Protecting Against Mold Claims (Mann Report)

04/29/2004

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Mold is as old as the hills, but recent widespread media coverage and prominent lawsuits have inspired anxiety and usually overreaction in businesses confronting its presence.  Real estate lawyers seek new protections, environmental lawyers urge due diligence, consultants propose testing, insurance carriers exclude coverage.  An overview and some helpful suggestions for businesses to minimize their mold risks follow.

Health Issues

Unlike asbestos or lead paint, mold is a naturally occurring organism.  Allow it moisture and an organic food source and mold will grow.

Not all mold harms humans, but some people are more susceptible to adverse health affects.  Reactions range from temporary cold symptoms and pulmonary problems to severe respiratory difficulties and other illnesses.

Science has not yet provided "safe" standards for mold.  The federal and most state governments — including New York and New Jersey — have not set health-based standards or regulated the conduct of affected individuals and industries.  

Real Estate Issues

The commercial sector has responded to this threat.  Lenders may require mold-related representations and warranties concerning water damage, complaints (leaks, odors, etc.), and building code compliance.  Lenders also may impose new operational requirements – personnel training; preparation of manuals for prevention, inspections and responses; and mold remediation.

Buyers of real estate may insist on due diligence to evaluate buildings with environmental representations and warranties covering mold.

Mold Claims

Claims can allege personal injury and/or property damage.  Buyers, tenants, employees or invitees (like customers) may seek damages and injunctive relief. 

Major mold verdicts include:

• Ballard case in Texas ($32 million bad faith verdict against insurer, reduced to $4 million on appeal);
• Ed McMahon's California house ($7.2 million settlement against insurers and contractors);
• $14 million judgment against contractor for building a mold-infested courthouse in Florida;
• million-dollar-plus personal injury verdict for Delaware apartment residents.

New York moved from ninth to fourth in the number of mold claims nationally, with insurance claims tripling in 2002. 

Insurance

Insurers have sought coverage under property, liability, homeowner's, builder's risk and other similar policies.  Employee lawsuits may be foreclosed by worker's compensation.

Unlike Texas and California, New York has seen limited coverage litigation.  Insurers, anticipating greater loss exposure, have sought approval of new policy forms restricting mold coverage from the State's Superintendent of Insurance.  

Depending upon the facts, the policyholder may have coverage for mold liabilities under standard form property, homeowner's and liability policies.  With respect to commercial property and homeowner policies, the initial inquiry will be whether the mold contamination resulted from a covered cause of loss, i.e., water damage caused by a burst pipe which subsequently contributes to mold contamination.  Policy exclusions which may be invoked to preclude coverage include continuous or repeated seepage; design or construction defect; loss or damage caused by fungus, rust, corrosion, decay, hidden or latent defect; and pollution.  Insurers also may reject costs of testing or disposing of mold even if willing to pay to repair damage.

Coverage Restrictions, Buy-Backs

Policyholders should be alert to policy renewals restricting mold coverage.  More states are permitting insurers to restrict coverage through new forms of mold-specific exclusions in their policies or policy caps of relatively low dollar amounts ($5,000-$10,000). 

Coverage to fill potential gaps may be available through environmental insurance policies.  Forms of buy-back endorsements for mold coverage may be added to existing property and liability policies at additional cost.

Ten Practical Recommendations

• Practice active risk management for moisture and mold claims.  Prompt, proactive action avoids nightmare scenarios.
• Train your staff to deal with moisture and mold.  Prepare a response manual.
• Document moisture/mold complaints, recording what you learned, how, when, what inspection showed and what you did.  Take photographs.
• Designate a "go to" person in your organization for moisture and mold issues.
• Review lease and rule provisions concerning tenant responsibilities.
• For special moisture risks, consider special lease provisions.
• Maintain records of past tenants.  Check for mold problems as part of exit inspections before security deposits are returned.  If no mold or moisture condition is found, document that fact.
• Know your insurance coverage.
• Monitor insurance renewals for new coverage exclusions and limitations.
• GIVE NOTICE IMMEDIATELY TO YOUR INSURER IF YOU BECOME AWARE OF A MOISTURE/MOLD PROBLEM.