Expert Commentary

Insurance Coverage for Mold Arising Out of Defective Workmanship

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.


Construction Defect Coverage
February 2001

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.


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