Summary: Multi-million dollar claims and settlements alleging mold infestation have triggered other claims seeking damages. Insurers found dealing with mold claims difficult because of a lack of science establishing the toxicity of mold infestations. Insurers, not wishing to deal with mold claims either wrote detailed and unambiguous exclusions or agreed to cover the injury due to mold for a small limit of liability. The most effective change in the policies have been the specific coverage with a small limit of liability.
Mold became a concern for insurers after a trial in Texas that resulted in a major verdict against an insurer. The fear of mold claims was engendered in the insurance industry by the trial court decision in Ballard v. Fire Ins. Exchange, No. 99-05232 (Texas District Court, Travis County, June 1, 2001), cited in "Jury Awards: $32 Million to Texas Homeowner in Mold Coverage Action," 6, No. 12, Mealey's Emerging Insurance Disputes 11 (June 20, 2001) and "What Coverage Attorneys Need to Know About Mold," Tort and Insurance Practice Law Journal, (Fall 2002 (38:1), at page 45).
In fact, the fear of being painted with the Ballard brush was mostly misplaced. The verdict was the result of poor claims handling, not mold. Almost the entire $32 million verdict was punitive damages that did not withstand appellate review and resulted from an admission by the adjuster that she lied to the insured.
The appeals court reversed much of the trial court's opinion in Allison v. Fire Ins. Exchange, 98 S.W.3d 227 (Ct. App. Tx.–Austin 2002) and explained the factual background that resulted in an improper and excessive judgment against the Fire Insurance Exchange (FIE). The court described the evidence presented at trial in detail necessary to the understanding of the decision.
In order to avoid an insurance claim as complex as this one, the FIE should have followed proper claims-handling protocol. The lawsuit, and the results of the lawsuit, could have been avoided.
In the following discussion, we explore the topic of mold—what it is, health issues, and clean-up. We examine homeowners, commercial property, and liability forms and endorsements and review current court cases addressing mold.
An extensive, though by no means comprehensive, list of sources used as background or specifically cited in this discussion is included.
Topics covered:
What Is Mold?
Mold is a subset of fungi. Since fungi are neither plant nor animal they are difficult to classify. Fungi share with animals and plants the ability to absorb various products for nutrition. Fungi move by extending filaments from the main body. When one of the filaments contacts a food supply, according to Dr. Blackwell "the entire colony mobilizes and reallocates resources to exploit the new food. Should all food become depleted the mold or fungi sends out spores. Although the fungal filaments and spores are microscopic, the colony can be very large with individuals of some species rivaling the mass of the largest animals or plants."
According to Webster's Collegiate Dictionary, Tenth Edition, fungi are "saprophytic and parasitic spore-producing organisms usu. classified as plants that lack chlorophyll and include molds, rusts, mildews, smuts, mushrooms, and yeasts." Mold is "a superficial often woolly growth produced esp. on damp or decaying organic matter or on living organisms."
Molds are found wherever there is moisture, oxygen, and something to feed on. All molds require some form of moisture to grow, although the amount of moisture varies for different species. Molds also need an organic source of food. Although they appear to grow on glass, tile, stainless steel, cookware, and similar surfaces, they generally feed off some organic source deposited on these surfaces (e.g., oils, film, dirt, or skin cells).
In essence, mold is found everywhere and complete elimination is impossible. In the U.S. molds presented a health hazard primarily to agricultural workers, since mold is found in abundance in the outdoors around compost or moldy hay or grain.
Mold has played an historical role. Although we think today of mold as an inhaled nuisance, that has not always been the case. Alan Gotlieb, in his paper "Mycotoxins in Silage: A Silent Loss in Profits," says that "in Europe, Napoleon's defeat in Russia may not have been due as much to cold but rather to ergotized [poisoned by ergot, a part of a fungus that can replace the seed of a grain head] grain fed to their animals which resulted in a catastrophic loss in horses….In Russia, during World War II, thousands of civilians died due to a fall grain harvest delayed by war until spring. The result was a grain crop contaminated with T-2 toxin, produced by a Fusarium mold in the grain heads. T-2 is also the primary toxin in the biological weapon known as yellow rain."
There are over 100,000 known species of mold. The most common indoor types of mold are Penicillium, Alternaria, Aspergillus, Cladosporium, and Mucor. Stachybotrys chartarum (also known as Stachybotrys atra) is the type of mold thought to produce the most risk to habitability because some believe it is toxic to humans. The mold produces mycotoxins that might cause physical reactions in some individuals. That is not to say the other molds are not potentially dangerous.
Stachybotrys is a greenish-black fungus that grows on material with a high cellulose and low nitrogen content—such as fiberboard, gypsum board, paper, dust, and lint—that becomes chronically moist or water damaged due to excessive humidity, water leaks, condensation, water infiltration, or flooding. No one knows how often this fungus is found since buildings are not routinely tested for its presence. However, one study produced by the California Department of Health Services found it in 2.9 percent of sixty-eight homes. Under the appropriate environmental conditions it can produce several toxic chemicals.
Stachybotrys is the mold most often found in residential locations and is the culprit in most insurance claims. The mycotoxins that litigants claim it releases are chemicals present on the spores and the small fungus fragments that are released into the air. Although spores and other parts of this fungus are usually trapped in a wet, slimy mass of fungal growth, many health officials are concerned that spores may become airborne when the fungus dies and dries up. Because the spores are very small, some may be drawn into the lungs when airborne spores are inhaled. Stachybotrys causes significant health effects in humans. Individuals with chronic exposure have reported cold and flu symptoms, sore throats, diarrhea, headaches, fatigue, dermatitis, localized hair loss, and generalized malaise. It is also claimed to produce mycotoxins that can suppress the human immune system. Mold also appears in every home benignly in blue cheese, mushrooms, and sour dough bread.
In Housing Authority of Baltimore City v. Roy, No. 2167, 2008 WL 565265 (Md.Sp. App. Mar. 4, 2008), the Maryland court found that the testimony of a physician was sufficient to permit a finding by the jury that there was a cause and effect relationship between the Stachybotrys mold conditions at the property and the medical problems suffered by the residents. Yet in Henley v. Fair Grove R-10 School Dist., 253 S.W.3d 115 (Mo. App. S.D. 2008), the court found that the plaintiff failed to carry the burden of proving causation from exposure to mold.
The claimed toxic nature of mold is not presented to be alarmist in nature; rather, to put news regarding mold into perspective. Indoors, mold is likely to grow anywhere there is constant moisture, such as in basements, bathrooms, laundry rooms, or kitchens. Along with moisture, mold requires warmth and a food source. According to the Centers for Disease Control (CDC), common food sources are building materials, such as wet cellulose products. These include paper, cardboard, or ceiling tiles. Some molds grow on drywall, carpet, fabric, upholstery, or wallpaper. When disturbed or damaged, mold can release spores into the air. It is these spores that commonly produce respiratory or allergic reactions. Mold may be black, green, blue, white, or even pink in color. The New York City Department of Health stated that, "many molds are black in appearance but are not Stachybotrys. For example, the black mold commonly found between bathroom tiles is not Stachybotrys. Stachybotrys can be positively identified only by specially trained professionals (e.g., mycologists) through a microscopic exam."
To date, according to the CDC, there is no proven link between the extreme physical symptoms sometimes claimed, such as loss of memory, inability to concentrate, and pulmonary hemorrhage except in persons suffering from autoimmune diseases. There has been some evidence linking severe pulmonary hemosiderosis (a condition marked by bleeding in the lungs) in infants under six months old, but in those cases the exposure to Stachybotrys was over a period of time in highly contaminated buildings. Reliable research in this area, though, is in its infancy. According to the CDC, Stachybotrys chartarum is not particularly rare, although it is not common. However, many persons do experience an allergic reaction to molds in general, such as eye irritation and nasal stuffiness.
Methods of Testing for Mold
Air Samples: The investigator collects samples of the air to determine if hidden sources of mold are present in a building. The simplest type is called the "spore trap technique," in which a known quantity of air is drawn across a sticky surface. Spores in the air adhere to the sticky surface.
Bulk/Surface Sampling: A piece of building material or furnishing suspected of housing mold growth is cut out and sent to a laboratory. The sample can either be inspected under a microscope or cultured in a growth medium.
Bulk or surface sampling is not required to undertake a remediation. Bulk or surface samples may need to be collected to identify specific fungal contaminants as part of a medical evaluation if occupants are experiencing symptoms that may be related to fungal exposure or to identify the presence or absence of mold if a visual inspection is equivocal (e.g., discoloration or staining). An individual trained in appropriate sampling methodology should perform bulk or surface sampling. Bulk samples are usually collected from visibly moldy surfaces by scraping or cutting materials with a clean tool into a clean plastic bag. Surface samples are usually collected by wiping a measured area with a sterile swab or by stripping the suspect surface with clear tape. Surface sampling is less destructive than bulk sampling.
Dust Collection Samples: Samples of settled dust are sometimes collected to see how much and what types of fungi are in the dust.
Tape Lift Sample: A piece of cellophane tape is placed on a surface containing discoloration that is suspected to be mold. A trained mycologist using a microscope in a laboratory can confirm the sample.
Wipe or "Swab" Samples: The investigator wipes a smooth surface with a cotton swab, which is then placed in a growth media.
Other sampling methods may also be available. A laboratory specializing in mycology should be consulted for specific sampling and delivery instructions.
Most reputable sources of information suggest that a building owner need not go to extremes in dealing with mold; that is, by purchasing expensive testing kits or hiring firms to test or remediate. See, for example, the fact sheet put out by the Illinois Department of Public Health Division of Environmental Health. The sheet states that "if you can see or smell mold, testing is not necessary; it needs to be cleaned up." In fact, with regard to testing for mold in schools, the department does not recommend it because of the lack of standards as to what constitutes an acceptable level of mold. Further, because a mold count can vary from day to day, a test on one day would have no validity the next. This seems to be the general consensus in the sampling of Internet sites visited (California, New York, and Illinois). Every sample should show the count in the ambient air outside the structure and the air inside. If the counts are greater outside than inside there should not be a problem worthy of remediation.
Mold can be cleaned up by using, above all, common sense and common household products. On the other hand, if there is severe contamination, common sense requires the assistance of expert mold remediation professionals. If mold is growing on porous surfaces, such as carpet, removal of mold is generally unsuccessful and such items should be discarded.
For the remainder, the less than severe contamination, clean-up steps involve first cleaning surfaces with a non-ammonia soap and water, rinsing, and then preventing reoccurrences by disinfecting surfaces with a mixture of one-half to one cup household bleach per gallon of water. Mixing ammonia and chlorine bleach is extremely dangerous and should be avoided. Never use a cleaning solution containing ammonia with chlorine bleach. The key to common sense removal of mold is to remove the moisture it needs to grow or to remove the food it requires. Although the bleach will kill the mold, if the moisture is not removed it will return.
The EPA takes the position that eliminating the source of the moisture, and then cleaning, is adequate. The areas should then be left to dry naturally. Common sense, and science, dictates caution lest mold spores be further released into the air. For example, if mold occurs in a basement area, then basement heating or air conditioning should be turned off so spores will not travel through the ductwork into the building.
Persons with allergic reactions to mold or chronic illnesses such as asthma should not attempt cleaning. Those who do carry out cleaning operations should wear rubber gloves and HEPA (high efficiency particulate air) masks found in hardware stores. Work should be carried out in short time spans with frequent breaks in the fresh air.
Although mold can be removed, the property owner should consider that the most vital step in the process is to prevent the return of the mold. Therefore, all sources of constant moisture or humidity must be addressed. Leaking pipes must be fixed. Exhaust fans should be used in areas susceptible to high humidity, such as bathrooms and laundry areas. The humidity level in a dwelling should not exceed 50 or 60 percent.
It is entirely possible that the United States's energy conservation and building standards have exacerbated mold growth. When windows leaked a certain amount of fresh air and spacing between joists allowed air circulation between floors, moisture evaporated and mold did not freely grow. New homes and office buildings do not breathe as freely as older ones. Even if mold is a result of modern building codes, the fact remains it can easily be prevented and removed. Resorting to the type of home testing kits sold via the Internet or searching the Yellow Pages for a licensed mold remediation expert is usually a waste of money. Licensed mold remediation experts will be necessary only if the mold infestation is severe and the occupants are susceptible to injury or illness as a result of the existence of the mold.
Homeowners Insurance Implications
Because of the $32 million dollar award in Texas in 2001 in Ballard v. Fire Ins. Exchange, supra., the Insurance Services Office (ISO) and American Association of Insurance Services (AAIS) have formulated homeowners endorsements restricting or eliminating coverage for mold damage. (Note: in the remainder of this discussion mold is used as a catch-all term for any and all molds and fungi.) Insurers who draft their own forms are addressing mold as well. Given the need to formulate homeowners rates based on actuarial principles, the reasoning behind mold, fungi, and bacterial infestation is obvious. Unfortunately, coverage that had been available will now be curtailed.
Although mold exclusions in most first-party property policies and the pollution exclusions in most third-party liability policies may be seen as "notoriously complex," they are, in fact, usually clear and unambiguous. It is only the interpreters of the contract language who willfully interpret the provisions as complex or mystical when they desire to find coverage where none exists, attempting to use insurance as a form of social engineering.
When an insurer truly wishes to limit coverage for mold it should eliminate from the exclusion use of the word "cause" and, in easy to read language, simply exclude the result. An example of this wording could be the following: "Mold, or the cost to remove, repair, or remediate the existence of mold, however caused, is not covered." With regard to mold, fungi, and bacterial infestations, many states are authorizing the use of all-encompassing exclusions against such perils with coverage available at a higher premium or through the surplus lines market. The owner, contractor, and subcontractor should review the policy to determine that coverage was purchased for the risks faced.
The editors of FC&S have always held that in the ISO homeowners forms, mold damage resulting from a covered cause of loss is covered as long as an intervening exclusion (such as neglect) does not apply. The list of excluded perils, of which mold is one, stems from earlier marine coverage forms and refers to things that will deteriorate over time and are thus uninsurable. The 1991 ISO Homeowners HO 00 03 contains exclusions 2.e.(1) through 2.e.(8). Examples include metal rusts, industrial smoke discolors walls, furnaces break down, and foundations settle. These excluded causes of loss are not prefaced by concurrent causation language, as are the section I general exclusions (1.a. through 1.h.). Therefore, he efficient proximate cause theory applies—the predominate cause without which the final loss would not occur. (Be aware that not all jurisdictions recognize the efficient proximate cause theory.) For example, if a tornado removes a portion of a dwelling's roof and water gets into the interior, particularly between walls, mold damage resulting from the covered cause of loss should be covered as well.
Most mold remediation experts agree that dry-out must begin within twenty-four to forty-eight hours after water damage occurs to prevent mold growth. However, this time-frame is not always possible. When there is widespread loss (for example, the May 3, 1999, tornado that damaged a large area of Oklahoma City), restoration firms are often stretched beyond capacity. The homeowner whose roof has been removed may wish to mitigate damage, but given lack of resources may be unable to do more than cover the damaged area with a tarp. The exclusion for mold should not be used in that case to preclude coverage.
This is a rather extreme example. It is more common for mold damage to occur as the result of plumbing leaks or irrigation water seeping through unprotected walls. Although claims for mold damage are sometimes denied, it must be remembered that hidden damage should be covered unless one of the new exclusions with mold "however caused" is involved. An insured cannot know he has a loss and take steps to prevent further loss unless the result is visible. A bathroom pipe can leak undetected for considerable time until damage becomes visible. At that point the first manifestation of the loss becomes the date of the loss. If the insured then does nothing, the exclusions of mold and neglect may be used to deny coverage. However, if the insured immediately calls a plumber to rectify damage and finds mold, the remediation should be, depending on the policy wording, covered.
The ISO 2000 Homeowners Form, HO 00 03, recognizes this. The current exclusion is A.2.c.(5), which excludes "mold, fungus, or wet rot." But the exclusion continues: "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 of 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.'"
That is not to say that only mold resulting from leaking pipes is covered; again, there is no concurrent causation language preceding this exclusion. If the cause of the mold is a covered cause of loss then the mold damage will be covered. If the mold is the cause of the loss the remediation or damage will not be covered.
Not all homeowners forms are the same, however. The AAIS Form 3 (Ed. 2.0) exclusion for wear and tear, marring, deterioration, smog, and mold is located in the section of general exclusions prefaced by the statement "'We' do not pay for loss if one or more of the following exclusions apply to the loss…However, 'we' do pay for an ensuing loss that is otherwise covered by this policy." And, under the exclusions applying to coverages A and B, is the preclusion of coverage for "loss caused by repeated or continuous seepage or leakage of liquids or steam from within a plumbing, heating, air conditioning, or automatic fire protective sprinkling system; water heater; or domestic appliance." Therefore, less of a case could be made for coverage for mold damage if the AAIS insured had an on-going leak. (The "continuous or repeated" language was removed from the ISO homeowners forms in the 1991 edition.)
The current AAIS homeowners HO 00 03 declares that the insurer will not pay for loss caused by continuous or repeated discharge, seepage, or leakage of water, or the presence or condensation of humidity, moisture, or vapor over a period of weeks, months, or years, unless no insured could reasonably have been expected to suspect the discharge, seepage, leakage, or presence of humidity or moisture. Then, in the general exclusions, exclusion 1.j. states "'We' do not pay for loss, cost, or expense caused by, consisting of, or relating to the existence of or any activity of bacteria, 'fungi', wet rot, or dry rot that is not the direct result of a Peril Insured Against. 'We' do pay for direct loss to covered property caused by a Peril Insured Against resulting from bacteria, 'fungi', wet rot, or dry rot."
AAIS has two endorsements with mold as their subject. The first, HO 13 35, is an exclusion of liability coverage for testing, cleanup, or costs to remove pollutants, fungi, bacteria, and other irritants. The second, HO 20 89, provides a scheduled amount of coverage for both property and liability.
ISO also has endorsements for use with homeowners forms. The HO 04 27 form provides a scheduled amount of coverage for both property damage and liability coverage. This form can be attached to either the HO 00 03 or HO 00 05. Form HO 04 32 is similar, except that it is designed to be attached to the HO 00 03. Form HO 04 33 is to be used with form HO 00 06. Coverage for mold is added as an additional section I property coverage, and the amount is scheduled. This is the most that will be paid for the costs to test for, remove, or replace mold-damaged portions of covered property. Coverage applies only when the loss or costs result from a covered cause of loss and only when the insured has taken all reasonable steps to save and protect property from further damage at and after the time of loss.
Note that both AAIS and ISO forms recognize that in times of widespread damage, such as from a tornado, immediate restoration might not always lie within the insured's control. However, insureds are obligated to take what steps they can to mitigate loss. Although the forms add an exclusion for fungi and wet or dry rot, except to the extent coverage is provided by the endorsed additional coverage, there is an exception for mold and wet or dry rot resulting from lightning or fire. Thus, if water used to put out a fire causes mold formation, such loss would be covered, presumably up to the policy limits, provided no other exclusion, such as for intentional loss, applies. But in all other situations, coverage for mold remediation is tied to covered causes of loss other than fire or lightning.
The limit of liability for bodily injury or property damage arising out of mold is an aggregate sublimit of liability within the total coverage E amount. The sublimit does not increase the coverage E limit.
The personal injury forms for both AAIS (HO 40 01) and ISO (HO 24 82) eliminate coverage for any exposure to mold, including any loss, cost, or expense arising out of any demand, order, statutory, or regulatory requirement to assess, treat, or otherwise clean up pollutants or mold.
It is interesting to note that the AAIS and ISO forms, in referring to mold, mean wet or dry rot, fungi, or bacteria. Given that anthrax is a bacteria, conceivably these coverages could be called upon to provide remediation. (ISO has developed exclusions for terrorism; they apply when the total of all damage exceeds $25 million; however, they also apply if the terrorism involves the use of biological, chemical, or nuclear weapons. Therefore, depending upon states' acceptance of these endorsements the mold damage endorsements may not provide coverage for terrorist bacterial attacks.)
Commercial General Liability Insurance Implications
To date, although there have been many lawsuits involving mold, they have not received the publicity of Ballard. However, suits by inhabitants of so-called "sick buildings" are not uncommon. The same building codes that encourage air-tight, energy-efficient dwellings also impact commercial construction with the result that moisture does not readily evaporate. (See the next paragraph for a discussion of various cases.) But workers compensation statutes often prohibit employees' suits against their employers for providing an unhealthy workplace. The focus then becomes the construction firm that built the building, the heating, ventilation, and air conditioning (HVAC) system contractor, the building's owner, or a property manager. Suits may allege bodily injury, property damage, or both. Other suits may target housing construction firms, alleging construction defects that contributed to mold growth.
In Hayley v. Allstate Ins. Co., 686 N.W.2d 273 (Mich. App. 2004), the Michigan Court of Appeals, with one justice dissenting, decided that a clear and unambiguous exclusion must be enforced because of long-standing precedent set in Farm Bureau Mut. Ins. Co. of Michigan v. Nikkel, 596 NW2d 915 (1999). Interpreting a policy in the context of a claim for mold damage discovered in 2000 that was an alleged consequence of water damage caused by ice damming on the roof of the insured's home, the insurer refused to pay for any claim associated with the mold, relying on a policy exclusion that provided "…we do not cover loss consisting of or caused by any of the following:…15. a) …d) rust or other corrosion, mold, wet or dry rot; …
23. We do not cover loss to covered property described in Coverage A — Dwelling Protection or Coverage B — Other Structures Protection when: there are two or more causes of loss to the covered property; and b) the predominant cause(s) of loss is (are) excluded under Losses We Do Not Cover, items 1 through 22 above. (Emphasis added.)
The court of appeals concluded that exclusion 15.d clearly excludes both losses caused by mold and losses consisting of mold damage. This exclusion, the court found, applies only where "there are two or more causes of loss." Since the court found there was only one cause of loss—the water backup that resulted from the ice dam—the insurer had to pay for covered losses resulting from that cause to the extent they were not excluded from coverage, as mold is excluded.
One recent exclusion provides the following wording:
It is hereby agreed that this policy shall not apply:
3. to any loss, cost or expense, including but not limited to fines and penalties, arising out of any governmental direction or request, or any private party or citizen action, that an insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize "organic pathogens"; or
4. to any "suit" or administrative or regulatory procedure or process in which an insured may be involved as a party;
arising, directly or indirectly, or in concurrence or in any sequence out of or in any way relating to actual, alleged or threatened existence, discharge, dispersal, release or escape of "organic pathogens," whether or not such actual, alleged or threatened existence, discharge, dispersal, release or escape is sudden, accidental or gradual in nature.
This insurance shall not apply to any "bodily injury", "property damage", "personal and advertising injury", loss, cost or expense arising out of or in any way related to any form of "organic pathogens," whether or not such actual, alleged or threatened existence, discharge, dispersal, release or escape is intentionally caused, or whether or not such injury, damage, devaluation, cost or expense is expected or intended from the standpoint of the insured.
The current CGL forms preclude coverage for bodily injury or property damage arising out of "the actual, alleged or threatened discharge, dispersal, seepage, migration, release of escape of 'pollutants'." But is mold a pollutant within the scope of the definition? The CGL defines "pollutant" as "any solid, liquid, gaseous or thermal (thermal, in this sense, according to Webster's Collegiate Dictionary, Tenth Edition, means "of, relating to, or caused by heat; being or involving a state of matter dependent upon temperature.") irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed." Many courts are of the opinion that the definition relates to manmade environmental pollutants, such as asbestos, lead, or chemicals. See, for example, Kim v. State Farm Fire and Casualty Co., 728 N.E.2d 530 (Ill. App. 2000). The court looked to an Illinois Supreme Court decision (American States Ins. Co. v. Koloms, 687 N.E.2d 72 [Ill. 1997]) which stated it was "troubled by the overbreadth in the language of the exclusion." The Kim court agreed with this, and added that the words used in the exclusion—discharge, dispersal, release, and escape—were "terms of art used in environmental law to indicate the release of hazardous material into the environment," particularly into the land, atmosphere, or any watercourse or body of water.
Mold, therefore, occurring as it does naturally in the environment with or without manmade assistance, would appear to fall outside the definition (although it should be noted that the pollution exclusion does not limit a pollutant to being one or the other). And, if it falls outside the definition, then the exclusion for pollution does not apply. This is in spite of the fact that the EPA has classified mold as an indoor pollutant and biocontaminant. (Remember, it is absolutely impossible under normal conditions to maintain a mold-free environment.) The courts currently appear to hold that the nature of mold as something that occurs naturally will preclude application of the pollution exclusion.
Thus, ISO has developed several endorsements that may be used with the CGL, the Commercial Liability Umbrella (CLU), the Owners and Contractors Protective Liability Coverage Part, and the Products/Completed Operations Coverage Part. The endorsements are similar to the homeowners endorsements in that they either exclude coverage completely or else provide limited coverage. The definition of "fungi" is the same as that used in the homeowners forms.
The exclusion in forms CG 21 67 (used with the CGL) and CG 31 31 (used with the Owners and Contractors Protective and Products/Completed Operations Coverage Parts) precludes coverage for 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." The form further excludes any cost or expense arising out of abating, remediating, or testing for effects of fungi. The exclusion also applies to personal and advertising injury. Remember that one of the components of personal and advertising injury is wrongful eviction; thus, a claim cannot allege the presence of mold forced a wrongful eviction in hopes of triggering coverage.
The limited coverage forms (CG 24 25, used with the CGL, and CG 31 32, used with the Owners and Contractors Protective and Products/Completed Operations Coverage Parts) allow an aggregate amount of coverage to be scheduled. These forms define "fungi" as stated previously and add a definition for "fungi or bacteria incident": "an incident 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." The coverage of the CG 24 25 differs in that it does not apply to personal and advertising injury arising out of a "fungi or bacteria incident." The aggregate amount is the most that will be paid for all bodily injury, property damage, and medical payments arising out of one or more fungi or bacteria incidents. (There is an exception for fungi or bacteria in a good or product intended for consumption.)
The AAIS commercial property special form CP-85 (Ed. 1.0) eliminates coverage for mold by including it in the exclusion for contamination or deterioration: "We do not cover loss caused by contamination or deterioration including corrosion, decay, fungus, mildew, mold, rot, rust or any quality, fault, or weakness in property that causes it to damage or destroy itself, We cover any resulting loss caused by a specified peril or breakage of building glass." The AAIS businessowners form BP 02 00 01 04, however, provides limited fungus and related perils coverage.
ISO, in the Building and Personal Property Coverage Form, CP 00 10 10 12, and the Causes of Loss – Special Form, CP 10 30 10 12, has taken the approach of limiting coverage so that insurers can manage the financial scope of these losses. (This is equally true regarding the steps taken in personal lines coverage.) The open perils causes of loss form will be used as representative of the changes.
The exclusion for wear and tear, rust, corrosion, fungus, decay, and the like has been modified. Fungus has been removed from this list and now has its own exclusion: there is no coverage for the "presence, growth, proliferation, spread or any activity of 'fungus' [defined as in the homeowners forms], wet or dry rot or bacteria. But if 'fungus', wet or dry rot or bacteria results in a 'specified cause of loss', we will pay for the loss or damage caused by that 'specified cause of loss'." This exclusion does not apply if the mold results from fire or lightning or to the extent that coverage is provided as an additional coverage.
The additional coverage provides an annual aggregate limit of $15,000 for mold resulting from a "specified cause of loss" (as defined) other than fire or lightning. If flood coverage is endorsed onto the policy the additional coverage will respond. However, this coverage is not in addition to the limit of liability on any covered property; it is included within the limit and is thus a limitation of coverage. The additional coverage also responds to time element loss. If the loss resulting in the mold does not trigger a suspension of operations, but suspension becomes necessary because of mold, then business income and/or extra expense applies for up to thirty days, which need not be consecutive. If mold damage prolongs a covered suspension of operations, the business income and/or extra expense during that additional period is covered, but again for not more than a period of thirty days, which need not be consecutive.
An endorsement allowing additional coverage may be attached. A limit of other than $15,000 may be selected, and a time frame greater than thirty days chosen for business income and/or extra expense.
Current Legal Climate
Following are cases of interest. Though by no means an exhaustive review, these cases provide an insight into current judicial thinking. But because coverage for mold is provided or excluded depending upon policy language and jurisdiction, these cases cannot be held to be more than a sampling.
First, in answer to the question addressed earlier as to whether mold is a contaminant or pollutant, the court in Hastings Mut. Ins. Co. v. Mosher Dolan Cataldo & Kelly, Inc., No. 296791, 2014 WL 265506 (Mich.App. Jan. 23, 2014) concluded that mold was not a pollutant as defined in a policy. The court concluded the following:
The policy at issue defines "pollutants" as: "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, liquids, gases and waste. Waste includes materials to be recycled, reconditioned or reclaimed." However, plaintiff does not provide the definition of "mold" and indicate whether or not "mold" can be classified as a "pollutant."
On the other hand, the court in Indian Harbor Ins. Co. v. City of San Diego, 972 F.Supp.2d 634 (S.D..N.Y. 2013), dealt with a policy that defined "pollutant condition" as follows:
"Pollution condition," in turn, is defined as:
|- the discharge, dispersal, release, seepage, migration, or escape of POLLUTANTS into or upon land, or structures thereupon, the atmosphere, or any watercourse or body of water including groundwater;
- the presence of any uncontrolled or uncontained POLLUTANTS into [sic] land, the atmosphere, or any watercourse or body of water including groundwater; or
- the presence of MOLD MATTER on buildings or structures.
In Arch Ins. Co. v. Commercial Steel Treating Corp., No. 11–cv–15535, 2013 WL 4536163 (E.D.Mich. Aug. 27, 2013), the policy defined "pollutant" as "any solid, liquid, gaseous, biological, radiological or thermal contaminant or irritant, including, without limitation, smoke, vapor, soot, fumes, acids, alkalis, chemicals, mold, fungi, odors, noise, lead, oil or oil products, radiation, asbestos or asbestos containing products, waste or any electric, magnetic, or electromagnetic field of any frequency."
A case involving similar exclusionary language is DeVore v. American Family Mut. Ins. Co., 891 N.E.2d 505 (Ill. App. 2008). The appellate court found that the policy unambiguously excluded loss "resulting directly or indirectly from or caused by…mold…regardless of any other cause or event contributing concurrently or in any sequence to the loss." Thus, the water damage caused by a burst pipe was covered, but the cost to remove or contain any mold was not covered. (The insureds were out of town when the pipe burst, and so immediate clean up was not possible.)
Mold resulting from vandalism was the subject of Bowers v. Farmers Ins. Exchange, 991 P.2d 734 (Wash. App. 2000). The insured rented a dwelling to tenants who, unbeknownst to her, used the dwelling to grow marijuana. They sealed the dwelling so that heat and moisture could not escape, and mold rapidly developed. The insurer denied coverage for clean up of the mold, citing the mold exclusion. But the court held that the tenants' acts constituted vandalism, for which there was coverage, and the vandalism was the efficient proximate cause of the loss.
Mold sometimes causes a less-than-agreeable odor but no physical damage to the property. When there is proof that an insured suffered intangible harms as strong odors and the presence of mold or bacteria in the air and ventilation system within its building, which, in its judgment, rendered the insured premises useless, the court found no coverage available. Even physical damage that occurs at the molecular or microscopic level must be distinct and demonstrable. Because the insured failed to show that it suffered a direct physical loss under the policy, the insurer was entitled to judgment. See Universal Image Productions, Inc. v. Chubb Corp., 703 F.Supp.2d 705 (E.D. Mich. 2010).
Many recent claims involving mold have relied on expert witnesses to strengthen a case. This does not always work to the insured's advantage. Minner v. American Mortg. & Guar. Co., 791 A.2d 826 (Del. Ch. 2000) is notable for the court's exposition on the history of the expert witness and the court's role as gatekeeper to ensure reliability and relevancy of the expert evidence (citing Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 [1993]). In Minner, a suit alleged injury arising from multiple chemical sensitivity and sick building syndrome (which included mold), among others, was diagnosed by a physician called by the plaintiffs as an expert witness. The court viewed each of these, and found that there was not enough support in the literature to lend credence to a diagnosis of multiple chemical sensitivity. Sick building syndrome was dismissed with "a general diagnosis of SBS is not yet a medically valid diagnosis." There is much more, and a reading of this case is informative and educational. Consider, also, Wall v. Astrue, No. CV 09–02807(SH), 2010 WL 2757514 (C.D.Cal. July 13, 2010) and Montgomery Mut. Ins. Co. v. Chesson, 569, 51 A.3d 18 (Md. App. 2012) that found experts wanting.
Centex-Rooney Const. Co. v. Martin County, 706 So. 2d 20 (Fla. App. 1997) relied on expert testimony at trial, and on appeal the court concluded that the burden of showing general scientific acceptance had been met. Here, a newly-constructed courthouse and constitutional office building were found to be excessively humid so that mold grew. The county retained two experts to conduct tests on the indoor air quality, and the presence of two highly toxic molds was discovered. It was this testimony that Centex objected to, but at trial a hearing had been conducted with the court acting as gatekeeper to determine if the testimony was based on sufficiently established scientific principle.
A Kentucky case, Reynolds v. Travelers Indem. Co. of America, 233 S.W. 3d 197 (Ky. App. 2007), is notable for its look at the exclusion for repeated seepage or leakage "over a period of time, weeks, months, or years." The insureds had owned a home for some time, but repeated drainage problems, with the ongoing repair work needed, caused them to purchase another home. However, much property was left in the home, and the insureds checked on the home regularly. The refrigerator was stolen, and the water line to the ice maker cut. The water damage caused mold to grow. The insurer denied the remediation claim, basing the denial on theft to a dwelling while under construction; vandalism if the home is vacant more than thirty days; and repeated seepage or leakage. On appeal, the court noted the home had been constructed in 1994, and the loss occurred in 2003. The drainage project was certainly not construction of the dwelling. The vacancy exclusion applied only to vandalism and malicious mischief, and the theft fell outside the common definitions.
Next, the court turned to the repeated seepage or leakage. The policy language precluded coverage caused by "continued or repeated… leakage of water or steam over a period of time, weeks, months, or years." The insurer argued that the terms "period of time" and "weeks" referred to separate spans of time. The court disagreed, stating that the grammatical structure was such that the ordinary person would think that leakage was not covered if and only if the leakage occurred over a period of time that could be comprised of weeks, months, or years. Since the insured could prove that the time of the leakage was less than fourteen days, there was coverage, since the theft was the efficient proximate cause of the mold loss.
The conclusion of this legal review looks back at Ballard. What began as Ballard v. Fire Ins. Ex. morphed into Allison v. Fire Ins. Exchange., 98 S.W.3d 227 (Tex. App. 2002) with a reduction in the $32 million award. The court found that the insurer had breached the standard of good faith and fair dealing, but its conduct did not rise to the level of intentional fraud. The court also found that some of the delay in mitigation was caused by Ballard's refusal to accept payment for several days and that there was no settled science to definitively declare that the husband had sustained physical injury. So, the $32 million became $4 million. Neither the Ballard nor the Allison cases, both with the same parties but different case names, mention that the suit did not involve mold as much as it involved bad faith claims handling.
Sources of Information
There have been many excellent white papers published on mold and its ramifications for our industry. Because many of these exist on the Internet, availability is dependent upon their continuing to be provided.
"Mold: A Comprehensive Claims Guide" by Barry Zalma
∙ "A Mold Case Study," by Gordon M. Parkand and Christopher Lozano.
· "Mycotoxins in Silage: A Silent Loss in Profits," by Alan Gotlieb.
Published by the New York City Department of Health, it was one of the first such documents and is a thorough examination of the effects of mold. It contains valuable information for building managers or engineers as well as an extensive bibliography. Most of the articles in the New York site are dated prior to 2005.
Originally published September 3, 2014
Reviewed and updated by Barry Zalma, Esq., CFE
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