e. Any of the following:

(1) Wear and tear, marring, deterioration;

(2) Inherent vice, latent defect, mechanical breakdown;

(3) Smog, rust or other corrosion, mold, wet or dry rot;

(4) Smoke from agricultural smudging or industrial operations. . .

Note that the policy does not exclude mold damage. Rather, it excludes mold as the cause of loss.

By placing mold in this laundry list of other things that happen over a long period of time, it is clear that the policywriters intention was to only exclude mold that just happens–like in the corner of a damp basement or on the underside of the steps leading down to that basement.

In order to stem what it feared might be a mounting tide of mold claims, Insurance Services Office filed new homeowners forms with what appears to be more restrictive language. The exclusion of mold has been removed from that laundry list and placed on its own. The 2001 edition of the HO-3 reads as follows:

2. We do not insure, however, for loss:

c. Caused by:

(5) Mold, fungus or wet rot. However, we do insure for loss caused by mold, fungus or wet rot that is hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure if such loss results from the accidental discharge or overflow of water or steam from within:

(a) A plumbing, heating, air conditioning or automatic fire protective sprinkler system, or a household appliance, on the “residence premises;” or

(b) A storm drain, or water, steam or sewer pipes, off the “residence premises.”

For purposes of this provision, a plumbing system or household appliance does not include a sump, sump pump or related equipment, or a roof drain, gutter, downspout or similar fixtures or equipment.

While this language would have clearly provided coverage in a Ballard-type situation, ISO has said that this language is a clarification of its intent.

If read literally, it appears that the only type of mold damage the form drafters want to cover is that resulting from the types of “accidental discharge or overflow of water or steam” as quoted above.

But that leaves open the question: what happens in case of a fire? The fire department comes, puts out the fire with a lot of water, and then mold grows. Will that mold damage be covered?

Unquestionably, it should be. Fire was the proximate cause of the loss. Again, a literal reading of this language might cause a denial of such mold damage, because it didnt result from “an accidental discharge” as described above.

The same question arises for homeowners along the Atlantic and Gulf coasts. What if a hurricane rips off the roof of a home and water enters, and then mold grows before restoration work can be done? Again, that literal reading of the policy might cause denial of a mold claim following a hurricane.

Note also that the new language requires that the mold be “hidden” in order to be covered. That apparently rules out mold that is visible on walls, floors, carpets and furniture–even mold that results from a described discharge.

While I applaud the policywriters good-faith efforts at clarification of a very complex issue, I believe that if adjusters, agents and consumers arent careful, the new language may cause more and different problems.

My best advice in case of a mold claim: stand back, take a deep breath, and examine the policy against whether mold damage has arisen out of a covered event, or whether mold is the excluded event.

It makes a difference. Maybe millions of dollars worth.

Michael K. McCracken, CPCU, ASLI is Associate Editor of FC&S, published by the National Underwriter Company in Erlanger, KY. The FC&S editors welcome comment and questions, and may be reached via e-mail at [email protected]

Reproduced from National Underwriter Edition, March 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.