The Pollution Exclusion and Mold Claims
January, 2002
Mold is a naturally occurring fungus that has been around for centuries and is found almost everywhere. Until recently, mold was not commonly understood to be a pollutant, irritant or contaminant. However, there is a growing change in perception regarding mold, possibly contributed to by the Environmental Protection Agency’s classification of mold as an indoor pollutant, that has led to an increase in insurance claims. These claims range from construction managers to homeowners seeking defense and indemnity coverage from their liability insurers. As a result of the numerous mold-related claims being asserted by policyholders, claims adjusters have found themselves grappling with the issue of whether they can decline coverage to the policyholder based on the pollution exclusion. This article explores recent court decisions that provide some insight as to how the courts will possibly rule on this issue.
In analyzing the applicability of the pollution exclusion clause, courts typically focus on whether mold, fungus or excessive moisture can be unambiguously considered an “irritant,” “contaminant,” or “pollutant” within the plain meaning of the policy exclusion. Unlike typical pollution exclusion cases where the injury-producing substance could easily be categorized as a “chemical” or “waste” or “gas,” mold and fungi are more difficult to categorize within the terms of the pollution exclusion. Mold and fungi do not appear to clearly fall within any of the categories set forth in the pollution exclusion in that neither have the characteristics of smoke, vapors, toxic chemicals or waste material. Courts also focus on whether the mold and/or fungi have been “released, dispersed or discharged” within the meaning of the pollution exclusion. It is very difficult to argue that the dispersal, discharge or release of mold or fungi occurred within the meaning of the policy’s pollution exclusion. Seldom are both of these inquiries answered in the affirmative, thereby eliminating an insurer’s duty to defend.
Mold And Fungi
Few cases have specifically addressed third-party liability claims for mold contamination. Of those few cases, most deal with mold contamination in the context of sick building syndrome. For example, in Stillman v. Charter Oak Fire Ins. Co., No. 1949-CV Highsmith (S.D. Fla. 1993), mold, fungi and yeast were released into the air of an office building. Former employees sued the building owner alleging that they suffered from various health injuries arising from the negligent design, maintenance, installation, and repair of the heating, ventilating, and air conditioning systems. Their allegations focused on the owner’s alleged failure to circulate fresh air.
The building owner’s CGL insurer denied coverage based on the pollution exclusion. In cross motions for summary judgment, the trial court found that the policy failed to define “pollutant” in the exclusion and that failure rendered the provision ambiguous. The trial court reasoned that absent a definition, the term could be interpreted according to its popular meaning and, broadly defined, could include natural occurring substances. However, the court found that the provision could be narrowly construed to include such things as nuclear waste. As a result, the court held that the provision was ambiguous and consequently construed the clause against the drafter. The U.S. Court of Appeals for the Eleventh Circuit reversed Stillman on procedural grounds, but the trial court’s determination regarding the ambiguity of the pollution exclusion remained intact.
Other Substances
Because mold contamination cases in the third-party context are few, analogous indoor exposure cases involving bacteria, lead, asbestos, and carbon dioxide/monoxide provide guidance in how the pollution exclusion may be applied to mold-related claims.
Bacteria
In East Quincy Services District v. Continental Ins. Co., 864 F. Supp. 976 (E.D. Cal. 1994) (applying California law) the insured brought a declaratory judgment action against its CGL carrier after it was sued by land purchasers claiming damage from groundwater pollution consisting of fecal coliform and other sewage borne bacteria. The insurer refused the defense on the grounds that the pollution exclusion applied and that the personal injury was not covered. Continental’s pollution exclusion endorsement excluded coverage for:
Bodily injury or property damage arising out of actual, alleged or threatened emission, discharge, dispersal, seepage, migration, release or escape of “pollutants” . . .
The Continental policy defined the term “pollutants” as:
. . . any noise, solid, semi-solid, liquid, gaseous or thermal irritant or contaminant, including . . . biological and etiologic agents or materials . . . “waste” and any irritant or contaminant.
In finding for the insurer, the court held that fecal coliform and other sewage borne bacteria clearly fall within the list of specific examples set forth in the exclusion because they are “solid, semi-solid or liquid . . . contaminants, including biologic and etiologic agents or materials . . .” Thus, the court held that E-coli bacteria was a “pollutant,” precluding coverage and eliminating Continental’s duty to defend.
On the other hand, the court in Keggi v. Northbrook Property & Casualty Ins. Co., 13 P.3d 785 (Ariz. App. 2000), held that waterborne total and fecal coliform bacteria were not “pollutants” subject to the absolute pollution exclusion. Keggi involved the consumption of tap water containing E-coli, which resulted in serious illness, medical expenses and lost income. The City of Scottsdale was the water supplier and the source of the bacteria was unknown. Northbrook’s pollution exclusion provided that:
This insurance does not apply to:
(1) Bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants . . .
* * *
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 or reclaimed.
After careful review of the absolute pollution exclusion, the Keggi court concluded that the exclusion’s plain language did not include bacteria because of their living organic form. The court further held that even if the policy language could be read broadly enough to exclude bacteria, public policy would reject such a broad reading absent evidence that contamination arose from “traditional environmental pollution.” The Keggi court based its rationale, in part, on the widely held view that “public policy supports a narrow interpretation of the exclusion so that it does not eviscerate coverage otherwise reasonably expected by the insured.”
The Quincy and Keggi courts’ discussions of bacteria probably are the most insightful with respect to how courts will apply the pollution exclusion to mold. As with bacteria, mold is a living, natural organism. Unlike Quincy, most policies do not define what is meant by “irritant,” “contaminant,” or “pollutant.” The terms “irritant” and “contaminant,” when viewed in isolation, are virtually boundless for there is virtually no substance or chemical in existence that would not irritate or damage some person or property. (This clause cannot be read literally as it would negate virtually all coverage). Viewed in the context of the typical CGL policy, mold and fungus cannot be easily categorized as smoke, vapor, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, lead or waste material. Unlike mold and fungus, these enumerated items are primarily inorganic in nature. Under the circumstances, it would strain the term “pollution” to apply it to a naturally occurring organic substance such as mold.
Asbestos
In Owens-Corning Fiberglass Corp. v. Allstate Insurance Co., 660 N.E.2d 746 (Oh. C. P. 1993), the insured brought a declaratory judgment action against its excess liability carriers when it was sued for asbestos related product liability claims. The court examined whether asbestos was a pollutant within the plain language of the policy’s pollution exclusion.
Based on the few authorities that addressed whether asbestos was an “irritant,” “pollutant,” or “contaminant,” the court found that asbestos could not be associated with other substances listed in the exclusion like smoke, fumes or waste because these substances bore a closer resemblance to industrial waste. The court also found the insurer’s reliance on cases that did not specifically address the application of the pollution exclusion to indoor releases and to asbestos was misplaced. The court concluded that asbestos “cannot be characterized as an irritant, contaminant or pollutant as a matter of law within the meaning of the exclusion.”
Lead Paint
In Atlantic Mutual Ins. Co. v. McFadden, 595 N.E.2d 762 (Mass. 1992), the Massachusetts Supreme Judicial Court held that the absolute pollution exclusion did not apply to ingestion of lead paint chips resulting in lead poisoning. In concluding that the policy provided coverage, the McFadden court stated:
When construing language in an insurance policy, we consider what an objectively reasonable insured, reading the relevant policy language, would expect to be covered. We conclude that an insured could reasonably have understood the provision at issue to exclude coverage for injury caused by certain forms of industrial pollution, but not coverage for injury allegedly caused by the presence of leaded materials in a private residence . . . there simply is no language in the exclusion provision from which to infer that the provision was drafted with a view towards limiting liability for lead paint-related injury. The definition of “pollutant” in the policy does not indicate that leaded materials fall within its scope. Rather, the terms in the pollution exclusion, such as “discharge,” “dispersal,” “release,” and “escape” are terms of art within environmental law which generally are used with reference to damage or injury caused by improper disposal or containment of hazardous waste.
In Peace v. Northwestern National Ins. Co., 596 N.W.2d 429 (Wis. 1999), the Wisconsin Supreme Court reached a different conclusion. The plaintiff’s child sustained injuries from ingesting lead paint in an apartment owned by the insured. The court held that the absolute pollution exclusion clause barred the property owner’ s claim against its insurer for coverage for bodily injury from lead ingestion in paint that chips, flakes, and breaks down into dust. The court reasoned that “when the pollutant lead once contained begins to disperse, discharge or escape from the containment of the painted surface, it falls within the plain language of the pollution exclusion”. The Peace court distinguished Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728 (Wis. 1997), discussed below, by stating that lead paint chips, flakes, and dust, unlike carbon dioxide, are not universally present and generally harmless. Moreover, the court reasoned that the toxic effects of lead have been recognized for centuries, and reasonable owners of rental property understand their obligation to deal with the problem of lead paint.
Carbon Dioxide And Monoxide
In Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728 (Wis. 1997), employees working in a building alleged that an inadequate air exchange ventilation system caused excessive accumulation of carbon dioxide in their work area and caused them to suffer from headaches, sinus problems, eye irritations, and extreme fatigue, among other symptoms. The Supreme Court limited its review to whether injuries allegedly caused by carbon dioxide that came from human breathing were excluded by a pollution exclusion. The Donaldson court reasoned that too much of any chemical can be injurious and found coverage by concluding that a reasonable insured would not understand an injurious concentration of carbon dioxide from human respiration in a poorly ventilated area to be a “pollutant.” Therefore, an insured reasonably would not conclude that the pollution exclusion operated as a bar to coverage under these circumstances. The court reasoned that the plaintiffs’ injuries resulted from an everyday activity; thus, the reasonable expectations of the insured would be that an increased concentration of carbon dioxide was not a pollutant within the meaning of the exclusion.
The court in Reliance Insurance Company v. Moessner, 121 F.3d 895 (3rd Cir. 1997), reached a different result. In Moessner, former employees allegedly suffered carbon monoxide poisoning as a result of the malfunction of a direct-fired steam generator sold to their employer. The district court granted summary judgment to the insurer on the basis that the pollution exclusion did not cover products liability claims for carbon monoxide poisoning. The manufacturer appealed. The appellate court, applying Pennsylvania law, concluded that the total pollution exclusion clause was unambiguous and that its plain language would bar coverage for Moessner’s claims. The court further held that where the exclusion clearly states that it applies to the escape of pollutants “at any time,” the exclusion did not require that the release be “into the atmosphere” and contained no language limiting its scope to environmental catastrophes.
Additionally, the court in West American Insurance Co. v. Band & Desenberg, 925 F.Supp. 758 (M.D. Fla. 1996), aff’d, 138 F.3d 1428 (11th Cir. 1998), held that the absolute pollution exclusion contained in a business owners’ policy applied to indoor air pollution. In Band, the employees of a tenant in the insured’s office building complained that the contaminants in the building’s defectively designed air conditioning system caused them to suffer from a series of symptoms collectively referred to as sick building syndrome. The court held that the absolute pollution exclusion was clear and unambiguous and did not require that the insured be the actual polluter for the exclusion to apply. The court further held that the dispersal of contaminants from the attic space of a building into the indoor air supply of the building would constitute a release of the contaminants into the environment of the building. See also, Essex Ins. Co. v. Tri-Town Corp., 863 F. Supp. 38 (D. Mass. 1994) (involving the discharge of carbon monoxide from an ice resurfacing machine); League of Minn. Cities Ins. Trust v. Coon Rapids, 446 N.W.2d 419 (Minn. App. 1989) (involving the discharge of nitrogen dioxide from an ice resurfacing machine).
Conclusion
The reasoning expressed in the aforementioned cases demonstrates the difficulty of determining how courts will address a mold contamination case. Courts that have applied various forms of the pollution exclusion as a bar to coverage for types of exposure similar to mold will probably apply the exclusion to mold-related claims on the basis that mold myotoxins are pollutants within the meaning of the exclusion. These courts will probably argue that the release of the myotoxins into the building’s air amounts to an excluded discharge, dispersal or release. As such, claims resulting from exposure to mold myotoxins should be excluded pursuant to the policy’s pollution exclusion. On the other hand, courts that have not applied the pollution exclusion to types of exposure similar to mold will probably argue that the exclusion does not apply to mold-related claims because, by its plain language, the pollution exclusion does not include “mold” or “fungus.” These courts will likely conclude that it would be inappropriate to interpret the pollution exclusion so broadly as to include mold and/or fungus as it would effectively eviscerate coverage otherwise reasonably expected by the insured. •
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