CM Report Special Report on Mold (2002)
2002 Winter
CM Report Special Report on Mold
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Articles in this report
First Party Property Exclusions and Mold
When a mold claim is presented under a first-party property policy, it is important to consider whether one or more of the exclusions may apply. Below we discuss a number of exclusions common to a first-party property policy which may apply to a claim for property damage from mold. Although many of the cases discussed do not specifically deal with mold damage, they are instructive as to how exclusions in a property policy may or may not apply in the mold context.
Introduction to Mold: A Primer
Mold is ubiquitous in outdoor environments. It grows naturally outdoors, and the spores that it produces are present in the outside air. The potential problem arises when mold moves indoors. Because molds proliferate in environments that contain an excessive amount of moisture, a leaky roof, broken pipe, or clogged drainage system can initiate the process of mold growth. After moisture is present, mold needs a nutrient source to develop and spread, and those nutrients are also present indoors. Wallpaper, cardboard, ceiling tiles, wood, and wood products all provide nutrients that may sustain mold growth.
Mold in Buildings: The Mechanics of Identification and Remediation
Mold is everywhere. It grows on tree leaves, in potted plants, on old bread, and it turns milk products into fine cheese. But mold is also in the headlines. It’s in our basements, in our air-conditioning systems, and may be hidden in the walls and ceilings of our homes and offices. Because of mold’s potential to impact our health, buildings are being evacuated, schools closed, and homes bulldozed. Naturally, litigation abounds. This is why building owners and managers should work to prevent moldy conditions and to investigate and correct them if they are suspected.
Performance Bonds and Surety Bonds: Response to Mold Related Claims
A performance bond guarantees that a principal/contractor will complete a construction project in accordance with the contract. When there is a failure to complete construction or a defect in construction, the bond may be called upon to pay the cost to complete or correct work that does not conform to the client’s specifications. The surety may also be liable for breaches of warranties that have been extended to the owner, as well as for latent defects (work not in accordance with the contract of which the owner was not aware at acceptance of the project) subject to applicable limitations periods.
Potential Subrogation Targets for Recovery of Mold-Related Property Damage Losses
The improved property is in place. An insured property loss takes place. Part or all of the property loss includes a claim for mold-related property damage and expenses to repair, replace, and/or remediate. The property carrier pays the claim and receives subrogation rights from the insured. Although there are matters of investigation and scientific expertise somewhat unique to mold-related property damage claims, property carriers responding to mold property damage claims quite simply have the same rights in subrogation—subject to state by state jurisdictional differences—that they have in any other property damage claim.
The Insured's Duty to Mitigate Mold Damages
When the insured suffers mold damage, its effort—or lack of effort—to mitigate that damage affects the carrier’s liability for the loss. This is because the insured has a duty “to mitigate covered losses, either by preventing them or minimizing their extent....” Couch on Insurance 3d §178:10 at p.178-17 (1998). The rationale behind this duty is “virtually common sense: any other rule would provide the insured with the economic incentive to allow the loss to occur, to the detriment of the insurer, quite possibly the insured, and in a fair number of cases, to the general public, as well.” Couch, supra, at p.178-16.
The Pollution Exclusion and Mold Claims
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.
The Potential for Recovery of Emotional Damages in a Mold Lawsuit: Two Areas for Analysis
The proliferation of lawsuits stemming from the presence of mold in homes and businesses across the country has alerted defense attorneys to the prospect of damages for the negligent infliction of emotional distress. Specifically, it is conceivable that plaintiffs who claim damages to their property because of mold may also bring claims for personal damages because of (1) the emotional distress they experienced upon discovering mold’s presence in their property; or (2) the potential for developing a mold-related illness.
The Proliferation of Mold Contamination and Claims: States Have Responded with Legislation
The discovery of extensive mold contamination in property throughout the United States has led to the introduction of legislation in various states in an effort to combat this problem. Representatives from California, Maryland, New York, and Texas have all introduced legislation focused on educating and protecting the public from the potentially hazardous effects of mold. The following describes both pending legislation, as well as legislation that has been passed into law across the United States.
Update: Recent Mold Related Decisions
There is no question that the landmark verdict in Ballard v. Fire Insurance Exchange, No. 99-05252 (Travis County, Texas, filed May 5, 1999), elicits concern among insurers, property owners, landlords, and developers. In Ballard, plaintiff alleged that her homeowner’s insurer acted in an unfair, deceptive, and fraudulent manner when evaluating her claim that her home had been damaged by mold. The jury awarded plaintiff $32 million. And Ballard is not the only case that ended with the plaintiff recovering a substantial verdict. In Mazza v. Schurtz, No. 00AS04795 (Calif. Super. Ct., Sacramento, 2001), the jury awarded a family living in a mold-infested apartment complex $2.7 million for personal injuries allegedly caused by mold exposure.
What To Do If Your Insured Fears Liability for Mold Contamination
When a building owner or occupant claims personal injury or property damage by reason of mold, an insured contractor may be quick to assume that his work at the site caused the contamination and turn the matter over to his insurer’s claim representative for resolution. It is important for the claim adjuster to investigate and consider each such claim on a “case-by-case” basis and not to assume at the outset that the existence of mold on a premises will give rise to a finding of liability.
