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Out of the Closet Into the Board Room: Mold Is In Your Future



August 29, 2003

On June 12, 2003, I presented a seminar on toxic mold entitled “Is Toxic Mold the Next Asbestos” to the Tri-state Area Architects and Engineers as part of their continuing education requirements. This article highlights some of the topics covered in the seminar.

There are two aspects to damages from mold: property damage and personal injury. At present, the health related issues caused by mold may appear to be the most important in a legal case as it is the most difficult to prove. There is considerable debate among professionals as to the actual cause and effect of molds. Presently, there are no biomarkers created by mold as there are for other diseases. Further, there is debate over how to establish permissible exposure limits which have not been legally established yet. Nonetheless, the recent trend in the courts is to allow medical experts to testify on the medical evidence related to mold. In most of the cases, however, there has been overwhelming property damage caused by pervasive mold. The case which has received the most media attention is Ballard v. Fire Insurance Exchange, a case in Texas decided in 2001. The homeowners alleged a leaky pipe caused the floor to buckle. The family experienced mold. They sued the insurance company and obtained a $32 million dollar verdict. On appeal it was reduced to a $15 million dollar verdict.

Since that case, over 10,000 mold cases have been filed. Primarily, the suits are in the south (Florida, Texas, Mississippi), southwest (Arizona, Nevada, California), but some are in the north (Pennsylvania, New York and Illinois). Mold exists in the same conditions humans find desirable – between 40 degrees and 100 degrees Fahrenheit. They like moisture and something organic to eat. Mold can cause substantial damage to most interior and exterior surfaces in a short period. These surfaces include wallpaper, paint, drywall, ceiling tiles, wood, furnishings, textiles and paper goods. If left unchecked, the ultimate solution to repairing these materials is often replacement. Mold will continue to decay wood if it remains moist. This can lead to structural damage in wood supported structures.

Who are the parties being sued? Anyone who is involved with the design, construction, operation and maintenance or owns any facility in which mold appears. A review of the cases demonstrates that defendants include persons who own property or their agents, sellers of property, real estate agents, property managers, developers, public agencies (including federal, state and local), employers, contractors, subcontractors, architects, and engineers.

The causes of action include professional malpractice, breach of contract, tortious interference, fraud, legal or consumer fraud, strict liability in tort, breach of warranties, constructive eviction, nuisance, failure to disclose, defective design, construction defects, negligence, violations of the ADA, and intentional infliction of emotional harm. There are also insurance coverage suits. Indeed, many of the suits are against insurers.

Insurers have had general mold exclusion clauses in homeowner policies for years. These exclusions appear in clauses that can be interpreted to bar coverage for damages “naturally occurring over time.” If mold is the result of an accident, and the accident is covered and the mold is the resultant activity generated from the accident, the exclusion is likely inapplicable. For example, if a house deteriorated through wear and tear, lack of maintenance etc, then the mold exclusion would be applicable. If the house were flooded by a leaky pipe and mold propagated, then coverage should not be excluded.

Recently, insurers have done what they normally do when experiencing a surge in claims. They are moving to exclude them by adding better exclusions. In New Jersey in July 2002, the insurers put in a mold/fungus exclusion guideline for personal and commercial lines through ISO. They proposed a Property Damage $10,000 annual aggregate coverage for mold, fungi, wet or dry rot, but only if the mold loss results from a peril insured against. In other words, they acknowledge the covered loss, but cap the damage at $10,000. Many states have approved similar caps at $5,000. State Farm added a $5,000 mold limitation endorsement to its policies as of April 2003.

As the insurance policies dry up, so to speak, as sources of mold coverage, the plaintiffs’ bar will look more often toward other sources of coverage. The Architect and Engineer’s liability policy is similar in nature, primarily providing coverage for damages stemming from the design of the facility. There may some liability during construction depending on the design professional’s scope of services, especially if they are responsible for inspections and progress reviews during construction.

The contractor includes general contractors, construction managers, program managers, developers and subcontractors. Their liability is related to how the facility is built and any defects associated with construction.

The vendor includes anyone who supplies materials and equipment for the facility. Their liability rests primarily with defective products and products that do not perform as advertised.

Once the owner has accepted the facility, he has the responsibility to properly operate and maintain it. In the case of mold, the HVAC system is particularly important. The HVAC system needs to be operated and maintained specifically as instructed by the manufacturer of the equipment. The primary battle will be between maintenance and design or construction activities.

Recently Ed McMahon settled a suit, McMahon v. American Equity Insurance Co. et al. (Cal.) May 7, 2003. He reached $7 million dollar settlement in a suit he filed against several defendants, including Scottsdale, Arizona-based American Equity Insurance Co., a unit of Citigroup Inc., as well as several Southern California contractors who had been hired to clean up the mold. The suit alleged that the companies allowed the mold to infest his home, making his family sick and killing his dog. Erin Brockovitch of Civil Action fame has filed a similar suit.

Developers have been sued. In Maday v. Toll Brothers, Inc., (Va. Cir. Ct.), Toll Brothers was sued for liability for mold in 21 homes in subdivision. Homeowners claimed the developer misled them into thinking real stucco was placed on their homes, not artificial stucco which they claimed propagated the mold. In Chenensky v. Glenwood Management Corp., a family sued for $180 million for mold exposure arising from a water leak that management knew of for several years. N.Y. Sup. Ct. No. 120461/00 (N.Y. Co. July 19, 2001).

Mold allergies are among the most common allergies that people have. In Cleveland in l993, 17 children died from pulmonary hemorrhaging which has been associated with mold. Recently in New Jersey a suit was filed by 18 former state employees against developers and others alleging aggravation of asthma. It is clear that the next wave of toxic tort litigation will be mold litigation.