Mold is an ubiquitous substance whose health hazards present indoor air quality challenges that have been gaining public attention in recent years. As clarity on the health effects of mold – both positive like penicillin and negative such as respiratory implications – has emerged, so too the propensity for claims of bodily injury and property damage. Indeed, at the beginning of this current millennium, predictions were that mold would emerge as the ‘next asbestos’. This prophecy, which has not materialized, was prompted by several notable property damage insurance claims that attracted media attention: one by Tonight Show sidekick Ed McMahon who agreed in 2003 to a settlement of $7.2 million for damages from alleged toxic mold that sickened his family and killed their dog; another involved a jury award of $32 million to a Texas couple for alleged mishandling of their mold claim.
These high-profile claims, a series of tort claims, and mounting uncertainty as to whether mold would be considered a pollutant within the scope of the absolute pollution exclusion in commercial general liability policies, prompted the insurance industry to introduce a variety of mold and fungi related exclusions into their forms. In this emerging coverage void, insureds and their advisors sought an alternative risk transfer solution to address this now seemingly uninsured exposure. So if, as the industry thought, mold was a pollutant, then certainly mold should find a home in the environmental site liability insurance marketplace.
Initially, insurers were justifiably skittish due to the media hype about mold claims. Adopting a cautionary approach, environmental underwriters began to conduct more particular analysis about the nature of a given structure’s building construction, specific materials and wall coverings. Underwriters also looked at a location’s history and source of water intrusions, not solely soil and groundwater beneath and around the property. The industry also looked at ways of more effectively managing and mitigating water intrusion events through development of mold mitigation plans and protocols. Soon, the environmental site liability industry was routinely adding mold to its list of trigger pollutants.
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Nevertheless mold claims are becoming a costly tormenter for environmental insurance carriers, especially in properties such as apartments, condos, and hotels, and present several unique challenges and considerations.
Claims Made and Reported Coverage
Mold coverage is typically offered on a claims-made-and-reported basis such that the claim, or discovery of the mold, must first happen during the policy period and be reported to the insurer in that same period. Property owners and managers of properties, especially residential and hotel properties, deal with a host of complaints involving water and mold, most of which are addressed as maintenance issues. These seemingly slight matters can mushroom into a lawsuit, which could become problematic if the initial complaint by the tenant or guest is not reported to the insurer during that policy year and is subsequently interpreted by the insurance company as the triggering claim under a succeeding policy when the lawsuit is filed. This presents a fundamental challenge on the claims made and reported requirement in the policy. Such circumstances may also implicate a known pollution exclusion, which is typically standard in environmental site liability policies.
When the mold is revealed by a tenant, often a property manager will want to take immediate steps to eliminate the problem. While laudable from the perspective of property stewardship, taking this action without notice to the carrier (pre-tender) and without consent (voluntary payments) can lead to a reduction or elimination of coverage.
Cleanup Costs versus Water Damage
Environmental site liability policies typically cover mold cleanup to the extent required by law or as recommended by a licensed and insurer-approved certified industrial hygienist (CIH). Usually, however, where there is mold, there is also water and water damage that needs to be addressed lest it develop into mold. The policies often only respond to actual mold conditions, not potential mold conditions. As an example, the policy will pay for the costs to handle and dispose of drywall that has mold on it, but not likely any drywall that is only wet or water stained or discolored. A CIH would recommend the removal of such material as well as addressing the source of the water. Unless, however, there is mold confirmed to be present, these non-directly-mold-related activities would not likely be covered under an environmental site liability policy.
In a similar vein, environmental site liability policies typically provide some restoration coverage for real or personal property not damaged by mold but damaged during the cleanup. So in the hypothetical situation above, the removal of the moldy wall in the course of the mold remediation would likely trigger an obligation to restore or replace such property. Restoration or replacement of the wet or water stained or discolored drywall, however, would not be covered. Policy wordings on this aspect can differ, but frequently in addition to requiring carrier prior approval, the restoration, repair or replacement is limited to the value of the property immediately before it was damaged during the cleanup. So, in other words, the value of the replacement could be limited to the value of a moldy wall.
Another challenge arises when the insured’s operations or rental activities are suspended due to water and mold. The environmental site liability policies typically define the interruption as the suspension of operations directly resulting from the cleanup of the pollution and prescribe the period of restoration as the time necessary to complete the cleanup. Establishing that the interruption is the direct result of the cleanup can prove elusive and then isolating the duration of the mold business interruption from the water business interruption can also prove problematic. Additionally, sometimes the mold is discovered in the course of a planned renovation – this offers another avenue of dispute – determining what was the duration of the planned suspension compared with the duration of the suspension from mold cleanup.
While environmental site liability insurance is typically written as primary coverage, often the mold extension is granted only in excess of other available coverage (such as, but not limited to, property coverage). This structure can add an additional level of complexity (and delay) as the insured must establish to the carrier that no other potential coverage could apply to the loss.
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Managing mold insurance claims can present unique challenges to owners and operators of real property, including disruption of tenancy, liability for bodily injury and property damage claims, costly cleanup, economic loss from a tenancy disruption and reputational damages. The first step is prompt notification of a claim or the discovery of mold to the carrier in accordance with the policy terms. Thereafter, clients can work with their broker in collaboration with the carrier so that the condition is remediated to the extent recommended by a CIH and that thorough documentation of the work and costs, including any business interruption expenses, are submitted to the carrier for consideration and prompt payment. Mold is not the next asbestos but offers unique challenges to those who advocate for, purchase, or sell coverage for mold conditions.
All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.