There has been a proliferation of mold-related insurance claims in recent years. The implications of this on the insurance industry have been, and continue to be serious. Media hype and increased public awareness has fueled a frenzy of claims against insurers for not only property damage and remediation of mold infestations in both residential and commercial properties, but also for personal injuries supposedly derived from exposure to mold.
And, based on the propensity of mold for quick growth in the right climactic conditions, failure of insurers to quickly remediate during the pendency of coverage disputes has led to an influx of bad faith claims. See, e.g., Ballard v. Fire Ins. Exch., No. 99-05252 (Travis Co. Ct. June 6, 2001), aff'd in part, denied in part, 98 S.W.3d 227 (Tex. App. Dec. 19, 2002).
Effect on Insurance Industry
It's effect on the insurance industry, while not as devastating to date as asbestos, has had a significant impact. In a pro-active move, insurers have taken measures to bar coverage for mold completely, or limit their exposure for mold-related claims. Some insurers have left certain markets altogether. Left with no, or limited recourse against the insurer, insureds are increasingly turning to third-party claims against contractors, builders, architects, repairmen, condominium associations, and the like.
Similarly, with first-party claims arise increased subrogation and third party claims. In these circumstances, third-party claimants are looking to their liability insurers for defense and indemnification. The introduction of mold exclusions by homeowner and commercial lines insurers has created a substantial number of uninsured mold losses, which in turn, has created an increase in professional liability loss exposure for insurance agents and brokers. This has triggered the adoption of exclusions in E&O polices for mold related claims.
Effect on Consumers
For the consumer, the effects on the insurance industry have trickled into increased cost for homeowner insurance and, in some highly affected areas, a decrease in home sales. For the insurer, an ounce of prevention has been worth a pound of cure. The pro-active approach taken by the industry has been a necessary measure to prevent a recurrence of the devastation wrought by asbestos and superfund claims.
What Is Mold?
Molds have been present in our environment for hundreds of millions of years. All strains of mold are a form of fungus that reproduce through spores. The CDC estimates that there are somewhere in the vicinity of 50,000 to 250,000 species of fungi. Of these, more than 1,000 distinct varieties of mold have been found in homes in the United States. See State of the Science on Molds and Human Health, House Financial Services Subcommittee (July 18, 2002).
Molds, which are predominantly saprophytic, require non-living, carbon-based materials for food and moisture to grow. Experience has shown that construction materials such as paper, wallpaper and paste, drywall and other composites and exterior finishes containing carbon-based ingredients serve as food sources to molds under the right environmental conditions. Molds thrive in warm, damp and humid conditions. It can grow nearly anywhere there is water intrusion and a damp or humid environment with insufficient air flow. Id.
Toxic Mold
Some of the more common species of mold include Stachybotrys ("black mold"), Cladosporium, Penicillium and Aspergillus. These have been coined the so-called "toxic molds" by the media. There is no scientific definition of "toxic mold". In the litigation arena, however, this term has been applied to any mold that produces mycotoxins in its spores. Mycotoxins are generally recognized to be cytoxic, meaning they have the capacity to pass through the human cellular wall and disrupt certain cellular processes. However, there has been considerable dispute in the scientific arena as to the effect of mycotoxins on humans.
Studies on Health-Related Impact of Mold
The CDC has conducted numerous studies as to the health-related impact of molds on individuals. There is general consensus among the medical community that certain types of mold can cause aggravated respiratory conditions in already susceptible individuals, such as those with chronic respiratory illnesses (asthma, allergies, etc.) or those with immune deficiencies.
For example, in a 2002 report, the Institute of Medicine ("IOM") concluded that there is conclusive evidence of a link between exposure to mold and exacerbation of pre-existing asthma. See "Clearing the Air: Asthma and Indoor Air Exposures," Institute of Medicine 2002. However, in the same report, the IOM found insufficient evidence that molds caused asthma in otherwise healthy individuals. Id. Similarly, the CDC has stated that "[w]e do not know whether molds cause other adverse effects, such as pulmonary hemorrhage, memory loss, or lethargy."
There is insufficient medical evidence to substantiate such claims at present. See State of the Science on Molds and Human Health, House Financial Services Subcommittee at p. 3 (July 18, 2002)
The CDC charged the IOM to convene a committee and comprehensively review the current scientific literature on the relationship between mold and adverse health effects. See Damp Indoor Spaces and Health, IOM (2004), National Academies Press. Similar to it's prior declarations, the IOM concluded that there is scientific evidence to link mild respiratory symptoms, such a coughing and wheezing in otherwise healthy individuals and increased asthmatic symptoms in sensitized individuals. Id.
Furthermore, the IOM found insufficient or inadequate evidence to determine whether a causal nexus exists between mold exposure and serious health problems, such as dyspnea, development of asthma, acute idiopathic pulmonary hemorrhage in infants (as reported in an earlier Cleveland study), skin symptoms, fatigue, reproductive effects, rheumatologic or immune diseases or neuropsychiatric symptoms, and called for greater studies in this area. Id.
Nonetheless, committee chair Noreen Clark recently commented that "[e]ven though the available evidence does not link mold or other factors associated with building moisture to all the serious health problems that some attribute to them, excessive indoor dampness is a widespread problem that warrants action at the local, state and national levels." See "Indoor Mold, Building Dampness Linked to Respiratory Problems and Require Better Prevention; Evidence Does Not Support Links to Wider Array of Illnesses," National Academy of Sciences News (2004).
Types of Claims
There are two broad types of mold claims being made: requests for reimbursement for, and/or remediation of, property damage and claims for personal injuries arising out of exposure to mold. The majority of these claims are made under homeowner policies, although there has been an increasing trend in claims made to CGL carriers for workplace related mold exposure or damage. Tangential to these first and third-party claims, there also has been a proliferation in bad faith claims against insurers for their handling of these claims.
Property Damage/Remediation
The wave of litigation of mold-related claims erupted in late 2001, after a jury awarded a Texas family $32 million for property damage and mental anguish against their insurer in a mold related case. Ballard v. Fire Ins. Exch., No. 99-05252 (Travis Co. Ct.. June 6, 2001), aff'd in part, denied in part, 98 S.W.3d 227 (Tex. App. Dec. 19, 2002). In that case, the insureds experienced a water loss from leaking plumbing, resulting in damage to their hardwood floors and sub-flooring. The insureds made a water damage claim in December 1998, after repeated water leakage had caused significant hardwood floor and sub-floor damage.
In the Ballard case, an independent adjuster assigned by their homeowner insurer, Fire Insurance Exchange ("FIE"), initially reported that the damage was caused by settling of the home, and not water damage, but subsequently amended his findings when locating other areas of water damage in the house. There was delay in repairing and remediating the premises.
Approximately four months after the initial water loss damage claim was made, the insureds discovered the presence of stachybotrys mold. Soon thereafter, the insureds brought suit against FIE, alleging breach of contract, deceptive trade practices, bad faith in the claims handling process and negligence. The trial court ultimately entered a verdict against FIE in the amount of $32 million, including $12 million in punitive damages. The insureds, who also alleged personal injury claims, were not allowed to proceed on those claims on the basis that there are insufficient epidemiological studies to support a causal nexus between mold exposure and neurological impairment.
The appellate court subsequently molded the verdict to $4 million, removing the punitive damages and legal fees previously awarded to the insureds. The appellate court found no evidence of unconscionability or fraud on the part of FIE and insufficient evidence of bad faith for imposition of punitive damages.
After the initial verdict in Ballard, mold claims rose exponentially. The hype has been further fueled by media exposure and suits brought by personalities such as Erin Brokovich and Ed McMahon. In the first year alone after the Ballard verdict, insurers in the United States paid $3 billion in mold-related claims, up from $1.3 billion the previous year. See Insurance Information Institute, "Mold and Insurance," Insurance Institute Series, vol. 1, no. 4 (August 2003).
Personal Injury
The other emerging area in mold claims is for personal injuries allegedly arising from exposure to mold. See Ballard v. Fire Ins. Exch., No. 99-05252 (Travis Co. Ct.. June 6, 2001), aff'd in part, denied in part, 98 S.W.3d 227 (Tex. App. Dec. 19, 2002); New Haverford Partnership v. Stroot, 772 A.2d 792 (Del. Super. 2001); State Farm Fire & Cas. Co. v. M.L.T. Const. Co., Inc., 849 So.2d 762 (La. App. 2003). Claims have ranged from watery eyes and exacerbated asthma to memory loss and immune suppression.
While some courts have allowed such evidence to be introduced, see, e.g, Stroot, supra., others are holding it inadmissible under Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 597, 593-94 (1993), since there is, to date, no consensus in the medical community that exposure to mold causes adverse health effects. For example, in Ballard, supra., the insureds argued that mold exposure caused their son to develop asthma and the husband-insured to develop cognitive difficulties.
The court disallowed the introduction of expert causation testimony as to these injuries since the foundational data used to support their conclusions was unreliable (i.e., data collection methodology used was not generally accepted in the scientific community). Ballard, 98 S.W.3d at 239-40; but see Stroot, 772 A.2d 792 (court allowed expert testimony causally linking cognitive difficulties with mold exposure); Mondelli v. Kendel Homes Corp ., 631 N.W. 846 (Neb. 2001)(same).
Lack of Governmental Standards on Acceptable Exposure
The feeding frenzy in personal injury claims, while tempered somewhat based on the lack of scientific research in the area of mold exposure, has been compounded by a lack of governmental standards on acceptable exposure limits. Standards for judging what is acceptable or a normal quantity of mold have not been established. See the Centers for Disease Control and Prevention, Facts about Stachybotrys chartarum and Other Molds. The leading study remains Damp Indoor Spaces and Health (IOM May 2004).
The federal government continues to study mold and its health effects, but there have been no established regulations or standards for limits. States have independently addressed the problem of acceptable exposure limits by enacting legislation to study and make such determinations. See the Toxic Mold Protection Act of 2001, Cal. Health & Safety Code, §26100, et seq.
It is questionable how beneficial these standards will actually be to the insurance industry. While providing a guidepost to aid insurers in quick and efficient remediation efforts so as to avoid bad faith liability, hard-core statistics might actually exacerbate the number of personal injury claims, since it could provide evidence sufficient to satisfy Daubert.
Personal injury claims arising from mold exposure will continue to be costly for insurers, who must retain competent counsel to file appropriate motions in limine, and participate in Daubert hearings questioning the admissibility of causation testimony.
Bad Faith
Of increasing concern to insurers is the proliferation of bad faith claims arising out of first and third-party mold claims. There is a heightened exposure for bad faith arising from mold claims since mold tends to develop and spread quickly and contains airborne particles that questionably affect human health. In this regard, insureds have argued that mold would not have grown at all had the insurer quickly remediated water damage, or that mold growth became worse because of an insurer's inaction or slow action.
Quick and efficient remediation of claims is the goal of the adjuster. Failure to do so can lead to potential bad faith exposure. See, e.g. Ballard v. Fire Ins. Exch., No. 99-05252 (Travis Co. Ct.. June 6, 2001), aff'd in part, denied in part, 98 S.W.3d 227 (Tex. App. Dec. 19, 2002). This, coupled with the intense media hype and sympathetic position of the plaintiff-insured, can be a recipe for disaster to the insurer.
To handle this, insurers, such as Allstate, have implemented training for its claims personnel to quickly and effectively deal with water and mold damage to insured property.
Standard Coverages
Homeowner
The standard, pre-mold litigation explosion homeowner policy covers mold clean-up only in cases where the mold originated from a covered loss. Typically, coverage arises when the mold was caused by a listed peril on the policy, such as water damage from a burst pipe or covered natural disaster, such as mold resulting from fighting a fire.
Coverage is usually excluded for mold arising from excessive humidity, condensation or maintenance issues. For example, a typical homeowner insuring agreement provides:
We will pay for direct physical loss or for damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss
Cause of Loss is typically defined very broadly as:
Covered Cause of Loss means Risks of Direct Physical Loss unless the loss is: (1) Excluded in Section B., Exclusions, or (2) Limited in Section C, Limitations.
Since "covered causes of loss" are broadly defined under most personal lines policies, the policy exclusions and limitations are critical in determining coverage for mold-related losses. Most personal lines policies now contain specific exclusions for damage caused by mold, dry rot, corrosion, construction defects, faulty workmanship and wear and tear.
For example, the ISO HO-3 homeowner policy forms exclude losses such as "collapse . . . freezing of plumbing, heating, air-conditioning or automatic fire protection sprinkler system . . . wear and tear . . . [and] smog, rust or other corrosion, mold, wet or dry rot." Insurance Services Office, Inc., Homeowners 3 Special Form at 8-0 (HO 00 03 10 00). Courts have reached differing outcomes regarding the enforceability of these types of exclusions.
In some cases, courts have upheld specifically written exclusions even where the mold itself was caused by an event that was otherwise covered under the policy, such as from storm damage. See, e.g., Sather v. State Farm. Fire & Cas. Ins. Co., 2002 Minn. App. LEXIS 277 (Minn. App. Mar. 12, 2002).
In that case, the State Farm policy contained an exclusion precluding recovery for "any loss to the property . . . which consists of, or is directly and immediately caused by, one of more of the perils listed . . . below [mold fungus, or wet or dry rot], regardless of whether the loss occurs suddenly or gradually, involves isolated or widespread damages, arises from natural or external forces, or occurs as a result of any combination." Id. at *5-6. The insured's property sustained damage in a storm.
While State Farm tendered monies for clean-up costs, it later denied coverage for mold that developed. Both the trial court and the Minnesota Court of Appeals found that the exclusion clearly and unambiguously precluded coverage. Id.; see also Cooper v. American Family Mut. Ins. Co ., 184 F. Supp. 2d 960 (D.C. Ariz. 2002)(insurer covered repairs to drywall and flooring from plumbing leak, but denied coverage for mold damage; reliance on mold exclusion upheld by court).
Efficient Proximate Cause Rule
Other jurisdictions follow the "efficient proximate cause" rule, whereby coverage is deemed to exist, even in the face of a valid exclusion, when the resulting loss is caused by a covered peril. See Bowers v. Farmers Ins. Exch., 991 P.2d 734, 738 (Wash App. 2000); see generally Premier Ins. Co. v. Welch, 189 Cal. Rptr. 657, 660 (Cal. App. 1983)(holding that only question is whether efficient cause of loss that sets other perils in motion is covered peril, if so, there is coverage despite exclusions to the contrary).
In Bowers, the insured made claim for mold-related damage caused by tenants in her insured rental property. Without the insured's knowledge, her tenants converted the basement of the rental property into a hothouse for cultivating marijuana. Condensation created by this operation created rapid mold growth.
The insured made claim under her Landlord's Protection Package insurance policy for repair and remediation costs. The insurer, Farmers Insurance Exchange, paid for the repair costs, but denied the mold remediation costs based on a mold exclusion. The insured claimed that the loss was directly attributable to vandalism, a covered loss under the policy. Id. at 736-7.
The court agreed, finding the vandalism of the tenants the "efficient proximate cause" of her loss and not the mold, and "when the insured can identify an insured peril as the proximate cause, there is coverage 'even if subsequent events in the causal chain are specifically excluded from coverage.'" Id. at 738 (quoting Findlay v. United Pac. Ins. Co., 78 Wn. App. 17, 20. 895 P.2d 32, aff'd 129 Wn.2d 368, 917 P.2d 116 (1996)); see also Sunbreaker Condominium Assoc. v. Travelers Ins. Co ., 901 P.2d 1079 (Wn. App. 1995)(fungus exclusion did not bar remediation claim where efficient proximate cause of loss was covered peril of wind-driven rain).
Commercial General Liability Policies
Standard CGL policies used to provide potential coverage for mold claims. Prior to the onslaught of mold claims, commercial line insurers attempted to exclude mold coverage under the business risk exclusion or the pollution exclusion, neither of which specifically mentioned mold.
Business risk exclusions act to deny coverage to contractors for property damage arising out of defective workmanship (such as the faulty construction of a roof) to the insured's property. (ISO exclusions j(5), j(6), k, l, m and n of the CGL form are collectively known as the "business risk" or "work product" exclusion.)
Insurers have attempted under this exclusion to deny coverage for mold damage and remediation caused to a property by the faulty construction. Courts have been split as to the applicability of this exclusion to mold. See, e.g. Ind. Ins. Co. v. Alloyd Insulation Co., 2002 Ohio 3916 (2002) (while defective workmanship not covered, consequential damages arising from defective workmanship may be); Luxury Living, Inc. v. Mid-Continent Cas. Co ., 2003 U.S. Dist. LEXIS 24505 (S.D. Tex. Sept. 8, 2003)(mold damage created by faulty construction not excluded by business risk exclusion).
Commercial lines insurers also historically have relied upon the pollution exclusion in an attempt to exclude coverage for mold. This exclusion denies coverage for:
"Bodily injury" or "property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at or from the premises you own, rent or occupy.....
Pollutants typically is further 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.
Obviously, two contentious points are whether mold is a pollutant per the definition and whether mold falls within the "discharge, dispersal, seepage" language that was clearly designed with industrial waste in mind.
There is much pre-mold litigation on the enforceability of this exclusion in the area of toxic torts and sick buildings, none of it consistent. At least one court had held that the exclusion acts to bar coverage for mold. See Lexington Ins. Co. v. Unity/Waterford-Fair Oaks, 2002 U.S. Dist. LEXIS 3594, No. 3:99-CV-1623-D (N.D. Tex. Mar. 5, 2002). In that case, the Northern District of Texas determined that a CGL pollution exclusion acted to bar coverage for mold damage to an apartment complex caused by a rainstorm.
In typical fashion, the pollution exclusion at issue specifically excluded "damage caused by, resulting from, contributed to or made worse by the actual, alleged or threatened release, discharge, escape or dispersal or contaminants or pollutants". However, fungi was an expressly enumerated pollutant under this exclusion. Id. at 5. Specifically at issue was whether the mold was "released, discharged or dispersed" per the exclusion.
Hearing expert evidence about how mold reproduces through spores, the court found that release of mold spores into the air constituted "dispersion" sufficient to constitute a "pollutant" and satisfy the exclusion. Id . at 8. It must be noted, however, that the policy at issue expressly included fungi, which historically such exclusions did not.
CGL insurers also rely upon the "discharge, dispersal or release" language to limit recovery for mold under the pollution exclusion. This interpretation has met with limited success. E.g. Leverence v. U.S. Fidelity & Guaranty , 462 N.W.2d 218 (Wis. App. 1990)(holding that mold is not 'released' so that exclusion inapplicable as to claim for mold).
Increased Risk & Industry Changes
With increasing frequency given the exponential increase in mold claims in recent years, personal and commercial lines insurers are now specifically excluding or severely limiting mold coverage. This is pro-active approach is not surprising given the effect of asbestos litigation on the industry.
Insurance Services Office ("ISO")
Homeowner Policies
ISO has introduced a homeowner endorsement entitled "Limited Fungi, Wet or Dry Rot, or Bacteria Coverage." This provision restricts coverage by: (1) adding to the definition of fungi to include mold; (2) changing the mold exclusion to cover only mold that results from fighting a fire; and (3) restricting coverage for repeated seepage so that coverage will only apply when the repeated seepage and resulting damage occurred without the knowledge of any insured.
Most significantly, the ISO endorsements limit coverage for loss from mold arising from a covered water loss. This limit can be increased at the election of the insured. Furthermore, an annual aggregate limit is also placed on mold liability claims, which also can be increased at the election of the insured.
Commercial Lines
ISO has likewise created new commercial lines endorsements. The first is the "Fungi or Bacteria Exclusion," which applies to both Bodily Injury and Property Damage (Coverage A) and Personal and Advertising Injury (Coverage B). Secondly, ISO has created the "Limited Fungi or Bacteria Coverage" endorsement which allows an insured to purchase limited liability coverage with an aggregate limit. To date, the ISO endorsements have been approved in over 42 jurisdictions.
Other Exclusions & Endorsements
There are numerous mold endorsements in existence, using various terminologies, but with the collective purpose of limiting, or fully excluding coverage for mold, in addition to the ISO endorsements. The Brokers & Reinsurance Markets Association, and the American Association of Insurance Services ("AAIS") are just two sources.
While insurers have been facing some resistance to approval of these exclusions and endorsements by state departments of insurance, it is the first line of attack to prevent extensive future losses for mold, a risk either not properly accounted for in previous policies, or for which previous endorsements have been rendered meaningless by recent court decisions.
Impact on the Insurance Industry
The effect on the insurance industry of the increased litigation of mold claims has been substantial. The Insurance Information Institute ("III") estimates that the typical homeowner claim involving mold costs between $15,000.00 to $30,000.00 to handle, compared with the non-mold related claim figure of $3,000.00 to $4,000.00. Robert P. Hartwig, Ph.D. & Claire Wilkinson, Insurance Issue Series: Mold and Insurance, vol. 1, no. 4 (Ins. Info. Inst. Aug. 2003). Between 2001 and 2002, payouts by insurers for mold-related claims doubled, topping over $3 billion. Id .
The impact of large jury verdicts has been that some companies have chosen not to write new business in certain high-risk areas, or to refuse to renew policies for insureds with past water-damage to the insured structure. There has been an increase in filings to state insurance departments seeking to completely exclude mold coverage.
In areas where the state has refused an insurer's request to completely pull out of a market, insurers are attempting to limit mold coverage. See, e.g., Connecticut S.B. 417 (attempting to prohibit insurers from excluding or limiting mold coverage in personal or commercial policies other than to include a minimum aggregate limit).
Other insurers have chosen to cover all mold claims, and price their coverage accordingly. While some insurers have carefully drafted complete exclusions, other insurers have merely chosen to tighten their definitions as to what is and what is not specifically covered.
Finally, other insurers have chosen to include coverage, up to an aggregate limit, with the option for the insured to add-on more coverage for an increased premium.
In addition to outward manifestations of change, insurers are adjusting their internal operating procedures. Underwriting procedures are being re-evaluated and modified. More focus is being placed on risk selection and policy language to assist in loss control.
For example, some insurers are requiring engineering analyses regarding the existence of prior water damage or mold before choosing to underwrite a policy for a particular personal or commercial property. Others are giving extra consideration to issues such as the type of risk posed by the construction of the premises (such as whether it contains much wood, drywall or other organic materials conducive to mold growth) and the quality of the maintenance of the structure.
Furthermore, underwriters are being asked to consider whether the particular market will bear or even allow a mold exclusion or limitation.
Insurers are likewise training their claims personnel to quickly and efficiently handle mold-related claims, from initial notice of the claim through investigation and resolution. New guidelines include:
- an expedited transmission of a reservation of rights letter;
- a quick and thorough loss determination;
- a quick and thorough determination as to whether there is coverage;
- a determination as to the type of remediation that is needed;
- prompt notification to the insured if the loss is not covered. See generally New Orleans Assets, LLC v. Travelers Prop. & Cas. Co. , No. 01-CV-2171, 02-CV-974 (E.D. La. Sept. 12, 2002)(timely reservation of rights letter protected insurer from insured's claim of detrimental reliance on initial assessment of damages to insured property).
Conclusion
The pro-active approach taken by insurers after the Ballard decision seems to have limited exposure to the degree that the economic impact on the industry will not be as severe as was asbestos.
Nonetheless, aggressive measures, such as those outlined above, must still be taken to ensure that the impact stabilizes and, hopefully, lessens. Declaratory judgment actions should be filed to enforce existing mold exclusions.
New exclusions and endorsements should be filed with Departments of Insurance. New underwriting and claims procedures should be enacted. In this way, mold will not be toxic to insurers in the future.