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
e-mail at