Insurance Coverage Issues in Mold Litigation Claims

Ronald L. Hack
Gallop, Johnson & Neuman, L.C.
St. Louis, Missouri
rlhack@gjn.com

Landowners and lessors of industrial/commercial properties are now aware of "toxic mold" litigation, the purported next wave of toxic tort litigation. However, the question facing each of them is whether they will have insurance coverage to defend those suits. This article will review the availability of such coverage for third-party claims filed by various claimants.

"What's All the Fuss About?"

Simply put, all mold strains are types of common fungi that reproduce through spores. In essence, various strains of mold can cause susceptible individuals a variety of health effects ranging from simple sore throats to severe breathing problems and even reports of permanent mental impairments. One species of toxic mold Stachybotrys chartarium (S. charatum), commonly referred to as "black mold," has been implicated in reports of severe physical injuries including initial reports that it caused pulmonary hemorrhages in infants. These reports have since been repudiated, with links not shown between toxic mold and the hemorrhages. The public controversy about possible toxic fungal exposure has led the EPA to create an information resource on the Internet for anyone needing information about toxic mold. (http://www.epa.gov/iaq/pubs/moldresources.html)

Mold thus fits the definition of a "litogen" (a substance that induces much more litigation than injury). Mold-related lawsuits can target general contractors, home builders, building subcontractors, architects, engineers, HVAC companies, real estate agents, prior owners or just about anyone connected to the construction or maintenance of a structure for negligent design or construction that promotes mold growth above background levels (e.g., enclosed areas with insufficient air flow and with recurrent moisture sources such as foundation leaks or HVAC contamination). For example, a busy contractor can inadvertently create a mold initiator by failing to give interior wood supports or other absorbent material time to dry before being sealed up.

Mold as Insured Peril

The rise in mold litigation has captured the attention of insurers, insureds and the members of the American Trial Lawyers Association and their new cottage industry of "mold experts." See, Catherine Tapia, Fear of the Unknown - The Mold Issue Raises More Questions than Answers, http://www.insurancejournal.com, html/yweb/breakingnews/national/na0901/
na091011.htm. In the most publicized case to date, in May 2001, a Texas jury awarded Melinda Ballard and her family $32 million in their claim against Farmers Insurance Group for allegedly mishandling the Ballard's water claim. Added to the media exposure of the Ballard case comes an additional concerted campaign from Erin Brockovich arising from mold contamination of her dream house in California. Ed McMahon of Tonight Show fame joined in with a suit filed on April 11, 2002.

Many insureds face more trouble getting coverage for such claims. Generally, the recent trend is for insurers to deny coverage for mold and other possible pollutants under the absolute pollution exclusion found in most modern comprehensive general liability (CGL) policies. Landowner insureds are forced to bear the expense, time and effort of participating in extensive litigation as a result of mold expense. Insureds may then look to their insurers to defend against claims brought by renters, property owners, condominium associations and homeowner associations for damages due to alleged mold exposure coming from alleged construction defects when there is some form of water damage or moisture problem. Claims are typically brought against general contractors, manufacturers, sub-contractors, equipment installers and providers under negligence, breach of contract, breach of warranty and state consumer protection claims. See Centex - Rooney Construction Co. v. Maiden County, 706 So. 2nd 20 (Florida Ct. App. 1997); Alberty v. J.C. Partners, Ltd., 2000 WL 180 7273 (Ohio Ct. App. 2000).

Expert Testimony in Mold Litigation

To defend against mold claims, a battle is being waged in courts across the nation over the "junk science" used to support personal injury claims. Courts must decide whether the varied claims of increased breathing problems, memory loss, and various "cognitive difficulties" are supported by competent scientific evidence or whether the claims by various experts are based on nothing more than speculation and assumptions. Some courts have accepted such evidence as admissible at trial. Mondelli v. Kendel Homes Corporation, 262 Nebraska 263, 631 N.W. 846 (2001); New Haverford Partnership v. Stroot, 772 A. 2nd 792 (Del. Sup. Ct. 2001). Other courts have granted motions to exclude such testimony using the factors set out by the U.S. Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc. 509 U.S. 5791 (1993) and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999).

For example, in the Ballard case, the defendant was able to exclude the testimony by plaintiffs' physicians about alleged physical problems. The trial court found that the expert testimony sought to be introduced was not admissible because plaintiff failed to show general acceptance of the expert's theories, based on published and accepted medical literature. Order granting Defendant's Motion to Exclude Causation Opinions. Ballard v. Fire Insurance Exchange, (Tex. Dist. Ct. No. 99-05252). Other courts have taken a similar approach. See, Minner v. American Mortgage & Guaranty Company, 791 A.2d 826 (Del.Supr. 2000); Sculpture City, Inc. v. Smooth - On Inc., Jan. 29, 2002 at 18 (Sup. Ct. New York Cty., 2002). Thus, a successful defense to such claims depends on expert testimony. This includes retaining competent experts to debunk the plaintiffs' claims, but also a concerted effort to properly exclude speculative "junk science" using the Daubert factors and an ever-growing list of cases affirmatively reviewing those factors.

Coverage Under Comprehensive General Liability Policies

Most businesses carry CGL coverage. A typical CGL policy will provide potential coverage for most mold claims. Currently many insurers are specifically excluding mold coverage, however, under new policies they are issuing or renewing. 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. Under such policies, the carrier in most situations has an affirmative duty to defend the insured in any lawsuit seeking damages against the insured. As a prerequisite for application of the policy, there must be a defined "occurrence" within the policy period.

As drafted most standard policies have for a number of years contained both the standard "business risk" exclusion but also a "pollution exclusion."

A typical CGL policy will state:

This insurance policy does not apply to:
1. Property damage to your product arising out if 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; and

"Your product" includes:
1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your product"; and
2) The providing of or failure to provide warnings or instructions.

This insurance does not apply to:
2) 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:
1) Work or operations performed by you or on behalf; and
2) 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.

"Business risk" exclusions apply to one property damage claims, and cannot be used to preclude the typical bodily injury claims now found in most third-party mold-related lawsuits.
For example, assume Acme Contractors, the insured, builds an office complex and almost immediately the occupants begin to complain to the owner of water intrusion. Later, Acme learns that the roofing membrane was applied incorrectly and windows were caulked incorrectly by Acme. Mold is discovered on the walls and in the air system with the mold damage requiring extensive building renovation. Due to the severity of the damage, disputes arise, and a lawsuit is filed against Acme alleging bodily injury and property damage/mold due to their negligence. Acme contractors place their CGL carrier on notice of the litigation.

The CGL policy will cover Acme Contractors in the defense of the lawsuit. The bodily injury claims will have to be litigated and defended. Since the property has been remedied the carrier will have to cover part of it. The CGL policy should afford coverage for all the remediation, except for the cost to correctly applying the roofing membrane and caulk the windows correctly.

Absolute Pollution Exclusion

Another exclusion on the CGL policies that carriers will no doubt try to use to preclude 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:
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 reclaimed.

As with the business risk exclusion, there is significant pre-mold case law on the pollution exclusion. 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 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 of this litigation it is clear that certain language will be contentious.

The two main points of controversy will be:

• Is this mold a "pollutant"?
  
• Does this mold fall within the "discharge, dispersal" language?

A recent case held that the pollution exclusion does not apply to water contaminated with bacteria, because bacteria do not constitute a "pollutant." Keggi v. North Brook Property and Casualty Insurance Co. (Ariz. Ct. App. 2000). Mold is similarly organic as opposed to man-made, which might be a defining factor for finding that a "pollutant" caused the harm.

Courts have specifically held that an insurance company had no duty to defend or indemnify its policyholder in a product liability action stemming from the release of a toxic substance that injured two employees at a work site. The court held the exclusion McKusick v. Travelers Indemnity Company, was unambiguous, so there was no insurance coverage for the employer/landowner in the incident No. 22171 (Mich. Ct. App. June 8, 2001). Insurers are filing declaratory judgement actions denying coverage on third party claims based upon the pollution exclusion. See Connecticut General Life Insurance Company v. Zurich American Insurance Company, No. X03CV010502685 (Conn. Sup. Ct., New Britain Jud. Dist.) No uniform resolution of this issue has been reached in the courts.

On the issue of "discharge, dispersal" we look to the various judicial opinions on exposure to lead-based paint, asbestos or carbon monoxide. Courts have held both ways in these cases, alternately denying or awarding coverage. In some cases, the pollution exclusion applies to bar coverage where exposure to these items is not the type of traditional active disposal or discharge of pollution that is barred from coverage. Mold is more stationary and therefore does not discharge or disperse. Mold may also be a naturally occurring allergen, like plant pollens, so technically it is not a traditional pollutant.

There is very little case law on specific coverage issues for mold. Drawing analogies from prior case law is helpful but not authoritative. It may take years of appeals before a clear consensus emerges on the critical coverage questions.

Conclusion

Landowners, insureds and insurance companies should take mold litigation seriously because of the numerous substantial verdicts both awarded at the trial court level, and later confirmed in various appellate courts. At a minimum, if there is any suspicion of a possible mold-related claim, care should be taken to preserve all pertinent records and insurance policies. Additionally, significant preparations should be made to defend such claims factually as well as legally.