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.
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 previously.
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.
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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.
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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.
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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.