Part 2: Mold: Are You Covered?

Rachel Jakubovitz, Esq.
Willis Environmental Practice
Willis North America
Nashville, Tennessee

[Note: The author gratefully acknowledges the assistance of Sandy Rodgers and Gordon Barham of Willis North America in preparing this article.]

[Ed. Note: In the first installment of this article, Ms. Jakubovitz discussed the various kinds of mold of concern in indoor air environments, the science relating to mold pollution, apparent or potential health effects, and mold litigation. In this installment, the author discusses insurance issues related to mold pollution and its effects.]

Insurance Coverage
Insurance coverage for mold claims may be found both in first party property policies, such as homeowners or commercial property, and in third party liability coverages. Both are discussed below.

First-Party Coverage: Property Policy Issues
First party property insurance is generally written on “all risk” policies. These policies are meant to provide comprehensive coverage for any loss to an insured property that is not expressly excluded on the policy.

This analysis is based on commercial property forms; homeowners forms are similar.

Mold is normally excluded on all risk policies, but only as a peril, or cause of loss. All the policy exclusions are listed following an introductory preamble. Typical preambles may be one of the following:

1. This policy does not insure against loss caused directly or indirectly by any of the following:
2. This policy will not pay for loss or damage caused by or resulting from any of the following:
3. This policy does not insure against the following types of loss or damage:

This is followed by a listing of all excluded perils applicable to the policy. Mold is rarely found as a separate item. It is normally included in a listing of similar perils, or causes of loss, which are of a type that occur over time. The following examples are illustrative of typical insurance policy wording:

A. Wear and tear, deterioration, depletion, erosion, corrosion, mold, wet or dry rot;
B. Moth, vermin, termites or other insects; inherent vice; defective or faulty workmanship, error in design or materials; wear and tear or gradual deterioration; contamination; pollution; corrosion, rust, wet or dry rot, mold, dampness of atmosphere, smog or extremes of temperature; or loss or damage by normal settling, shrinkage, or expansion in buildings or foundations.
C. Rust, corrosion, fungus, decay, deterioration, hidden or latent defect, or any quality in the property that causes it to damage or destroy itself: . . . .

Note that regardless of the language used, mold is excluded as a peril, or cause of loss.
Despite this language, most mold losses that occur are paid. Such claims have been paid because the mold is actually just a portion of the “damage” caused by water infiltration from another cause. In almost all such mold claims, coverage is afforded if the cause of loss was actually a covered cause of loss, such as water damage from a broken pipe, a leaking roof as a result of roof damage by wind, a covered flood loss, or water used by a fire department in extinguishing a fire. This makes the mold an “ensuing loss” from a covered cause of loss (wind, flood, water damage, etc.) and thereby covered.

For example, one of the larger recent claims resulted from the closure of a client’s facility by order of California’s Occupational Safety and Health Administration (CAL-OSHA) after employees at the facility had complained of symptoms typical of “sick building syndrome.” Investigation revealed a severe mold problem. The insurer reserved rights to decline coverage. The client researched their records and found documentation of a water leak in the basement that had occurred in the past. At that time, only minor damage had been noted, cleanup was done, and the loss not even reported as it was under the deductible. Knowledge of the past water leak changed the claim from a claim for mold damage to a claim for water damage with mold as a resultant damage of a covered cause of loss (water damage).

In order to maximize first party mold coverage, it is important that the client explains (when accurate) that the mold is an “ensuing loss” from a covered cause of loss. It is not always clear what the cause of the loss actually is, particularly when there are concurrent causes.

This position has been enforced in some jurisdictions by the “efficient proximate cause” doctrine. This doctrine requires that when a loss is the result of concurrent causes, it is attributed to the efficient cause of loss. The efficient cause of loss is the predominant cause of the loss. Using this doctrine if the predominant cause of the loss is a covered cause of loss, although there is a concurrent excluded cause also, the entire loss will be covered. One good example applying the efficient proximate cause doctrine is a commonly cited California case in which the California Supreme Court held that if negligent construction (covered cause of loss) and improper earth movement (excluded cause of loss) were concurrent causes of a loss, and the negligent construction was the predominant cause of loss, the entire loss is covered. Garvey v. State Farm & Casualty Co., 48 Cal.3d 395, 257 Cal. Rptr. 292 (1989).

The efficient proximate cause is not always straightforward. Some jurisdictions interpret it differently, e.g., the efficient cause of loss is the first cause in the chain of events. Other jurisdictions do not apply it at all.

Another exclusion found in most property policies is:

The cost of correcting or making good:
a) Faulty workmanship, material, construction or design, or;
b) Inherent or latent defect.

This exclusion would not necessarily preclude a claim arising because of mold attributed to the original building contractors and/or suppliers of building components. An example would be a claim for water damage involving mold caused by water infiltration into the walls as a result of the design/manufacture/installation of the original windows. There may be no visible damage by water for some years, but when some repair/modification is begun the water damage and resulting mold are discovered within the walls. In accordance with the above exclusion, the cost of correcting the defect (window design and installation) would be excluded, but the resulting damage by water (including the mold remediation) would be covered. (Upon settlement, the property insurers will likely subrogate against the original contractor and materials suppliers – one insurer making a mold claim against another.

Third-Party Coverages: Casualty Policy Issues
Third-party claims are arising in the form of litigation brought by property owners, building owners, commercial tenants, employees of tenants (who are barred from suing their employers by workers compensation laws), and/or homeowner associations (including condominium associations). They are presented as construction defect, personal injury, trespass, and nuisance claims. Mold is often named as part of the damages resulting from the claimed construction defect or failure to maintenance where there is some form of water damage or moisture problem. The litigation is filed against building owners, general contractors, manufacturers, suppliers, installers and sub-contractors. Almost any party that did any construction or maintenance on the property may be brought into these lawsuits. The lawsuits include causes of action such as breach of contract or lease, failure to construct an adequate building for its intended purpose, breach of express and implied warranties, misrepresentation, and negligence.

Much of the mold litigation is due to “EIFS” and failures of plumbing systems and/or HVAC systems. EIFS, or Exterior Insulation Finish Systems, is a synthetic stucco used on exterior walls. It is a multi-layered system consisting of a finish coat, a base coat and insulation board, all of which is secured to wallboard or plywood. It has been used in commercial and residential construction in the United States since 1969. From the perspective of homeowners, many problems have been encountered with EIFS walls. See http://www.eifsfacts.org/index.htm. For the manufacturers’ version of the issues, see http://www.eifsalliance.com.

The extensive litigation relating to EFIS has involved, inter alia, claims of intentional and negligent misrepresentation. The plaintiffs’ argument is that EFIS has been known for some time to be defective and, therefore, the manufacturers and the installers (and others in the construction industry) should be liable for the resulting enormous damages to structures (resulting in some complete rebuilding of interiors and exteriors) and punitive damages for fraud. In addition, serious illnesses have been found in some individuals exposed to mold which has grown from water damage. The water damage, in turn, has allegedly been caused by defective synthetic stucco systems, failures to maintain HVAC systems, failures to repair premises after flooding, and other types of water damage.

Commercial General Liability (CGL)

Basic Policy Provisions

Most businesses carry Commercial General Liability (“CGL” – previously called Comprehensive General Liability) coverage. A typical CGL policy should provide coverage for many mold-related claims. A standard CGL policy states in the Insuring Agreement that it will pay those sums that the insured becomes legally obligated to pay as “damages” due to “bodily injury” or “property damage” to which the insurance applies. It goes on to state that the carrier has the duty to defend the insured in any lawsuit seeking those damages. In order for the policy to apply there must be an “occurrence” during the policy period.

There are various exclusions that the carriers may try to use to exclude coverage for mold. These include the Business Risk exclusions and the Pollution exclusion. The relevant language is quoted below:

Business Risk Exclusions

The primary business risk exclusions are the “own product” and “own risk” exclusions.

A typical CGL policy will state:

This insurance policy does not apply to:
K. Property damage to your product arising out of or any part of it.

Usually the definition of “your product” is:

a) Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:

(1) You;
(2) Others trading under your name; or
(3) A person or organization whose business or assets you have acquired . . .

“Your product” includes:

a) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your product”; and
b) The providing of or failure to provide warnings or instructions.

This insurance does not apply to:

I. Property damage to your work arising out of it or any part of it and included in the completed operations hazard.

The definition of “Your Work” usually reads:

“Your work” means:

a. Work or operations performed by you or on your behalf; and
b. Materials, parts or equipment furnished in connection with such work or operations.

“Your work” includes:

a. Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work”; and
b. The providing of or failure to provide warnings or instructions.

Insurance companies will often assert that the “business risk exclusions” preclude coverage for mold claims. Nevertheless, the first thing to keep in mind is that the business risk exclusions only apply to property damage claims. Business risk exclusions cannot be used to preclude any Bodily Injury claims or defense of a lawsuit alleging bodily injury.

Additionally, as for property damage claims, there is case law on the business risk exclusions generally in construction defect scenarios. Long before there was any issue about mold, policyholders and insurance carriers were subject to construction defect and “sick building” cases. From the law developed in judicial decisions, the generally accepted standard is that the business risk exclusions do not bar coverage for physical damage to property other than the insured’s own product or own work.

As an example, assume Acme Contractors, the insured, builds an office complex. Almost immediately, the occupants begin to complain to the owner about water intrusion. The water intrusion – and the complaints – become an ongoing and serious problem. The complaints continue. Later, it is learned that Acme incorrectly applied the roofing membrane and incorrectly caulked the windows. Mold is discovered in and on the walls and around the windows. The mold damage will require extensive renovation. It becomes necessary for Acme, the general contractor, to make repairs for the damage and it begins to do so. However, the damage is severe and disputes arise. Individuals working in the building and the building owner sue Acme, alleging bodily injury and property damage/mold due to Acme’s negligence. Acme Contractors places its CGL insurance carrier on notice of the litigation.

The CGL policy will pay for defending Acme Contractors in the lawsuit. The bodily injury claims have to be litigated and defended. Since the property has been remediated, the insurance carrier will have to cover at least part of the repairs. Acme’s CGL policy should pay the costs of all the remediation except for the cost to correctly apply the roofing membrane and to caulk the windows properly. Although the CGL carrier is not obligated to pay for the faulty workmanship (i.e., the poor caulking of the windows and incorrectly applied roofing membrane) of Acme, the insured, all the resulting damage to third parties (i.e., renovating the walls, cleaning the HVAC, replacing floor coverings, etc.) should be covered and thus paid for by the CGL carrier.

Absolute Pollution Exclusion

Another exclusion in the CGL policies often used by carriers to avoid coverage for mold claims is the pollution exclusion. This exclusion has evolved over the years into a fairly standard Absolute Pollution Exclusion (APE). Generally, this exclusion bars coverage for:

Pollution
(1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants . . . .

“Pollutants” are defined as:

. . . 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.

As with the business risk exclusion, there is a lot of (pre-mold) case law on the pollution exclusion in CGL policies. Cases that may have some similarity to the mold issues are the various “sick building” cases and others such as lead paint ingestion, asbestosis, silicosis, and carbon monoxide exposure. The courts in various states have come out differently on the application of the pollution exclusion to these types of cases. Based on the many issues and rationale behind the different decisions in various jurisdictions over the years, the debate a policyholder will have with its CGL insurance carrier may be contentious.

The two main points of controversy will be:

• Is mold a “Pollutant”?
• Does mold fall within the “discharge, dispersal, seepage, migration, release or escape” language?

A recent decision held that the pollution exclusion does not apply to bacteria-contaminated water because bacteria do not constitute a “pollutant.” Keggi v. North brook Property and Casualty Ins. Co. (Az. App. 2000). Since there is not a lot of case law on this issue, it is uncertain whether this decision will be followed in all jurisdictions.

On the issue of “discharge, dispersal, etc.,” one should look to the various judicial opinions on exposure to lead based paint, asbestos or carbon monoxide. The courts have not been consistent. Some have ruled that the pollution exclusion does apply to bar coverage. Others have decided that that exposure to these items is not the type of traditional active disposal or discharge of pollution that should be barred from coverage. The latter group of courts reason that mold is stationary and, therefore, does not discharge, disperse, etc. Also, mold is a naturally occurring allergen, like plant pollens, so technically it is not a traditional pollutant.

The author is unaware of any case law on these specific coverage issues for mold. Drawing analogies from prior case law is helpful, but not authoritative.

What the insurance market has seen from the carriers to date is not definitive on the issue either. Commercial insurance brokers have not seen denials of coverage for mold based on the pollution exclusion in CGL policies, nor have they seen any Reservation of Rights letters mention the APE in the face of claims based on mold. It appears the insurance carriers are advising their claims personnel to be vague and to avoid giving specific opinions regarding mold.

In fact, when specifically named as a type of damage, mold has been a known factor in expediting claim settlements. For example, the author is aware of a matter in which insurance carriers settled recent litigation involving construction defects, primarily EIFS and subsequent mold, where the settlement was hastened since mold was alleged and repairs had not yet been made.

Environmental Impairment Liability (EIL)

Environmental Impairment Liability (EIL) policies were designed to fill the gap left by the Pollution Exclusion in CGL policies. Contemporary EIL policies have evolved over the years and the policies now offer many variations on (a) the coverages available, (b) the limits and (c) the types of businesses that can be insured. Over the years, the coverages have been refined so that they meet the requirements of the marketplace. Most of these policies have many manuscript endorsements in order to cover the specific needs of the insureds.

The mold litigation is beginning to address CGL and Property policies. As discussed above, there are many outstanding issues yet to be determined regarding the insurance coverage for mold. As a result of these outstanding issues, almost all of the EIL carriers are taking the precautionary measure of putting some form of fungal exclusion on every quote sent out. The potential mold coverage issues that have surfaced in the CGL/Property context are being clearly excluded in EIL policies. It is possible to get this exclusion removed and another put on that gives back limited mold coverage. However, obtaining such coverage requires serious negotiations involving both cost and the extent of the limited coverage.

The various EIL carriers are handling the mold issue differently. While they all initially quote with the mold exclusion, the available mold coverage buybacks have significant differences. The result is that the policyholder and the insurance carrier should engage in careful negotiations. The language in the forms that “give back” mold coverage varies widely and has additional language that changes the policy significantly for this one additional coverage. Depending on the type of insured’s business, some of the “mold givebacks” may be useless.

One of the more common mold “givebacks” that exhibit this, especially for an insured that is in the construction business, is a mold coverage buyback form that offers a sublimit of mold coverage for an additional premium. Sublimits are appropriate for risks for which underwriting is difficult. However, the construction industry coverage buyback adds an additional exclusion – for “Failure to Maintain and Construction Defects.”

It is questionable whether this exclusion will allow coverage for common mold claims against contractors. As shown earlier in this paper, most of the mold cases stem from construction defect claims against at least one party in the lawsuit. This additional exclusion, in effect, negates any mold coverage it may have offered to an insured that is a contractor, builder, or almost any trade in that business.

This mold giveback endorsement also changes the definition of Bodily Injury on the policy form, only for mold claims. Bodily Injury (BI) is defined to include emotional distress, except for emotional distress involving mold claims. For mold BI, the emotional distress must be accompanied by physical injury in order to be covered. Again, something discussed earlier in the paper, the physical injury and causation attributable to mold is questionable at this point in time.

Another interesting change in this form that applies only to the mold coverage is in the Other Insurance section. For the rest of the policy, the Other Insurance Clause states that this policy is primary where applicable. Solely for the mold coverage, the Other Insurance is “Excess.” Some of these changes are found in the mold endorsement and others are found in the policy form. Therefore, the entire policy and all the endorsements must be read very closely.

Another EIL carrier excludes mold by broadly defining all the language in the policy that may be considered ambiguous and thereby afford mold coverage to an insured. This carrier states in its mold exclusion that it will not cover Liability arising out of mold, mildew, fungus, spores, yeast, or other toxins, microorganisms, biological organisms or organic contaminants. This seems to exclude any form of mold that may possibly cause a claim. The potential coverage issue of the mold “dispersal” is addressed in this exclusion again by trying to list every possible way mold may be dispersed. This list includes discharge, emission, issuance, dispersal, scattering, spread, distribution, release, liberation, freeing escape, leakage, overflow, formation, presence or inhalation of or exposure to.

Another carrier which has all inclusive language in its mold exclusion seeks to prevent recovery based upon any possible concurrent causation issues that may arise that might otherwise offer some coverage. Basically, this exclusion states that mold will not be covered regardless of any cause or condition involving the presence, discharge, infiltration of moisture, vapor, water or any other liquid, or any damage related thereto. It is impossible for mold to grow where some form of water is not present. This carrier does also offer a buyback of some mold coverage.

All of the new language addressing mold issues began in mid to late 2001 and is now being used by almost all EIL carriers. In this short time frame some the carriers have refined their policies and endorsements more than once. The carriers are clearly attempting to avoid any ambiguity there may have been in their policies. Most of them specifically state that they exclude coverage for mold, fungi, microbial matter, etc.

The logistics for a policyholder seeking to obtain mold coverage are quite similar for most carriers. It may include any/all of several items:

• additional premium,
• higher SIR’s,
• sublimits,
• copay,
• additional underwriting material.

In a nutshell, EIL policies are intended to cover pollution. Since it is unclear whether mold is a pollutant or not, most EIL carriers are taking a proactive approach to this issue. Any of these carriers may be the appropriate carrier to take the risk of the insured. The insured should have their broker review their entire insurance program, from property to workers comp to pollution, and address all exposures in the aggregate. Most EIL policies are manuscripted to meet the specific needs of the client. The EIL can be put together to cover all risks including mold.

Summary
There is no scientifically accepted or governmentally mandated standard for:

• Safe exposure to mold, or
• Remediation of mold.

Due to increased public awareness of the potential health effects and the huge monetary awards that have come out of some of the mold cases, more litigation is on the way. The market has seen the cases begin and is watching to see which way they will go. A regulatory response, such as in California, has begun. Other states and the federal government will likely follow.

Property owners, builders, contractors, subcontractors, lenders, architects and all other parties involved in construction and use of commercial buildings or homes need to be aware of this issue and how it will or could potentially impact them. Business owners, property owners, property developers and management companies also need to be aware of their new responsibility to warn of mold exposure present in their property.

At this time, insurance carriers seem to be handling these claims in a manner similar to construction defects claims. They are giving partial coverage for a property damage claim under a first-party property policy or a third-party CGL policy. They offer coverage for the property damage to the third parties but no coverage for the policyholders’ faulty work or faulty product. Mold is not yet being classified as a pollutant. The few reported decisions on bacterial issues have not established a majority and minority position. If a company receives a denial on the tender of a mold claim to its CGL carrier, it should look at the denial very closely to determine its basis. Until there is authoritative case law on point, any denial should be questioned. Any mold related complaint is likely to contain at least one allegation, or could contain an allegation, which would trigger the CGL carrier’s duty to defend while the facts are developed in the litigation.

As the present CGL policies expire, the CGL carriers will include a “microbial matter” exclusion in new policies. Therefore, if a company needs protection from the risk of mold, the mold exclusion will need to be removed and the coverage negotiated. The endorsement used to “give back” mold coverage should be carefully analyzed in conjunction with the entire policy language. One needs to be sure that the coverage being bought back is not then actually taken away by some other language hidden in the form somewhere or restricted by sub-limits.