Dallas, TX – Mold Crisis? What crisis? Has cheese gone bad? In case you haven’t been paying attention to the world of litigation, there has been an explosion of lawsuits relating to the presence of mold in buildings. Here are some recent headlines: New York: Last year, 125 New York City families filed an $8 billion lawsuit against their landlord because they allege a toxic mold has spread sickness and possibly even caused the death of a seven-year-old girl who died from asthma-related causes.
- Texas: In June 2001, a jury awarded a Texas family $32 million (later reduced) in a highly publicized toxic mold lawsuit against Farmers Insurance Group. The jury said Farmers Insurance failed to promptly cover the necessary repairs for a water leak, thus allowing toxic mold to overrun Melinda Ballard’s rural home.
- Ohio: Builder sued for $75,000,000 by homeowner for damages to home, health and financial future due to the presence of “toxic” mold.
- Connecticut: School contaminated with mold. 40-60 students sick including two hospitalized.
- California: Insurance companies balk at issuing homeowners insurance due to mold “crisis.” State Senator Ortiz introduced a bill including the “Toxic Mold Protection Act” requiring the State Department of Health Services to adopt specific regulations to protect the public health from mold.
Washington, D.C: Representative John Conyers (D. Mich.) will introduce legislation requiring the EPA to prepare guidelines setting levels of toxic mold as dangerous or acceptable and proposing that the government oversee the mold remediation industry.
Nationwide: Property damage claims due to mold damage are increasing forcing insurance companies to raise premiums from 6 to 15 percent.
These are just a few of the many stories relating to the growth of mold-related claims against insurance companies, contractors, building owners, architects and engineers. The Insurance Services Office, Inc. (ISO) has just released a special endorsement to commercial general liability (CGL) policies titled “Fungi or Bacteria Exclusion,” effective May 1, 2002. The exclusion for Fungi or Bacteria states in part:
A. “bodily injury” or “property damage” which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any “fungi” or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.
B. Any loss, cost or expense arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of , or in any way responding to, or assessing the effects of, “fungi” or bacteria, by any insured or by any other person or entity.
“Fungi” is defined as “any type or form of fungus, including mold or mildew and any mycotoxins, spores, scents or byproducts produced or released by fungi.
The exclusion, CG 21 67 04 02, would apply to both Section I-Coverage A (Bodily Injury and Property Damage Liability) and Coverage B (Personal and Advertising Injury Liability) of the CGL policy.
If this exclusion is uniformly enforced (and it’s too early to tell if it will be), then responsibility for paying for and defending claims of mold damage will fall to the insureds. Uniform enforcement of the exclusion may reduce the number of mold lawsuits. However, as long as there are other solvent defendants, plaintiffs, such as tenants, building owners and employees will continue to bring mold claims. Mold, unlike asbestos, which spawned massive litigation in the 1980s, is not a man-made substance that was purposely introduced into buildings by humans, nor can it be completely removed from buildings.
What is Mold?
Mold is a naturally occurring organism and it is everywhere. It can grow on any organic substance, as long as moisture and oxygen are present. The terms mold, mildew and fungus are synonymous. Fungi have been described as “the garbagemen of nature.” They are found naturally both indoors and outdoors and are carried about by air currents, objects, people and animals. Fungus is incapable of producing its own food; it produces enzymes that break down other matter upon which it thrives. Almost any object containing carbon-based matter, including petroleum products, plastics, textiles and paint, can act as its food source. Although molds can be useful, such as in the baking of bread, fermenting of alcohol, production of cheese and production of medicine, such as penicillin, they also can be detrimental. Fungal spores can cause allergic reactions in people and more severe reactions in some cases.
Three things needed for the development of fungi are: fungal spores, a food source and water. Because these spores can spread everywhere indoors and outdoors by air movements, objects, people and animals, it is physically impossible for the average commercial building to be free of fungal spores. The way to prevent fungal growth is through control of water. A fungus will not grow unless the moisture content is at least 25%. If it is too dry or too wet the spores will not grow.
Moisture can enter a building through outside air infiltration, water diffusing through the building envelope, moisture in construction materials, moisture from people, leaks from the building and water damage from burst pipes or from fire extinguishment. Humidity problems arising from the intrusion of humid outside air and water diffusing through the building envelope are the most complex problems to solve.
Mold litigation falls into two general types of claims – personal injury claims and property damage claims. Most recent claims are homeowners and other building occupants suing contractors and insurance companies for “personal injuries” i.e. alleged health effects due to the presence of mold in the building or home. Property damage claims are brought by building owners against contractors, architects and engineers and their insurers for constructing or designing a building that allowed mold to grow. Although health concerns may be an issue in this type of litigation, the primary issue is to recover remediation and reconstruction damages rather than to prove that mold exposure caused occupants’ medical conditions.
Finding sources of funds to pay legal costs to defend these lawsuits and to pay subsequent judgments or settlements can be a challenge for all parties. One potential source of funds is insurance. All parties should look closely at their available insurance coverage. There are several types of coverage that may apply:
Design Professional Insurance
Assuming that the design professional has insurance, the primary questions are how much coverage is available, and will there be any coverage left after paying defense costs? Surprisingly, design professionals on large projects frequently have relatively low coverage limits, sometimes $1 million or less. In addition, many owners are unaware that the insurance policy is written so that the cost of litigating the dispute reduces the amount of coverage. This is called a declining balance policy. With this type of policy, it is possible that there will be little or no insurance left to pay a judgment after paying all the legal costs for a trial or an appeal.
Another concern with design professionals’ liability insurance is whether the policy is a “claims made” or an “occurrence” policy. Claims made policies cover only those claims made during the policy period, regardless of when they arose. Occurrence policies cover claims that arose during the policy period, regardless of when they are made. It is not uncommon for owners to require design professionals to have errors and omissions coverage during a project, only to find that the coverage has been dropped by the time the claim arises, leaving the owner with no “deep pocket.”
Builder’s Risk Insurance
Usually, contractors purchase builder’s risk insurance to cover possible property damage while the project is under construction. However, sometimes the policy includes the owner as an “additional insured,” thus providing additional insurance. The Polk County Courthouse was one of the first “sick building” cases in the United States. The courthouse was riddled with mold resulting from water leaks through the walls and windows and HVAC defects. The County was named as an additional insured on the general contractor’s builder’s risk policy. The County sued the architect and the general contractor for design and construction defects; it also sued the builder’s risk insurer for breach of contract for denying its claim. After settling with the contractor and the architect for $12.8 million, the County went to a jury trial against the insurance company and obtained a $25.9 million judgment. The case was settled on appeal.
Contractor’s Commercial General Liability Insurance
Commercial general liability insurance generally does not cover the cost to repair or to replace defective work or the material itself, but covers consequential damages arising from defective work. Consequential damages may include loss of use of the building, damages to furniture and fixtures and, in some cases, the cost to repair other portions of the work. The wording of the standard general contractor’s CGL policy states that defective work performed by subcontractors is covered, but defective work the general contractor performed itself is not covered.
The owner, the general contractor and the subcontractors should carefully examine the CGL policy and its exclusions. From the owner’s standpoint, the CGL insurance may be a good source for paying a settlement or a judgment. From the general contractor’s and subcontractor’s standpoint, the CGL carrier may help pay costs to defend a lawsuit. Of course the presence or absence of the new Fungi and Bacteria Exclusion would also apply to this insurance analysis.
Homeowners’ and Commercial Property Insurance Policies
These policies typically provide coverage for “covered causes of loss.” Any risk not specifically excluded or limited under the policy can be a “Covered Cause of Loss.” Homeowners’ insurance carriers argue that mold is caused by the owner’s failure to maintain the residence and, therefore, is not covered under the policy. They may also deny coverage on the basis that homeowner’s insurance does not cover faulty design or construction. Insurers also may attempt to use the “pollution exclusion” to deny coverage. An Arizona court recently ruled that mold did not come within the pollution exclusion of an insurance policy. Although some carriers are now writing “mold” exclusions in their policies, a Texas court held that, despite a mold exclusion, homeowners could recover for mold damage resulting from a leaking roof because it was “ensuing loss caused by water damage.”
Insurance companies have asserted the pollution exclusion clause, such as the following:
It is hereby understood and agreed that such insurance as is afforded by this policy does not apply to any claim based upon, arising out of or in any way involving the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants.
This exclusion has had only limited success in blocking mold claims, hence the adoption of the new fungi or bacteria exclusion.
The new ISO Fungi or Bacteria Exclusion purports to exclude insurance coverage for any property damage or bodily injury due to the presence of mold. The extent to which the exclusion will be enforced and how the exclusion will be interpreted is unknown at this time. If this exclusion is fully and uniformly enforced there will be no insurance coverage for mold damage claims under a CGL policy. The burden on paying those damages will then fall on the insured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.