By John Larkin

Summary: This article—based on one that ran in the WQANewsFax in December 2002—discusses mold, insurance and how claims against water treatment dealers like you can cause serious financial and business hardship.


Mold has emerged as a significant health issue with serious implications for the insurance industry. As a participant in water softening, water filtration and bottled water markets, it’s only a matter of time before you or someone you know is affected by this.

Currently, insurance companies exclude coverage for pollution from their policies, i.e., mold. Many insurance policies state: “This insurance does not apply to bodily injury or property damage arising out of the actual, alleged or threatened discharge disposal, release or escape of pollutants at or from the premises owned, rented or occupied by the named insured. And the insurance does not apply to any loss, cost or expense arising out of governmental direction or request from the named insured to test, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.”

This is known as an absolute pollution exclusion.

Millions in losses
Mold claims cost money—a great deal of it. Recent examples illustrate this: $32 million dollar judgement in Texas against an insurance company for not properly adjusting a water damage claim; a $20 million dollar lawsuit by a well-known entertainer against his insurer, and another multi-million dollar lawsuit by a famed “whistleblower.” These are but a few of roughly 16,000 lawsuits on file today alleging mold damage to homes and businesses.

Homes are so well built these days they often can’t “breathe” or dry out when moisture is introduced. Once wet, certain building materials can become a haven for mold, if not dried out properly. Under the right conditions, certain kinds of spores called mycotoxins can be released into air and inhaled by residents. Depending on which “expert” you talk to, everything from minor allergic reactions to pulmonary hemorrhage and memory loss can occur.

Since mold releases spores into the internal environment, claims alleging damage and/or negligence for those who cause it are on the rise. Such claims are testing the insurance industry and court system with respect to the pollution exclusion’s applicability to bodily injury or property damage from mold.

Courts seem hesitant to apply the standard pollution exclusion—developed by the Insurance Services Office Inc. (see www.iso.com)—to such damage or injury largely on the theory mold may not constitute the type of “pollutant” to which the exclusion is directed. Nor is indoor contamination regarded as the type of environmental dispersal or release to which it traditionally applies.

Defining coverage
In the end, water damage to a property usually isn’t a result of pollution, so it’s not a release, discharge or dispersal of a pollutant. As such, the pollution exclusion in a general liability policy shouldn’t apply. Therefore, coverage for repairing the alleged building damage will come from your insurer. With the new exclusion for mold, though, you won’t have any coverage.

Still, the argument for applicability of the cleanup provision of the standard pollution clause should suffer from the same weakness as that for applying the general provision of the exclusion—repairs are made for the purpose of curing the moisture problem; that is, the actual property damage. Elimination of the alleged pollutant (mold), thus, is a collateral benefit.

Many mold claims are limited to bodily injury; however, clean-up of mold infestation and repairs necessary to accomplish this—as well as to prevent future excess moisture in the building—will likely generate a companion property damage claim. As to bodily injury, the pollution exclusion in the standard commercial general liability (CGL) policy issued to a contractor may affect coverage availability. On property damage issues, it’s likely it will have less effect.

Where to go from here
While the scientific community continues to discuss the true medical maladies from mold (see On Tap this issue), lawyers already are on the bandwagon. Should you or an employee improperly install water equipment or your equipment fail, you can be liable for a mold claim if the customer’s home isn’t properly cleared of water or accompanying moisture. This means if a customer suffers a loss because of your negligence, you may be held liable. Thus, dealers have to be extremely careful when installing equipment.

If your company causes a leak or water release in a client’s home or business, don’t tell your customer you’ll “take care of it.” First, make sure it’s your fault. Second, be very careful about fixing the problem. In the old days, you called a carpet care company to have them “air out” the area and clean it. This no longer suffices. I’m now working on a claim where one of our clients caused a leak. It hired a nationally known company to get the water out of its client’s carpeting. Unfortunately, the company didn’t get all the water out and resulting moisture turned to mold and a claim north of $100,000. While the carrier is subrogating against the carpet cleaner, the $100,000 claim is still on our client’s loss history. Until it’s removed, it may frighten off future insurance companies who might compete for the account.

If your company is responsible for a major loss, let the insurance company handle any and all repairs. If there’s a small leak and minor damage, let the homeowner pick a contractor (you may suggest they get bids) to make repairs. Why? While you may be the procuring cause of a loss, if their contractor fails to completely remove moisture (that turns to mold), it will be responsible for any mold claim. The days of “we’ll take care of it” may be over.

Won’t insurance cover mold?
Most, if not all, liability policies now contain an absolute pollution exclusion. But many policyholders still feel they don’t have a pollution exposure because they’re covered if they cause a leak or water damage. Unfortunately, this can create a false sense of security as broadness of the pollution exclusion makes it applicable to every single policyholder performing any installation of water softeners, water filtration or bottled water equipment. That means you!

As you’re keenly aware, insurance rates rose steadily in recent years because of the 9/11 terrorist attack losses and lack of profits in the insurance industry. Insurers are responding to mold issues and increased liability by limiting or “clarifying” what’s covered and what isn’t in their policies. Many states have approved endorsements to limit general liability, pollution liability, umbrella and products/completed operations forms. In fact, a number are allowing carriers to exclude mold altogether from their policies. Policies you think will respond in times of a loss may not.

What are my choices?
We’re working with several companies writing pollution policies to cover mold exposures. If your insurance company excludes coverage for such claims, we think it foolish to go without the pollution coverage. Depending on your size, policy premiums start at $3,500 and up a year. Also, deductibles for these policies begin at $5,000.

Conclusion
While mold litigation is still in its infancy, there are predictions mold-related claims may surpass asbestos-related ones. As a lawyer recently stated, “For science to prove something, it has to be 100 percent certain… in a civil lawsuit, it only has to be proved 51 percent.” Don’t be in that 51 percent.

About the author
John Larkin is president of the Pure Water Insurance Association, a provider of insurance services for Water Quality Association members. This article is intended for general discussion and shouldn’t be mistaken for legal advice. Please consult appropriate advisors for advice applicable to your individual circumstances. Larkin can be reached at (877) 987-7873.

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