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Protecting Your Business Against Mold Claims

By G. Andrew Lundberg, Linda Schilling and Leslie A. Pereira

If the plaintiffs’ bar has its way, toxic mold lawsuits may well be the asbestos litigation of the new millennium. According to allegations in recent lawsuits, mold has caused everything from allergic reactions to cancer. Because few businesses are immune from the threat of toxic mold claims, finding insurance coverage to finance the fight against such claims has become critically important. But, as recent court decisions have shown, insurers appear intent on making the recovery of such benefits a challenge.

During the past few years, a diverse group of plaintiffs has filed a wide variety of lawsuits alleging property damage, bodily injury, and business interruption due to exposure to allegedly toxic mold. Tenants have sued landlords and property managers; property owners have sued builders, subcontractors, and material suppliers, including paint, wood sealant, air conditioner and water heater manufacturers; condominium owners have sued homeowner associations; employees have sued employers; and parents have sued school districts. Erin Brockovich has sued the builder and previous owner of her home. EPA employees have even claimed they developed illnesses at the agency’s headquarters in Washington, D.C. The foundation for all of these claims is exposure to allegedly toxic mold conditions.

Considering the nature and amount of damages asserted by these claimants — and the results achieved — it is clear that mold lawsuits must be taken seriously. Here are some recent examples:

• In June 2001, a Texas jury awarded a woman and her family $32.1 million in damages against the insurance company that issued the family’s homeowners’ policy.¹ The jury found that the insurance company had failed to adequately repair the family’s home in 1998 after the family filed a claim for water damage caused by a plumbing leak. The water damage ultimately caused mold to spread throughout the house.² The $32.1 million award represented $6.2 million to replace the family’s home and possessions, $5 million for mental anguish, $12 million in punitive damages, and $8.9 million in legal fees.³ Although the family had initially made claims for personal injuries, including alleged neurological damage, the court did not allow those claims to go to the jury. The plaintiff has stated that she intends to pursue further legal action against the insurance company for her husband’s and son’s health-related claims.
  
  
• In October 2000, a New York family renting an apartment sued the owner for approximately $180 million in alleged personal injuries and property damage caused by water intrusion and exposure to dangerous mold and fungus.⁴ The plaintiffs claimed that the defendant corporate owner and operator knew of the toxic mold’s existence for several years, but failed to notify the plaintiffs or take steps to remediate the mold.
  
  
• In Michigan, a class action was filed in March 2000 on behalf of all persons who owned or lived in homes constructed by the defendant building company.⁵ The complaint alleges that all homes constructed by the defendant had defective ventilation systems, roof systems, basement walls and floors, all of which caused or contributed to mold contamination.
  
  
• Apartment residents in California filed a class action in September 2000 against builders, property managers, and others seeking the establishment of a “medical monitoring” fund to determine whether residents have suffered ̵ or will suffer — injuries due to exposure from mold.⁶
  
  
• In Delaware, apartment residents sued their apartment complex owners claiming their alleged exposure to mold caused one or more of them to suffer severe asthma, permanent cognitive defects, osteopenia, and an increased risk of tuberculosis.⁷ In May 1999, a jury awarded the plaintiffs $1,040,000 in damages for medical expenses, permanent impairment, and pain and suffering.
  
  
• In 1997, a California couple obtained a $1,353,000 settlement from several defendants after construction defects in their newly-purchased home led to water intrusion and mold growth which allegedly caused respiratory problems and other ailments.
  
  
• In California, Tulare County Superior Court Judge Elisabeth Krant sued the local county government in March 2000 seeking unspecified damages due to mold growing on the ceiling tiles of her chambers which allegedly caused her to become ill. ⁸

Indeed, mold claims and lawsuits are making front-page news. A May 15, 2001 Wall Street Journal article details the claims of apartment residents and homeowners in Texas and California complaining of mold contamination.⁹ According to the article, mold growth inside a Texas apartment complex caused tenants to develop sores, bumps, headaches and other ailments, and resulted in their loss of thousands of dollars of personal property.¹⁰ The article also reports on a California couple who, frustrated with battling mold growth in their home and faced with the enormous cost of having their home professionally purged of mold, opted instead to have firefighters burn the house down.¹¹

As discussed below, prior to finding your company named as a defendant in a mold lawsuit, we suggest conducting an objective assessment of your potential liability exposure and the adequacy of your insurance coverage to defend and indemnify you against such claims. The up-front, relatively modest effort and expense of such prudent planning pales in comparison to the potentially significant expense that often is required to defend allegations of injury or damage due to that toxic mold.

Mold Basics

Molds, which are living organisms, are ubiquitous: they can grow on virtually any organic substance, as long as moisture and oxygen are present.¹² Certain molds grow on wood, carpet and insulation, among other things.¹³ When excessive moisture accumulates in buildings or on building materials, mold growth will often occur unless the moisture problem is discovered and addressed quickly.¹⁴ A wide variety of humidity-causing conditions can produce indoor mold contamination. Water intrusion-often from defective construction or faulty plumbing-is a common culprit. Building humidifiers, air conditioning systems, and damp storage and crawl spaces may also provide a welcome environment for indoor toxic molds to grow. While it is not possible to eliminate all mold in the indoor environment, mold growth can be limited by controlling indoor moisture.¹⁵

Molds reproduce by making “spores.” Mold spores are microscopic and only become visible when individual spores accumulate.¹⁶ According to the United States Environmental Protection Agency (“EPA”), these microscopic particles continuously move through indoor and outdoor air.¹⁷ When mold spores find moisture indoors, they may “begin growing and digesting whatever they are growing on in order to survive.”¹⁸ Molds gradually destroy whatever they are growing on.

The scientific and medical literature contains differing opinions regarding the potential health impacts of exposure to mold. Some investigators claim that high levels of Stachybotrys are toxic for all individuals, while other investigators argue the science does not support such a claim.¹⁹ However, most investigators agree that mold is an allergen that can adversely affect individuals who have allergies or asthma, or who otherwise are predisposed to react to environmental triggers.²⁰

Significantly, the EPA appears firmly behind the proposition that exposure to mold can impair individuals’ health. In its March 2001 published guidelines on “Mold Remediation in Schools and Commercial Buildings,” EPA stated that all molds “have the potential to cause health effects.” ²¹ Moreover, according to EPA, certain molds “can produce allergens that can trigger allergic reactions or even asthma attacks in people allergic to mold,” and others “are known to produce potent toxins and irritants.”²²

Mold Remediation and Removal Protocols

EPA recognizes that, once mold growth has progressed to the point that the mold is visible, it must be removed. As with removal of asbestos or other potentially hazardous substances, however, caution must be exercised in any remediation efforts to avoid harming workers or others. The procedures necessary to remove mold safely vary depending on the amount of visible mold present.

Small-scale mold contamination of one square foot or less may be surface-cleaned by a property manager or owner using modest personal protection (such as gloves) and a diluted chlorine solution, followed by discarding the contaminated material. Larger-scale mold contamination, however, should be removed only by a remediation specialist who has taken specific precautions to protect the health and safety of workers and others nearby. Indeed, large-scale mold remediation efforts may require containment measures commensurate with asbestos abatement projects. In such cases, specialists frequently utilize two-layer polyethylene enclosures to prevent the spread of dirt and spores beyond the containment area. Such enclosures often use negative air pressure differentials to further prevent mold dispersal. In all cases, clean-up projects should enforce special protocols to protect both remediation workers and occupants from exposure to mold spores.

All mold remediation protocols should provide for: (a) cleaning or physically removing surface microbial growth on non-porous materials; (b) removing of porous materials showing extensive microbial growth; and (c) eliminating moisture conditions that led to the fungal contamination. In practical terms, clean-up and rehabilitation efforts may include the permanent removal and disposal of badly contaminated carpet, ceiling tiles, upholstered furnishings, and wallboard. A more modest level of contamination might permit the salvage of carpeting and drapes after thorough cleaning and drying. Specialists may also be able to remove fungal growth on non-porous surfaces with special vacuums using high-efficiency filters, thereby permitting the continued, safe use of these materials.

Insurance Coverage for Mold Liabilities

Many of the plaintiffs in toxic mold lawsuits allege that exposure to mold in their home or on the job caused them to become ill, or exacerbated pre-existing physical conditions, such as asthma. Others allege that mold growth damaged or destroyed their property, or impaired or destroyed their business. Presented with one or more of these fact patterns, businesses are finding that mold lawsuits are expensive to defend. Mold cases often present difficult issues of proof with regard to causation and damages, primarily because there presently is no scientifically accepted, or governmentally mandated, standard for a “safe” level of exposure to mold of any type. While this may change soon (see discussion below), for the time being, an effective defense may require the retention of numerous and costly scientific and technical experts, and a proactive, rather than passive, approach to the litigation. For all of these reasons, securing insurance coverage for mold claims is critically important.

Most businesses carry commercial general liability (CGL) insurance, and this is where a company should look first for coverage. A typical CGL policy should provide coverage for many mold claims. The standard CGL coverage states that the insurance company will defend the insured against lawsuits brought by third parties alleging “bodily injury” or “property damage” caused by an occurrence during the policy period, and will indemnify the insured for any sums the insured becomes legally obligated to pay as damages as a result of such a lawsuit.

For many years, however, CGL policies have generally contained versions of what is commonly known as a “pollution exclusion.” Pollution exclusions have also become standardized, and generally preclude insurance coverage for bodily injury and property damage claims which arise out of “the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” The term “pollutants” is typically defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Insurers have invoked pollution exclusions as a basis for denying defense and indemnity coverage for toxic mold claims.

Business owners should resist an insurance company’s effort to deny coverage for mold claims on the basis of the pollution exclusion. Recently, courts have decided that mold, which is naturally-occurring, does not constitute a “pollutant” as that term is defined in a typical CGL policy.²³ In addition, because mold tends to be relatively stationary, an insurance company may face some hurdles proving the “discharge, dispersal, seepage, migration, release, or escape” of the mold, as required under one common form of pollution exclusion.²⁴

Businesses concerned with potential difficulties in securing coverage for mold exposures under existing CGL policies may either seek clarification of their coverage through their brokers, or consider the purchase of separate Pollution Legal Liability or similar “environmental” coverage, which offers both first- and third-party coverage for exposures for which insurers may deny coverage under typical CGL policies. Those considering the purchase of “environmental” coverage, however, must pay close attention to the definitions and other provisions contained in such policies, to ensure that the “pollution conditions” and “hazardous substances” for which coverage is afforded do in fact include naturally occurring mold. Policyholders and their brokers should carefully study supplemental “environmental” coverages being offered to ensure that they dovetail with existing CGL coverage and do in fact insure mold risks, rather than leaving an uninsured “gap” into which mold and similar exposures might later be argued to fall.

In addition to exposing a business to lawsuits, mold contamination can also destroy or significantly damage a business’s own property. Under these circumstances, losses may be covered under the business’s first-party property insurance policy.

Property insurance typically comes in one of two forms: (1) an “all risks” policy which provides coverage for property damage caused by all perils except those specifically excluded; or (2) a “named peril” policy which provides coverage only for damage caused by one or more specified perils (e.g., fire). Depending on the terms of the specific policy, it is more likely that coverage will exist for damage caused by mold under an “all risks” policy.

Two important and interrelated timing issues must be considered when seeking coverage for mold damage under property policies. First, a company needs to identify the date when coverage arguably has been triggered. Property insurance generally provides coverage only for losses that occurred during the policy period. In situations involving mold growth which has gone undetected for a period of time and which has progressively worsened, the date of “loss” — and therefore the applicable property insurance policy — can be difficult to pinpoint. Courts in California have ruled that the property policy in force at the time the loss was “manifested,” defined as the date the loss was “known or apparent to the insured,” is the only policy which provides coverage for the loss.²⁵

Second, companies looking for coverage for mold damage under their property policies should act quickly. Property policies commonly contain a “suit limitation” provision. A suit limitation provision typically states that no action may be filed against the insurer under the policy “unless commenced within 12 months next after inception of the loss.”²⁶ Notice of a claim therefore generally should be given to all property insurers potentially liable for the loss as soon as evidence of water intrusion or leaks is apparent.

Governmental Regulation of Mold

Until March 2001, federal regulation of toxic mold was extremely limited. However, with EPA’s issuance of its March 2001 mold remediation protocol, entitled “Mold Remediation in Schools and Commercial Buildings,” it appears that EPA, and other governmental agencies, will be taking a much more hands-on approach to mold issues in the future.

Indeed, in California, state lawmakers have recently introduced several separate measures that may presage a wave of local standards on mold exposure. The most ambitious California legislative effort to date is the Toxic Mold Protection Act, Senate Bill 732 (S.B. 732), proposed by California State Senator Deborah Ortiz in February 2001. The Act, which was passed by the Senate on June 4, 2001 and is currently under consideration by the Assembly, would require the California Department of Health Services to conduct studies, consider specific delineated criteria and consult with professional and medical experts in the field to arrive at permissible exposure limits to mold. If S.B. 732 is enacted, California will be the first state to set permissible exposure limits to mold in both commercial and residential structures.

S.B. 732 would also set the standards for the identification and remediation of toxic molds. Of particular interest to property owners and managers, S.B. 732 would require any person who sells or rents real or commercial property to provide a written disclosure to potential buyers or renters, disclosing the presence and location of mold-containing construction materials in the building, HVAC system, or surrounding environments, and the potential health risks that may result from exposure to mold.

California lawmakers submitted other important mold-related bills to the State Legislature in February 2001. Assembly Bill 178 (A.B. 178), proposed by Assembly Member Dave Cox, would add visible mold growths on interior walls, ceilings, and floors to California’s list of officially-designated “dangerous conditions” constituting a substandard residential dwelling. A.B. 178 would require landlords of residential property to disclose to prospective tenants the existence of any such visible mold growths or face civil fines of up to $1,000 for each violation. In a related proposal, Assembly Bill 284 (A.B. 284), authored by Assembly Member Hannah-Beth Jackson, would require the State Department of Health to establish a toxic mold surveillance and monitoring program, and to examine the feasibility of establishing a pilot toxic mold surveillance network with local agencies.

California is not the only state which has begun considering the issue of regulating mold. In Texas, several bills concerning indoor air quality were introduced in February 2001.²⁷ One would require the Texas Department of Health to develop voluntary indoor air quality guidelines for publicly owned or leased buildings. Another would require school districts to conduct indoor air quality assessments in every school, including ambient temperature, relative humidity, the adequacy of ventilation and the presence of mold and other constituents.

Conclusion

Toxic mold litigation shows signs of following in the footsteps of the asbestos claims that have clogged the courts for years. While it remains to be seen whether the cost of toxic mold identification and abatement will match the mammoth costs accrued in asbestos removal or Superfund cleanups, the heightened awareness and concern over exposure to allegedly toxic mold deserves the attention of managers, developers, and owners of real property. Moreover, the increased judicial and social awareness of the potential adverse health effects of exposure to mold has materially increased the likelihood of federal and/or state regulation of mold exposure and remediation. For all of these reasons, business owners, and owners and developers of real property, would be well-served, prior to claims being filed or legislation being passed, to evaluate their potential liability exposure and the adequacy of their insurance coverage for mold claims. 

ABOUT THE AUTHORS

Mr. Lundberg is a partner in Latham & Watkins, where he chairs the Los Angeles office’s Litigation Department and the firm’s Insurance Coverage Practice Group. He has assisted clients in obtaining insurance coverage for toxic mold and other environmental liabilities. Ms. Schilling is a litigation partner in Latham & Watkins’ Orange County office and has defended clients against numerous toxic mold claims. Ms. Pereira is a senior litigation associate in the firm’s Los Angeles office and has assisted both in defending mold claims and securing insurance coverage for such claims. A version of this article originally appeared in The Recorder on May 7, 2001.

Notes
¹ Christopher Oster, “Insurers Blanch at Proliferation of Mold Claims,” The Wall Street Journal, June 6, 2001.
² Id.
³ Id.
⁴ Chenensky v. Glenwood Management Corp., No. 120461/00, N.Y. Sup., N.Y. Co.
⁵ Harmon, et al. v. The Silverman Building Companies Inc., No. 00-021483, Mich. Cir., Oakland County.
⁶ Wheeler, et al. v. Avalonbay Communities, et al., No. BC 237274, Calif. Super., Los Angeles County.
⁷ Stroot v. Haverford Partnership, No. 95C-05-074-HLA, Del Super.
⁸ Lewis Griswold, “Office Mold Spurs Suit Against Tulare County,” The Fresno Bee, April 3, 2000.
⁹ Kortney Stringer, “Don’t Call Stachybotris the Black Plague, but it is Plaguing the South,” The Wall Street Journal, May 15, 2001.
¹⁰ Id.
¹¹ Id.
¹² Mold Remediation in Schools and Commercial Buildings, United States Environmental Protection Agency, Office of Air and Radiation, Indoor Environments Division, March 2001 at 2.
¹³ Id.
¹⁴ Id.
¹⁵ Id.
¹⁶ David M. Governo and Steven F. Goselin, “Avoiding and Minimizing Mold Liability: Understanding the Dynamics of Mold and Its Remediation,” Mealey’s Litigation Report: Mold, Vol. 1, Issue 4, April 2001, at 27.
¹⁷ Id.
¹⁸ Id.
¹⁹ David M. Governo and Steven F. Goselin, “Avoiding and Minimizing Mold Liability: Understanding the Dynamics of Mold and Its Remediation,” Mealey’s Litigation Report: Mold, Vol. 1, Issue 4, April 2001, at 27.
²⁰ Id.
²¹ Mold Remediation in Schools and Commercial Buildings, United States Environmental Protection Agency, Office of Air and Radiation, Indoor Environments Division, March 2001 at 2.
²² Id.
²³ See Keggi v. Northbrook Property and Casualty Ins. Co. (Az. App. 2000) 13 P.2d 785 (holding that the pollution exclusion does not apply to bacteria-contaminated water because bacteria does not constitute a “pollutant”); see also Tsakopoulos v. American Manufacturers Mutual Ins. Co., 2000 U.S.Dist. LEXIS 18569,*29 (Aug. 2000) (court rejected insurer’s argument that soil fill was a “pollutant” within the terms of pollution exclusion “[s]ince soil is not apparently of ’the same kind, class, or nature,’… as ’smoke, vapor, soot, fumes, acids, alkalis, chemicals [or] waste.’”
²⁴ See Lefrak Organization, Inc. v. Chubb Custom Ins. Co., 942 F. Supp. 949 (D.C.N.Y. 1996) (“injuries caused by irritants that normally are stationary, but that can be shifted or moved manually, are not excluded from coverage because they do not cause injury by one of the prescribed methods.”); see also Byrd v. Blumreich, 722 A.2d 598, 602 (N.J.Super.Ct. 1999) (the terms of the pollution exclusion denote “an active or clearly perceived physical event” on the part of the pollutant); Leverence v. United States Fidelity & Guaranty, 462 N.W.2d 218, 232 (Wis. 1990) (“No contaminants were released, but rather formed over time as a result of environmental conditions … We agree with the trial court’s determination that the pollution exclusion clause does not apply.”).
²⁵ See Prudential-LMI Commercial Ins. v. Superior Court, 51 Cal. 3d 674, 699 (1990).
²⁶ These provisions have been found valid in California. See id. at 683.
²⁷ Mealey’s Litigation Reports: Mold, Vol. 1, Issue 4, April 2000, at p. 3.

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September 2001