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"Toxic" Mold Part III: Are You Covered For Mold Liability? Here's The Scoop On Construction Insurance Coverage For Mold.
By Patrick Wielinski


This is the third article in CONSTRUCTOR's three-part series on "toxic" mold. Part I, which appeared in October, examined what "toxic mold" is and discussed the practical steps contractors should take to avoid mold-related problems. Part II, which appeared in November, covered the legal and financial risks that "toxic" mold creates. This month, Part III discusses the difficulties of obtaining adequate insurance coverage for mold liability and outlines the measures that contractors can take to protect themselves.

Water infiltration that causes mold to grow can severely damage a building and make its occupants ill. Often major litigation ensues-as happened in a case involving the Tulare County Courthouse in Visalia, Ca., built in the late 1980s. Led by a state district judge, county employees filed suit against the county, seeking damages for personal injury caused by exposure to mold in the courthouse. The trial court held that the county was liable to the employees only for aggravation of their injuries caused by alleged fraudulent concealment of the condition of the courthouse. In this situation, however, (as often happens) the employees also sought other potential defendants in the designers, contractors, and subcontractors who worked on the building.

THE POLLUTION EXCLUSION

This litigation over "toxic mold" presents unique insurance coverage issues for contractors. A contractor's primary "litigation insurance" is the commercial general liability (CGL) insurance policy, which is usually issued on a standard form produced by the Insurance Services Office (ISO). Included in the form is a standard "pollution exclusion" that is frequently implicated in mold claims and relates to both bodily injury and property damage. The exclusion states that the insurance does not apply to the following

"Bodily Injury or Property Damage arising out of the actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants..."

"Pollutants" is defined as 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.

Two major questions surround the pollution exclusion. The first is whether mold constitutes a "pollutant" as defined in the pollution exclusion. The second is whether the way in which exposure to the mold actually occurs is "a discharge, dispersal, release, or escape" under the exclusionary language.

KEY LANGUAGE IN COURT CASES

Very few courts have directly addressed the issue of insurance coverage for mold under liability policies. Those that have done so for mold or similar issues seem hesitant to apply the standard pollution exclusion; they are unsure whether mold constitutes a "pollutant" that is "discharged" or "dispersed." In an early case, a Wisconsin court concluded that mold from water vapor trapped in the walls did not constitute a "release" of contaminants, but rather was formed over time by environmental conditions.1

In a similar context, another court held that the pollution exclusion did not apply to a claim involving an inadequate HVAC system that caused excessive accumulation of carbon dioxide. The resultant poor air quality caused the plaintiffs' headaches, sinus problems, eye irritation, and extreme fatigue. The court held that the pollution exclusion was ambiguous when applied to injuries resulting from the breathing of carbon dioxide, "in every day activities gone slightly, but not surprisingly, awry."2

In yet another case involving the pollution exclusion, the plaintiffs sought damages for styrene fumes from a floor-resurfacing job that contaminated chicken in a processing plant. The court held that "discharge," "dispersal," "release," and "escape" were terms of art in environmental law and that indoor emissions did not constitute any of these terms as regulated by the pollution exclusion.3

On the other hand, other cases have found that indoor emissions of various substances, such as carbon monoxide fumes from an HVAC unit,4 fumes from concrete curing chemicals,5 and lead paint chips6 do indeed constitute a "dispersal" or "discharge" under the pollution exclusion. Some argue that mold is like lead in the way it flakes out or otherwise eventually "disperses" into the air from plenums, ductwork, and walls. This line of argument maintains that mold (like lead) should be subject to the pollution exclusion.

IS MOLD A "POLLUTANT"?

The companion issue to the "discharge, dispersal, release, escape" controversy relates to whether the pollution exclusion's definition of "pollutant" applies to mold. Some argue that the pollution exclusion has historically been directed at chemical or hazardous substances produced by industry (not live organisms such as mold). Nevertheless, the symptoms of mold inhalation may qualify mold as an "irritant" or "contaminant," and therefore as a "pollutant," under the pollution exclusion.

Still, some courts have hesitated to classify airborne mold, fungi, or other organisms as "pollutants." In a Florida case, former bank employees sued the building owner, charging that the negligent design, maintenance, installation, and repair of the HVAC system led to airborne molds, fungi and yeasts that made them sick. The owner tendered its defense to its CGL carrier which denied coverage based on-among other things-the pollution exclusion. The trial court found the policy to be ambiguous because it did not define "pollutant." In the absence of another definition, the term was interpreted according to its popular meaning: Broadly defined, the term can include naturally occurring substances-even dust. Narrowly defined, it includes only extreme toxins such as nuclear waste. The court chose the narrow definition and ruled in favor of the insured.7

Another case that has attracted considerable attention for the way it addressed the issue of microorganisms as pollutants is Keggi v. Northbrook Property & Casualty Insurance, a case in which the plaintiff became seriously ill after drinking water from a public water system that was contaminated with fecal coliform bacteria.8 The court refused to apply the pollution exclusion, stating that it was intended to preclude coverage for only widespread industrial pollution of the environment and not for all contact with substances that can be classified as pollutants. In addition, the court determined that the exclusion was only intended to deny coverage for cleanup operations ordered under environmental laws. Since the source of the bacteria was unknown, it could have resulted from causes unrelated to what is traditionally considered "environmental pollution."

Obviously, the court cases so far haven't definitively determined the proper application of the standard pollution exclusion. However, we do know that the standard pollution exclusion in the ISO CGL policy generally does not apply to property damage or bodily injury occurring within the "products-completed operations hazard," or after the work has been completed. (Work is deemed complete when all the work called for in the contract is finished or has been put to its intended use by the owner.) Therefore, the standard pollution exclusion will likely not apply to mold infestations that occur over time and after project completion.

NEW INSURANCE LANGUAGE THAT EXCLUDES COVERAGE FOR MOLD

Because of the standard pollution exclusion's limitations, many policies may contain provisions that broaden its scope to deny coverage for mold. One such exclusion is called the "Total Pollution Exclusion," a standard endorsement also promulgated by the ISO. Yet even this exclusion shares essentially the same definition of "pollutant" and requires a "dispersal" or "discharge" in the same manner as the standard ISO pollution exclusion discussed above. As such, the same issues relating to the status of mold as a "pollutant" and whether indoor circulation of spores constitutes a "discharge" or "dispersal" apply to this exclusion.

While standard ISO forms are still in the works, some insurers have adopted exclusions that state that the insurance does not apply to bodily injury or property damage arising out of or contributed to by any fungus, mildew, mold, or resulting allergens. Neither does it cover any costs associated with abatement, mitigation, remediation, or containment of mold.

NEW INSURANCE PRODUCTS TO DEAL WITH MOLD

Still other insurers are contemplating providing coverage for mold under pollution legal liability (PLL) policies or contractors pollution liability (CPL) policies, expressly extending the definition of "pollutant" to include "fungi"-bacterial matter that produces the release of spores or the spreading of cells, including mold, mildew, and viruses. However, it appears that such coverage may be provided only through a relatively small sublimit. Alternatively, in order to obtain a higher limit, an additional premium may be charged on a case-by-case basis. Still other carriers may not offer such coverage or enhancements at all.

NEW INSURANCE PRODUCTS TO DEAL WITH MOLD

Still other insurers are contemplating providing coverage for mold under pollution legal liability (PLL) policies or contractors pollution liability (CPL) policies, expressly extending the definition of "pollutant" to include "fungi"-bacterial matter that produces the release of spores or the spreading of cells, including mold, mildew, and viruses. However, it appears that such coverage may be provided only through a relatively small sublimit. Alternatively, in order to obtain a higher limit, an additional premium may be charged on a case-by-case basis. Still other carriers may not offer such coverage or enhancements at all.

CONTRACTOR BEWARE

The bottom line is that mold claims are serious business for insurance companies. Contractors are well advised to address this issue when their current CGL coverage is up for renewal. Ongoing coverage for mold may not be easily obtainable, especially in light of the hardening of the insurance market which will make insurance more expensive for all. It's likely that claims will be eventually excluded from coverage by standard CGL policies. Whether this happens because of court interpretations of the pollution exclusion, or because of additional mold exclusionary endorsements, it will become even more necessary for contractors to consider PLL or CPL policies.

Setting aside all issues relating to possible pollution and environmental effects, the root of a mold claim against a contractor is likely to remain the alleged construction defect which caused the water damage out of which the mold infestation arose. These are always hotly contested claims by insurers and they raise issues about whether the alleged defective workmanship constitutes an occurrence or property damage as defined in the CGL policy, and whether the so-called "business risk" exclusions apply. Basically, these exclusions are designed to ensure that the policy does not provide coverage to a contractor for risks such as faulty workmanship which are within the contractor's own control. However, these exclusions are often not held to apply where the allegedly defective work damages other nondefective components of the work. As such, mold growing on drywall, or inside a wall, may in fact be covered as property damage to other work.

But whatever issues are involved, once a contractor is hit with one of these claims, the first thing to do is report it promptly to the insurance company and aggressively pursue coverage.

Patrick J. Wielinski is a lawyer in the Fort Worth, Texas, office of the law firm of Haynes and Boone, LLP. He practices in the areas of construction and insurance law and has spent his career advising clients on contract, insurance coverage, and risk management issues. Reprinted from the December 2001 issue of CONSTRUCTOR. In continuous publication since 1919, CONSTRUCTOR is the national magazine of the Associated General Contractors of America (AGC). For more information, visit AGC on the web at www.agc.org.

For More Information
Contact Patrick Wielinski
Phone: (817) 347-6623
e-mail: wielinsp@haynesboone.com

ENDNOTES

  1. Leverence v. USF&G, 462 N.W.2d 218 (Wis. App. 1990).
  2. Donald v. Urban Land Interests, Inc., 564 N.W.2d 728 (Wis. 1997).
  3. West America Ins. Co. v. Tufco Flooring East, Inc., 409 S.W.2d 692 (N.C. App. 1991).
  4. Bernhardt v. Hartford Fire Ins. Co., 102 Md. App., 648 A.2d 1047 (1994)
  5. Madison Constr. Co. v. The Harleysville Mut. Ins. Co., 557 Pa. 595, 735 A.2d 100 (1999).
  6. Peace v. Djukic, 228 Wisc.2d 106, 596 N.W.2d 429 (1999); Auto-Owners Ins. Co. v. Hansen, 588 N.W.2d 777 (Minn. App. 1999).
  7. Stillman v. Charter Oak Fire Ins. Co., No. 1949-CV (S.D. Fla. June 18, 1993), rev. on other grounds, Stillman v. Travelers, 88 F.3d 911 (11th Cir. 1996).
  8. 13 P.3d 875 (Ariz. App. 2000).

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