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How to Maximize Insurance Coverage for Mold Damage
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March 2, 2009
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(This article first appeared in the summer 2005 edition of Risk, Howrey’s insurance coverage newsletter.)
By Ernest Summers
Howrey LLP
Molds are a type of fungi that can cause millions of dollars in property damage and serious health problems, sometimes before the mold is even discovered. Some molds have been linked to triggering asthma attacks.
Molds grow from spores that can be found virtually anywhere. All the spores need is moisture and a food source, and they can begin to grow. Much has been written concerning the legal problems stemming from mold, mildew and other fungi. Some forms of mold are toxic, but most are not. Without question, there has been a proliferation of litigation over mold, and there is considerable debate among legal and medical experts over the consequences of mold growth.
Insurance companies are becoming increasingly concerned about liability for mold and have attempted to limit their exposure in a variety of ways, including the creation of mold exclusions, the application of previously existing pollution exclusions and other exclusions, the creation of sub-limits of liability for mold claims, and other provisions. To date, the legislative, regulatory and judicial responses have been mixed and still are evolving.
Those with mold problems face the question: Is there insurance coverage for mold damage? There is no universal answer. The fact is that some mold claims will be covered and others will not, depending on a variety of interrelated factual and legal issues. Policyholders faced with a mold problem should expect that their insurers will assert countless arguments in an attempt to defeat coverage. These arguments may be unfounded, though. A policyholder must be both diligent and persistent in the claims process or risk losing coverage that otherwise would be available.
A variety of insurance policies may provide coverage for mold claims, but obtaining coverage is dependent on the nature of the damage, its causes, and the injured parties or premises. A policyholder should consider whether the mold problem gives rise to a claim under its own first party property coverage, a contractor’s insurance program, general liability coverage, worker’s compensation, professional liability insurance or other insurance.
Potential Insurance Claims to Investigate
First Party Claims: When mold damages property owned by the policyholder or injures the policyholder, there are a variety of first party policies that can provide coverage, including homeowner’s, renter’s, commercial property and builder’s risk. The language of the policies is not uniform; it can vary from state to state. But, most modern policies contain some form of mold and/or pollution exclusion that the insurer will claim precludes coverage. The exclusion may or may not bar coverage for a given mold problem, and a policyholder must fully understand the facts, the policies and the law before concluding whether or not there is coverage.
The insuring agreements for such policies typically provide that the insurer will pay for direct physical loss from covered perils or for damage to property arising from a covered peril. The policies can be all-risk policies, or they can be specified peril policies. Whether mold damage is covered can seem like a chicken-and-egg proposition. The insurers are likely to argue that mold damage is not a covered peril and any consequences similarly are not covered. On the other hand, if the damage is caused by a covered peril (e.g., roof leaks, wind-driven rain or accidental discharge from a plumbing system) and mold is the consequence of the covered peril, the policyholder has a better argument for coverage.
Courts have been inconsistent in applying the insuring agreements and exclusions to mold claims. It would be a mistake to assume that a given policy does or does not cover mold without understanding the relevant case authorities. Three important concepts to consider are the “wear and tear” exclusions, the “ensuing loss” doctrine and “efficient proximate cause.” Some courts have enforced “wear and tear” exclusions to preclude coverage for mold naturally occurring over time as a result of high humidity and other general climatic conditions. In other words, there is no single covered event that can be said to be the cause of the mold. This is a very fact-specific analysis. If a mold claim is made under a policy with a “wear and tear” exclusion, the policyholder should be prepared to offer proof of a covered peril that resulted in the mold.
Some courts have found coverage for mold damage when the damage is an ensuing loss of a covered peril, even where there is a specific mold exclusion in the policy. Other courts relied on the doctrine of efficient proximate cause to find coverage for mold despite mold exclusions. In such cases, whether there is coverage for mold will depend on a factual showing that the efficient proximate cause of the mold is a covered peril rather than an excluded peril such as wear and tear.
Third Party Liability Claims: Mold also can result in liability to third parties and implicate liability policies. As is the case with first party coverage, the specific language of liability policies varies, and it is necessary to understand the specific terms of the applicable policies. The insuring agreements of liability policies typically provide that the insurance company will pay “all sums the insured becomes legally obligated to pay as damages” or that it will reimburse the ultimate net loss sustained by the policyholder. Like first party coverage, third party liability coverage can contain numerous exclusions, including mold exclusions, pollution exclusions and owned-property exclusions.
The law regarding the applicability and enforceability of mold exclusions in liability policies is unclear at this time. In policies that do not contain specific mold exclusions, insurers have asserted that pollution exclusions bar coverage, relying by analogy on indoor air quality cases that involved lead paint, carbon monoxide and other contaminants. There are countless cases both in favor of coverage and restricting coverage for policyholders and insurers to cite by analogy to pollution cases. For now, the law is unsettled, and policyholders faced with mold issues should take steps to maximize the potential for insurance coverage for their claims. That is why it is important for a policyholder to get a prompt evaluation of both the nature of the mold problem and the insurance policies that may provide coverage.
Five Critical Steps to Maximize Insurance Coverage for Mold
| 1. | Understand the facts and the nature of the mold damage/liability. Take mold damage seriously and hire an expert, if necessary, to determine the cause of the mold and whether it occurred gradually over long periods of time.
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| 2. | Identify and collect ALL of your insurance policies. Multiple policies may be implicated, and they may contain substantially different provisions.
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| 3. | Review the policy provisions carefully. Read your insuring agreements and exclusions carefully. Understand your deadlines for submitting claims and proofs of loss and for filing suit. Understand your policies’ suit limitations provisions, which can involve deadlines materially shorter than those in statutes of limitations, and understand whether appraisal, arbitration or other alternative dispute resolution is required before litigation.
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| 4. | Give written notice to all potentially implicated insurers as soon as you are aware of a potential claim. Err on the side of giving notice, even if a policy arguably does not apply. Many valid insurance claims have been lost because there was late or no notice of the claims.
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| 5. | Keep a record of all insurance notice correspondence and claims-handling communications. Document all oral conversations with your insurer. Keep records of activities undertaken by your insurer, including dates, the names of insurer representatives involved, requests for follow-up information and so on. Be diligent and persistent. If you end up in litigation, you will want a clear record of the insurer’s handling of your claim. Such a record may lead to a bad faith claim against the insurer.
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For more information about the issues covered in this report, please contact Ernest Summers in our Chicago office at 312-595-1285 or at SummersE@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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