News Release For Immediate Release

Mold: Will It Grow to be Bigger Than Asbestos?

Richfield, OH – (November 30, 2001) Alexander Robertson, Erin Brockovich’s attorney, recently commented that “mold is where asbestos was thirty years ago.” Mold-related property damage claims, like asbestos-related property damage claims 30 years ago, are being filed at an accelerated pace. Although different in certain factual respects, it is becoming abundantly clear that mold-related property damage claims are growing into the proportions that we saw with asbestos-related property damage claims — in both numbers and dollars.

Conversely, mold-related bodily injury claims, like asbestos-related bodily injury claims 30 years ago, are being viewed with skepticism. Because the bodily injuries allegedly associated with mold exposure could stem from a myriad of sources, they are difficult to attribute directly to mold. Those injuries include nasal congestion, bloody nose, cough, sore throat, fatigue, night sweats, low grade fever, rash, short-term memory loss and mood swings. Further, it has been observed that after the mold-related property damage is remediated or a person is removed from the mold environment, their health appears to revert to its pre-exposure state. While there is no consensus as to whether mold causes permanent bodily injury, scientific studies are currently addressing this issue. Until the results from these studies are conclusive, it is unclear whether mold-related bodily injury claims will reach the number of asbestos bodily injury claims.

Cases in state courts are sprouting up as quickly as the spread of mold itself. For example in approximately the last 24 months there have been numerous school closures in Florida, Illinois, Minnesota, New York, Ohio, South Carolina, Tennessee, Texas, Vermont, Virginia, and Washington due to mold contamination. In Martin County, Florida, a construction company is facing a $11,550,000 jury verdict for construction defects that caused mold growth on 60-65% of the exterior surface of a building. Farmer’s Insurance Group was hit with a $32.2 million jury verdict for not handling a mold claim properly. In Oakland, California, 130 residents of a housing project received a $1,300,000 settlement of a mold contamination claim. Additionally, in 2000, 300 New York City tenants of an apartment complex filed a lawsuit seeking damages in excess of $10 billion for personal injury and property damage arising from mold and fungi exposure.

According to EPA statistics, mold has affected approximately 10-25 million workers and 800,000-1.1 million buildings. The costs to remediate mold related property damage is enormous. According to a recent report from the Independent Insurance Agents of America, the cost to clean up a mold-contaminated commercial building normally exceeds $300,000. State Farm reports that the average cost to clean up a mold-contaminated home is $50,000. Who will bear the financial burden of these mold claims? In order to answer this question, it is important to understand the cause of mold.

Simply put, without the presence of water, mold will not exist. For mold to exist and grow, it requires water, a food source—any type of building material, time and bearable temperatures. Therefore, the focus of mold claimants will be determining how water entered a particular building, and whether such entry was caused by negligent design/construction or by a defective building product. Accordingly, the companies that will bear the financial burden of mold claims will likely be owners, designers, or constructors of buildings (including landlords, commercial real estate developers, architectural and engineering firms, construction companies, landscapers, etc.), and manufacturers of building-related products, such as windows, doors, roofing materials, carpet, ceiling tiles, cellulose and fiberglass insulation, wallboard (drywall and gypsum board), paints, sealants, etc.

How can these companies combat the financial burden that will be imposed upon them by mold claims? “Simply put: INSURANCE,” replies David Anderson, senior counsel for Risk International, a risk management consulting firm.¹ Companies should look either to their commercial general liability (“CGL”) policies or their property policies for financial relief.

CGL Insurance. CGL policies provide coverage for “all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage,” subject to exclusions. “As a general rule, CGL policies do not contain mold exclusions,” states Anderson. As a result, the only potentially problematic exclusions that insurers can site are the “absolute pollution” exclusion and the “product/workmanship” exclusions, neither of which should preclude coverage for mold claims.

The “absolute pollution” exclusion denies coverage for bodily injury or property damage arising out of “the actual, alleged or threatened discharge, dispersal, release or escape of pollutants.” CGL policies define pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Although the “absolute pollution” exclusion has been effective in excluding traditional environmental pollution claims, it has been less effective in excluding coverage for nontraditional pollution claims such as lead, carbon monoxide, sick building syndrome, and mold, especially when these claims involve indoor releases. In particular, “a literal reading of the definition of ‘pollutants,’ suggests that the ‘absolute pollution’ exclusion is inapplicable to mold claims,” clarifies Anderson.

Standard CGL policy forms also contain “product” and “workmanship” exclusions that the insurers will argue preclude coverage for mold claims. These exclusions bar coverage for property damage to “your product” or “your work” arising out of it or any part of it. At face value, neither of these exclusions precludes coverage for bodily injury resulting from a policyholder’s product or work, nor are there other standard exclusions that purport to do so. Thus, if a mold claim includes allegations of property damage and bodily injury, the insurer, at a minimum, has a duty to defend the policyholder in the underlying action and to indemnify the policyholder for any bodily injury liability. Courts also hold that these exclusions do not preclude coverage for damage to other property resulting from the failure of the policyholder’s product or work. “These exclusions only preclude coverage for damage to a policyholder’s own product or work,” states Anderson.

Property Insurance. For those businesses that are faced with mold-related property damage in their own buildings (e.g., landlords and commercial real estate developers), property policies can be used to recover the enormous costs associated with remediation. Property policies provide coverage for physical loss or damage to the policyholder’s property. Named-peril property policies specifically enumerate the causes of loss that are covered including fire, lightning, water damage, and earthquake. In contrast, “all-risk” property policies provide coverage for all risks of loss, except those specifically excluded. Historic “all-risk” policies generally excluded coverage for mold damage. However, since the late 1980s and early 1990s, the mold exclusion has been absent in many policies. Thus, if a policyholder has an “all-risk” property policy that does not contain a mold exclusion, the policyholder can obtain coverage for mold damage. Similarly, if a policyholder has a named-peril policy that includes water leakage, the policyholder can also obtain coverage for any resulting mold damage.

Property policies also contain provisions for additional grants of coverage for indirect loss or damage caused by mold. For example, if a commercial or residential building becomes “untenantable” due to mold damage, the owner can recover the lost rental value during remediation under the “Rental Value” provision. Similarly, if a policyholder is forced to vacate a building and rent office space during remediation, the policyholder can obtain coverage for the extra rental cost under the “Extra Expense” provision. Finally, to the extent that a policyholder borrows money to finance the remediation, the policyholder can recover the interest incurred for financing the remediation under the “Soft Costs” provision.

For those companies being hit by mold claims, the value of insurance coverage cannot be overstated. The insurance companies know that there is coverage for mold claims and, according to A.M. Best, have begun to hold forums to discuss the manner in which this issue should be addressed.

Risk International is one of the nation’s leading risk management consulting firms also specializing in insurance archaeology, insurance claim administration and recovery, risk science and forensics and litigation support with offices in Cleveland, OH and Charlotte, NC.

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Notes:

1. David P. Anderson is senior counsel for Risk International and is responsible for handling the negotiation and settlement of insurance claims for corporate clients. David also spent more than seven years in private legal practice where he handled insurance coverage litigation involving environmental, toxic tort, and product liability issues, and general commercial litigation.