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Why The Fuss Over Fungus?

By Linda Striefsky and Heidi Goldstein, Thompson Hine LLP

Mold has moved from the kitchen to the courtroom. Recent multi-million dollar toxic mold settlements and lavish media attention are no longer limited to residential legal cases. Commercial market exposure is increasing rapidly, and professionals in the insurance, real estate, lending, and construction industries are taking the dramatic rise in toxic mold complaints and resulting damage awards seriously.

The sophistication level of these mold suits, brought to the courtroom by a host of plaintiffs, requires an equally rigorous response from defense attorneys and their clients. Potential business targets of sick building litigation need help protecting themselves from becoming victims of a lawsuit.

What Is The Fuzzy Stuff?

One reason mold is such a hot topic in the courtroom is because no consensus exists in the scientific community regarding the risks presented by exposure to mold. Though most types of mold are innocuous, the mold debate centers around if, when, and to whom mold exposure becomes toxic.

"Toxic mold" actually is a term coined by the media; there is no scientific definition for it. However, there are thousands of species of fungus found everywhere. Mold requires only moisture, oxygen, and food-like the cellulose in drywall-to grow indoors. Several types of indoor molds have received increased public scrutiny. These have become known as "toxic molds," because they have the potential to produce spores that contain potent substances called mycotoxins. It is believed that mycotoxins can become dangerous when released into the air.

The most notorious toxic mold is stachybotrys chartarum, the greenish black fungus at the center of most litigation cases. Allergenic molds, such as penicillium and aspergillius, may be found in buildings as well.

The "nontoxic" species-nearly all other mold species-do not receive much attention, because they have not been tied to health-related impacts.

While there is little debate that certain types of mold can aggravate specific existing conditions, their ability to make people sick is quite literally the million dollar question. To date, there is no confirmed scientific link between mold and related health effects.

The Roots Of Mold Litigation

In late 1997, the Centers for Disease Control & Prevention (CDC&P) published a report that investigated whether mold was responsible for bleeding lungs found in eight infants being cared for in Cleveland. From this study, epidemiologist Ruth Etzel concluded that sick children were more likely to live in homes with stachybotrys than were children from a control group.1 Thus the premise for the "toxic mold" case was put in place. Medical journals gave extensive coverage to the study, and lawyers saw this as an opportunity for a new type of law practice with staggering settlements.

A later report issued by the CDC&P in early 2000 2, however, recanted its findings from the Cleveland infants study. The latter report stated that the former study was flawed for a variety of reasons, including unorthodox data collection techniques.

Because of these flaws, the Center's second report concluded there is no proof that stachybotrys causes health conditions such as bleeding lungs or memory loss, as originally reported. It did concede that mold can cause allergic reactions such as teary eyes and watery noses. Further, the Center concluded that more research would be necessary. Even though the Center's latest report diluted the findings in the original study, the allegations attempting to connect mold and sickness have remained.

The debate continues regarding which types of health issues are caused by mycotoxins. Usually, people affected by fungal diseases have other debilitations that are worsened by exposure, or they have weakened immune systems.

Sorting through the maze of ambiguities is the heart of the mold litigation battle. In time, there may be enough research and knowledge to identify actual mold related illnesses-if any exist-and determine appropriate settlements. For now, eliminating mold before it causes problems is the only sure way to avoid litigation.

Do Policies Address Infestation?

Although many commercial policies are written on customized forms, the Insurance Services Office (ISO) publishes a document with model policies offered by individual insurance companies. Prior to the recent changes, most of these policies have had either a general pollution exclusion or an absolute pollution exclusion.

In the past, certain exclusion clauses were used to bar coverage for industrial pollution, but courts have started to address the issue of whether insurance companies can hide behind such provisions to protect themselves from mold related claims.

Four questions seem to determine whether mold related issues will be covered by such exclusions.

1. Is mold an irritant, contaminant, or pollutant?

Based on the definition above, the jury is still out. The current trend indicates that as mold issues become more widely known, it is more likely that courts will find mold covered as a "pollutant," and insurance companies may expressly define "pollutant" to include mold, thereby excluding coverage for mold related claims.

2. Has the mold been "released, dispersed, or discharged" into the environment?

Historically, this clause was applicable to chemicals that produced fumes, and thus, the issue was whether mycotoxins produced by mold satisfy the definition for fumes. Courts have to determine whether mold contaminants are released, or rather are formed over time because of water and moisture affecting environmental conditions.

3. Is the environment (i.e. indoor air contamination) covered by the exclusion?

To date, courts have required a discharge into the outside environment to trigger a general pollution exclusion and have held that an absolute pollution exclusion applies to indoor pollution-meaning there is no coverage.

4. Was the mold the cause of the alleged property damage?

It can be argued that alleged property damage is not from the mold itself, but the cause of the mold, which is from moisture or water. Therefore, the pollution exclusion may not apply.

There is no simple answer to any of these questions, and the result often depends on the jurisdiction addressing the issue. This uncertainty is compounded by the fact that only a few courts have issued opinions regarding these issues directly in the context of mold. Instead, parties are left to rely on precedents involving other indoor air pollutants, such as asbestos and carbon dioxide. Overall, the courts seem to be broadening the application of the exclusion to include mold as long as it is consistent with the reasonable expectations of the insured. As mold becomes more widely associated with common indoor air pollutants, it is more likely that courts will find it covered by these exclusionary clauses.

Specific mold exclusions are found in traditional commercial policies. Such exclusions often provide no insurance against "loss caused by smog, rust, other corrosion, mold, or wet or dry rot." Generally, courts have found that if the mold damage occurs over time (i.e. due to climatic conditions or long term wear and tear losses), rather than from a covered and identifiable event, such as a burst pipe, the exclusion bars coverage.6 Mold Exclusions Today. The insurance industry is not relying on outdated policy language to protect it from rising numbers of mold claims. Nor is it waiting and hoping that favorable case law develops.

Insurers are modifying the exclusionary jargon used in commercial policies for property and liability coverage to exclude mold issues more clearly. While the approaches taken by various insurance companies of course do vary, here are some examples from recently revised exclusions:

• -Reference to fungus and to wet or dry rot broadened to refer specifically to mycotoxins and spores;
• -Specific reference to contact (whether actual, threatened, or alleged) with fungus or bacteria;
• -Sometimes exclusion applies even if an otherwise insured cause (like fire) occurred first-sometimes a policy continues to override exclusion if a fire precedes mold;
• -Exclusion broadened to cover abating, testing, monitoring, remediating, etc.;
• -Sometimes uses "but for" test relating to fungi;
• -Sometimes expressly disclaims any duty to investigate or to defend;
• -Sometimes cuts off coverage if water leaks continue over a period of time (i.e. 14 days); and
• -Sometimes policy covers the loss, but with a cap (i.e. $10,000).

Even if a policyholder negotiates for some mold protection, a mold related claim will not necessarily be covered. The claim still must meet all other requirements of the policy, including compliance with the applicable notification period.

Often, a policy that does not address the issue directly is more of a risk than one that definitely excludes mold. If a policy clearly excludes mold claims, at least then a party can evaluate the true risks associated with lack of coverage.

Lack Of Standards Fuels Controversy

The main reason behind the sudden acceleration of such claims is a lack of regulatory standards that address the problem specifically. No regulatory agency has formulated any regulatory standard addressing "safe" levels of mold, proper identification of mold, or methods of mold remediation.

The most helpful authority on a federal level is an Environmental Protection Agency (EPA) Guidance Document, "Mold Identification and Remediation in Schools and Commercial Buildings" (epa.gov/iaq/molds/index.html). This document primarily addresses mold remediation in schools and provides very basic principles or guidelines, but no binding mandates. In 1994, OSHA proposed rules for Indoor Air Quality (IAQ) (59 Fed. Reg. 15968) that covered various contaminants, including mold, but recently withdrew the proposal.

A handful of states have general IAQ guidelines dealing with mold, but these are just guidelines. While recent federal and state legislation and studies have been launched, the scientific research necessary to develop standards for mold regulation is likely to be years away. Facility professionals and contractors are left to rely on basic building codes that have no provisions regarding mold.

For The Plaintiff: Mold Is Gold

It is a mistake to think large verdicts and settlements are limited to the residential context. In fact, the commercial sector is where the next round of lawsuits is expected to erupt, and there is a backlog of these cases to support that expectation.

For example, a Court of Appeals upheld a $14 million judgment against a construction management company and the sureties that issued the performance bond in connection with the construction of a courthouse. The jury concluded that a construction defect caused mold to grow, which led to various sick building syndrome complaints [Centrex-Rooney Construction Co. v. Martin County, Florida, 706 So. 2d 20 (Fla. Ct. App. 1997)]. The verdict was larger than the original costs of construction.

As represented by this case, the commercial market is likely to see increasing exposure in office buildings, apartment complexes, hotels, nursing homes, and shopping centers-basically anywhere that mold can grow.

In an article entitled, "Coverage for Losses Uncertain: Mold Concerns Growing," and published in the May 28, 2001 issue of Business Insurance, Roberto Ceninceros writes, "Environmental remediation experts note there are cases in which they have been called upon to deal with commercial structures, including some in which they have had to gut several stories of high rise buildings to eliminate the spores."vii

How To Defend Against Mold Litigation

Against these odds, defense attorneys need to establish sophisticated tactics to protect their clients from the onslaught of mold litigation cases. Obvious first steps include immediately responding to complaints from building occupants and identifying and remediating moisture and mold problems. These are the best first steps in maintaining a building's quality reputation while guarding against litigation. However, if litigation should occur, the key to success is an attack on all aspects of causation, which requires defense attorneys to retain the right experts. These experts include:

• -Industrial Hygienists: A qualified industrial hygienist will conduct necessary sampling to identify the source of the mold or provide a reasonable basis to question an alleged source. The hygienist may also identify appropriate remediation procedures.
• -Mycologists: Mycologists, scientists who specialize in fungi and molds, can break alleged "cause and effect" links between mold and various ailments associated with sufficiently high concentrations of mold.
• -Construction Experts: Many mold cases are based on allegations that construction defects allowed water and moisture to seep into a building's interior, providing a breeding ground for mold. Construction experts can inspect and provide commentary relative to a building's design, construction, and soundness.
• -Toxicologist/Occupational Physicians: These medical experts can address the lack of any scientific evidence linking exposure to mold to alleged health effects.

The admissibility of expert opinions can be challenged, which creates a major issue in defense strategies, as it did in Daubert v. Merrel Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). According to this case, an expert may give an opinion only to a "reasonable degree of medical or scientific certainty."

Understanding mold issues in the design, construction, and maintenance of properties is essential to protect against mold-related claims. If mold problems occur, identify and remediate moisture problems immediately. Listen and respond to concerns and complaints raised by building tenants. Big verdicts are the result of bad faith claims. Thus, good will and a reasonable response are often the first defense against possible litigation.