Mold: What about Environmental Impairment Liability (EIL) Coverage?

Rachel Jakubovitz
Senior Vice President/
Senior Resource Consultant
Willis Environmental Practice

Mold……everywhere we turn these days there are articles or commentaries on mold. Local and national newspapers, magazines and television are inundating us with mold discussions - particularly focusing on the potential health hazards of mold and the escalating number of mold cases being litigated. By now, most people have heard about the infamous Ballard case in Texas. In June 2001, a Texas jury awarded Melinda Ballard and her family $32 million in damages from the Farmers Insurance Company, which issued the family's homeowners policy.

The wave of mold litigation has caused concern in the insurance, legal and regulatory communities. The property insurance companies in Texas attempted to stop writing mold coverage altogether, California passed the first legislation on mold in the nation, and most insurance companies have added some form of "mold exclusion" to their policies. Whether mold will be the next "asbestos type" of toxic tort is still unclear.

The issues are developing presently. The Commercial General Liability and Property insurance carriers were the first to feel the impact. There are two major issues with regard to the applicability of the pollution exclusion to mold claims. The first is whether mold constitutes a "pollutant" as defined in the policies. Second is whether the manner in which persons are exposed to mold that caused them injury is a "discharge, dispersal, release…" There is also the larger issue of medical causation. Did the mold exposure cause the illness? The medical community is trying to catch up with the litigation. The research is ongoing.

As a result of the uncertainty of the decisions on these issues many Environmental Impairment Liability (EIL) insurance carriers are taking a proactive approach and adding some form of fungal exclusion to their policies. In order to alleviate some of the mold risk, these carriers may offer what is called a "mold buyback." These "buybacks" offer limited coverage and require additional underwriting material and an additional premium.

Any corporation that buys, sells, rents and/or leases real property needs to be aware of these issues and how to address them appropriately.

Environmental Impairment Liability (EIL) Policies

Environmental Impairment Liability Policies (EIL) or pollution policies were designed to fill the gap left by the Pollution Exclusion in Commercial General Liability (CGL) policies. The intent of EIL policies is to cover pollution. EIL policies have evolved over the years and the policies now offer many variations on the coverages available, limits and types of businesses that can be insured. Most of these policies have numerous manuscripted endorsements in order to cover the specific needs of the insureds.

The potential mold coverage issues that have surfaced in the CGL/Property context are being clearly excluded on EIL policies. This is done with an additional endorsement crafted to exclude coverage for fungi-related issues. It is sometimes possible to remove this endorsement and to get some mold coverage back onto the policy.

The logistics of securing mold coverage is quite similar among the carriers. It may include any or all of the below items:

• additional premium
• higher deductibles
• sub-limits (mold limits are a smaller piece of the entire policy limit)
• co-pay (insurance carrier and the insured both pay a percentage of claims, i.e., carrier pays 90% and insured pays 10%)
• additional underwriting material (such as an additional questionnaire that asks moisture/indoor air quality-specific questions)

For the most part, all the EIL carriers initially quote with some form of mold exclusion. The language in endorsements that "giveback" mold coverage varies among the carriers. As a result, the mold coverage available is quite diverse. Depending on the type of business the insured is in, some of the "mold givebacks" may not actually offer any additional coverage.

For example, one of the microbial matter endorsements which provides mold coverage with a sublimit also adds an additional exclusion to the policy for "Failure to Maintain and Construction Defects." For an insured in the construction business a large portion of the mold cases stem from construction defect claims. The primary reason a builder, contractor or any trade in the business purchases this mold coverage is for protection from these risks. This language, in effect, negates the additional protection the policyholder requires.

Other changes will be found either in the buyback endorsement or in the text of the policy form itself. Certain changes to look for are:

• Definition of Bodily Injury: 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. (At this point in the mold litigation, the physical injury and causation to mold is an undecided issue that is only beginning to be analyzed).
• Other Insurance section: 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.

This new language 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 seem to be attempting to avoid any ambiguity there may have been in these policies. Most of them specifically state that they exclude coverage for mold, fungi, microbial matter, and so on.

In a nutshell, EIL policies are intended to cover pollution. Since it is unclear whether mold is a "pollutant" and whether it will be covered or not, most EIL carriers are taking a proactive approach to this issue. The carriers add their version of a mold exclusion and then may allow a partial buyback of coverage. Most EIL policies have always been manuscripted to meet the specific needs of the client. Mold is now an additional risk that the client will need to have reviewed very closely for insurance protection. With the appropriate underwriting, an EIL policy may be put together to secure mold coverage.

As this evolving issue develops, corporate counsel need to work with their risk management team to be on the alert for changes to their insurance program, for water damage claims that may involve mold, and other property damage claims at properties their employer own, operate or manage.