Attak of th Black Mold

Unlike the fuzzy blue/green stuff in Fleming’s London laboratory, which triggered further research and the development in the 1940s of the life-saving antibiotic penicillin, the mold most talked about today may prove to be anything but a shot in the arm for some property and casualty insurers.

Currently, the industry Petri dish appears to be Texas, where everything is big – including mold claims. In early June, a jury in a state court in Austin awarded Melinda Ballard and her family US$32.1 million in a case involving allegedly extensive mold damage in their Dripping Springs, Texas, house. The jury ruled that Farmers Insurance Group had failed to properly address Ballard’s original water-damage and mold claim and committed fraud in its handling of her file.

The mold problem has become so prevalent, that at least two homeowners’ carriers in Texas have issued a moratorium on new business. Progressive Insurance Co. said August 1 that its moratorium was prompted by the “emerging exposure” of insurers to costly black mold claims. The announcement came a few days after Farmers announced its intention to quit selling full-coverage homeowners policies starting August 15 because of increasing losses from water damage to homes – including mold contamination. Excluding the Ballard award, Farmers – with 7% of the U.S. homeowners’ insurance market – estimates that mold claims will cost the company about US$85 million this year alone. State Farm has said that it has also seen a significant rise in the number of claims involving mold – 1,700 in 2001, with 900 in the Houston area alone.

Mold claims have become so predominant in some places (like Texas) that the hiring of microbiologists by adjusting companies has become not only commonplace, but a necessity.

The nature of the problem

Increasingly, property owners are discovering mold under sinks, behind wallpaper, under floorboards, between walls – virtually anyplace water can collect. It can grow from a sudden and accidental release of moisture, or may arise as a result of slow and steady leakage lasting days, months or even years.

By many accounts, mold problems have become more prevalent partly because of increased use of cheaper building materials like plasterboard and plywood, which are more prone to growing mold when wet. According to Harold Hopf, assistant vice president and deputy head of claims for Swiss Re Canada in “Sick Building Syndrome: Real or phantom risk?” (CU, January 1998): “Targets for SBS [including mold] litigation, particularly in the U.S., have included building owners, property management companies, employers, heating and air conditioning maintenance firms, architects, engineers and product manufacturers. The last category may worry insurers the most because the list of products that could come under fire is almost endless…”

Coverage issues

Claims experts say the costs industrywide could rise into the billions, with perhaps the biggest chunk coming from health claims (i.e. if the respiratory problems, rashes and headaches that some maintain are mold-related are scientifically determined to be so. This is not currently the case).

Another substantial chunk may be triggered by all perils property policies, both commercial and personal. The technical details of these claims are complex enough to be the subject of an article unto itself. But, suffice to say that to limit their exposures, U.S. insurers already are trying to more explicitly exclude mold as a “covered loss” under normal homeowners’ and, possibly, commercial property policies. It is also important to note that there are instances where liability policies, particularly commercial general liability (CGL) covers, may be triggered.

According to a paper from the Independent Insurance Agents of America (IIAA) entitled “The Insurance Implications of Toxic Mold Claims”, (July 2001) “…the current ISO CGL policy provides broad coverage for liability, but two sets of exclusions could be applicable to mold claims. The first is the pollution exclusion (the only exclusion that appears remotely applicable to bodily injury claims) and the second is the series of property damage exclusions.” The IIAA states that two main questions arise when discussing whether a CGL cover can be triggered in the event of a mold claim. “First, is mold a “pollutant”? Second, in these claims has there been ‘discharge, dispersal, seepage, migration, release or escape’?” It is estimated that as much as 25% of the earth’s entire biomass consists of molds and other fungi, maintains the IIAA. “In other words, molds are naturally occurring organisms, not man-made substances. At issue is whether or not the intent of the pollution exclusion, or the literal reading of the wording to a reasonable person, is to exclude coverage for a naturally occurring substance such as mold.”

The IIAA says the courts are divided in answering this question. “Whether or not the pollution exclusion applies,” says the IIAA, “there are several other property damage exclusions that could certainly preclude coverage for claims of legal liability, regardless of the cause of the damage that creates that liability”. The two, says the IIAA, are the “damage to property” exclusion, and the “damage to your work” exclusion.

According to the IIAA paper, at least one carrier has filed an endorsement for its CGL and umbrella programs that would exclude coverage for all damages (BI, PD, PI, & AI), “…caused directly or indirectly, in whole or in part” by fungi (including mold, mushrooms, or mildew), “regardless of any other cause, event, material, product and/or building component that contributed concurrently or in any sequence to that injury or damage”. The IIAA says the industry should expect to see many more carriers filing, or attempting to file, such exclusionary endorsements.

Here at home

Unlike the situation in Texas and other states, there has not been much public discussion in Canada about mold affecting private residences or commercial buildings (this is not to say there have not been cases). Instead, most discussions, concerns and media reports here seem to concentrate almost solely on mold in public buildings: schools, hospitals, court houses and the like. For instance:

July 11, 2001: The Toronto Star reports that the Ontario Science Centre is among 58 Ontario government buildings that have been identified as having mold problems;

June 28, 2001: A courthouse in Newmarket, Ontario is reopened almost a year after it was closed due to toxic mold;

February 22, 2001: Spring trials in a mold-infested Etobicoke courthouse are postponed until government officials find temporary alternate quarters;

January 22, 2001: It was announced that portables at the Milliken Mills High School in Markham, Ontario would be closed permanently because of mold;

February 4, 2000: The Canadian Press reports that parts of a Dauphin, Manitoba hospital and nearby personal care home have been closed due to mold found in the hospital’s chemotherapy waiting area, birthing room, boiler room and crawl spaces;

June 3, 2000: The Globe and Mail reports that Ontario Ministry of Transportation employees have been moved out of some of their offices in Downsview because of mold in the building;

November 1, 2000: The Toronto Star reports that about 250 students of Saint Nicholas of Bari elementary school will be moved to two nearby schools because of the discovery of high levels of mold in portable classrooms;

March 24, 1999: The Toronto Star reports that school officials in Peel Region in Ontario are scrambling to clean up their portables by fall or find new places to put thousands of students after the acting medical officer of health instructed both the Peel public board and Dufferin-Peel Catholic board March 23 to inspect their portables for hazardous mold by September.

At least two of the cases reported above have triggered class action lawsuits. Dufferin-Peel’s Catholic school board was hit with a $2 billion class action lawsuit July 2, 1999 accusing it of negligence and breaking the Education Act in exposing children to toxic mold. And, o
n March 6, 2001, an illness-plagued special court constable launched a $50 million class action lawsuit on behalf of court workers, lawyers, judges and others who may have been exposed to toxic molds in the Newmarket courthouse. As many as 300 people may join the class.

Learn ahead of experience

As with most looming threat scenarios, the mold problem in this country is nowhere near where it is in the U.S. But we know that mold can and does grow in structures north of the border, the sampling of newspaper clippings above establishes that fact. With this in mind, underwriters would probably do well to become familiar with what’s happening in such places as Texas, get familiar with the wonderful world of mold (as there are over 100 varieties), and the wordings of the policies they bind – whether personal lines, commercial lines, or both.

We may never get to the point where Canadian carriers have to stop writing new business because of excessive mold claims. But then again, we very well may, and the knowledge built up starting now will go a long way to ensure that those lessons learned by others in the world, usually the hard way, become meaningful in Canada. In this day and age we need not experience such events firsthand in order to extract value from them.

Stachybotrys chartarum (also known by its synonym Stachybotrys atra) is a greenish-black mold. It can grow on material with a high cellulose and low nitrogen content, such as fiberboard, gypsum board, paper, dust, and lint. Growth occurs when there is moisture from water damage, excessive humidity, water leaks, condensation, water infiltration, or flooding. Constant moisture is required for its growth. It is not necessary, however, to determine what type of mold you may have. All molds should be treated the same with respect to potential health risks and removal (source: Centers for Disease Control and Prevention).