How To Defend A Mold Claim In Construction Law Briefs

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1 Summer 2004 A Summary of Current Developments in Construction Law CONSTRUCTION LAW Briefs Special Edition - MOLD On The Inside Insurance Coverage 3 Legislation 4 First there was asbestos. Then there was lead paint. Now many commentators believe that the next wave of toxic tort litigation and remediation will involve mold. This edition of Construction Law Briefs is dedicated to court decisions, legislation and regulation, and insurance aspects of this issue, which is vitally important to contractors, design professionals and owners. Cases and Decisions A broken water pipe in celebrity Ed McMahon s Beverly Hills mansion flooded his den. The contractors hired by his insurance company allegedly simply painted over some of the water-damaged areas. The result: mold that had begun to grow on those damaged areas spread throughout the house; McMahon and his wife became sick; McMahon s dog died; and McMahon collected over $7 million from his insurance company and the environmental cleanup contractors that worked on the job. We are surrounded by molds everyday of our lives. Molds are microscopic fungi that reproduce by releasing spores that float in the air. These spores are present on many items we come in contact with on a regular basis. Mold spores only become active if they come in contact with both organic matter and moisture at the same time. Moisture allows the mold spore to begin digesting the organic material that it is touching. A mold problem can develop from a single mold spore, a single drop of water, and the oils that someone s hand left on a piece of glass after they touched it. Once mold begins growing, it can produce substances that cause allergic reactions, substances that irritate a person s lungs, or even substances that are toxic. The particular type of mold and there are over 100,000 types of mold determines what type of substance is produced as the mold begins to grow. According to the insurance industry, mold-related damage accounts for $2.5 billion a year in insurance claims and there are over 10,000 mold lawsuits currently pending. Large verdicts have made insurance companies very cautious when handling water damage claims involving mold, and some carriers refuse to cover mold claims altogether. Many homeowners faced with mold problems have received substantial amounts from their homeowner s insurance company. It is not just insurance companies that are forced to pay for mold-caused damages. Tenants in a 2001 Delaware case received more than $1 million in damages from their landlord and apartment complex manager after a leaky shower caused extensive mold damage to their unit; a state statute required landlords to maintain apartments in a reasonably safe and sanitary condition. New Haverford Part. v. Stroot. Contractors and architects are targets of mold lawsuits as well. A Florida county sued a construction manager, numerous sureties, an architect, and concrete and masonry contractors. The county alleged that the defendants had breached their construction management agreement with the county and that the breach resulted in window and exterior wall leaks in a new courthouse and that those leaks lead to significant mold-related damage. The final verdict was over $14 million. The crux of the county s claim against the construction manager was that the construction manager had failed to properly supervise the construction of the building. This failure to supervise ultimately resulted in the poor workmanship that caused the mold problems. On appeal, the Continued on page 2

2 2 Continued from page 1 construction manager argued that the county had failed to show that the mold had caused any health problems. The court dismissed this argument because the county was forced to evacuate the building to complete the necessary remediation. In a 1999 case in Maine, a building owner filed suit against the general contractor, the architect, and the subcontractors who supplied fireproofing materials for the building. Claiming that mold had severely damaged the building, the owner asserted claims for breach of contract, negligence, breach of warranty, and strict liability. The owner sought as damages only the cost to remove the mold. The defendants argued that the economic loss doctrine prevented the plaintiff from recovering on its tort claims. The court concluded that under Maine law the economic loss doctrine prevented recovery in tort if a plaintiff could not claim personal injury or damage to other property. The owner had alleged only damage to the building, not to other property. The plaintiff argued that an exception known as the contamination exception which had been adopted in other jurisdictions in asbestos and formaldehyde cases allowed recovery in tort. The court refused to extend this exception to mold claims and dismissed the plaintiff s strict liability and negligence claims. L.L. Bean Inc. v. United States Mineral Products Co. In Pennsylvania, a Beaver county trial judge recently denied a motion for summary judgment in a claim involving mold damage. Relying on prior Pennsylvania case law, the judge concluded that a homeowners insurance policy might provide coverage for mold claims if the cause of the mold is covered under the policy. The policy at issue stated that losses from mold were not covered, but that damages from water were covered. The plaintiffs argued that a leaking roof allowed the infiltration of water and that the water caused the mold. The judge concluded that there was an ambiguity in the policy and ruled that summary judgment was improper and that the cause of the mold was a factual issue. This case is significant because it appears to be the first occasion a Pennsylvania court has invoked the efficient proximate cause rule in a mold case. Under this rule, a loss is covered if it is caused by a risk covered under the policy, even if other excluded perils contributed to the overall damage. Tatalovich v. Pennsylvania Nat. Mut. Cas. Ins. Co. In another Pennsylvania case, the EEOC concluded that a school district violated the ADA by continually exposing a teacher with a respiratory condition to mold. Blum v. Council Rock School Dist. Proving a mold claim for personal injury at times has been difficult because the relationship between mold and physical illness is a hotly contested issue. Plaintiffs claim that mold causes allergy problems, respiratory problems, cancer, and brain damage. Many courts throughout the country have, in the past, dismissed personal injury claims by concluding that there is not enough scientific support for an expert to provide medical testimony on the issue of causation. However, in view of the numerous cases that are currently pending, the scientific studies are probably now sufficient for a court to accept a link between mold and various health problems and the Environmental Protection Agency has published information concerning the link between mold and health problems. The size of verdicts in mold cases and the complexity of the issues involved in this type of case make it imperative for contractors and design professionals to understand the risks they are taking on when working on a construction project. It is clear that plaintiffs filing mold claims take a shotgun approach and sue anyone that has any connection to the problem, including landlords, property managers, general contractors, architects, suppliers, property owners, neighbors, and tenants. For more information on recent cases and court decisions on mold related claims, contact John Lucas at or jl@muslaw.com. Insurance Coverage While insurers and the construction industry have collaborated in defending mold claims, their respective interests often diverge quickly when a contractor seeks coverage from his insurer. In states where mold litigation is just gaining a foothold, such as Pennsylvania, insurers have preemptively moved to limit their exposure. For example,

3 3 homeowners for the first time have seen policies containing specific mold exclusions or sublimits of coverage for losses due to mold. Likewise, the construction industry is now faced with accepting specific mold exclusions or minimal sublimits of coverage in Commercial and General Liability ( CGL ) policies. Third Party Claims Because the presence of mold often releases spores or mycotoxins into the surrounding environment, claims for related damages generally impact the applicability of the absolute pollution exclusion contained in most CGL policies. Some mold claims are limited to bodily injury. However, the requirement of remediating the mold problem and working to prevent future excess moisture problems often creates companion property damage claims. Recent CGL policies specifically exclude mold and/or fungus damages, leaving the insured scant hope for coverage in defending a mold claim. However, most of the older policies do not. Because coverage under third party policies is usually triggered during the policy periods of the subject occurrence, the issues concerning mold coverage under CGL policies will continue to be litigated. The standard CGL policy provides coverage for all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage subject to a number of exclusions. Most insurers seeking to deny coverage for a mold claim rely upon the absolute pollution exclusion. The customary exclusion provides that coverage does not apply to bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants at or from premises you own, rent or occupy. Since 1986, CGL policies have broadly defined the term pollutant to include chemicals, irritants, and contaminants, etc., that are released or discharged into the environment. Therefore, the two primary issues are: (1) whether mold falls within the policy definition of a pollutant, and (2) whether mycotoxins are released, so as to fall within the scope of the exclusion. Few cases nationwide have been litigated on the issue of whether the pollution exclusion in a CGL policy bars coverage for a mold claim. Pennsylvania courts have yet to address the issue. In the cases that have been litigated, the courts have struggled to fit mold into traditional pollution definitions. The results have been widely divergent and the authoritative case law is sparse. Some courts have refused to classify mold, fungi or other organisms as pollutants under standard pollution exclusions, because such non-traditional pollutants are commonly present in the environment and therefore do not fit within traditional definitions. In the Florida case of Stillman v. Charter Oak Fire Insurance Company, molds, fungi and yeasts were released into the air in an office building, and former employees sued the owner of the building alleging that the negligent design of the HVAC system prevented recirculation of stale air. As a result, contaminants were released into the workplace. The CGL insurer for the building owner denied coverage on the basis of the pollution exclusion. However, the court declared the policy ambiguous because of the limited definition of pollutant and its belief that the definition in the policy did not include substances that are commonly present in the environment, including mold and fungi. The court ultimately required the insurer to provide coverage. Once a court decides that mold is a pollutant under the policy, it still faces the challenge of deciding if the mold was released for purposes of whether to apply the absolute pollution exclusion. Courts have reached very different results in this regard. In Lexington Insurance Company v. Unity/ Waterford-Fair Oaks, LTD, the insured sought coverage for a mold claim in an apartment complex. In this case, the pollution exclusion specifically referenced fungi. The insured did not challenge the validity of the pollution exclusion, but rather argued that the exclusion did not apply because the mold in the apartments was not released, discharged or dispersed. The Texas court disagreed with the insured and held that the documented transmission of elevated levels of mold spores inside the apartments did constitute a release or dispersal of pollutants within the meaning of the absolute pollution exclusion. However, in Leverence v. USF&G, a Wisconsin court held that no contaminants were released based on the fact that the

4 4 cause of the property damage was exposure to water vapor trapped in the walls, which in turn caused the growth of mold, mildew and fungus. The court held that no contaminant was released, but rather formed over time as a result of environmental conditions. Pollution exclusions have a lesser effect on property damage claims. Generally these types of claims allege that the source of the moisture giving rise to the mold problem include faulty HVAC, mechanical systems and any other defects that result in wet and damp building materials which in turn serve as a breeding ground for mold. Water damage to a building, for example, is generally a covered claim under a CGL policy. Repairs or remediation efforts to cure the moisture problem generally eliminate the mold problem as well. Therefore, the pollution exclusion would not apply because the damage was caused by the release of water, which is not generally found to be a pollutant. First Party Claims Courts have been equally frustrated in deciding claims for coverage due to mold damage under homeowners policies. A number of courts, including one in Pennsylvania, have used ensuing loss provisions in insurance policies and the efficient proximate cause rule to find coverage for mold damage despite the existence of specific mold exclusions. In a typical homeowner policy, coverage for loss from continuous seepage or latent defects is typically excluded along with normal wear and tear deterioration. The typical policy also contains an ensuing loss provision that generally appears similar to the following: Under items 1 and 2, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered. To understand its application, consider the following scenario. A water pipe in a concrete slab home ruptures and leaking water causes damage to the floor beams and joists. A defective copper pipe or the improper installation of the pipe caused the leak. The exclusion for latent defects in the policy precludes the cost of replacing the pipe. However, the cost of tearing up and replacing the walls and floor would be covered, because water damage caused by the sudden bursting of the pipe is covered under the policy. Therefore, the ensuing loss from water damage would include the cost of tearing up and replacing the walls and floors. In this instance, mold damage ensuing from the covered loss, water damage, would also be covered. The efficient proximate cause rule works much the same way. This rule provides that a loss is covered under the insurance policy when the loss is caused by a covered peril, even though other excluded perils contributed to the loss. Conclusion Considering the potential impact of mold claims on the insurance industry and the liability exposure to construction companies, mold litigation will continue to be very contentious and extremely complicated. Therefore, any potential claim or lawsuit will have to be given careful consideration and creative thought. As more and more cases are filed and tried in Pennsylvania, certain of the issues discussed in this article may become clearer. Until then, it is incumbent upon all parties to be extremely careful when dealing with potential mold claims. For more information on insurance coverage and issues relating to mold, contact Douglas M. Hottle at or dmh@muslaw.com. Legislation And Government Regulation Reacting to the growing publicity over mold and the recent avalanche of related lawsuits, at least 19 states have introduced legislation dealing with mold assessment and remediation. In general, much of the legislation focuses on studying the effects of mold on the population, developing some indoor air quality (IAQ) guidelines, requiring state agencies to provide information on monitoring mold, providing educational material to the public or licensing and regulation of mold remediation professionals. During the past year some 60 pieces of Continued on page 5

5 5 Continued from page 4 IAQ related legislation were considered by 27 state legislatures. Congress is also considering federal mold legislation. Representative John Conyers, Jr. (D. Mich.) introduced legislation in June 2002 entitled the United States Toxic Mold Safety Act of 2002 (or the Melena Bill, after a young constituent whose asthma attacks were reportedly triggered by mold in her home). If passed, the Melena Bill would, among other things, Require the Environmental Protection Agency (EPA) and the Department of Housing and Urban Development to adopt the guidelines for mold inspections, testing and remediation; Create a national toxic mold program run by the Federal Emergency Management Agency; Require mandatory inspections of buildings covered by federally issued or insured mortgages; Require annual inspections of rental property; Require disclosure of mold hazards before the sale or lease of residences; and Mandate various changes in construction methods. Although another bill is expected to be introduced in the United States Congress that would require the EPA to create guidelines establishing what levels of toxic mold are acceptable, and what levels are dangerous, currently there are no government or industry standards that specify allowable or acceptable levels of indoor airborne fungi. The Centers for Disease Control (CDC), EPA, OSHA and individual state environmental and health agencies nationwide are aware of the concern and potential health issues driven by mold, but have not developed rules, such as those found in other laws, like the Safe Drinking Water Act, to specify Threshold Limit Values ( TLVs ) for indoor air concentrations of mold and mold spores. The EPA reportedly is in the process of developing remediation guidelines for residential housing, with the focus being on how to rather than information for those who will engage a remediation company to do the work. In March 2001, the EPA did issue a guidance document for mold remediation projects that provides some general guidelines for identifying and responding to an indoor mold problem. The EPA s protocol for schools and commercial buildings provides some standard for remediation, describing steps to take depending upon the type of and amount of mold identified. California became the first state to adopt legislation regarding toxic mold when it enacted the Toxic Mold Protection Act of 2001 in October This Act addresses issues of disclosure, remediation, exposure levels and standardization for experts. The first phase of the law, a task force to be established to study mold effects and exposure levels, has remained unfunded. Both the California Act and the more far-reaching Melena Bill mandate disclosure of the presence of mold when selling residential or commercial property. Similar bills are also pending in several other states. Another bill is also pending before the legislature in California (SB 1763) which would require insurance companies to specifically cover mold in all property or liability policies issued, amended or renewed after January 1, 2003, unless the insurance policy excludes coverage for mold in clear, explicit and understandable terms. In seven states Illinois, Maryland, Massachusetts, Oklahoma, Pennsylvania, Tennessee and Washington current and pending legislation focuses on the formation of task forces to study the health effects of mold and assess the need for standards for disclosure, and remediation. State legislatures across the country seem to be split on the need for legislation. Many proposed bills relating to mold have failed to pass both houses and therefore were not enacted. The increasing awareness of mold growth and resulting indoor air quality issues has spawned an industry specializing in mold testing and remediation of commercial and residential buildings. Only recently, have legislatures in Arizona, California, Louisiana, Nevada and New Jersey addressed the regulation or licensing of mold remediation professionals. Pennsylvania has not yet enacted any laws on the licensing or qualifications of companies for mold Continued on back page

6 1300 Oliver Building Pittsburgh, PA (412) Fax (412) PRSRT STD U.S. POSTAGE PAID PERMIT NO PITTSBURGH, PA One source for all your legal needs: Business Transactions & Planning Real Estate & Construction Bankruptcy & Commercial Law Employment Law & Employee Benefits International Law & Immigration Continued from page 5 remediation, and companies with only a background in asbestos or other remediation have moved into this new practice area. Considering the amount of attention and public concern generated by significant mold related lawsuits and verdicts, the lack of legislation enacted regarding the regulation of mold is surprising. Undoubtedly, state and federal legislatures, as well as the EPA, will continue to address this issue throughout For a more complete synopsis of legislation and government action on toxic mold issues throughout the US, contact James R. Mall, Vice-Chair of Meyer, Unkovic and Scott s Construction Law Group at or jrm@muslaw.com. Meritas member firms practice independently and are not in a relationship for the joint practice of law. NAME TELEPHONE Richard G. Kotarba (Chair) rgk@muslaw.com James R. Mall (Vice-Chair) jrm@muslaw.com Kevin C. Hansen kch@muslaw.com Ronald L. Hicks rlh@muslaw.com Douglas M. Hottle dmh@muslaw.com Joseph E. Linehan jel@muslaw.com Joshua R. Lorenz jrl@muslaw.com John Lucas jl@muslaw.com Chad I. Michaelson cim@muslaw.com Julian Neiser jen@muslaw.com W. Grant Scott wgs@muslaw.com Michael Yablonski my@muslaw.com Tax & Estate Planning Litigation Construction Law Briefs is a publication of Meyer, Unkovic & Scott LLP and is a general report on recent developments in Construction Law for the information of our clients and friends. Space does not permit comprehensive treatment of all legal issues and, therefore, the contents are not and should not be considered as legal advice. Meyer, Unkovic & Scott LLP, 2004 Articles appearing in Construction Law Briefs may not be reproduced without the permission of the author and Meyer, Unkovic & Scott, LLP.