One of the Hottest issues Facing the Insurance Industry Today

One of the hottest issues facing the insurance industry today involves toxic mold claims under both personal and commercial lines policies. Following several recent multi-million dollar judgments, some attorneys are comparing this to asbestos and lead paint claims with regard to the litigation potential. In this article, we'll take a look at the problem and coverage (or lack thereof) under standard homeowners policies.

From the standpoint of commercial exposures, toxic mold claims are beginning to rival "construction defect" claims in their numbers and magnitude. Home and business owners are looking to their insurers and contractors, building material suppliers, plumbers, and others for remuneration for real or perceived property damage and bodily injury. In this article, we'll also take a look at the problem and coverage (or lack thereof) under standard commercial property, general liability, and other commercial policies.

As if the construction industry didn't have enough to contend with (construction defect claims, Montrose, "sick building syndrome," etc.), toxic tort claims appear to be the newest bonanza for plaintiffs' lawyers. For example....

At the time of this writing, a state court in Austin, Texas had just awarded a homeowner $32.1 million for the insurer's failure to properly handle a mold claim. The award included $5 million for mental anguish, $12 million in punitive damages, and $8.9 million in legal fees...and a suit for bodily injury has yet to be filed. According to the carrier, it expects to pay $85 million in claims countrywide this year, and similar claims could easily approach $130 million in Texas alone, requiring a 40% increase in homeowners premiums. Many experts believe costs will run into the billions for damages and remediation.

The cost of inspection and toxicology testing of homes for mold infestation starts at about $1,500 - $3,500. The cost for larger commercial structures can be many times that amount. If the infestation is extensive, some structures may be a constructive total loss, with additional cleanup expenses of $30,000 - $300,000 or more.

According to one investigative/adjusting firm, the issue of toxic mold is approaching one of hysteria. The firms says they are now handling 6-7 mold claims a day. A year ago, they did not have a microbiologist on May, they had hired their ninth one. An indoor environmentalist was quoted as saying he'd never heard of the mold problem three years ago, but now it's 50% of his business.

Attorneys are also "benefiting" from the growing (no pun intended) problem. According to one plaintiff lawyer, "These cases have jury appeal." Another attorney commented, "Mold is everywhere. There are no specific government guidelines and not a whole lot of medical information. It's ripe for lawyers to get into and expand it." Class action suits may not be far behind the proliferation of suits, just as we've seen with asbestos and lead paint suits.

Here are just a few examples of toxic mold lawsuits:

A California homeowner was awarded $18.5 million, of which $18 million was punitive damages.

Almost $60 million was paid as a result of toxic mold infestation in a Florida county courthouse for building repairs, defense costs, relocation expenses, and workers' claims.

A North Carolina motel owner was awarded $6.7 million for contractors when construction defects led to water intrusion and mold infestation.

Two class actions suits were filed against the owners of several

California apartment buildings.

A New York community college employee filed suit for $65 million for bodily injury due to exposure to toxic mold.

In many ways, bodily injury claims for toxic mold are similar to pollution claims in that they allege injury that MIGHT occur in the future. This problem is compounded by an apparent lack of authoritative, scientific evidence demonstrating a causal relationship between mold and serious health conditions in otherwise healthy adults. Other than some EPA and CDC guidelines, there appear to be few, if any, state or federal regulations regarding mold infestations and remediation.

According to one report, in the 1970's and 1980's, mold contamination was identified as a principal cause of poor air quality in only 5% of NIOSH inspections. However, during the period 1986-1996, that figure rose to 35-50%. Another study found mold and mildew in 35% of buildings inspected. According to experts, the problem is significantly greater in newer buildings, possibly due to poor construction practices, increased use of substandard materials, and increased air tightness of structures that facilitates the accumulation of moisture. In addition, the prevalence of central HVAC systems may increase the spreading and recirculation of mold spores.

The potential damages for mold claims include:

• Investigation expenses

• Testing costs

• Containment and remediation expenses

• Abatement and mitigation expenses

• Direct damage claims, including repair or replacement

• Loss of use claims

• Relocation expenses

• Diminution of value claims

• Medical expenses

• Loss of earnings potential

• Emotional distress/mental anguish

The potential defendants in lawsuits include:

• Insurance companies (both property and liability)

• Property owners and managers

• Architects, engineers, developers, contractors (general, plumbing, roofing, drywall, HVAC, etc.)

• Construction materials manufacturers, distributors, and suppliers

• Anyone else that can be causally connected to the mold

• Testers, remediators and others (professional liability claims for failure to property test, remove, etc. toxic mold)

of course, the big question is whether or not standard insurance policies cover these claims. So, let's take a look at the major ISO forms. We'll start with the ISO Homeowners program but, even if you work in commercial lines, be sure to review this section since several of the analyses will be referenced when we examine the commercial forms later.

Homeowners Policy

At issue here is whether or not the homeowners policy will cover direct damage to property under Section I. ISO made a change in coverage in their HO2000 program, so we'll take a look at both the 1991 and 2000 ISO Homeowners programs.

1991 ISO Homeowners Program

The 1991 HO-3 form provides "all risks" coverage for damage under Coverages A & B. However, there is no coverage for loss:

2. Caused by:

e. Any of the following:

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

(5) Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against under Coverage C of this policy.

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed;

So, there appear to be two possible exclusions. Exclusion 2.e.(3) specifically removes coverage for any loss CAUSED BY mold. At issue, then is whether or not the damage is caused by mold or whether the mold is a result of another cause of loss that is not excluded such as a leaking water pipe. In other words, is the mold a cause or effect? Does the property need to be repaired or replaced due to the mold or the water damage?

It is the consensus opinion of many industry experts that the purpose of Exclusion 2.e.(3) is to preclude coverage for mold that arises naturally due to high relative humidity or an otherwise excluded loss (e.g., flooding, defective construction, etc.), and not due to an otherwise covered loss such as a burst water pipe. So, in some situations, mold damage would most likely be covered, while it wouldn't in others. This position is bolstered by the other excluded causes that appear in Item (3) of the exclusion...smog, rust, corrosion, rot. These are all naturally occurring phenomena that usually take place over a period of time as a result of atmospheric conditions.

A premise for supporting the position that the exclusions above do not apply to mold resulting from an otherwise covered peril is the fact that these exclusions do not exist in the named perils homeowners forms such as the HO-2. So, if a covered peril is the efficient proximate cause of the mold, such damage is covered. This argument is also supported by the Filing Memorandum which accompanied the ISO 1991 Homeowners filing. According to that memorandum, referring to a change in the deterioration exclusion wording, "This change is being made to avoid having the Special Coverage forms provide lesser coverage than what is provided under a Named Perils form...." In other words, according to ISO, a "special" (a.k.a. "all risks") form should not provide lesser coverage than a named perils form.

There is also at least one court case that supports the efficient proximate cause principle. In Home Insurance Company v. McClain, the Texas Court of Appeals ruled that, since a mold infestation resulted from a leaky roof, a covered peril under the policy, that the "mold and other fungi" exclusion did not apply. In another lower Texas court ruling, Merrimack Mut. Fire Ins. Co. v. McCaffree, the court ruled that mold and fungi were not covered because the infestation did not arise out of a covered water damage loss.

In addition, for the reason(s) cited in the prior paragraph, mold damage to Coverage C property would be covered if caused by a Coverage C peril. If "all risks" coverage is provide on personal property via the HO-15 endorsement in the 1991 HO program, the same arguments for or against coverage would apply as they do for Coverages A and B.

Exclusion 2.e.(5) is the "pollution" exclusion. At issue, then is whether or not "mold" is a pollutant AND, if so, whether there has been any "discharge, dispersal, seepage, migration, release or escape." If both conditions are met, then coverage depends on whether or not such discharge, etc. was caused by a Coverage C peril.

Clearly, if the mold resulted from a Coverage C peril such as a leaking water pipe, then the pollution exclusion does not apply. If the mold is due to something else, such as atmospheric humidity however caused, then the insurer must establish that mold is a pollutant AND damage resulted from the discharge, etc. of the mold.

Courts differ in their application of pollution exclusions. Some require environmental pollution for this type of exclusion to apply at all. According to a GeneralCologne Re paper, these jurisdictions include Alabama, Illinois, Kentucky, Maryland, Massachusetts, New York, and North Carolina. In addition, they indicate that courts in Indiana, Missouri and Ohio have found absolute pollution exclusions to be ambiguous. Some other states have narrowly interpreted the definition of "pollutant" or have found coverage under some other basis such as the reasonable expectations doctrine.

However, where permitted, a case could conceivably be made that mold is a pollutant since it is "matter" (solid, liquid or gas) and it is a "contaminant." An argument against this would be that, based on the wording in the exclusion, a "pollutant" does not appear to be a living organism. In fact, some carriers are providing a "micro-organism exclusion" within their pollution exclusion to preclude such biological claims (at least one carrier is using this exclusion within their pollution liability policy). So, whether or not mold is considered a "pollutant" may depend on judicial decisions that govern where the claim occurs.

With regard to whether or not the mold, even if it is a pollutant, has been discharged, dispersed, seeped, migrated, or has been released or escaped is another matter. Again, there is no definitive answer, but at least one court has looked at this issue within this context: Leverence v. United States Fidelity & Guar., 158 Wis. 2d 64, 97, 462 N.W.2d 218, 232 (Ct. App. 1990).

In Leverence, the owner/occupants of prefabricated homes sued the manufacturer, alleging that their homes retained excessive moisture within the exterior walls, resulting in the growth of mold, mildew, fungus, spores, and other toxins that posed a continuing health risk and adversely affected the value of the units. They sought damages against the manufacturer and its insurer for their bodily injuries and cost of repairs. The liability insurer denied coverage relying on the pollution exclusion which excluded:

"...bodily injury or property damage arising out of 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 into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden or accidental."

The court held that the exclusion did not bar coverage because the growth of the microorganisms was the result of water vapor trapped in the walls. The court, thus, concluded that the contaminants were not "released" within the meaning of the policy, "but rather formed over time as a result of environmental conditions."

This case presents a strong argument that mold claims largely do not involve the "discharge, dispersal, etc." requirement for the exclusion to apply. If that position is taken, then the issue of whether or not mold is a "pollutant" is moot.

Perhaps recognizing the potential ambiguity here, some carriers are attempting to introduce more absolute mold or fungus exclusionary endorsements in their homeowners programs. For example, one major homeowners carrier has introduced an exclusionary endorsement that would apply to mold claims regardless of whether naturally occurring or caused by an otherwise covered peril. Typically, these endorsements include "concurrent causation" type wording such as "Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss." The attempt here is to clarify that, even if the mold is precipitated by an otherwise covered peril, the intent is to exclude the direct damage (if any) by the mold.

2000 ISO Homeowners Program

While the pollution exclusions remains unchanged, the HO2000 HO-3 form places mold and wet rot, along with a new word "fungus," into their own exclusionary category:

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

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;

Note that ISO now provides an explicit exception to the exclusion so that mold damage resulting from accidental discharge of a plumbing, heating, air conditioning, or sprinkler system is covered, even if hidden. In their filing memorandum, ISO says that they made this change so that coverage under the special form was the same as the named perils forms. This would seem to imply that the intent of the exclusion is that mold damage is excluded even if it otherwise results from another covered peril (e.g., windstorm). However, it is questionable whether this is actually accomplished given the efficient proximate cause doctrine and court decisions in some jurisdictions.

In addition, ISO indicated that the reason for adding "fungus" to the exclusionary grouping was that insurers had reported a rise in claims for damage to dwellings and other structures caused by the sphaerobolus stellatus fungus, commonly referred to as the "artillery fungus." However, the filing memorandum says that adding the term "fungus" to the mold preclusion in the policy results in "no change in coverage."

A related issue to this discussion involves the Ordinance or Law exclusion. As indicated earlier, there are currently few, if any, laws or regulations dealing with toxic mold cleanup. If and when such laws are passed, this exclusion might become material to otherwise covered claims with regard to tearing down "undamaged" portions of a structure, cleaning and/or disposing of the materials, and increased reconstruction costs.

Commercial Property & BOP Policies

In ISO's Commercial Property Coverage Part, the perils are provided in the Causes of Loss forms. The Causes of Loss - Special Form (CP 10 30) currently says:

2. We will not pay for loss or damage caused by or resulting from any of the following:

d. (1) Wear and tear; (2) Rust, corrosion, fungus, decay, deterioration, hidden or latent defect or any quality in property that causes it to damage or destroy itself;

(3) Smog;

(4) Settling, cracking, shrinking or expansion;

(5) Nesting or infestation, or discharge or release of waste products or secretions, by insects, birds, rodents or other animals.

(6) Mechanical breakdown, including rupture or bursting caused by centrifugal force. But if mechanical breakdown results in elevator collision, we will pay for the loss or damage caused by that elevator collision.

(7) The following causes of loss to personal property:

(a) Dampness or dryness of atmosphere;

(b) Changes in or extremes of temperature; or

c) Marring or scratching.

But if an excluded cause of loss that is listed in 2.d. (1) through (7) results in a "specified cause of loss" or building glass breakage, we will pay for the loss or damage caused by that "specified cause of loss" or building glass breakage.

As you can see, the applicable exclusion above is somewhat broader than the HO2000 exclusion. There is no coverage for damage "...caused by OR RESULTING FROM...fungus...." Again, though, if you look at the excluded perils in this grouping they largely involve long-term, wear and tear type losses. In addition, the same arguments dealing with covered precipitating causes applies, such as damage resulting from a burst water pipe.

However, this form adds a limiting provision not found in the HO policies for damage to personal property due to "dampness...of atmosphere" which could be applicable to claims involving personal property. In addition, this form includes the following exclusionary wording:

f. Continuous or repeated seepage or leakage of water that occurs over a period of 14 days or more.

This language was removed from the ISO HO policies in the 1991 revision, but still remains in the commercial form (as well as many proprietary company HO forms). So, while damage proximately caused by a burst water line is covered, it is NOT covered if the damage results from seepage or leakage that occurs over a period of 14 days or more, which is often the case in mold claims. In the HO policies, this restriction was removed and reliance placed upon the "Neglect" exclusion...coverage exists for long-term leakage as long as the insured takes action when the damage is discovered.

In addition to the above, the form also has a limitation for interior damage:


The following limitations apply to all policy forms and endorsements, unless otherwise stated. We will not pay for loss of or damage to property, as described and limited in this section. In addition, we will not pay for any loss that is a consequence of loss or damage as described and limited in this


c. The interior of any building or structure, or to personal property in

the building or structure, caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driven by wind or not, unless:

(1) The building or structure first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters; or

(2) The loss or damage is caused by or results from thawing of snow, sleet or ice on the building or structure.

This limitation could restrict coverage for mold claims that arise out of a leaking roof unless the roof is first damaged by a covered cause of loss.

With regard to named perils coverage such as that under the CP 10 20 Causes of Loss - Broad Form, like its HO equivalent, there is no exclusion for fungus. So all of the arguments presented in the homeowners discussion above for coverage by named perils forms, and thus the "all risk" forms, applies here.

Finally, while the ISO BOP property policies do not include the broad listing of perils or limitations, coverage (or lack thereof) is comparable to that provided under the CP forms. In addition, many companies use their own proprietary BOP forms, so it is imperative that each be reviewed individually to determine their applicability to mold claims. The BOP liability coverage is comparable to the CGL as discussed below.

Commercial General Liability Policy

The current ISO CGL policy provides broad coverage for liability, but two sets of exclusions could be applicable to mold claims. The first is the pollution exclusion (the only exclusion that appears remotely applicable to bodily injury claims) and the second is the series of property damage exclusions.

Without repeating the voluminous CGL pollution exclusion here, it is safe to say that the same issues discussed with regard to the HO exclusion above apply here. First, is mold a "pollutant"? Second, in these claims has there been "discharge, dispersal, seepage, migration, release or escape"? In addition, with regard to contractors (e.g., plumbing contractors) working at a client's premises, the pollution exclusion is generally inapplicable unless they bring the pollutant onto the premises, which would not be the case with mold claims. Also, in general, the exclusion does not apply to completed operations.

It is estimated that as much as 25% of the earth's entire biomass consists of molds and other fungi. In other words, molds are naturally occurring organisms, not man-made substances. At issue is whether or not the intent of the pollution exclusion, or the literal reading of the wording to a reasonable person, is to exclude coverage for a naturally occurring substance such as mold. As discussed in the HO section above, courts are divided in answering this question.

Whether or not the pollution exclusion applies, there are several other property damage exclusions that could certainly preclude coverage for claims of legal liability, regardless of the cause of the damage that creates that liability. For example, the following exclusionary excerpts could apply to any liability claim, including mold claims:

j. Damage To Property

"Property damage" to:

(1) Property you own, rent, or occupy;

(2) Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises;

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

Paragraph (2) of this exclusion does not apply if the premises are "your work" and were never occupied, rented or held for rental by you.

Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard".

l. Damage To Your Work

"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard". This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

m. Damage To Impaired Property Or Property Not Physically Injured

"Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.

At least one carrier has filed an endorsement for its CGL and umbrella programs that would exclude coverage for all damages (BI, PD, PI, & AI) "caused directly or indirectly, in whole or in part" by fungi (including mold, mushrooms, or mildew) "regardless of any other cause, event, material, product and/or building component that contributed concurrently or in any sequence to that injury or damage." Expect to see many more carriers filing, or attempting to file, such exclusionary endorsements.

Other Commercial Policies

A number of other policies can be affected by toxic mold claims. In general, if workers claim bodily injury or sickness, a workers compensation policy will respond if the claim appears to have merit. Since there are no standard commercial umbrellas, like many BOP policies, each will need to be reviewed for applicability to mold claims. Finally, DIC forms may respond to claims not covered by underlying property policies. Again, though, since there are no standard DIC forms, each must be analyzed individually.

Additional Information:

WKRN Channel 2 - Nashville, TN (includes a video clip)

NAMIC Mold Update Web Site

International Risk Management Institute