The lawyer who tried the case for Ballard has explained his trial strategy by emphasizing lies the adjuster admitted telling Ms. Ballard. For detail see [Mold Bad Faith Cases, Tools and Strategies, by Fred Hagans and Jennifer Rustay, The Brief, Fall 2003, A Journal of the Tort Trial and Insurance Practice Section of the American Bar Association.]

Professional and knowledgeable claims handling should avoid litigation and charges of bad faith. Ballard won her case against Farmers because the Farmers employees admitted they lied to her and that the statement that "Farmers gets you back where you belong" was "just an advertising slogan." The jury was clearly angered.

A tropical storm hit Texas just days after the judgment and, with the news from the verdict, a statewide hysteria over what was called "toxic" mold grew exponentially. Plaintiff law firms created "mold information" websites and mold remediation experts appeared to serve the need fueled by the toxic-mold hysteria.

Recent Court Cases

Although the hysteria no longer controls the public or the insurance industry, mold litigation continues to grow across the country, resulting in extremely large verdicts against builders, property owners, and insurers. The National Association of Mutual Insurance Companies tracks mold suits at its website at http://www.namic.org/. Every judgment or settlement claiming damages from mold make headlines and cause a new hysteria.

California

In November 2003, a Tulare County, California, Superior Court judge settled a lawsuit against the County over exposure to a dangerous mold found above a ceiling tile in her court chambers. The County agreed to pay Judge Elisabeth Krant $40,000, but did not admit liability in addition to the $277,500 she obtained from 10 contractors who built the Tulare County Courthouse where the mold was found. She expects to collect from 5 more contractors an additional $80,000 to $180,000.

Judge Krant, who was out of work for a year with illnesses she attributed to mold exposure, now works in the courthouse in Tulare. The mold found in a tile over Judge Krant's office was found to be stachybotrys, which she linked to certain illnesses. [Judge Krant's story was reported at www.moldupdate.com.]

Florida

On November 26, 2003, Tony Doris of the Miami Daily Business Review reported that one of the nation's largest real estate investment trusts will pay a multimillion-dollar settlement. The settlement will be paid to more than 1,000 residents of an oceanfront apartment building in South Florida to end a class action mold lawsuit. Total repair, settlement, and related costs in the case could reach $25 million.

At Harbour House, experts retained by the plaintiffs found mold in 450 of the tower's 452 units. In some units, they found mold spores equal to 100 times the number of spores naturally occurring outdoors. Since mold is present in the environment everywhere, and since 100 times natural outdoor levels have not been shown to cause injury, the settlement is an expression of fear of a runaway jury verdict in a class action suit.

Testing for Mold

Often, the largest expense incurred by insurers faced with mold claims are the fees of experts to test for mold and provide opinions on what is needed to remediate the situation. It is imperative that every claims person faced with a mold claim understand how the sampling is done, and the weight that should be given to the findings.

An expert testing for mold will collect samples for laboratory analysis. These may include: air samples, bulk/surface sampling, dust collection samples, tape lift sample, and wipe or "swab" samples. OSHA recommends that, in most cases, if visible mold growth is present, sampling is unnecessary. Air sampling for mold may not be part of a routine assessment because decisions about appropriate remediation strategies often can be made on the basis of a visual inspection.

The first step in any mold investigation is to inspect for any evidence of water damage and visible mold growth. In many cases, it is not economically practical or useful to test for mold growth on surfaces or for airborne spores in the building. OSHA does not recommend testing because:

  • There are no standards for acceptable levels of mold in buildings, and the lack of a definitive correlation between exposure levels and health effects makes interpreting the data difficult, if not impossible. ["A Brief Guide to Mold in the Workplace, Safety and Health Information Bulletin," U.S. Department of Labor, document SHIB 03-10-10 www.osha.gov/dts/shib/shib101003.html].

Consultation with an industrial hygienist or other environmental health or safety professional with experience in microbial investigations should be performed before a decision is made that sampling for mold is necessary or useful, and to identify persons who can conduct any necessary sampling. Sampling results can be used as a guide to determine the extent of an infestation and the effectiveness of the cleanup. Interpretation is best left to the industrial hygienist or other environmental health or safety professional.

Mold Remediation

In all situations, the underlying cause of water accumulation must be rectified or fungal growth will recur. Any initial water infiltration should be stopped and cleaned immediately. An immediate response (within 24 to 48 hours) and thorough cleanup, drying, and/or removal of water damaged materials will prevent or limit mold growth. If the source of water is elevated humidity, relative humidity should be maintained at levels below 60 percent to inhibit mold growth.

Emphasis should be on ensuring proper repairs of the building infrastructure, so that water damage and moisture buildup does not recur. The work area and areas used by remediation workers for egress should be cleaned with a damp cloth or mop and a detergent solution. OSHA provides detailed instructions on what is necessary for mold remediation.

Conclusion

Every insured, insurer, or their respective lawyers involved in claims regarding injury or damage due to mold or fungal infestations, must thoroughly understand every aspect of the mold claim. Knowledge about mold and mold claims is the only means by which insurers can successfully control covered mold claims or defeat those that are not covered. Knowledge in possession of an insured, a public insurance adjuster, or a plaintiff's lawyer will allow them to recover of insurance benefits owed to their clients and protect them from adverse decisions of inadequately trained claims personnel. Mold: A Comprehensive Claims Guide is the only available source that covers every aspect of mold claims from governmental regulation to insurance policy interpretation, from claims investigation to litigation. It can be used as the basis for a training program for claims personnel or a resource for litigators pursuing or defending a mold claim.

A full table of contents is available for review at www.stpub.com/pubs/mold.htm. You can contact the publisher, Specialty Technical Publishers at www.stpub.com or (800) 251-0381.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do 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.

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