Mold: a superficial, often wooly growth, found especially on damp or decaying matter or on living organisms
As evidenced by sensational stories in The New York Times Magazine, regional newspapers, television specials on 48 Hours and The Today Show, and a number of regional and national conferences, toxic mold is an emotionally charged issue that has created a public frenzy over its potential health impact.
Although it affects a broad range of concerns for risk managers, from damage claims to workers' compensation, this frenzy has created an instant insurance industry crisis. The major reason toxic mold has become one of the hottest topics in the insurance industry is the usual reason: money, in the form of multimillion dollar judgments against insurers.
The flagship case is Ballard vs. Fire Insurance Exchange. In June 2001, a Texas jury found in favor of the plaintiffs and awarded $32 million, including $12 million in punitive damages and $8.9 million in legal fees. According to Alexander Robertson, the California attorney representing the Ballards, the jury found bad faith, concluding that the insurance company, a subsidiary of Farmer's Insurance Group, had fraudulently and intentionally held back vital information from the insured after discovering Stachybotrys, a mold that produces mycotoxins. When inhaled, these mycotoxins can cause nosebleeds, cold symptoms, headaches and pulmonary infections. The jury held that the adjuster owed a duty to inform the insured of the presence of toxic mold.
Although the Fire Insurance case is presently under appeal, it represents a harbinger of change in the way that risk managers must examine their approach to mitigation, as well as their coverage polices with many insurance companies, because toxic mold litigation is by no means limited to residential cases. Construction defect suits and litigation stemming from mold contamination are among the fastest growing areas of tort litigation. Defendants include contractors, subcontractors, landlords, property managers, construction managers, architects, building owners and construction component suppliers. Millions of dollars have already been awarded in remediation claims.
The Uncertain Costs
Quantifying the precise number of mold-related claims pending or the projected costs is difficult. Mold claims are often the result of other more easily defined and covered perils, such as water damage or a construction defect.
The Environmental Protection Agency (EPA) warns that mold growth can weaken floors and walls and cause structural damage to schools and office buildings, so claims could also include personal injury and property damage. An increase in sick building claims could result in both workers' compensation and civil liability lawsuits. And defense costs including data gathering, scientific analysis and expert medical opinions are considerable.
At a June hearing on the mold issue, Farmer's officials said they already have received more than one thousand new mold-related claims this year. Further, they said, independent actuaries have estimated that insurance companies will pay an additional $128.5 million for Texas-based mold damage claims in 2001.
Several cases are under appeal and their outcomes will shape the responses to losses involving mold. It appears, though, that the courts are favoring the plaintiffs. Companies may have two choices: mitigate or litigate.
Insurance Industry Reactions
The insurance industry is monitoring the mold issue closely and it is uneasy. Insurers are considering a number of options to mitigate mold losses, including premium increases, excluding mold from policies or eliminating policies that cover water damage and the mold damage that may follow.
More proactive responses include educational forums developed by industry associations that risk managers should consider attending. The National Association of Independent Insurers (NAII) is closely watching the litigation developments and serves as an education and information resource. …