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:
- temperate climate (typically above 70 degrees Fahrenheit);
- existence of nutrient source such as wood, paper, or other cellulose-
or carbon-based material; and
- 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.
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
email.