Mold delineated: Insurance Services Office has introduced policy language on mold to help insurers limit exposure but retain underwriting flexibility. (Mold: Property/Casualty).

A California jury awarded $18.5 million to a homeowner in a coverage dispute with his insurance company, an award that a judge later reduced to $3 million. A construction company in Florida paid $17.3 million in a sick building and construction defects case. A Texas family initially was awarded $32 million in a jury verdict for the insurer's delay and denial of the homeowners insurance claim, although an appeals court cut the amount to $4 million.

The tie that binds these high-profile lawsuits and judgments is a four-letter word: mold.

Seemingly overnight, mold claims have proliferated in many states--a rapidly unfolding underwriting nightmare that potentially threatens insurers' claim-paying ability and is likely to crimp availability of affordable insurance for millions of homeowners and businesses.

The growing number of multimillion dollar claims, high remediation costs, and a large number of third-party and class action lawsuits--by some estimates as many as 9,000 countrywide--are making many insurers apprehensive that mold could potentially escalate into the "new asbestos" liability for the property/casualty industry.

Insurers are encountering the most mold claims in Texas, but the problem has surfaced in California, Florida, Louisiana and Alabama.

The Environmental Protection Agency estimates approximately 1,000 species of mold exist in the United States, not all of them harmful to humans. Several species, however, have been alleged to cause health problems. Studies by the Centers for Disease Control and Prevention suggest a lack of verifiable proof linking mold to serious health risks, but other experts disagree. (See "Mixing--and Separating--Mold and Myth," page 45.) Clear federal regulations or guidelines on evaluating fungal contamination and remediation are lacking. The result is a flurry of complex and expensive litigation.

New Rules

When it became apparent the industry's exposure to mold-damage claims was growing significantly, Insurance Services Office Inc. developed and filed with insurance regulators new coverage options to assist insurers in underwriting commercial property, general liability, and personal property/liability risks with a mold exposure.

ISO took a further prudent step by including limitations on coverage resulting from bacteria since bacteria is known to grow in the same environment as mold. With bacteria specifically addressed in the policy language, claimants cannot allege bacteria-related injury or damage as a way of circumventing mold exclusions or limitations.

ISO's policy language on mold gives insurers the option of applying coverage limitations to protect themselves against lawsuits, ensure affordable insurance in the marketplace and limit potentially catastrophic exposures, while retaining greater flexibility in underwriting coverage for individual insureds.

Commercial Property

In general, ISO's commercial-property policies cover loss due to mold that develops as a result of a covered peril under the policy. These policies contain various exclusions that address fungus and conditions that may cause fungus. Mold is a type of fungus, When it develops over a prolonged period of time, it is usually the result of conditions that are excluded under the policy.

Many commercial-property policies specify covered events and exclusions under the special causes of loss form--most often, the broadest form of coverage. The special form contains the following exclusions that either mention fungus directly or relate to circumstances that can result in a fungus loss:

* Loss or damage caused by or resulting from fungus, rust, corrosion, decay, hidden or latent defect or any quality in a property that causes it to damage or destroy itself.

* Water damage due to continuous or repeated seepage or leakage of water over a period of 14 days or more.

* Loss or damage caused by or arising from faulty design, construction and materials.

* Pollution (fungus might be considered a pollutant).

Generally, mold-related property damage claims arise from two types of incidents:

* Building or personal property exposed to water following the sudden, forceful discharge and intrusion of water--for example, the use of water to fight a fire or the breaking apart or cracking of a system or appliance located within the premises.

* Accumulation of moisture or water over a prolonged period of time--for example, faulty, inadequate or defective construction or repair by a contractor, or materials used in repairs, construction, renovation or remodeling. Exposure to humid atmosphere is another example.

The ISO commercial-property policy currently provides some coverage for water damage in the broad and special forms, The water damage coverage is designed to cover a sudden event such as the breaking apart of a water heater. The seepage exclusion, which excludes coverage for damage caused by seepage spanning 14 days or more, supports that intent of the policy.

Another scenario involves the growth of mold in a building because a construction defect allows moisture to accumulate. ISO's exclusion denies coverage for mold and bacteria relating to faulty construction, long-term water damage and fungus.

ISO's recent filings elaborate on the circumstances under which coverage is provided or excluded and limit coverage to keep the exposure within the bounds intended by insurers.

The following are the revisions to the ISO commercial-property forms:

* The existing wear and tear exclusion has been modified to eliminate reference to fungus.

* A separate exclusion addressing fungus (a newly defined term), wet and dry rot, and bacteria has been introduced. An exception to this new exclusion, in the form of a limited coverage, has also been introduced. There is no change in coverage for fungi that manifest as a result of a fire or lightning loss, since that scenario has not been a problem.

* The 14-day continuous or repeated seepage/leakage exclusion has been reinforced by explicitly referring to the presence or condensation of humidity, moisture or vapor.

A limited coverage with the following features has been introduced:

* Coverage is limited to fungus resulting from certain specified causes of loss, including sudden discharge of water from an on-premises system or appliance.

* A sublimit of $15,000 applies on an annual aggregate basis and can be increased by endorsement. This sublimit does not increase, and cannot exceed, the limit of insurance on the property.

* The coverage includes the expense of tearing out and replacing parts of the building to gain access to the mold, and the expense of post-remediation testing for the presence of mold, both subject to--not in addition to--the above sublimit.

* Time element insurance will be limited to 30 days if mold is the only loss. When a mold loss occurs in combination with other damage, an additional 30 days' coverage is provided for mold, if the mold is not remediated by the time the other damage is repaired.

The dollar amount of the new coverage exceeds the amount of the typical mold claim as envisioned by the policy's current coverage and premium.

Commercial Liability

Liability exposure attributable to mold for contractors, building owners and commercial tenants is potentially enormous. Legal liability theories applicable to mold claims may include negligence, strict liability, breach of warranty, constructive eviction, failure to disclose, breach of contract, fraud, workers' compensation, and violation of air quality laws. Claims can be associated with bodily injury, property damage (particularly construction defects) or personal injury under the wrongful eviction offense. Business owners and managers are getting hit with lawsuits for not maintaining the property, as are construction companies, architects, plumbers, roofers and waterproofers for defective design or workmanship.

Under the current ISO policy language, one may well expect the pollution exclusion to exclude coverage for mold, since the EPA has classified mold as an indoor pollutant and biocontamimant. While a small number of court cases have addressed the issue of whether the pollution exclusion applies to mold-related claims, it appears that there is some hesitation to consider such organisms as a pollutant because mold is commonly present in the natural environment and is not man-made. The pollution exclusion, as currently written, does not depend on either issue. There also are coverages to which the pollution exclusion does not apply such as injury or damage under the "products-completed operations hazard."

Exclusions such as "damage to your product" and "damage to your work" may apply to mold claims, although the "damage to your work" exclusion contains an exception for a subcontractor's work.

ISO's two options for fungi and bacteria liability--one for limited coverage, the other for a total exclusion-help underwriters address this issue. Both optional endorsements are designed for use with the commercial general liability, products/completed operations liability, and owners and contractors protective liability coverage forms.

The limited coverage option establishes a new fungi and bacteria aggregate limit, which applies to bodily injury, property damage and medical payments arising out of fungi or bacteria. Coverage under this option is subject to the each occurrence limit as well as the new fungi or bacteria liability aggregate limit. However, under this option, personal and advertising injury liability arising out of mold or bacteria is not covered. In addition, the new fungi and bacteria aggregate limit would not apply to situations where fungi or bacteria contaminate something meant for consumption. This exception is intended to allow coverage particularly for food poisoning claims.

The total exclusion option applies to bodily injury or property damage and personal and advertising injury. However, this exclusion also includes an exception for fungi or bacteria that are on, or contained in, a good or product intended for consumption (the food poisoning exception.)

Personal Property

In general, the ISO homeowners policy covers mold that develops as a result of a covered peril. Preclusions in the policy address mold and fungus. When mold develops over a prolonged period of time, it is typically the result of conditions such as negligence of the insured, which are excluded under the policy.

The limited coverage option provides $10,000 first-party coverage and $50,000 third-party coverage, on an aggregate basis, for loss or damage caused by fungi or wet or dry rot or bacteria resulting from an insured peril. Increased limits also are available for both first- and third-party coverage.

The limited coverage accommodates not only direct physical damage, but also any pre- and postremediation testing required in connection with the mold. However, when mold occurs following fire or lightning, the personal property policy would provide coverage up to full policy limits.

Mold is a growing exposure to most carriers and in most insurance lines. It will increasingly affect more and more insurers and insureds. By providing adequate mold coverage options, the ISO endorsements can help to produce a stable market and affordable insurance.

Exposure Grows

Mold claims in Texas made in 2000 and 2001 cluld cost insurers $1
billion.

                                        No. of Claims  Avg. Loss
Report      Est. Total   Est. Incurred      Per 1,000   & ALAE *
Quarter  No. of Claims   Loss & ALAE *  Policyholders  Per Claim

1Q 2000          1,050     $14,405,484         1.7001    $13,719
2Q 2000          1,933      29,778,910         3.1539     15,402
3Q 2000          1,627      39,098,068         2.6660     24,024
4Q 2000          2,472      69,378,367         4.0763     28,061
1Q 2001          4,033     146,047,711         6.6911     36,213
2Q 2001          7,145     246,771,128        11.7077     34,538
3Q 2001         11,318     274,044,194        18.3517     24,213
4Q 2001         14,706     187,514,976        23.5667     12,751
TOTAL           44,285  $1,007,038,839         9.0352   $ 22,740

         Avg. Cost Per
Report    Policyholder
Quarter       Per Year

1Q 2000        $ 23.32
2Q 2000          48.57
3Q 2000          64.05
4Q 2000         114.39
1Q 2001         242.31
2Q 2001         404.36
3Q 2001         444.35
4Q 2001         300.50
TOTAL         $ 205,46

* Allocated Loss Adjustment Expense

Source: Texas Department of Insurance

RELATED ARTICLE: Commercial Property Coverage Exclusions

The special causes of loss form now contains the following exclusions for loss or damage from circumstances that could result in a fungus-related loss.

* Loss or damage caused by or resulting from fungus, rust, corrosion, decay, hidden or latent defect or any quality in a property that causes it to damage or destroy itself.

* Water damage due to continuous or repeated seepage or leakage of water over a period of 14 days or more.

* Loss or damage caused by or arising from faulty design, construction and materials.

* Pollution (fungus might be considered a pollutant).

Kevin B. Thompson is vice president--Standard Commercial and Personal Lines, Insurance Services Office Inc.