A Preliminary Take on Mold Coverage

Mold. Stachybotrys. The stuff of broken refrigerators and the aftermath of floods is now the scourge of insurance companies. In the humid South, the epidemic of claims has led to actions by carriers and regulators similar to those actions that we last saw at the early stages of the enactment of Superfund legislation or the explosion of asbestos claims. For example, in Texas, the Department of Insurance has reacted with a series of public meetings similar to town hall meetings. In these widely attended and highly publicized sessions, representatives of consumer groups, the insurance industry and regulators respond to the heated, often passionate, concerns of the public in a combination exploratory and tension release session. Presumably these meetings will be followed by hearings, and, ultimately, revisions to coverage.

In the meantime, facing mounting pressures, the industry has considered modifying coverage or withdrawing from certain markets altogether.

From a claims handling prospective, the sheer volume of claims continues to raise a wide variety of coverage issues. And while this column is not the best place for an exhaustive discussion of the many coverage issues that are popping up, I would like to outline a few of those issues as they have been developed by my partner, Beth Bradley. Unlike many of us, Beth had the foresight to recognize this area of growing concern over a year ago. She has spoken at several conferences and has given a comprehensive paper entitled “Coverage for Mold Claims: Deadly Fungus or Black Gold?”.

One of the main thrusts of her paper is to outline the types of coverage concerns that have shown up under both general liability and homeowner policies. For instance, in the general liability context, the issues have generally focused on the existence of an occurrence, trigger of coverage and the applicability of the pollution exclusion. In addition, property damage claims are often subject to the applicability of the “business risk” exclusions.

General liability issues
Many courts have held that shoddy workmanship, or failure to follow specifications, that results in expected, even if unintended damage, will not constitute an occurrence under a general liability policy. Thus, while most mold cases resulting from sudden water leaks will likely involve unexpected and unintended damage, it is possible that some claims resulting from faulty construction work, such as faulty design installation of the HVAC system, or the use of improper materials such as EIFS, may support an argument that mold growth is a reasonably foreseeable, and therefore expected, consequence of the work and does not constitute an occurrence.

Trigger of coverage is very much a jurisdiction by jurisdiction issue. In manifestation jurisdictions, such as Texas (although some may argue that this has been under recent attack), many claims may fall outside of coverage for any specific policy based upon when the damage “manifests.” The issue becomes more complex in jurisdictions with long tail triggers of coverage, but it is an issue which needs to be evaluated in the context of each claim.

The pollution ex-clusion issue is dependent in most circumstances on the specific exclusion in the policy. The more recent versions of the absolute pollution exclusion will likely bar coverage depending upon whether mold is found to be a “pollutant.” There is limited precedent nationwide addressing whether mold is a pollutant. In addition, whether mold constitutes a pollutant will turn in large part on whether a causal link can be established between exposure to mold and physical injury. There are no federal or EPA standards for a remediation of mold or mold spores, and what constitutes proper air quality is not only in dispute, but may vary by jurisdiction. However, the increasing number and frequency of allegations of mold-related injury certainly require courts to grapple with the issue of whether mold is a pollutant.

Liability policies typically include a number of “work product” or “business risk” exclusions designed to limit coverage for defects in the insured’s work or work product. These exclusions typically apply to preclude coverage for the insured’s own work, while allowing coverage for bodily injury or damage to other property arising from the insured’s work. Consequently, if mold allegedly results from defects in the construction of a residence or other structure, or in the installation or repair of an HVAC or plumbing system, the policy’s work product or business risk exclusions may apply to preclude coverage for damage to, or replacement of, the work or product itself.

Homeowner policy issues
The issues with respect to a homeowner’s policy are similar in many regards. For instance, the liability portions of the homeowner’s policy often raise the same type of issues as to whether mold constitutes a pollutant.

The property coverage portions are usually different. For instance, one portion of the property coverage form usually offers limited coverage for specific perils such as fire and lightning; smoke; windstorm; hurricane and hail; and others. These perils normally do not include coverage for accidental leaks, and the only covered water related peril is usually for windstorm, hurricane and hail damage. Indeed, even that coverage is subject to additional limitations excluding coverage for rain or snow unless the direct force of the wind or hail first makes an opening through which the rain or snow enters and causes damage. Consequently, coverage for mold claims, although possible, are less likely under these provisions.

In contrast, some homeowner’s policies provide coverage for dwellings on an all-risk basis. Certain types of property are covered, and certain types of mold claims are excluded. Under the terms of these policies, issues arise
under provisions such as “additional living expense” or fair rental value. In addition, an issue often arises under a homeowner’s policy as to the number of losses. Where there are a number of leaks, some insurers have imposed multiple deductibles. This leads to an argument that multiple policy limits apply, as well as multiple sub-limits for additional living expense.

One point common to both the general liability and homeowner’s policies is that we are going to see many more issues arise as these claims are developed. Indeed, the foregoing is a very bare bones view of a complex picture which will increase in complexity over the next few years. Stay tuned.

Brian S. Martin is a partner in the Insurance and Coverage Section of the Houston office of Thompson, Coe, Cousins & Irons, L.L.P. He has extensive experience in insurance coverage and defense matters, specializing in environmental, toxic tort and product cases. Martin is a frequent author and CLE speaker on insurance topics, including coverage and bad faith issues.

Topics Claims Property Homeowners Pollution