SUGGESTIONS FOR INSURANCE AGENTS RESPONDING TO QUESTIONS REGARDING MOLD
by Joseph J. De Hope, Jr.
Joe Smith, an insurance agent, received a message to call his customer regarding a "mold" question. He wondered why he received the call. Could it be possible that his customer was reading a recent Florida decision? That court ordered a building contractor to stop making representations relating to the availability of insurance coverage for the work he performed. The court stated:
Without Kodsy's opinion and advice that the insurance policy will cover his services, property owners would likely contact their insurance agent or company to inquire as to whether their policy covers mold removal. If homeowners knew that their policies did not cover mold removal they would be able to make informed decisions on whether to do business with All Restoration Services or consult with other mold removal businesses and compare prices. (Emphasis added) Kodsy v. Department of Financial Services of Florida (2008) 2008 WL 36616.
Since Joe had no further information, he started thinking about what he knew about mold, the questions he should ask his customer and advice he could give regarding sources of information. He considered the scientific support for a mold claim, the potential for insurance coverage for a mold claim and sufficiency of insurer responses to those claims, the latest industry trends to exclude or limit mold coverage and the potential for a claim against an insurance agent for failing to properly explain or provide mold coverage.
SCIENTIFIC SUPPORT FOR MOLD CLAIMS
Joe first focused on what he remembered about mold and the other terms usually discussed in the same context, mildew and fungus. He knew that the terms mold and mildew were often used interchangeably and both were a species within the broader category of fungus. Mold has specifically been held, as a matter of science and law, to be a type of fungus. Board of Education of Liverpool Central School District v. Utica Mutual Ins. Co. (2007) 836 N.Y.S.2d 491.
Of course, mushrooms are also a fungus, and fungi are critical to the breakdown of plant matter in composting. Therefore, he knew it was important to be more specific and to think about the moist conditions that, if allowed to persist, can contribute to the growth of mold as a fluffy or powdery growth on carpet, wood, furniture, sheetrock and most foods.
He also knew that there was a lot of misinformation relating to molds, so to refresh his recollection he turned to the Department of Health and Human Services Center for Disease Control and Prevention ("CDC"). He learned that despite the widespread use of the term "toxic mold" in commentaries, statutes and court cases, the CDC states "The term 'toxic mold' is not accurate." CDC advises that "There is always a little mold everywhere - in the air and on many surfaces." http://www.cdc.gov/mold/stachy.htm
While Joe knew this might lessen his customer's concern, he also knew that news reports following Hurricane Katrina and the flooding of New Orleans had increased fears regarding the potential for mold infestation. He found out, however, that the CDC states: "No reports of increased fungal infections related to floods in the United States exist." Mold Prevention Strategies and Possible Health Effects in the Aftermath of Hurricanes and Major Floods, CDC, http://www.cdc.gov/mmwr/preview/mmwrhtml/rr5508a1.htm
Nevertheless, he knew he had a question from a customer so Joe looked to the scientific studies to discover the actual risks associated with mold contamination. He learned that the CDC reports: "For the majority of persons, undisturbed mold is not a substantial health hazard. Mold is a greater hazard for persons with conditions such as impaired host defenses and mold allergies." Id.
Molds can produce beneficial results such as an antibiotic (penicillium) or fungal metabolites that are poisonous to humans and animals. CDC reports, however, that almost all of the known ill effects from mycotoxin (a toxin produced by an organism of the fungus kingdom) exposure are attributable to ingestion of contaminated food. Id.
The literature does suggest that asthma may be aggravated by home dampness but it may not be clear that these conditions cause asthma. Jeroen Douwes and Neil Pearce, Invited Commentary: Is Indoor Mold Exposure a Risk Factor for Asthma? Am. J. Epidemiol. 158: 203-206.
Joe also found out that an earlier study that suggested a particular type of mold, Stachybotrys chartarum, also known as Stachybotrys atra, was associated with acute pulmonary bleeding and other illnesses in children had been discredited by a later study published by the CDC. http://www.cdc.gov/MMWR/preview/mmwrhtml/mm4909a3.htm
Therefore, while there were legitimate health concerns relating to mold exposure, it did not appear that the dire warnings issued in the past were supported in the medical and scientific literature.
GENERAL BACKGROUND AND THE "CELEBRITY ANGLE" OF MOLD CLAIMS
Joe knew mold was not new. He recalled that Moses had written about mildew and the treatment for it between 1440 and 1400 B.C. The biblical reference is found beginning at Leviticus, Chapter 13, verse 51 and then at Chapter 14, verse 43:
... If the plague has spread in the garment, either in the warp, or in the woof, or in the skin, whatever use the skin is used for, the plague is a destructive mildew. It is unclean. He shall burn the garment, whether the warp or the woof, in wool or in linen, or anything of skin, in which the plague is: for it is a destructive mildew. It shall be burned in the fire.
... It is a mildewed spot, whether the bareness is inside or outside.
... This is the law of the plague of mildew in a garment of wool or linen, either in the warp, or the woof, or in anything of skin, to pronounce it clean, or to pronounce it unclean. http://worldebible.com/leviticus/13.htm
If the plague comes again, and breaks out in the house, after he has taken out the stones, and after he has scraped the house, and after it was plastered; then the priest shall come in and look; and behold, if the plague has spread in the house, it is a destructive mildew in the house. It is unclean. He shall break down the house, its stones, and its timber, and all the house's mortar. He shall carry them out of the city into an unclean place. Moreover he who goes into the house while it is shut up shall be unclean until the evening. He who lies down in the house shall wash his clothes; and he who eats in the house shall wash his clothes.
... This is the law for any plague of leprosy, and for an itch, and for the destructive mildew of a garment, and for a house, and for a rising, and for a scab, and for a bright spot; to teach when it is unclean, and when it is clean. This is the law of leprosy. http://worldebible.com/leviticus/14.htm.
Joe knew his customer might be interested in the celebrity angle and thought about Erin Brockovich (portrayed by Julia Roberts in the movie, about her life). Erin Brockovich was the paralegal that investigated illnesses in a small California town and contended they were due to groundwater contaminated by Pacific Gas & Electric. After the case resolved, Ms. Brockovich became a motivational speaker and purchased a multi-million dollar home in Agoura Hills, California. She contended her home was infested with mold and that her family was ill due to the mold. She sued the builder and the seller for bodily injuries under a construction defect theory. She testified before the California legislature promoting legislation that became the "Toxic Mold Prevention Act," California Health and Safety Code §§ 26100 - 26107.
There was also the claim by Ed McMahon (of Johnny Carson fame) that his dog, Muffin, died and he and his wife became ill because contractors cleaning up after a broken pipe failed to properly clean the home and mold resulted. The case was reportedly settled for more than $7 million.
Then there were the homeowners who concluded they could never eradicate the mold from their home, so they burned the house to the ground! This event is part of a botany lecture given at the University of Hawaii by Professor George J. Wong in his class entitled: "Magical Mushrooms and Mystical Mold." The lecture reveals the real facts relating to fungus. http://www.botany.hawaii.edu/faculty/wong/BOT135/Lect011.htm.
Finally, there is the timeless dialogue in the movie Ghostbusters:
Janine Melnitz: "Oh, that's very fascinating to me. I read a lot myself. Some people think I'm too intellectual but I think it's a fabulous way to spend your spare time. I also play racquetball. Do you have any hobbies?" Dr. Egon Spengler: "I collect spores, molds, and fungus."
INSURANCE COVERAGE AND CLAIMS HANDLING ISSUES RELATING TO MOLD
More seriously, Joe knew that the call probably related to a question of insurance coverage. Of course, he knew that the standard homeowners policy forms all contained exclusions relating to mold. He knew that most property policies excluded loss consisting of or caused by rust or other corrosion, mold, wet or dry rot; or smog, rust or other corrosion, mold, fungi, wet or dry rot; or a similar phrase.
He also knew that many insurance policies excluded loss caused by or consisting of pollution, sometimes phrased as the release of pollutants and that some insurers argued the pollution exclusion applied to mold claims. A Fungus Among Us: The New Epidemic Of Mold Claims, Julie S. Elmer, 64 Ala. Law 109.
He also knew that the analysis was complicated by the type of coverage afforded by the policy. Many standard homeowners policies were specified peril policies that did not insure water damage as a covered loss. Many deluxe homeowners policies were all peril policies that covered direct physical loss and then excluded certain types of water loss such as flooding, standing water or overflow from drains or pipes.
He also knew that in the commercial insurance setting, many broad form property coverages included accidental discharge or leakage of water as a covered peril and excluded rust, corrosion, fungus, decay or deterioration from coverage.
He understood that claims for mold damage had been asserted, despite the mold exclusions, on the basis that the mold resulted from a covered peril such as water loss from a broken pipe. In these cases the mold was not a cause of the loss but rather resulted from the loss. Thus, mold would not be covered when it is a naturally occurring condition. However, when mold results from covered water damage the exclusion may not apply. Boardwalk Condominium Association v. Travelers Indem. Co. of Illinois (S.D. Cal. 2007) WL 1989656 citing with approval Eckstein v. Cincinnati Insurance Company (W.D. Ky 2007) 469 F. Supp. 2d 444, 455. Mold arising from an excluded peril would still not be covered. Kelly v. Travelers Lloyds of Texas Ins. Co. (2007) 2007WL527911.
He knew that the placement of the mold exclusion in the rust, corrosion and dry rot setting in the insurance contract had been found to relate only to mold or fungus that grew over a long period of time such as in a damp basement. Commercial Property (Second Edition), Hillman & McCracken, The National Underwriter Company (2001), Chapter 1, page S-2.
Joe wondered which insurance policy would apply to a claim for bodily injury or property damage arising from mold when the mold was alleged to exist for an extended period of time. Different arguments for the "trigger" of coverage were discussed in Insurance Triggers as Judicial Gatekeepers in Toxic Mold Litigation, (Jan. 2004) 57 Vand. L. Rev. 241. The manifestation trigger was recently adopted in Allstate Ins. Co. v. Hunter (2007) 242 S.W.3d 137.
Joe reviewed recent policy forms that demonstrated the industry response to mold claims. He learned that there are several recent legal decisions upholding the validity of an absolute mold exclusion: DeBruyn v. Superior Court (2008) 158 Cal.App.4th 1213; Justice v. State Farm Lloyd's Insurance Company (2008) 2008WL123857; D.C. USA Operating Company, LLC. v. Indian Harbor Insurance Company (S.D.N.Y. 2007) WL 945016; Mold exclusion upheld in Schmitt v. NIC Insurance Company (N.D. Cal 2007) 2007 WL 3232445.
Joe learned that one of the additional concerns was the type of remediation attempted to eliminate the mold. Early approaches of spraying with bleach and painting over the mold were found insufficient and led to claims of bad faith. Anderson v. Allstate Insurance Company (2002) 45 Fed. Appx. 754.
There are numerous other examples of claims against insurers arising from the handling of mold claims. For example, delays in resolving claims that allowed the mold to continue also resulted in bad faith claims. Allison v. Fire Ins. Exchange (2002) 98 S.W.3d 227. One recent case permitted a bad faith claim relating to claims handling even though the court found the policy did not apply to mold in the first instance. West v. Foremost Ins. Co. (2007) 2007WL456236.
Joe recognized the importance of distinguishing between an occurrence policy and a claims made policy. If the absolute mold exclusions are added to a claims made policy, they may have the effect of eliminating from coverage claims that would have been covered before. Of course, the potential application of a new exclusion will be impacted in an occurrence policy by the "trigger" of coverage, as noted above.
POTENTIAL CLAIMS AGAINST AN INSURANCE AGENT
Alarmingly, Joe learned that mold related claims against insurance agents may arise from the success of the insurance industry in limiting coverage for damages related to mold. An article on the topic concludes: "Insurance agents could be the insurer of last resort for toxic mold and environmental damages." The authors warn "... even the professional liability market is adding new exclusions for mold and pollution "related" claims to agents E&O policies." Mold Drives Demand for New Insurance Coverage, Dybdahl and Lemon
Now that the phone message has Joe's full attention, he intends to review his own errors and omissions insurance policy to determine whether it contains a mold exclusion.
Joe then considered the general rule that an insurance agent is only liable if he/she fails to use reasonable care and diligence in obtaining the insurance that the insured requested. This made him realize that the reasonable care standard may depend upon the testimony of other insurance agents in his community. The other agents may be more than competitors; they may be the expert witness in litigation.
Several courts have even held that insurance is a "non-technical" matter that does not require expert testimony. One court considered the following testimony of the insured, in a case in which the insurer denied coverage for mold, as evidence of negligence on the part of the insurance agent:
the insurance agent " ... (1) did not procure the insurance coverage the customers requested; (2) did not make himself or his clients aware of a possible gap in coverage; (3) accordingly failed to obtain additional coverage; (4) did not visit the building; (5) did not investigate the problems at the building; (6) did not contact the tenant about the issues; and (7) never discussed the extent of the problem with state personnel." Johnson & Higgins of Alaska, Inc. v. Blomfield (1996) 907 P2d 1371.
INFORMATION AVAILABLE TO JOE'S CUSTOMER
Joe decided the best course of action would be to have available certain sources of information to which he could refer his customer. He identified the CDC as a reliable source of factual information, specifically a Question and Answer page that would address many common concerns. http://www.cdc.gov/mold/pdfs/stachy.pdf
Now that Joe was prepared with this information, he returned his customer's call. Naturally, the customer was not there. What message should Joe leave?
Joseph J. De Hope, Jr.
Hinshaw & Culbertson LLP
One California Street, 18th Floor
San Francisco, CA 94111