American Re-Insurance Company

TOXIC MOLD

The purpose of this study is to provide information on toxic mold, the increase in mold-related claims and litigation facing insurers, potential insurance coverages, claims issues, and insurer responses.

Molds are simple, microscopic organisms that feed off of organic material. Mold exists in both indoor and outdoor environments, and is found almost everywhere. Mold requires moisture and oxygen to grow on organic substances, and is therefore most common in moist environments such as coastal regions. Indoor mold growth can occur in residential, commercial and industrial buildings. It will frequently occur when moisture accumulates in buildings or on organic building materials such as wood, paper, carpet, and insulation. Mold growth continues until its water source is stopped. Molds reproduce by releasing microscopic spores that travel through the air to find a surface on which to settle and grow.

There are 100,000 scientifically identified species of mold. An estimated 1,000 of these are common in the U.S. Most molds are not harmful; however, over 100 mold species are known to potentially cause infection in humans. In addition, several types of mold are considered "toxic," which means that they can produce toxic agents (metabolites) called mycotoxins.

The types of mold that have received the most attention in insurance litigation are Stachybotris, Aspergillus, and Penicillium. Although not frequently noted in litigation to date, Cladosporium is also noted because of its potential as a catalyst in such litigation, as it is commonly found in indoor environments. The type of mold that is involved in insurance litigation can be significant, because some types of molds are perceived as more dangerous than others, and litigation surrounding such molds can involve allegations of more serious injury.

Stachybotrys - is a black colored mold. Stachybotris colonies contain mycotoxins, and it is therefore considered a toxic mold. Stachybotris is considered the most potentially dangerous of the toxic mold types.

Aspergillus - can be yellow to green, or black. A small percentage of the colonies contain

Penicillium - are white and blue-green to green in color. One of the most common molds, it is found worldwide. It has beneficial uses such as the making of Roquefort cheese; however, it is considered a toxic mold because it can produce over 100 classes of mycotoxins.

Cladosporium - is dark brown or black. It is commonly found indoors as mildew on walls and trim. It is not a toxic mold, as it does not produce mycotoxins.

The media is awash in "details" of the adverse health effects of mold exposure, particularly toxic mold exposure. Toxic mold exposure is reported to cause everything from minor health effects such as skin irritation to serious adverse health effects such as cancer. Despite a vast amount of media coverage that implies the opposite, to date a direct causal link between toxic mold exposure and serious illness has not been proven. What is known is that all molds, whether toxic or not, do have the potential to cause health effects. Those health effects are allergy symptoms in people who are allergic to molds, and infection in people with suppressed immune systems or underlying lung disease. Common health concerns for these people include hay-fever-like allergic symptoms, and people with chronic respiratory diseases (i.e., asthma, chronic obstructive pulmonary disorder) may experience difficulty breathing. Some people are more sensitive to mold, and when exposed could experience nasal stuffiness, eye irritation, or wheezing. The established health effects of mold exposure do not differ between non-toxic and toxic molds. The Centers for Disease Control (CDC) states, "The hazards presented by molds that may contain mycotoxins should be considered the same as other common molds which can grow in you house." Although it has not been proven that toxic mold can cause serious adverse health effects, many in the scientific community still do believe that toxic mold causes such health effects. Insurers should be aware of the specific disputed health effects of toxic mold exposure, as these will likely appear in allegations of personal (bodily) injury and can impact damages claimed.

Toxic mold is alleged to cause: internal bleeding, cancer, respiratory ailments (including severe or fatal lung disease), adverse effects on the central nervous system, immune system suppression, eye and skin irritation, chronic fatigue, and adverse effects on both the male and female reproductive systems.

Reports and allegations of serious mold-related illness are made because controversy within the medical and scientific communities exists as to whether toxic mold exposure can actually cause the serious adverse health effects for which it is often blamed. Although no direct causal link between mold exposure and serious illness has been proven, it has also not been refuted, and many credible medical and scientific experts still believe that such a causal link exists and will ultimately be established. Other experts remain skeptical that a causal link exists. Fueling the controversy over mold-related illness is the fact that so many of the reported adverse health effects can have other causes or contributing factors, and no simple test exists — such as a blood test - to determine whether or not mold caused a specific health effect in a person. Allergy symptoms allegedly caused by mold can actually be allergic reactions to other factors, such as the presence of a pet. Smoking, poor diet, obesity, and inactivity can also contribute to or cause the same symptoms of allergic reactions to mold. Chronic fatigue can be caused by many factors, as can cancer.

In response to the controversy, the CDC has taken the position that simply not enough is known to form a conclusion, and that people should take appropriate measures to prevent and remove mold from their environment to avoid any potential reactions. The CDC states that "Stachybotris chartarum (Stachybotris atra), and other molds may cause health symptoms that are nonspecific. At present there is no test that proves an association between Stachybotris chartarum (Stachybotris atra) and particular health symptoms…" Despite the controversy, both sides agree that a potential for problems exists, and both are concerned enough to agree that more research is needed.

For regulatory — and often claims and litigation - purposes, mold falls under the category of "indoor air quality" (IAQ). Indoor air quality refers to the environmental quality of the indoor air we breathe. Indoor air quality can be affected by environmental irritants and pollutants such as tobacco smoke, radon decay products, carbon monoxide and dioxide, formaldehyde, asbestos fibers, viruses, bacteria, spores, and molds.

Several federal agencies regulate indoor air quality. The Environmental Protection Agency (EPA) has an Indoor Air Environments Division that is responsible for investigation of indoor air pollution. The Occupational Safety and Health Administration (OSHA) investigates indoor air pollution in occupational environments through its investigation and research arm, The National Institute of Occupational Safety and Health (NIOSH). NIOSH is also affiliated with the Centers for Disease Control (CDC), who investigates claims of mold-related illness or death from a national public health standpoint. State agencies, such as state health departments, may also govern the investigation of indoor air quality. These agencies have published standards for unacceptable contamination levels for airborne concentrations of many types of indoor air pollutants. However, not one agency has established such limits or standards for airborne concentrations of mold. The EPA website specifically states "Standards or Threshold Limit Values (TLVs) for airborne concentrations of mold, or mold spores, have not been set. Currently, there are no EPA regulations or standards for airborne mold contaminants. No regulations have been promulgated to date because of the lack of conclusive evidence of causal link between mold exposure and illness, and because of the lack of research in this area." No federal or state regulations or standards addressing mold prevention or remediation have been published either. No state or federal agencies currently offer testing services for mold samples, and mold remediation contractors are not licensed. Mealey’s Litigation Report reports that no federal, state or local agency in the nation has the authority to treat toxic molds as a serious health problem. Some of these agencies have, however, published extensive information on the potential allergic reactions to mold exposure. Some agencies and industry trade associations have also published general guidelines for preventing and remediating mold growth in homes and other facilities. In March, the EPA published guidelines for schools and office buildings to deal with mold problems, and New York City has created the New York City Mold-Fungi Assessment and Remediation in Indoor Environments Protocol. This protocol has been adopted by more than 30 U.S. cities and states, and has been adopted by the Environmental Abatement Professionals across Canada. The American Conference of Governmental Industrial Hygienists (ACGIH) has also issued guidelines. Some of the published guidelines have been criticized for being too general, and some have been criticized as not stringent enough. None have, as of yet, been adopted as standards.

Insurers must wonder why there has been such a sudden increase in the number — and severity — of mold-related claims in recent years, especially considering that mold has not been proven to cause the serious health effects it is being blamed for, and also that mold has existed forever. Understanding this phenomenon can help insurers assess whether this is a long-term problem, and how to respond. There are several factors that, combined, have led to the recent increase in mold-related claims and litigation:

The 1970s energy crisis led to the construction of commercial and residential buildings that created sealed environments for occupants and residents. Sealed environments were created by sealing windows shut and installing centralized mechanical ventilation (HVAC) systems. Sealed environments do not allow for moisture evaporation, creating Underwriting Research and Solutions environment suitable for mold growth. In addition, central HVAC systems may spread and recirculate mold spores.

Pressure to complete new construction quickly and cheaply has frequently led to the use of substandard, or cheaper building materials on which mold grows more readily and quickly. Also, pressure in recent years to meet housing demand may have led to the use of inexperienced laborers and contractors. This may have resulted in poor construction practices, which in turn may have left buildings that allow for water entry and moisture accumulation, providing an environment for mold growth.

Media attention that has centered on mold-related illness and litigation has increased public awareness of mold issues. Also, there is an increased awareness of indoor air quality issues in general, as government and scientific agencies research and publish findings on these issues.

As noted previously, plaintiffs’ attorneys have begun pursuing mold-related litigation in full force, which is increasing the amount of mold-related litigation.

Recent surveys and commentary from attorneys, insurance industry representatives, government agencies, claims consultants, industrial hygienists, environmental consultants, and a study of recent jury awards, can leave no doubt that there has been a significant and costly increase in the number of mold-related complaints, claims, and litigation in recent years. The trend is expected by many industry experts to continue for at least the immediate future. Historical claim trends specific to mold are difficult to establish because many mold-related claims are often presented and processed as water damage claims, sick building (related to indoor air quality) claims, or construction defect claims. Insurers are beginning to separately track mold-related claims. In an attempt to quantify increases in frequency and severity, some insurers may have to review historical water damage, sick building and construction defect claims to determine which of these may have been mold-related. Although evidence is anecdotal, to date most claims and litigation activity analysis has appeared to center on the high-moisture-prone areas of Texas, and on the homeowners line of business. Partly as a result of the Ballard case, this is a state of immediate concern to those insurers with such exposure. Industry representatives have made the following observations:

A group of independent actuaries for Farmers has estimated that insurers will pay out $128.5 million in mold damage claims in Texas this year. They have also said that homeowners’ premium could rise as much as 40 percent to pay for the increase in property losses. Farmers has estimated that it will pay $85 million in mold claims in Texas itself this year, representing a five-fold increase in mold damage claims.

State Farm has also reported an increase in mold-related claims throughout Texas, estimating several thousand mold-related claims pending in the state. This is as of June, and prior to Tropical Storm Allison. State Farm actuary Brian Cox reported current premium Underwriting Research and Solutions in Texas inadequate by 15% to 20% based on the company’s limited experience from 1999 and on loss trends in their extended coverage peril thus far. Allstate has also confirmed an increase in the number of mold-related claims in Texas over the past year.

Texas Insurance Department’s Office of Public Counsel has seen an increase in the number of claims filed for water damage. Such claims usually average three or four per one hundred policies, but late last year claims jumped to more than five claims per one hundred policies. The average cost per claim has nearly doubled since 1999. The office is speculating that much of the increase in activity could be mold-related, and is trying to determine if this is the case.

Jerry Johns of the Southwestern Insurance Information Institute has speculated that mold-related claims could cost the insurance industry billions of dollars nationwide if nothing is done to control the situation.

Robert Hartwig of the Insurance Information Institute has speculated that the mold issue could cost insurers hundreds of million of dollars this year.

Lawyers Weekly USA conducted a survey of lawyers at year-end 2000, including both plaintiff attorneys and insurance defense attorneys. Results showed that the number of toxic mold lawsuits is indeed on the rise. According the Lawyers Weekly survey, "some experts predict [mold-related claims] will be the next big tort wave." One plaintiffs’ attorney stated "It is a trend. It’s one of the hottest areas in construction defect as well as toxic tort law. I view these claims as similar to asbestos 30 years ago." Sara Thorpe, a San Francisco defense attorney, stated "Mold is everywhere. There are no specific government guidelines and not a whole lot of medical information on it. It’s ripe for lawyers to get into and expand it." (Source: Will Toxic Mold Be the Next Asbestos? Lawyers Weekly USA, the national newspaper for small law firms,

Further anecdotal evidence comes from numerous accounts of those involved in mold-related services, i.e., mold litigation attorneys, environmental inspectors, remediation contractors, toxicologists and biologists, who report a near explosion in mold-related business in recent years. Broader, more accurate assessments and projections of the impact of mold-related claims and litigation on the insurance industry should become available as insurers examine and quantify their claims experience in this area.

Many in the insurance industry are concerned that there exists a very large discrepancy between public perception of the health effects of mold exposure and scientifically established causal link. According to some public policy experts, without credible scientific evidence to support or refute a direct link between mold exposure and health problems, mold has evolved into a legal issue that public perception is influencing, as opposed to a medical issue whose scope is determined by scientific data.

While controversy over mold-related illness exists in the scientific fields, media coverage tends to be one-sided. Sensationalized media coverage of mold-related personal injury allegations and litigation, high-profile plaintiffs, aggressive plaintiff attorney tactics, highly publicized large awards, plus the involvement of consumer advocacy groups, have fostered a public perception of mold as a serious health problem of epidemic proportions, and a public perception that insurers are wrongfully denying mold claims by requiring proof that mold actually does cause harm and by explaining that certain policies do not and were never intended to cover mold damage. The media has fostered this perception by focusing on frightening reports, and has presented the scientific community’s speculations and study of possible mold-related illness as sensationalized fact.

By far the most publicized claims of the potential for serious health effects from exposure to toxic mold resulted from an outbreak of 37 cases of pulmonary hemosiderosis in a low-income area of Cleveland in 1993-94. All 37 cases were young infants, and twelve of them died. It was discovered that all of the homes in which the children lived had water damage and a high level of fungi. The Centers for Disease Control concluded that evidence could not support an association between the presence of mold and the sick babies, because the presence of environmental tobacco smoke was also found. The study received a great deal of media exposure when the CDC initially reported that exposure to Stachybotris caused pulmonary hemorrhaging. When it concluded that there was no proof that mold caused the hemorrhaging in the babies, it received almost no press. In reporting on mold claims and litigation, the media has used headlines such as, "Invisible Killers", "The Mold In Your Home May Be Deadly," and "Haunted by Mold," and has referred to the increase in mold-related litigation with such terms as "the mold invasion." Many of these same media sources are portraying insurers as negligent and profiting to the detriment of policyholders. The most publicized mold-related case to date is Texas’ Ballard case. This bad-faith case alleged that Farmers’ Insurance refused to authorize timely repairs to the 11,500 square foot Ballard home that would have prevented the spread of black mold that started from a water leak that soaked the hardwood floors in the home. Although Farmers contends that it handled the claims promptly and vigorously, the jury granted Ballard $32 million - approximately $6 million for the house and its contents, $12 million in punitive damages against Farmers, $5 million for emotional distress and nearly $9 million in attorneys fees. Since the trial, Melinda Ballard has had many highly publicized interviews in which she has expounded the serious health effects of toxic mold exposure, and has reaffirmed her conviction that insurers are improperly handling claims in an effort to save costs. Several insurance industry experts have expressed concern over the effects the Ballard verdict and publicity surrounding the verdict could have on mold-related litigation.

Mold claims might be brought under both first-party and third-party coverages, and can affect both personal lines and commercial lines. This section will examine each line of business where potential claims exist, potential allegations / causes of action, and potential defendants. It will also examine insurance coverage for the potential claims. In its analysis of potential damages and the applicability of ISO forms, this section uses excerpts from "The Insurance Implications of Toxic Mold" by William C. Wilson, Jr., CPCU, ARM, AIM, AAM, Copyright 2001 by the Independent Insurance Agents of America, with its permission. For a more complete analysis of the applicability of ISO forms to toxic mold claims, with the permission of the IIAA, a full copy of this paper is attached. Or, access this paper via the Internet at www.iiaa.org.

According to the IIAA’s report, potential damages for mold claims include:

Claims for mold damage are being brought under homeowners policies, Section I. Under ISO’s Homeowners 1991 HO-3 "All Risks" form, loss caused by mold is excluded. Mold damage is not typically covered because mold has always been considered a home maintenance problem. However, if the mold is a result of a covered cause of loss, coverage may be found. The attached IIAA paper discusses the differences in mold exclusions between ISO’s 1991 HO-3 form and ISO’s 2000 HO-3 form. Some insurers have maintained that claims for mold would be excluded under the pollution exclusion. If the mold resulted from a Coverage C peril, the exclusion may not apply. Per the IIAA’s report, if the mold is due to something else, such as atmospheric humidity however caused, then the insurer must establish that mold is a pollutant (any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes acids, alkalis, chemical and waste…) and that there has been "discharge, dispersal, seepage, migration, release or escape…" etc. Courts have differed in their interpretation and application of the pollution exclusion, and whether the pollution

the claims occur. Per the IIAA’s report, currently the Ordinance or Law exclusion would not apply, as there are no laws or regulations dealing with toxic mold cleanup. If and when such laws are passed, the exclusion may become material to otherwise covered claims with regard to tearing down "undamaged" portions of a structure, cleaning and/or disposing for the materials, and increased reconstruction costs.

Claims for damages may be brought by commercial insureds under the commercial property policy. Per the IIAA’s report, there is an applicable exclusion in ISO’s Commercial Property Coverage Part in the Causes of Loss forms. As with the homeowners policy, although damage from mold is excluded, there may be coverage if such damage is caused by a covered cause of loss. There are differences, however. (Refer to the IIAA’s paper and the ISO User Panel meeting minutes for a full analysis).

Claims may be made under commercial general liability and corresponding professional liability policies for personal injury (claimants may seek damages for medical expenses, pain & suffering, emotional distress) and property damage (claimants may seek damages for remediation, and to repair or replace the structure).

The following is a general discussion of possible causes of action and defendants. Allowable causes of action of liability may depend on the applicable jurisdiction. Mealey’s Litigation Report notes that the most common cause of loss for commercial general liability and professional liability is negligence. Per Mealey’s, negligence in the performance of duty can be alleged against builders, general contractors, subcontractors, and design professionals. Subcontractors who are connected in any way with moisture intrusion are at particular risk. These would include plumbers, roofers, drywall contractors, HVAC contractors, and framers.

Negligence in maintaining property can be alleged against building owners, landlords, and building managers. Still other defendants can include construction materials manufacturers, distributors and suppliers. Entities responsible for correcting or responding to complaints, such as homeowner associations officers and directors, may be named. Construction sureties may also be named. Specific to professional liability, potential defendants include architects (i.e., for failure to properly determine climatic effects and design appropriate moisture relieving mechanisms), engineers (including soils engineers and concrete subcontractors if soil subsidence causes cracking and water intrusion), designers, testers, remediators (i.e., for failure to properly test, remove, etc., toxic mold). Other professional liability defendants might include real estate agents (i.e., for failure to disclose facts that materially affect the value or desirability of the property), or insurance brokers (Mealey’s notes one unique case where an insurance broker was held liable for the expenses of mold remediation for failing to obtain insurance coverage for such risk). Breach of warranty can be alleged, depending on applicable jurisdiction. Allegations could include breach of implied warranty that a structure was designed and constructed in a reasonably workmanlike manner; breach of contractual warranty if the condition of the property has been specifically warranted by the builder or seller; breach of implied warranty of habitability by the courts imposing common law duty of the landlord to maintain and repair residential premises. Many of the potential claims scenarios noted involving contractors can fall into the realm of construction defect. Insurers with exposure in jurisdictions where construction defect presents challenges may want to take note. Anecdotally, some insurers with such exposure have already commented that they do not expect a substantial increase in construction defect claim activity related to mold, and others have commented that they are taking the potential for an increase in losses very seriously.

According to ISO, under the ISO Commercial General Liability Policy, toxic mold presents a products-completed operations exposure (i.e., for contractors and subcontractors) and a premises / operations exposure (i.e., for owners or lessees of premises). The IIAA notes that the ISO CGL policy provides broad coverage for liability. However, the IIAA also notes that, "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." Per the IIAA, the same issues regarding the application of the pollution exclusion that were discussed under the HO exclusion apply to the CGL pollution exclusion. First, is mold a "pollutant," and second, has there been "discharge, dispersal, seepage, migration, release or escape?" Finally, the IIAA notes that, "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 a more thorough analysis of the applicability of the CGL pollution exclusion and property damage exclusions, refer to the IIAA’s paper, attached.

Employees can make workers’ compensation claims against employers for mold-related illness. In some states, employees can avoid the exclusivity provisions of workers’ compensation statutes and bring suit against the employer by alleging that the employer knew there was a problem, but did not address it or intentionally hid it. It should be noted that employees can be the plaintiffs against several of the commercial general liability / professional liability defendants noted previously. Employees may pursue direct action against contractors, building owners and building maintenance companies.

According to the IIAA, other commercial policies, such as umbrella policies and difference in condition policies, could be affected. As these forms are not standardized, they would need to be analyzed on a case-by-case basis.

Insurance companies could be defendants because of bad faith allegations. To date, it appears that most bad faith allegations have been made against homeowners insurers, with claims that insurers have not addressed mold problems fast enough, that remediation and repair efforts have not been thorough, that insurers have not provided adequate reimbursement or payment of expenses, or that insurers have improperly denied coverage.

Public entities — local governments in particular — present special exposure because they can be defendants in their capacity not only as building owners, but also in the exercise of their responsibility to protect the public, and in their responsibility to oversee environmental health risks in public buildings. A survey commissioned last year by the International Center for Toxicology and Medicine found that public sector officials with responsibility for overseeing environmental health risks that may affect schools, courthouses, libraries and other public buildings, by an overwhelming 71% to 16% majority, believe that "indoor air quality is likely to become a much more significant issue in the near future." Molds were the most frequently mentioned cause of indoor air pollution. It should be noted, however, that the extent to which various public entities may be held liable for certain damages may be governed by governmental immunity laws in applicable jurisdictions.

Within local governments, schools present a special exposure. The media is full of headlines announcing classroom closings across the country due to the presence of mold. Doctors and researchers believe that children may be more at risk for health problems relating to mold because their lungs are still developing. There are also reports of poor building maintenance in schools in districts across the country — so much so that these reports have garnered the attention of the federal government and state governments. Building maintenance is a special challenge for schools, who must often scale back efforts because of budget cuts, when they are forced to choose between such items as hiring a teacher, buying textbooks, or maintaining buildings.

Hospitals and health care facilities that house ill or immune-compromised patients or residents may present special exposure. Facilities that perform surgery may be at special risk because surgical wounds can be infected. Also important to note is the changing nature of the hospital environment. According to Health Facilities Management, with advances in technology, many more hospitals now than in the recent past perform procedures that require protected areas with carefully maintained and monitored ventilation systems to prevent the spread of airborne disease to patients with severely suppressed immune systems (i.e., organ or tissue transplant procedures). Health Facilities Management further reports that construction or renovation to a facility can present special exposure while the construction / renovation is underway. Problems can arise if ventilation systems are not adequately maintained, and if construction sites within the health care facility are not properly maintained. In one case, a hospital in Montreal had two patients suspected of having been infected with aspergillus. When the hospital’s ventilation system was discovered to be infested with mold, it was criticized for not having replaced a system that is 40 years old. In Los Angeles, it has been reported that in one hospital, as many as six patients may have died as a result of exposure to aspergillus. In another case, a patient had to be kept hospitalized 105 extra days because construction in the operating suite released aspergillus.

Exterior Insulating Finishing System (EIFS) Manufacturers, Installers (Contractors), Buildings Residences made with Exterior Insulating Finishing System (EIFS) stucco may present additional exposure. EIFS stucco has been the focus of litigation in Alabama, South Carolina and Florida. Allegations are that the stucco was not installed properly or that it has delaminated, breaking the seal against water and dampness and allowing moisture to seep in and get trapped behind the EIFS, leading to mold growth and rot. In one case, a class action lawsuit has been filed against a homebuilder and the EIFS manufacturer by 73 families in a housing subdivision, alleging that the stucco is defective in that in traps moisture behind walls, leading to mold infestation and other problems.

The chain of defendants in any mold case can be extensive, and can include almost anyone who has had anything to do with the building. Claims for one event can cross lines. For example, employees alleging the presence of mold caused them to become ill may not only make claims under workers’ compensation, but may sue the building owner for remediation to the building and compensatory and punitive damages. Or, one event can give rise to both homeowners and construction defect claims. Mealey’s notes that toxic mold claims are particularly unusual, because one plaintiff can have a cause of action for damage to home or office building, and that same plaintiff may have a personal injury claim — both due to the same mold event.

Toxic mold is being described as a plaintiff’s attorney bonanza, both for property damage and personal injury claims. From a personal injury standpoint, it is difficult to scientifically prove that exposure to mold caused specific symptoms. There is no way to accurately test mold spore levels, because inside airflow is rarely consistent and mold levels may fluctuate. There is also no minimum level of exposure required to cause harm, and no simple medical test that can prove mold exposure caused certain health effects. Although lack of scientific proof may make it difficult for plaintiffs' attorneys to prove allegations of personal injury in litigation, both sides must rely on individual expert testimony from individual doctors, toxicologists, biologists or other experts. But these cases will be likely to engender jury sympathy, which would be more to the advantage of plaintiffs’ attorneys. As one New York City attorney who has won mold trials explained, "for science to prove something, it has to be 100% certain. In a civil lawsuit, it has to be proved only 51%." And, although insurers may defend such cases with their own experts who can testify that no causal link has been established, as another attorney explained, "You are dealing with people whose kids have bleeding noses and people who lose their homes." Another factor that is causing difficulty for insurers is that there are no regulations or standards of remediation, and no certifications or standards for environmental contractors specific to mold. There could be allegations that insurers did not act quickly enough, did not do enough to remediate or fix a problem, or that they used unqualified contractors to save costs. Insurers may find it difficult to defend such allegations without being able to point to remediation regulations, guidelines or standards that their contractors have followed, or to certifications that their contractors have attained.

Toxic mold claims can be expensive. Litigation can require many experts, and there are not yet very many in the field. Also, remediation can be expensive — in some cases requiring demolition and reconstruction of the entire building. If the initial remediation does not solve the mold contamination, there could be additional expense. Also, claims can exclude expenses for future medical monitoring, which can be substantial.

The public’s perception of toxic mold has been shaped by sensationalized media coverage and aggressive plaintiff advertising. Since the issue has become so widely publicized, juries may have preconceived ideas of the dangers of toxic mold exposure. Also, consumer groups have been stating that the toxic mold problem is aggravated by insurance companies that refuse to pay promptly for water damage repairs. They are also alleging that insurers are hiring amateurs to save costs. With so much anti-insurer publicity, the public may also have misguided expectations as to what insurers should be responsible for.

Aggressive plaintiff advertising includes specific instructions on how to sue and obtain payment from insurance companies. Such advertising is portraying insurers as entities claimants must fight because they are wrongfully denying claims. Additional plaintiff attorney tactics include targeting groups. They are encouraging potential claimants to join together with the advice that juries may be more likely to believe that a source of toxicity made someone ill if there are several people complaining of the same problem, and that litigation expenses can then be shared.

Plaintiffs’ attorneys are actively pursuing the formation of class action suits. A class action has already been filed in the EIFS stucco case. Mealey’s reports difficulty in forming class actions under allegations of personal injury caused by mold, because the differing nature of the injuries and etiology presents substantially dissimilar issues so as to preclude a class action. Despite this challenge, the NAII has reported that the first class action lawsuit has been filed in California on behalf of 800 University of California Berkley student-housing residents, and experts believe that this is just the beginning.

With all of the claims issues regarding mold that insurers face, insurer response and defense to claims and allegations can be challenging. According to Mealey’s, defense arguments include:

Analyzing the possible causes of the mold. (Is it a covered peril or a home maintenance issue? Did it result from the initial construction?)

Medical causation. (The challenges with this defense were presented above. However, there have been cases where medical testimony was not accepted because a causal link has not been scientifically established. Also, the defense can dispute the scientific accuracy of the "evidence" of causal link presented by the plaintiff attorney’s experts. Some claims professionals have referred to Daubert vs. Merrell Dow as a reason such "evidence" can be disputed. In Daubert, a federal district court held that the evidence the plaintiffs used was "substandard" because it had never been published, nor had it gone through a "normal peer-review process." The federal court ruled that such a process was necessary to prove the general acceptance rule of evidence).

Construction defect claims are being defended with the "business risk" doctrine, but it has been successful in only some states. This means that a contractor buys a general liability policy "for fortuitous loss such as bodily injury or property damage that is unintended." If the policyholder builds something poorly or cuts a corner, it could be argued that the damage was foreseeable and not insurable.

As discussed previously, mold is generally excluded from a property policy unless it is a consequence of an otherwise covered cause of loss. In order to control losses, insurers may consider a tighter exclusion for mold damage in their homeowners and commercial property policies. According to the IIAA, some insurers are introducing tighter mold or fungus exclusionary endorsements in their homeowners programs. An example is an exclusion that would apply to mold claims regardless of whether naturally occurring or caused by an otherwise covered peril. Per the IIAA, "Typically, these endorsement include ‘concurrent or 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 intent is to exclude direct damage caused by the mold, even if the mold is precipitated by an otherwise covered peril. Also, the IIAA reports that "at least one carrier has filed an endorsement for its CGL and umbrella programs that would exclude coverage for all damages (BI, PD, PI and 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." IIAA anticipates many more carriers filing, or attempting to file, such exclusions. There are some regulatory environments that may not allow such exclusions if they consider it against public policy. Such absolute exclusions are receiving bad publicity, as consumer advocates and plaintiffs accuse insurers of trying to exclude an exposure that is in the public they do not want to pay such claims. An example is Texas, where newly filed mold exclusions in homeowners policies are currently under consideration by the Texas regulators, who are conducting much publicized and emotionally charged hearings on the issue.

Some industry experts believe that mold will ultimately be excluded from most policies, and that specialized environmental policies covering mold will be introduced. Or, they believe that mold may be excluded from policies, with sublimits being made available for an additional charge. These experts believe that the real problem with mold is that the emerging exposure has not been anticipated, and therefore not contemplated in the pricing of applicable insurance policies. The challenge with this approach is that such coverage would be difficult to price, as there is limited historical data on losses due specifically to mold. Also, there are certain cases, such as in a homeowners policy or commercial property policy, where some industry experts believe it is against public policy to provide coverage for mold damage regardless of cause. It is their belief

that covering such damage would provide disincentive for property owners to maintain their homes or buildings. It would also be difficult, if not impossible, to price such coverage because the probability of an occurrence could not be estimated.

ISO User Panels, including the Personal Lines Panel, Personal Property Panel, Commercial Lines Panel, Commercial Property Panel, and Commercial General Liability Panel, are evaluating the exclusion of mold and fungus from their respective applicable policies. Commercial General Liability, Commercial Property, Homeowners and Dwelling filings will be made during the third quarter of 2001, and Business owners filings will follow the approval of the Commercial General Liability and Commercial Property filings.

Some of the best responses to the mold problem that insurers could have over time may be loss control and other loss prevention or mitigation methods. Loss control efforts for building owners include ensuring proper maintenance of buildings, responding quickly to complaints, and showing concern and thorough efforts to address complaints.

For commercial buildings, it is recommended that building owners assign an experienced person with credentials specifically to handle indoor air quality assessments and problems. The focus should be on monitoring air quality and water intrusion. If outside contractors are used for any mold remediation, the building owner should make sure the contractors have experience in mold remediation. The EPA has recently issued new guidelines on mold remediation in schools and commercial buildings. Although these guidelines are very general in nature and do not create numerical standards, building owners should still confirm that remediation contractors follow them.

For construction defect, the best loss control programs are usually quality control programs instituted and performed by the insureds. Such programs usually depend on adhering to local industry standards for construction. However, loss control should also include the use of quality building materials and experienced, qualified laborers. General contractors should use experienced and qualified subcontractors, and all contractors should be aware of how air and water promotes mold growth. Contractors should make sure to focus on limiting the ways water can enter when they undertake the construction of any building.

For workers’ compensation, employers should consider mold a health-safety issue concerning employees, not a building maintenance issue for building owners. They should respond quickly employee complaints quickly and completely. If applicable, they may also want to consider some of the loss control actions taken by commercial building owners. Some insurers are proactively providing remediation services with the intention of keeping potential mold related claims from occurring. Other insurers are taking action to prevent mold growth once a covered loss occurs, such as taking prevention and remediation steps after a sprinkler leak.

Lack of regulations or standards governing testing and remediation will present insurers with a presents a claims issue. For example, while an insured or insurer may be proactive in testing for mold levels regularly in buildings, with no maximum allowable exposure limit, they will still not know if they have a mold problem until either mold is spotted or there is a complaint. Similarly, even though a contractor or insurer may take quick and thorough action to remediate mold in response to complaints, claimants can still allege that not enough was done. The defendants can not refer to standards that prove they have taken necessary action. However, regular and proactive loss control and mitigation can still indicate to claimants and potential plaintiffs that a potential defendant is conscientiously addressing the mold issue and is genuinely concerned about their complaint. This can serve to offset some of the negative media messages that the public has been subjected to, and thus help prevent potential claims and litigation.

Insurers are concerned over regulatory proposals that may serve to promulgate standards and guidelines prior to the establishment of scientific causal link. Such standards may create maximum allowable exposure levels without the scientific foundation for them. This scenario has the potential to both help and hurt insurers. For example, should a maximum allowable exposure level be established, it could be easier in some cases to claim that mold exposure did not cause a particular illness if the maximum allowable exposure level was not breached. Alternatively, it could be easier for claimants and plaintiffs to claim mold-related illness simply by alleging that the maximum allowable exposure limit has been breached. Insurers are concerned exposure level is breached, sensitivities among individuals differ, and alleged symptoms of mold — related illness can have many other causes.

California State Senator Deborah Ortiz, D-Sacramento, has proposed a Toxic Mold Protection Act (SB No. 732) that would require the state Department of Health Services to conduct studies, consider specific delineated criteria, and consult with professional and medical experts in the field to arrive at permissible exposure limits to mold. The bill would also set standards for the identification and remediation of toxic molds. The bill would also require any person who sells or rents residential real property or sells commercial property to provide a written disclosure to the potential buyer or renter, disclosing the presents of mold in conditioning system or surrounding environments, and the potential risks that may result from exposure to mold. (Source: Mealey’s)

Two additional bills were introduced in California that would require landlords of residential property to disclose to prospective tenants the presence of mold within a unit, and require the State Department of Health to examine working with local agencies to minimize the adverse effects of toxic mold on human health.

The Texas Legislature is also reported to be considering bills that would address indoor air quality issues, including mold, in schools and other public buildings.

In April, 2001 the EPA issued guidelines on mold assessment and remediation in schools and commercial buildings. The guidelines are very general in nature, and can not be considered standards.

The Insurance Implications of Toxic Mold Claims

Williams C. Wilson, Jr., Copyright 2001 by the Independent Insurance Agents of America Guidelines on Assessment and Remediation of Fungi in Indoor Environments New York City Department of Health

100 Employees Sue Over Injuries Allegedly Caused By Toxic Mold, Mealey’s Emerging Toxic Torts, November 3, 2000.

Avoiding And Minimizing Mold Liability: Understanding The Dynamics Of Mold and Its Remediation, Mealey’s Litigation Report: Insurance, April 10, 2001.

Big Award In Texas Mold Case Sends Tremor Through Home-Insurance Industry, The Dallas Morning News, June 11, 2001.

California Homeowners Sue Insurer For Failing To Cover Mold Damage, Mealey’s Litigation Report: Emerging Insurance Disputes, January 9, 2001.

California Senator Introduces Toxic Mold Protection Act, Mealey’s Litigation Report: Mold, April, 2001.

Canadian Public Buildings Invaded By Toxic Mold; $100M In Construction Hit, Mealey’s Litigation Report: Construction Defects, December, 2000.

Carrier Moves To Exclude Expert Testimony In Texas Ballard Case, Mealey’s Litigation Report: Mold, March 2001.

Clearing The Air, Health Facilities Management, May 2001.

A Closer Look: Mold-Related Claims In Texas Point To Alarming Trend, BestWire, June 13, 2001.

Confounding Fungus, Families Blame Mold For Making Them Sick, Forcing Them From Their Homes, Milwaukee Journal Sentinel, July 8, 2001.

Construction Defect Battles Widespread, National Underwriter, May 21, 2001.

Coverage For Losses Uncertain; Mold Concerns Growing, Business Insurance, May 28, 2001.

Displaced Workers Seek Disclosure Rules On Toxic Mold, The Associated Press State & Local Wire, September 21, 2000.

EPA Advice On Removing Mold; U.S. Agency’s Booklet Offers Guidelines To Apartment Owners, Sacramento Bee, May 14, 2001.

Evaluation And Settlement Of Mold Cases In Landlord / Tenant Context, Mealey’s Litigation Report: Mold, May 2001.

Family Forced From Home Because Of Toxic Levels Of Mold, The Associated Press State & Local Wire, July 8, 2001.

First Came The Flood, Then Mold, Now Heat; Summertime Temperatures Exacerbate Problems At Storm-Damaged Dwellings, The Houston Chronicle, July 11, 2001.

Guidelines Can Protect Your Firm From Mold-Contamination Headaches; New York

Contamination Guidelines, Heating, Piping, Air Conditioning, January 1, 2001.

Haunted By Mold, The New York Times, August 12, 2001.

Homeowners Implore Texas Officials To Reject Insurance Companies’ Mold Efforts, The Dallas Morning News, June 27, 2001.

Household Mold Growing Concern; Rash Of Claims Has Insurers, Health Community Cautioning Against Overreactions, San Antonio Express-News, July 29, 2001.

Increasing Mold-Related Claims Activity Likely To Change Policy Language, BestWeek Reports, BestWire, June 11, 2001.

The Insurance Implications of Toxic Mold Claims, William C. Wilson, Jr., CPCU, ARM, AIM, AAM, Independent Insurance Agents of America, 2001.

Insurer To Halt Full Coverage Sales (In Texas), The Dallas Morning News, July 31, 2001. Invasion Of Toxic Mold, NBC News Transcripts, June 28, 2001.

Invisible Killers, 48 Hours, CBS News Transcripts, September 28, 2000.

The Liability System, Insurance Issues Update, Insurance Information Institute, July, 2001.

McCarter & English LLP On Mold Litigation Builders, Subcontractors And Architects: Finding Insurance Coverage For Mold Litigation, Mealey’s Litigation Report: Insurance, March 13, 2001.

Manage Mold With Air, Water Controls, National Underwriter, August 6, 2001.

Many Kinds Of Molds Are Presenting Serious Health Risks To Homeowners, The San Diego Union-Tribune, July 15, 2001.

Measuring Bioaerosols, Occupational Health & Safety, May, 2001.

Microbiological Contamination Litigation A/K/A ‘The Mold Monster,’ Mealey's Litigation Report: Emerging Toxic Torts, November 24, 1999.

Mold And The Hypersensitive Plaintiff, Mealey’s Litigation Report: Mold, May 2001.

Mold: A Very Serious Issue; Americans Urges To Test Their Homes, Business Wire, July 10, 2001.

Mold Claims Growing Fast, RMs Warn, National Underwriter, August 6, 2001.

Mold Contamination A Growing Problem With No Easy Answer, Sacramento Bee, May 10, 2001.

Mold Contamination Liability and Coverage Issues, Mealey’s Litigation Report: Mold, April 2001.

Mold Fears Overblown, Experts Say, Houston Chronicle, July 12, 2001.

Mould Problems Identified In 58 Government Buildings, Toronto Star, July 11, 2001.

Mold Q&A, Corpus Christi Caller-Times, June 25, 2001.

Mold Quickly Spreads As Health And Legal Issue, Los Angeles Times, February 5, 2001.

Neglecting Mold Abatement Can Leave You Vulnerable, Safety Director’s Report, June 2001.

On The Lookout!, Materials Management In Health Care, March 2001.

Province To Spend Millions To Clear Buildings Of Mould, London Free Press, July 12, 2001.

Psychological Aspects of ‘Sick Building’ Syndrome Complaints, Claims, September 1998.

Residents Get Information On How To Fight Toxic Mold, The Houston Chronicle, June 14, 2001.

Rise in Mold Claims Pits Texas Residents Against Insurers, The Houston Chronicle, June 27, 2001.

Santa Clara Plans Court; Facility — Sans Toxic Mold, The Recorder, July 2, 2001.

School Ordered To Clean Up Mold, The Cincinnati Enquirer, May 3, 2001.

Second Insurer Suspends Sale Of New Homeowners Policies In Texas, The Dallas Morning News, August 2, 2001.

Sexy It’s Not, But Mold Is Real Hot, The National Law Journal, June 11, 2001.

Sick Students, Staff Prompt Closure Of Vashon High; Toxic Mold? Students Walk Out Despite Inspections That Show No Airborne Spores, The News Tribune, September 30, 2000.

State Farm Puts Homeowners Policy Requests On Hold In Texas, BestWire, July 23, 2001.

Survey Finds Mounting Concern Over Indoor Air Quality Issue; Biggest Culprit: Molds, PR Newswire, January 29, 2001.

Texas: Caution Urged On Mold Claims, Insurance Chronicle, July 2, 2001.

Texas Gathers Wealth Of Testimony At Mold Hearings, BestWire, June 27, 2001.

Texas Is Battleground In Rising Insurance Claims, San Antonio Express News, July 29, 2001.

Toxic Mold, CNBC News Transcripts, June 29, 2001.

Toxic Mold Growing Legal Issue, United Press International, October 5, 2000.

Toxic Mold Leads To Lawsuits In California, Environment News Service, September 25, 2000.

Toxic Molds Making Children Ill, World News Tonight, ABC News Transcripts, April 18, 2001.

Toxic Mold Or Media Hype? Lack Of Proof Leaves Worried Families, The Oregonian, November 9, 2000.

Toxic Mold Threatens $929 Million Deal, Los Angeles Times, September 22, 2000.

Toxic Mold, Is The Fungus In Your Floorboards Making You Sick? With No Clear Answers, Panic and Lawsuits Abound, Time, July 2, 2001.

Two Proposed California Mold Bills Introduced, Mealey’s Litigation Report: Mold, March 2001.

Mould Claims Drive Up Premiums, Insurance Day, June 12, 2001.

U.S. Mould Needs Responsible Handling, Insurance Day, June 27, 2001.

Warning Sign For Hospitals, The Gazette (Montreal), March 14, 2001.

What Will Mold Cost Us? It’s a Growing Factor In Buying, Selling Homes, Chicago Tribune, July 22, 2001.

Why Are Indoor Air Quality Problems So Prevalent Today? Workplace Environment Information; Industry Overview, Occupational Hazards, January 1, 2001.

Why The Issue Of Mould Could Be The Next Big Liability Facing Insurers, Insurance Day, June 13, 2001.

Will Toxic Mold Be The Next Asbestos?, Lawyers Weekly USA, The National Newspaper For Small Law Firms, www.lawyersweeklyusa.com, March, 2001.

While the information contained in this report was obtained from or based upon material from sources we assume to be accurate and reliable, American Re and its affiliates make no warranty of any kind as to its accuracy, completeness or applicability to any specific situation. The material presented is for information only, and American Re does not necessarily subscribe to the views regarding the subject matter as expressed by others cited in this report. Further investigation may be necessary to verify the information's accuracy, completeness or applicability to any specific situation. For any legal research items, we recommend you consult with an attorney to determine applicability of the information to your particular circumstances.