Mold Exclusion Adopted

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United States: Mold Exclusion Adopted for CGL Policies - The Mold Crisis has

Reached the Point Where Insurance Companies are Fighting Back

17 July 2002

Article by Mr J. Johansen

The Crisis

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 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 22-room estate.

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 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.

The Exclusion

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 states in part:

2. Exclusions

This insurance does not apply to:

Fungi or Bacteria

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

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.

Insurance

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. "

Pollution Exclusion. 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.

Conclusion

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.