Insurance Companies Tighten Coverage for Mold-Related Damages
The recent anthrax scare amply illustrates the potentially devastating health risks posed by biological contaminants. It also underscores the reality that remediation of contaminated buildings is costly and disruptive.
Terrorism aside, many in the legal and insurance industries herald toxic mold as the most-feared claims area since asbestos. The number of mold claims filed is growing in epidemic proportions, as is the number of cases lauding multimillion dollar verdicts. Also on the rise are legislative initiatives attempting to address testing, monitoring, and disclosure requirements and establish health-based exposure limits.
Against this backdrop, insurance coverage for mold contamination is a crucial defense; however, several insurers temporarily have pulled out of certain markets to short-circuit what is perceived as a fast track to insolvency.
The likelihood of having no coverage for mold claims or the need to obtain additional coverage should concern professionals involved in real estate development. Insurance coverage issues are highly fact sensitive, dependent on specific policy language and the circumstances of the individual claims. Understanding what is covered under different insurance policies and how insurance companies will react to claims is the first step toward defending against mold-related liability.
Insurance Policy Issues
Each type of insurance policy treats mold differently; reading the fine print is essential to determine each policy's coverage level.
So-called special form or all-risk commercial property policies generally contain an exclusion for loss or damage “caused by or resulting from rust, corrosion, fungus, decay, deterioration, hidden or latent defect, or any quality in property that causes it to damage or destroy itself.” In addition, these policies usually contain an exclusion for damage ensuing from “continuous or repeated seepage or leakage of water that occurs over a period of 14 days or more.” These exclusions have yet to be the subject of judicial interpretation in the context of mold claims, but they most likely will be a first line of defense as they may create factual issues laden with proof problems for the policyholder.
Commercial General Liability Policies.
Occurrence-based comprehensive or commercial general liability policies present additional coverage issues, especially in cases in which mold allegedly results from faulty materials, design, or workmanship. In this context, analysis focuses on whether there was an occurrence and when it transpired. Since mold-related claims generally do not have a readily discernable event as a direct cause, this inquiry is dependent on the way in which the presence of the mold manifested.
For occurrence-based general liability policies, coverage is triggered when property damage or bodily injury occurs during the policy period. Trigger of coverage relates to the periods for which coverage must be provided. Three widely recognized types of triggers are manifestation, which limits coverage to those policies in place when the injury or damages are discovered, thus eliminating coverage under earlier policies; injury in fact, which limits coverage to those policies in place when the actual injury occurs, often requiring a retrospective fact-specific inquiry; and continuous, which triggers coverage on all policies from the time of first exposure to the manifestation of injury.
Business-risk exclusions do not cover contractual claims that a developer's product or workmanship is defective; they exclude from coverage problems with “your work” and “your product,” as defined within the policy.
However, by virtue of a separate exception, this exclusion is inapplicable if a subcontractor performs the defective work. When asserting these exclusions, insurers strive to distinguish between the cost to repair the defective product or workmanship and the cost to remediate third-party damage. Yet the distinction between third-party property damage and an insured's workmanship or product blurs in situations where remediation of mold and repair of underlying structural damage also involves replacing a defective product, such as exterior siding.
In one such case, Forest City Dillon, Inc. v. Aetna Cas. & Sur. Co., replacement of the defective exterior cladding was deemed covered third-party property damage, which was not affected by the business-risk exclusion. The court distinguished that the exclusion would not deny coverage for the cost to replace and repair defective exterior paneling, although the actual cost of the replacement paneling was excluded. The court relied upon various decisions dealing with the scope of the business-risk exclusion in cases involving similar factual circumstances.
New Exclusions and Coverages
The insurance industry has responded to the surge in mold claims by developing absolute mold exclusions. Such provisions generally eliminate any coverage for first- and third-party mold claims and often extend to any damages “directly or indirectly relating to the actual, potential, alleged, or threatened presence of mold, mildew, or fungi of any kind whatsoever, whether or not directly or indirectly caused by or resulting from an insured peril.”
Newer policies may include provisions that do not cover bodily injury or property damages due to “the actual, potential, alleged, or threatened presence of mold, mildew, or fungi of any kind whatsoever, or any materials containing them at any time.” They also most likely will not cover expenses related to the testing, removal, or treatment of mold or costs the insured incurred “in connection with any claim or ‘suit' on behalf of any governmental authority or any person or organization.”
The latter component of such exclusions may become critical, as many state governments are embarking on comprehensive legislative initiatives to address health issues specifically associated with mold exposure.
The current industry debate is whether insurers and the courts will handle mold claims in the same way they handled asbestos and lead claims. In their initial responses, insurers have modified policy language to tighten exclusions applicable to mold and also are offering endorsements that provide specific mold coverage.
However, claims and coverage litigation have only just begun to test the efficacy of the insurance industry's drafting efforts. Current and future claims will be measured against the coverage of policies written prior to the heightened industry sensitivity to the presence and danger of mold and its progeny.