Mold — is it insurable?
Mold is the most contentious indoor air quality issue since asbestos. For consultants and lawyers, "Mold is gold."
This fungus occurs naturally in air and water and on objects. In order to reproduce, mold needs a food source and water. This may include building materials with high cellulose content, such as wood, ceiling tiles, drywall, and paper. There are many potential sources of moisture on a construction site that can contribute to a mold problem, such as excess humidity, leaky roofs and pipes, foundation cracks, and condensation.
When the wrong kind of mold gets out of hand it can cause bodily injury and property damage. For bodily injury, symptoms may include rashes, coughing, eye and throat irritation, and congestion, with resultant medical bills. Property damage includes cleanup costs, diminution in value, temporary relocation costs, and business interruption.
The robust growth in mold claims and litigation shows that virtually everyone involved in a building — owners, sellers, real estate agents, landlords, builders, property managers, contractors, subcontractors, design professionals, and insurance companies — may be at risk.
Claims against these parties are based on a multitude of theories in tort and contract law — construction defects, negligent maintenance, civil and criminal statutory violations, fraud, bad faith, implied warranty of habitability, nuisance, constructive eviction, and emotional distress.
One thing that both victims and perpetrators of mold have in common is that they look to their insurance carriers for protection. This search, however, is problematic.
Most claims are made under three typical types of policies: homeowners (including multifamily), commercial property, and commercial general liability. Claims may also be asserted under worker's compensation and errors and omissions policies.
Frequently, the threshold issue for determining coverage is whether the mold was the cause of the loss or the result of another cause of loss that is covered by insurance. Claimants are finding mold is excluded from their insurance coverage where the mold is the actual cause of the loss.
However, there may be coverage if the mold damage results from materials that became wet as a result of a covered incident. For example, if the mold is caused by moisture from a covered flood loss, there is coverage; but where mold is not a covered loss, there would not be coverage under a property policy for business interruption or diminution in value.
Where mold growth results from poor maintenance of the property, insurers will seek to deny coverage on the policy exclusion for loss arising from wear, tear, and deterioration. Some policies also contain a pollution exclusion that denies coverage for the "discharge, dispersal, seepage, migration, release, or escape of pollutants," unless the discharge is caused by one of the enumerated perils.
A pollutant is defined as "any solid, liquid, gaseous, or thermal irritant or a contaminant." Insurance companies state that under this definition, toxic mold is nothing but a pollutant. However, this argument is countered by one that says mold is an organic substance that occurs naturally, while traditionally a pollutant is an industrial waste or other chemical.
In order for the pollution exclusion to apply, there must be a finding that the pollutant was discharged, dispersed, or released. One court has said that mold trapped within walls was not "released" into the environment, and thus the pollution exclusion did not apply.
The insurance industry has and will respond by becoming more explicit in excluding mold from coverage, possibly even where mold damage was caused by a covered peril.
A new form of coverage
With the insurance industry adding more and more exclusions for mold damage and with demand for coverage increasing, the specialty environmental insurance market has come up with what are called "microbial matter endorsements." These cover fungi and bacterial matter in any structure and the air within it.
Each such policy is separately and individually negotiated, based on such factors as the type and size of the property, the potential for wet conditions, the age of the building, the type of roof, incidents of water damage, reports of allergic reactions, respiratory or other air quality complaints, and HVAC and mold inspection plans. Coverage, when available, usually does not exceed five years, and there are often dollar limits and co-payment provisions.
Building owners who hope to reduce liability and increase their ability to obtain insurance coverage need to develop risk management plans that incorporate internal policies and procedures to prevent and abate mold.
I'll have more on this topic in our next installment.