Mold Litigation: The Defense
Perspective†
Douglas G.
Houser
Linda M.
Bolduan
I.
Mold: Not The Next Asbestos
Mold claims
are a problem, but are more the product of media hysteria than the result of an
actual health hazard. There is still no
scientific proof linking most mold health claims of “sick” people with “sick”
buildings. Mold claims are generally no
more than water-damage claims in new clothes, packaged for greater jury appeal. Most “mold” claims are, in reality, bad faith
claims in disguise. These claims are not
a recent phenomenon. We have been handling them in the wet
Although Ballard[2]
kick-started the current “mold rush” in 2001, there are mold cases dating back
decades. For example, in Thomas Roberts & Co. v. Calmar Steamship
Corp.,[3]
a case decided in 1945, the plaintiff sued the company that shipped cases of
its canned beets from
Since Ballard, however, homeowners have
suddenly discovered mold everywhere, “lurking under sinks, behind wallpaper or
under floorboards, and hearing from scientists that it can be a health hazard.”[6] By January 2002, some 10,000 mold lawsuits
were in the legal pipeline.[7] Guy Carpenter & Co., a major re-insurance
intermediary, has estimated that of those 10,000 suits, 5000 were brought
against insurance companies for acting in bad faith; 2000 were brought against
homeowner associations for improper maintenance; 1000 were brought against
former owners of sold homes; and, 2000 were brought against builders for
construction defects.[8] The average mold-related construction defect
claim is in the range of $10,000 to $20,000.
This sudden upsurge in the number of mold cases appears to be a uniquely
American phenomenon. Our understanding
from reliable sources in
Given that mold “‘has been around forever, . . . is easily
remediated, and its health threat . . . greatly exaggerated and virtually
unproven by scientific fact,’” the number of mold cases indicates that the mold
issue “is being blown out of proportion by public paranoia, media frenzy and
plaintiffs’ attorneys.”[9] According to R. Bryan Tilden, principal of
Pittsboro, North Carolina, based Tilden & Associates, a training and
consulting firm to the insurance industry, mold-related property damage
allegations are no more than “‘water damage claims repackaged for jury
appeal.’”[10] Tilden believes that the asbestos model used
by the plaintiffs’ bar will not work for mold because the potential for large
verdicts “just isn’t there.”[11] Tilden’s comment is borne out by data recently
released by the Texas Department of Insurance (“TDI”).
On
One may
reasonably wonder, then, why the plaintiffs’ bar has become enamored of mold
cases. It has been suggested that the
answer lies in the opportunity for a plaintiff’s attorney to use a mold claim
as a basis upon which to assert insurance company bad faith and to seek
punitive damages.[13] This notion is supported in part by the fact
noted above that one-half of the approximately 10,000 mold lawsuits filed by
January 2002 were brought against insurance companies for allegedly acting in
bad faith.[14] However, as will be discussed subsequently,
appellate courts are reversing or reducing bad-faith punitive damages awards
against insurance company defendants in mold cases.
The
bottom line is that courts are frequently finding in favor of defendant
insurers in mold cases. Plaintiff
insureds have been unable to meet their burden of proof, failing to establish
that 1) mold was the cause of their loss; 2) mold caused their personal injury;
or 3) the insurance company’s conduct in handling the insured’s claim warranted
an award of punitive damages.
II.
Causation Issues
A. First-Party
Insurance
Homeowners
insurance is often an “all-risk” policy, which typically insures against direct
physical loss to covered property caused by “perils” not excluded under the
policy. “Perils are active physical
forces which cause the loss of or damage to the insured property.”[15]
One
commonly excluded peril in “all-risk” policies is “mold.” Such “mold” exclusions may contain an
exception that provides coverage for any “ensuing” loss to covered property
when such loss is not otherwise excluded by the policy.[16] However, as will be discussed subsequently,
for an ensuing loss to be covered, it must be a second, separate “loss.”[17]
1.
Direct Physical Loss
Under
an “all-risk” policy, the insured must first prove that a direct physical loss
occurred to covered property during the policy period.[18] In Columbiaknit,
Inc. v. Affiliated FM Insurance Co.,[19]
the court, construing
The
plaintiff contended that the policy language “direct physical loss” was
ambiguous in that it raised a question as to whether damages must be “direct”
or “physical.” Under that theory, if
damages need be only direct and not physical, the plaintiff could recover for
purely economic loss. The court
disagreed, finding the language unambiguous and, under
The
arguments regarding coverage for economic loss aside, the plaintiff also
asserted that the property stored in the warehouse suffered direct physical
loss or damage due to direct contact with water or prolonged exposure to high
humidity and mold and mildew. The
plaintiff sought a “liberal” interpretation of the phrase “direct physical
loss” with respect to mold and mildew damages.
In
Farmers Insurance Co. v. Trutanich[20]
and Largent v. State Farm Fire &
Casualty Co.,[21]
the Oregon Court of Appeals held that odor from the “cooking” of methamphetamine
that permeated the carpets, drapes, and walls of a house constituted “direct physical loss” to property. According to the Columbiaknit court, Trutanich
and Largent suggested that “physical
damage can occur at the molecular level and can be undetectable in a cursory
inspection.”[22] Although recognizing that physical damage can
occur at the molecular level, the court in Columbiaknit
nevertheless emphasized that “physical damage need be distinct and
demonstrable.”[23] In the case at bar, to obtain coverage the
plaintiff had to establish “the presence of a pervasive, persistent or noxious
odor, or mold or mildew” or show that the fabric or garments were “physically
changed” in a way that would lead to mold or mildew damage in the future.”[24] The court commented:
However, it is important to distinguish between the necessity
of washing the garment because of its strong odor, and the decision by the
retailer not to sell the garment as new, merely because it has been exposed to
elevated levels of spore counts, for example, and may or may not develop mold
or mildew in the future. The decision
not to sell the garment as new, in the absence of distinct and demonstrable
physical change to the garment necessitating some remedial action that would
preclude honestly marketing as first quality goods, is not a covered loss. Furthermore, such damage that requires
remedial action to some items is not sufficient to prove such damage to all
items . . . .
. . . Trutanich instructs that goods with heightened spore counts may be
damaged if they will later develop odor or other effects so as to now require
washing or such treatment that they may not be sold as first-quality goods.[25]
In Prudential Property
& Casualty Insurance Co. v. Lillard-Roberts,[26] a
magistrate, following Columbiaknit,
held that a house with “visible mold” that might not be removable sustained
“‘distinct and demonstrable’” damage sufficient to constitute a “direct” and
“physical” loss under an “all-risk” policy.[27] In this case, water leaked into the insured’s
home, allegedly because of the prior owners’ knowing and negligent repair of
the roof and flashing. The insured’s
plumbing system also failed, backed up into the bathroom on the main floor, and
flooded the main floor with approximately one inch of sewer water. Mold resulted from these leak problems, and
the insured moved out of the house after being diagnosed with systemic fungal
disease allegedly due to her living there.
The insured sought coverage under an “all-risk” policy for the mold
damage.
The court agreed with the insurer
that the policy’s requirement of a “direct” and “physical” loss precluded the
insured from recovering “‘indirect, nonphysical losses,’ including
consequential or intangible damages such as loss in value.”[28] Thus, the question before the court, which it
answered in the affirmative, was whether the insured had a claim for loss due
to physical damage to her house and other structures caused by the presence of
mold. It also noted two cases not
involving mold that had deemed “the inability to inhabit a building as a
‘direct, physical loss’ covered by insurance.”[29] The court could find “no analytical
difference between these cases and the case here where a house has allegedly
been rendered uninhabitable by mold.”[30]
2.
Causation
To
determine whether a first-party insurance policy provides coverage for mold
losses, read the policy; read the policy; and read the policy again. Many first-party insurance policies now
exclude mold losses or cap a mold loss at a reasonably low limit, such as
$5000.
a. Proximate Cause
In the
context of first-party property insurance, issues of causation often
arise. The question is: What event caused a particular loss? In our common experience, we tend to simplify
causative events: Event A causes Loss B, the fire caused the house to burn
down. However, multiple events are often
implicated in losses to property and, for purposes of determining coverage
under a particular policy, the insurer needs to know which event “caused” the
loss and whether that event is a covered peril.
What has
“caused” a loss in a case involving mold is a question that has led to
extensive litigation. The determination
of causation in mold cases is extremely complicated when there are multiple
events that have led to a particular loss -- was the loss caused by faulty
workmanship that caused the leaky roof that led to the mold that caused the
shower to turn green?
To
determine causation where multiple events lead to a property loss, the majority
of jurisdictions have adopted a “proximate cause” type analysis.[31] Also sometimes called “efficient proximate
cause,” “moving cause,” “predominant cause,” or combinations thereof,[32]
the “proximate cause” of a loss is the “dominant, efficient one,”[33]
the one that “sets in motion a chain of events that results in the loss without
intervention of any new or independent source.”[34] Thus, where there is an “unbroken connection”
between the event and the injury, the act “causes” the injury, and an
intervening event is not a proximate cause of the injury “unless it is
efficient to break the causal connection.”[35]
As
explained by the Supreme Court of West Virginia:
[W]hen examining whether coverage
exists for a loss under a first-party insurance policy when the loss is caused
by a combination of covered and specifically excluded risks, the loss is
covered if the covered risk was the efficient proximate cause of the loss. No coverage exists for a loss if the covered
risk was only a remote cause of the loss, or conversely, if the excluded risk
was the efficient proximate cause of the loss.
The efficient proximate cause is the risk that sets others in motion. It
is not necessarily the last act in a chain of events, nor is it the triggering
cause. The efficient proximate cause
doctrine looks to the quality of the links in the chain of causation. The
efficient proximate cause is the predominating cause of the loss.[36]
However,
the efficient proximate cause doctrine applies only when there are at least two
distinct perils, which “could each, under some circumstances, have occurred
independently of the other and caused damage.”[37] Conversely, the efficient proximate cause
doctrine does not apply when a loss is caused by a “single cause, albeit one
susceptible to various characterizations.”[38] Moreover, an insured may not avoid a policy
exclusion “merely by affixing an additional label or separate characterization
to the act or event causing the loss.”[39] Although the efficient proximate cause
doctrine may be difficult in application, it may be stated simply:
§
Where a covered peril is the efficient proximate cause
of the loss, there is coverage.
§
But, where an excluded peril is the efficient
proximate cause of the loss, coverage is denied.
b. “Ensuing Loss”
The
proximate cause analysis tells us whether a covered peril has caused the loss
at issue. Depending upon the policy terms, to the extent a covered peril causes
the loss, the policy will provide coverage, subject to any applicable
exclusions. However, a property policy
may contain an ensuing loss clause, which may act as an exception to the
exclusion for some, but not all, of the damage.
There are
several types of ensuing loss clauses.
One type broadly covers any loss occurring subsequent to an excluded
loss, so long as that subsequent loss is not excluded by the policy.[40] A second type
more narrowly covers losses subsequent to an excluded loss arising from
specified perils.[41]
Most courts
appear to agree that the ensuing loss clause is clear and unambiguous. For example, in McDonald v. State Farm Fire & Casualty Co.,[42]
the Washington Supreme Court opined:
The ensuing loss clause may be confusing, but it is not
ambiguous. Reasonably interpreted, the ensuing loss clause says that if one of
the specified uncovered events takes place, any ensuing loss which is otherwise
covered by the policy will remain covered.
The uncovered event itself, however, is never covered.[43]
The purpose
of the ensuing loss exception to an exclusion is to provide coverage only for
certain losses that occur subsequent to an excluded loss, “not to enlarge the
list of items covered under the policy.”[44] Therefore, courts seek to ensure that the
exception does not swallow the exclusion by precluding coverage for ensuing
losses that are “directly related to the original excluded risk.”[45]
c.
The Mold Cases
“Consumers
should be aware that most standard homeowner policies typically do not cover
losses caused by rust, rot, mold or other fungi. Insurers generally consider mold a ‘home
maintenance’ issue.”[46] Washington Insurance Commissioner Kreidler’s
comment is correct. The standard
homeowners policy in most states does not generally cover mold losses. The current “mold rush” began in Texas, not
only because of the $32 million award in Ballard
and heightened press coverage of the mold “problem,” but because of the
expansive coverage for water damage offered under the Texas HO-B policy.[47] However, faced with insurers in Texas
reporting poor financial performance because of growing mold claims and
consumers complaining about rate hikes ranging from 14% to 200%, in 2002, the
Texas Insurance Commissioner approved State Farm’s less-expensive, national
“all-risk” homeowners policy form that excludes coverage for mold and
foundation damage.[48]
According
to Ron Dodd, Senior Vice President of State Farm’s Texas zone:
As much as we’d like to think that we need an insurance
policy that’s unique to Texas, the fact of the matter is that the state’s
existing policy provides insurance coverage for items that in almost every
other state are considered a property owner’s maintenance responsibility. As a
result, the costs of those maintenance[-]type activities have been rolled into
the process that we all pay for homeowners insurance.[49]
i. Representative “No Coverage” Cases
In Myers v. State Farm Fire & Casualty Co.,[50]
the insureds sought coverage for “unacceptable levels of mold” in their
home. Three experts investigated the
contamination. One concluded that the
mold problem was caused by moisture in the crawl space resulting from defective
plumbing. A second expert concluded that
the moisture in the crawl space and the resultant mold growth were due to both
a defective plumbing system and defective construction of the crawl space. The insurer’s expert concluded that the mold
in the house was not directly related to the mold in the crawl space, but,
rather, was the type of mold growth expected in a 100-year-old home.
The policy
at issue covered “accidental direct physical loss” to covered property.[51] It excluded from coverage, in part,
“continuous or repeated seepage or leakage of water or steam from a . . .
plumbing system . . . mold, fungus or wet or dry rot . . . [and]
contamination.”[52] The policy also contained a “faulty
workmanship” exclusion. The exclusions
were followed by a “resulting loss” clause barring coverage for “any resulting
loss . . . unless the resulting loss is itself a Loss Not Insured by this
Section.”[53] Based upon these exclusions, the court
concluded that there was no coverage:
All of the
damage that occurred to the [insureds’] home resulted from the continuous or
repeated seepage or leakage of water from a plumbing system or plumbing
fixture, from improper construction and grading, or from mold or fungal
contamination. The policy’s plain language excludes coverage for those damages.[54]
The court also
rejected the insureds’ contention that, even if their loss was not otherwise
covered, the resulting loss provisions provided coverage for the loss of value
to their home. In Sentinel Management Co. v. New Hampshire Insurance. Co.,[55]
the court construed an “ensuing loss” provision similar to the “resulting loss”
provision in the case at bar. In Sentinel, the court explained that a
covered “ensuing loss” must be “a distinct peril” and not a “different
classification[] of a single phenomenon.”[56] In the instant case, the Myers court opined that the insureds could not explain how the
home’s loss of value was separate from the property losses caused by the
seepage of water, mold, fungus, contamination, or faulty workmanship:
The
[insureds’] home lost its value because it was contaminated by mold or fungus.
The loss of value was a loss to property.
There was no separate, covered cause, like a fire or a pipe that burst
suddenly, that caused the loss of value to the [insureds’] home or the damage
to their personal property. To interpret
the resulting-loss clause as urged by the [insureds] would negate the policy
exclusions.[57]
In Prudential Property & Casualty Insurance
Co. v. Lillard-Roberts,[58]
the insured alleged, in part, that the mold damage to her house resulted from
the faulty workmanship of the prior owners’ negligent repair of the roof and
flashing. The policy at issue contained
a faulty workmanship exclusion, which stated: “We do not cover loss to property
. . . caused by any of the following.
Any ensuing loss to property . . . not excluded or excepted in this
policy is covered. . . . c. Faulty, inadequate or defective . . . repair.”[59]
The insurer
argued that the loss was excluded because it was caused by faulty
workmanship. The court found a fact
issue as to causation and denied the insurer’s motion for summary judgment on
this exclusion. Nevertheless, the court
addressed the insured’s argument (made in a counterclaim for declaratory
relief) that the faulty workmanship exclusion did not apply to bar coverage
because the mold damage fell within the “ensuing loss” exception to the
exclusion. As understood by the court,
the insured contended that the ensuing loss provision reinstated the coverage
for mold damage “ensuing” from water leaks caused by faulty workmanship. The insurer contended, however, that the mold
was not an “ensuing loss” because there was no “intervening cause, other than
time, beyond the initial water damage.”[60]
The court
agreed with the insurer, stating that an ensuing loss clause “‘does not
reinsert coverage for excluded losses, but reaffirms coverage for secondary
losses ultimately caused by excluded perils.’”[61]
It
emphatically concluded:
Though not inevitable, mold is a natural event that often
manifests after and as a direct result of the entry of water caused by some
other peril, such as a roof opened by a hailstorm, a leaky pipe or defectively
installed roof flashing. Mold cannot
exist or sustain itself without some moisture source, such as water
intrusion. When water intrudes into a
residence, mold, unlike fire, is not a surprise, particularly in the damp
northwestern United States. Because mold is a natural and expected, as
opposed to a separate and independent, result of water damage, it cannot be an
ensuing loss. An ensuing loss requires
an unexpected loss due to an intervening or contributing cause other than the
mere passage of time.[62]
The court
rejected the insured’s additional contention that toxicity from mold, as
opposed to the mold itself, was not foreseeable and was therefore a covered
ensuing loss. Noting that “‘[m]olds are
ubiquitous on our planet,’”[63]
the court opined that it would be expected that illness would result when a
water intrusion causes the mold to grow and consequently increases mold
quantities to toxic levels.
Nevertheless, the court concluded that “‘removal of the mold would
presumably also remove the mycotoxins.
As such the mycotoxins do not constitute a separate and independent loss resulting from mold.’”[64] It noted that cases in other jurisdictions interpreting
ensuing loss clauses supported the Lillard-Roberts
court’s interpretation, citing in part, Acme
Galvanizing Co. v. Fireman’s Fund Insurance Co.,[65] the leading “ensuing loss” case in the country.
In
Acme Galvanizing, a case often cited
with approval, the California Court of Appeal expressly stated that, for an
ensuing loss to be covered, it must be an independent, covered peril separate
from the initial excluded peril. In that
case, a steel kettle in the insured’s galvanizing plant ruptured, allowing
several tons of molten zinc to spill, damaging or destroying the surrounding
equipment. The evidence showed that the
rupture was caused by an inadequate weld.
The court ruled that the loss was caused by a latent defect, which was
excluded under the all-risk commercial property policy at issue.
However,
the insured contended that, even if the kettle rupture were caused by an
excluded latent defect, the discharge of the molten zinc that damaged or
destroyed the surrounding equipment was a covered “ensuing loss.” The court disagreed. The policy provided coverage for a loss
precipitated by an excluded peril where the “loss by a peril not otherwise
excluded ensues and then the Company shall be liable for only such ensuing
loss.”[66] The court interpreted this language to
provide coverage only for an ensuing loss arising from a separate, independent,
but covered peril resulting from the original excluded peril. The court concluded that, in the case at bar,
the ensuing loss clause did not apply to provide coverage for the insured’s
loss:
[T]here was
no peril separate from and in addition to the initial excluded peril of the
welding failure and kettle rupture. The spillage of molten zinc was part of the
loss directly caused by such peril, not a new hazard or phenomenon. If the molten zinc had ignited a fire or
caused an explosion which destroyed the plant, then the fire or explosion would
have been a new covered peril with the ensuing loss covered. That did not occur.[67]
In Lexington Insurance Co. v. Unity/Waterford-Fair Oaks, Ltd.,[68]
the insured sought coverage for mold damage to first- and second-floor
apartments caused by a severe rainstorm and flooding. The insurer denied coverage based upon the
policy’s Pollution and Contamination Exclusion, which provided, in pertinent
part:
This policy
does not cover loss or damage caused by, resulting from, contributed to or made
worse by actual, alleged or threatened release, discharge, escape or dispersal
of CONTAMINANTS or POLLUTANTS, all whether direct or indirect, proximate or
remote or in whole or in part caused by, contributed to or aggravated by any
physical damage insured by this policy.
. . . .
“CONTAMINANTS
or POLLUTANTS means any . . . irritant or contaminant . . . , which after its
release can cause or threaten damage to human health or human welfare or causes
or threatens damage, deterioration, loss of value, marketability or loss of use
to property insured hereunder, including . . . fungi . . . .”[69]
The insurer
argued that the insured’s mold losses fell within the above exclusion because
the mold spores that caused the damage were “fungi” that could “cause or
threaten damage” to human health or property.
The insured contended that the exclusion did not apply because the mold
in the apartments did not “escape” and was not “released, discharged or
dispersed” within the meaning of the exclusion.[70] The insured’s contention was based upon
expert testimony that mold and mold spores already exist at de minimis levels in all apartment
environments.
The court
disagreed with the insured, noting the insurer’s expert testimony regarding the
manner in which mold spreads under wet conditions. The testimony established that, “under normal
conditions, fungal mold spores exist at safe levels on the exterior and the
interior of virtually all homes and businesses.”[71] However, where additional water (e.g. flooding) improves the living
conditions for mold spores, the existing spores reproduce by giving off
reproductive spores that are dispersed into the air and consequently into the
surrounding environment,[72]
giving off mycotoxins that “are” dangerous to human health.[73]
Based upon
the insurer’s expert testimony and evidence showing that there were elevated,
unsafe levels of mold in the apartments, the court concluded that “[t]he mold
that was the cause of the damage at issue was dispersed within the covered properties and, consequently, that the
damage caused thereby falls within the scope of the Pollution and Contamination
Exclusion contained in the policy.”[74]
In Cooper v. American
Family Mutual Insurance Co.,[75]
dry wall and flooring in the insured’s master bedroom and hall closet were
damaged by a plumbing leak. Pursuant to
the insured’s homeowners policy, the insurer paid for repairs to the drywall
and flooring, but denied coverage for mold damage allegedly caused by the leak.
The insured brought suit, seeking payment for mold remediation.
The
policy at issue covered “risks of accidental physical loss . . . unless the
loss is excluded in this policy.”[76] It excluded “smog, rust, corrosion, frost,
condensation, mold, wet or dry rot” “regardless of any other cause or event
contributing concurrently or in any sequence to the loss.”[77]
However, the policy did cover “resulting
loss” to covered property “not excluded or excepted in this policy.”[78]
Based
upon that policy language, the insured contended that because water damage was
a covered loss under the efficient proximate cause rule, the resulting mold was
also covered. Consequently, the insurer
was liable for mold remediation, mold damage to personal property, and
additional living expenses incurred during the time the mold was being
remediated. On the other hand, the
insurer argued that the insured’s damages were caused by mold and therefore there was no coverage because the
policy expressly excluded coverage for mold “regardless of any other cause or
event.”[79]
As
explained by the Arizona federal court, the efficient proximate cause rule
would permit the insured to identify an insured peril as the proximate cause of
the loss “even if subsequent or concurrent events are specifically excluded
from coverage.”[80] However, the court noted that Arizona had not
adopted the efficient proximate cause rule, and therefore, the insurance
company was permitted to limit its liability pursuant to the anti-concurrent
causation language in its policy.
Nevertheless, in holding that there was no coverage for the mold losses
“even though a covered water event may have also contributed to the loss,”[81]
the court opined:
Even in the absence of the concurrent causation clause, it is
clear–and should be to a layman–that loss caused by mold is excluded. Unlike some coverage issues, where analysis
and rhetoric move one from a state of complexity to a state of simplicity and
clarity, the reverse is true with the mold exclusion in this policy. The policy says loss caused by mold is
excluded. Enforcing the policy as
written, this Court concludes loss caused by mold is excluded.[82]
The court also rejected the
insured’s argument that the “resulting loss” clause (i.e., ensuing loss clause) contradicted the policy’s
exclusions. The court found that the
clause, “[b]y its very wording . . . only reaffirms coverage for resulting loss
‘ . . . not excluded or excepted in the policy.’”[83] It noted other jurisdictions also holding
that “the resulting loss provision does not reinsert coverage for excluded
losses, but reaffirms coverage for secondary losses ultimately caused by
excluded perils.”[84]
In
addition, the court rejected the intervener’s argument that the mycotoxins
released by the mold constituted a “separate and independent” loss resulting
from the mold and were therefore a covered ensuing loss under the policy’s
“resulting loss” clause. The court
opined that the intervener’s own EPA official publication stated that mycotoxins
were produced and released by mold. It
found that, “therefore, removal of the mold would presumably also remove the
mycotoxins . . . [and,] [a]s such, the mycotoxins do not constitute a separate and independent loss resulting
from mold.”[85]
Quoting
with approval Acme Galvanizing Co. v.
Fireman's Fund Insurance Co.[86] in which the California Court of Appeal had
expressly stated that for an ensuing loss to be covered it must be an
independent, covered peril separate from the initial excluded peril, the Arizona
Federal District Court in Cooper
emphatically concluded:
Here, there is no separate and
independent peril. The claimed damage is mold. The proposed remediation is
removal of the mold. Calling it a pollutant does not change the result. It is still mold. The policy expressly excludes any losses that
are caused by and result from mold. The “resulting loss” clause does not
resurrect the excluded peril to provide coverage.[87]
In Point Triumph
Condominium Ass’n v. American Guarantee & Liability Insurance Co.,[88]
the Association owned a condominium complex in a small town located near the
mouth of the Columbia River. Situated
only a mile and a half from the Pacific Ocean, the condominium complex has been
exposed to normal violent wind and rainstorms.
Beginning in 1993, Point Triumph began experiencing problems with water
penetration into buildings finished with a siding material called
“Forestex.” The single building finished
with cedar siding, as distinguished from “Forestex,” did not experience any
water penetration problems. Point
Triumph sought coverage for damage to the buildings sided with Forestex,
alleging damage “as a result of weather.”
The insurer denied coverage, asserting that, based upon its
investigation, the damage was due to failure of the siding; i.e., the siding “developed buckling”
and then wind blew rainwater under the siding, causing wet and dry rot in the
buildings.
The subject
policy excluded, among other things, loss resulting from “fungus, decay,
deterioration, hidden or latent defect or any quality in the property that
causes it to damage or destroy itself” and faulty workmanship or materials.[89] Based upon the record before it, the court
found that the plaintiff’s damages consisted of “fungus,” “decay,” and
“deterioration,” causes of loss expressly excluded from coverage. Further, it determined that faulty
workmanship or materials, also expressly excluded from coverage under the
policy, caused the damage.
However,
the plaintiff contended that the efficient proximate cause of its loss was
covered wind-driven rain. The court
disagreed, concluding that there was no evidence in the record that wind-driven
rain, “a common phenomenon on the Oregon Coast,”[90]
would have damaged the plaintiff’s buildings absent defects in the materials or
inadequacies in their construction or maintenance.
In granting
the insurer’s motion for summary judgment, the court opined:
The damage
to plaintiff’s buildings was not a “natural” direct or indirect consequence of
the rain, but instead was an abnormal occurrence that would not occur in the
absence of other conditions, -- the faulty material, construction, or
maintenance established by the record – that were specifically excluded from
coverage under the policy. . . . [T]he rain cannot be characterized as the “dominant”
or “most important” cause of loss. Accordingly, a trier of fact could not
conclude that wind-driven rain constituted the efficient proximate cause.[91]
The court
also rejected the plaintiff’s argument that the damage to the underlying
structures of its buildings was covered even if the siding was defective. The court declined to distinguish damage to
the buildings’ structure and damage to the siding, opining that damage to the
underlying structures was a “direct result” of the defects in material, construction,
or maintenance excluded from coverage.[92]
ii. Some
Representative “Coverage” Cases
In Bruce Oakley, Inc.
v. Farmland Mutual Insurance Co.,[93]
Oakley stored its harvested soybeans in a 500,000 bushel storage bin. When some of Oakley’s employees began to
unload the storage bin, they noticed that some of the soybeans were charred and
blackened, and several people saw the blackened beans “amidst heat, smoke, and
steam.”[94] Oakley sought coverage for its loss. The policy at issue stated:
We will not pay for loss, damage, or expense caused by,
resulting from, contributed to or aggravated by the following causes, except
that ensuing fire is covered unless otherwise excluded:
. . .
(2) Wear and tear; deterioration; rust corrosion, or erosion;
wet or dry rot; mold; inherent vice; latent defect.[95]
The trial
court granted Oakley’s motion for summary judgment and awarded it more than
$300,000 for the loss of the soybeans, pre- and post-judgment interest, costs,
and attorney fees. The Eighth Circuit
affirmed. Oakley’s expert testified that
the beans in the storage bin had been unaerated and moist, allowing mold to
form. As the mold grew, the moisture
content of the beans increased, generating heat and eventually causing the
beans to burn. At issue before the court
was whether the “ensuing fire” exception to the mold exclusion applied.
Because the
policy did not define the term “fire,” the court looked to various
dictionaries, concluding that the witnesses had observed “fire” according to at
least two of the dictionary definitions, i.e.,
they had observed smoke, heat, and orange light. The court therefore held that Oakley could
recover under the “ensuing fire” exception to the exclusion because “the policy
should be interpreted in a manner most favorable to the insured.”[96]
In the
alternative, the court found coverage because heat damaged the beans, but heat
was not “explicitly listed” as one of the policy exclusions.[97] Because the insurance company did not
articulate whether heat damage was covered when there was also fire damage, the
court construed the policy in favor of the insured to provide coverage. The court opined, “[t]here is nothing in the
policy that excludes coverage of damage to beans due to heat; the insurance
company should have explicitly listed heat damage as an exclusion if it was
inclined to deny coverage for such damage.”[98]
In Bowers v. Farmers
Insurance Exchange,[99]
Bowers owned a rental house. Without her knowledge, tenants converted the
basement of the house into a hothouse for growing marijuana. The cultivation of the marijuana caused
damage to the house, including the growth of mold throughout the
structure. As described by the court:
[T]he
tenants diverted all of the heat from the furnace to the basement in order to
create a marijuana grow room. They
irrigated the marijuana plants under grow lights. This created a sauna-like environment in the
basement. Additionally, they sealed the
house and thereby trapped the water vapor generated by their activities in the
basement.[100]
Bowers
sought coverage under a landlord’s protection policy for warped paneling in the
basement and the clean up of mold-related damage. The insurer paid for the damaged paneling,
but denied coverage for the mold damage, asserting it was not covered under the
policy. The policy covered loss from
vandalism, but not from “mold.” Bowers
contended that her loss was covered vandalism because the tenants willfully,
wantonly, and recklessly damaged her property.
However, the insurer argued that Bowers’ loss was due to mold, and mold
losses were expressly excluded by the policy.
At issue was whether the efficient proximate cause of Bowers’ loss was
the tenants’ vandalism, a covered peril, or the mold, an excluded peril.
Under
Washington law, when an insured peril is the proximate cause of a loss, there
is coverage, “even if subsequent events in the causal chain are specifically
excluded from coverage.”[101] In the case at bar, the court found that
there could be no reasonable difference of opinion regarding the proximate
cause of Bowers’ loss, holding that it was the tenants’ acts, that “‘in an
unbroken sequence . . . [produced] the result for which recovery is sought[.]’”[102]
In Home Insurance Co.
v. McClain,[103]
the roof on the new addition to the McClain’s home leaked. The McClains subsequently discovered that the
leaking water had soaked the studs behind the interior walls, damaging the
walls, ceilings, and subfloors. Mold and
bacteria apparently flourished in the damp environment. The McClains’ residence became
uninhabitable. They sued the builder of
the addition. The case settled and the
builder went out of business sixty days after the settlement. The McClains then sought coverage under their
homeowners policy. The policy at issue
excluded losses caused by “rust, rot, mold or other fungi,” but did cover
“ensuing loss caused by . . . water damage . . . if the loss would otherwise be
covered under this policy.”[104] The insurer denied coverage, asserting the
policy’s mold exclusion. The McClains
sued. The trial court found for the
McClains, thereby determining that the mold exclusion did not apply. The Texas Court of Appeals affirmed.
On appeal,
the McClains argued that the policy covered ensuing loss from water damage -– in
this case, the loss from the mold and fungi.
The appeals court agreed. “To be
an ensuing loss caused by water damage, the mold and fungi would necessarily
have to follow or come afterward as a consequence of the water damage.”[105] It was uncontroverted that the claimed
damages resulted from water leaking from the roof. The court concluded that “the water from the
leaking roof pooling in the crawl spaces caused the mold and fungi . . . .
Consequently, the loss that followed the water damage was caused by water
damage. Therefore, under the facts of
this case, the exclusion for fungi and mold damage does not apply.”[106]
d. Anti-Concurrent Causation Clauses
To preclude
application of the efficient proximate cause doctrine, insurers have added
language to all-risk policies providing that loss or damage is excluded “‘regardless of any other cause or event that
contributes concurrently or in any sequence to the loss.’”[107] “Most” courts that have addressed the issue
have found such exclusionary language enforceable.[108] They generally reason that the parties to an
insurance contract can opt out of the efficient proximate cause doctrine by
clear and unambiguous exclusionary language.[109]
For
example, in Toumayan v. State Farm
General Insurance Co.,[110]
there were unusually heavy rains in the St. Louis area. The land at the rear of the insureds’
property moved downward and away from their home, causing the concrete patio
and retaining wall to sink. The insureds
sought coverage under their homeowners policy for their loss. The insurer denied their claim.
Sometime
later, the insureds had a large portion of the land at the rear of their
residence excavated for the purpose of stabilizing the land, and replacing the
destroyed patio and retaining wall.
During the excavation, the insureds discovered a broken sewer line
leading from beneath their residence out toward the rear of their home and
found evidence of previous attempts at repair or remediation. They eventually brought suit against the
insurer, alleging breach of contract and vexatious refusal to pay. The trial court granted summary judgment in
favor of the insureds on the breach-of-contract claim and in favor of the
insurer on the vexatious-refusal-to-pay claim.
The insurer appealed. The
Missouri Court of Appeals reversed on the breach-of-contract claim.
The policy
at issue contained an earth movement exclusion, barring coverage for “the
sinking, rising, shifting, expanding or contracting of earth, all whether
combined with water or not . . . .”[111] The appeals court found that the exclusion
applied to bar the insureds’ loss.
However, the insureds argued that the cause of their loss was water
saturation from the broken sewer pipe, a peril specifically covered by a
“back-up of sewer or drain endorsement.”[112] Therefore, it was irrelevant that the
resulting damage was caused by an excluded peril, i.e., earth movement. The
insureds’ argument thus relied upon an application of the efficient proximate
cause doctrine.
As
explained by the court:
If the
language of the sewer endorsement covered the specific facts of this case and
the efficient proximate cause doctrine applied, then plaintiffs [the insureds]
could recover under the policy because a covered risk under the endorsement, a
broken sewer pipe, set in motion a sequence of events which ultimately caused
the loss from an excepted risk, earth movement.[113]
However, the court determined that
the efficient proximate cause doctrine could be applied only if the policy did
not contain pertinent exclusionary language or was ambiguous. The policy contained the following exclusionary
language:
We do not insure under any coverage
for any loss which would not have occurred in the absence of one or more of the
following excluded events. We do not
insure for such loss regardless of: (a) the cause of the excluded event; or (b)
other causes of the loss; or (c) whether other causes acted concurrently or in
any sequence with the excluded event to produce the loss; or (d) whether the
event occurs suddenly or gradually, involves isolated or widespread damage,
arises from natural or external forces, or occurs as a result of any
combination of these: (listed exclusions).”[114]
The Toumayan court found this exclusionary
language was “unambiguous” and prevented application of the efficient proximate
cause doctrine.[115] It therefore reversed the trial court’s grant
of summary judgment in favor of the insureds and remanded the case to the trial
court.[116]
Although
most jurisdictions find anti-concurrent clauses enforceable, there are some
exceptions. For example, in Safeco
Inurance. Co. of America v. Hirschmann,[117]
the Washington Supreme Court, relying upon its prior decisions, expressly held
that “[w]hen an insured risk sets into operation a chain of causation in which
the last step may be an excluded risk, the [anti-concurrent cause] exclusion
will not defeat recovery.”[118] The court did note, however, that such a
clause “may operate to circumvent coverage for losses resulting from causal
chains in which excluded perils are the only proximate causes, or chains in
which an excluded peril is the efficient proximate cause.”[119]
Similarly,
in Murray v. State Farm Fire &
Casualty Co.,[120]
the West Virginia Supreme Court declined to enforce an anti-concurrent
causation clause like that quoted above, finding that enforcement would
conflict with the reasonable expectations of the parties. Relying upon the California Court of Appeal’s
opinion in Howell v. State Farm Fire
& Casualty Co.,[121]
discussed below, the court reasoned that “‘[n]o reasonable person would pay for
insurance against some future peril if it were possible for the insurer to
avoid liability by discovering an excluded peril somewhere in the chain of
causation.’”[122]
The court
concluded that, because the anti-concurrent causation clause at issue
conflicted with what the court considered to be the reasonable expectations of
the parties, the clause should be construed “to allow coverage for losses
proximately caused by a covered risk, and [to] deny coverage only when an
excepted risk is the efficient proximate cause of the loss.”[123]
B. Third-Party Insurance
In contrast to first-party insurance, which typically
provides coverage for losses incurred directly by the insured -- for example,
loss to insured property -- third-party insurance provides coverage to the
insured for claims brought by third parties.
Courts view first-party and third-party policies as distinct and
generally decline to apply the same rules to both types of policies. There have
been very few mold cases brought in the context of third-party insurance.
Third-party commercial general liability (“CGL”) policies may provide, in part, that the insurer: “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. . . .”[124]
1. Trigger of Coverage
CGL
policies typically require a covered event to take place during the policy
period.[125] When a particular event takes place can be
difficult to determine where a loss occurs over a long period of time. The timing of an event has been a litigious
issue in cases involving long-term environmental contamination. Because mold losses often similarly occur
over a period of time, environmental contamination cases may be instructive in
determining how a court will deal with mold contamination cases.
In cases
involving long-term environmental contamination, courts have generally adopted
one of four triggers, sometimes adopting different triggers depending upon
whether bodily injury or property damage is at issue.
·
Exposure Trigger.
Coverage is triggered at all points during exposure to a harmful
substance. Courts have adopted this
trigger most often in cases involving asbestos-related bodily injury claims,
where there is medical evidence that exposure and injury have occurred in close
temporal proximity.
·
Manifestation Trigger.
Coverage is triggered when the injury or damage first becomes reasonably
capable of diagnosis or is first discovered.
·
Injury-in-Fact Trigger. Coverage is triggered when actual injury or
damage is found to exist, or proved in retrospect, regardless of when the
injury or damage first became manifested or when exposure to a harmful
substance occurred.
·
Hybrid Trigger.
Some courts have adopted a continuous or “triple trigger” theory, where
coverage is triggered at all points from first exposure to the harmful
substance until the injury or damage is manifested. A few courts have adopted a “double trigger,”
where coverage is triggered either when the claimant is exposed to the harmful
substance or when the claimant’s condition resulting from that exposure
manifests itself. Both of these hybrid
triggers provide a broad range of coverage, which is likely to result in more
than one insurer being required to defend and indemnify an insured.
Oregon, for
example, has adopted an “injury-in-fact” theory, i.e., an “actual injury” theory.
In St. Paul Fire & Marine
Insurance Co. v. McCormick & Baxter Creosoting Co.,[126]
the insurers sought a declaratory judgment that the policies at issue did not
cover the costs incurred in investigating and correcting environmental
contamination resulting from operations at the insured’s wood treatment
plants. The subject policies provided
coverage for either “accidents” or “occurrences” taking place during the policy
period. The Oregon Supreme Court held
that, by their terms, those policies were triggered only where an accident or
occurrence took place during the policy period.
The court rejected the insurers’ arguments that the policies were not
triggered until the property damage was discovered or until the time when the
insured’s liability became fixed.
However,
the court noted that the policies also provided that the insurers would pay
“‘all sums which the insured shall become
legally obligated to pay.’”[127] It understood that language to allow coverage
for damages that might be assessed against the insured in the future,
concluding that the insured was covered for damages that it became legally
obligated to pay “even after the
policy period, so long as an ‘occurrence’ took place during the policy period.”[128]
Under the
Oregon “actual injury” trigger, an insured would more than likely have to show
that the event leading to the mold growth took place during the policy period,
not an easy proof because mold often results from the leakage or seepage of
water over a long period of time so the “water maintenance history” of the
building may become very important.
2. An “Occurrence”
CGL policies generally apply only to “bodily injury” or
“property damage” that is caused by an “occurrence.” An “occurrence” may be defined as “an
accident, including continuous or repeated exposure to substantially the same
general harmful conditions.”[129]
In Insurance Company of
North America v. Snyder Moving & Storage, Inc.,[130]
floods damaged goods in the insured’s warehouse. The claimant, who had goods stored in the
warehouse, brought suit against the insured, asserting various claims for the
damage resulting from the floods. The
insurance company brought a declaratory relief action, seeking a determination
that there was no coverage under the insured’s liability insurance.
The policy at issue limited coverage to property “loss or
damage which occurs during the policy period.”[131] The policy period began October 18, 1990 and
ended October 18, 1991. Although the
floods occurred at least forty-five days before the effective date of the
policy, the insured asserted there was coverage for the post-flood damage, such
as rust, mold, or mildew, to the extent that damage occurred during the policy
period. The policy at issue defined an
insured “occurrence” as “an accident that takes place during the period of
insurance under this policy, or in the absence thereof, a continuous or
repeated exposure during the period of insurance under this policy to
conditions which unexpectedly cause loss or destruction or damage to physical
property.”[132]
The insured contended that the “continuous or repeated
exposure” language provided coverage for the post-flood property damage. The court disagreed, finding the insured’s
proposed construction “contrary to the plain meaning of the insurance
contract.”[133] It found that the damaged property was not
subject to “continuous or repeated” exposure to flood water “or any other
damaging condition” during the policy period.[134] Rather, the damage was “entirely” due to
floods that occurred prior to the policy’s effective date. The court concluded that there was no
“occurrence” under the policy:
Although
the rust, mold and mildew damage may have worsened due to the property’s continued
storage at the warehouse, this fact does not establish that the property was
exposed to a damaging condition during the policy period, or that any condition
“unexpectedly” caused loss, destruction or damage. The policy clearly and
unambiguously limits coverage to events or conditions that occurred “during the
policy period.” The “occurrence” for
purposes of establishing coverage under the policy is the initial flooding and
not the subsequent property deterioration.[135]
3. Pollution Exclusions
CGL policies generally contain an exclusion barring coverage
for pollutants or contaminants. Whether mold losses fall within a liability
policy’s pollution exclusion is likely to be a litigious issue. Pre-1986 policies typically contain an
exclusion barring coverage for the discharge of pollutants, unless that
discharge was sudden and accidental.
Therefore, mold losses resulting from water leakage (that is involving
maintenance issues) would likely not be covered.[136]
Post-1986 CGL policies generally contain an “absolute”
pollution exclusion, which has dropped the “sudden and accidental” language and
simply excludes coverage for “bodily injury” or “property damage” “arising out
of the actual, alleged or threatened discharge, dispersal, seepage, migration,
release or escape of pollutants.”[137] Courts generally find such exclusions
unambiguous and enforceable.[138]
In 2002,
ISO issued a special endorsement to CGL policies, effective May 1, 2002,
entitled “Fungi or Bacteria Exclusion.”
Applicable to both Section I – Coverage A (Bodily Injury and Property
Damage Liability) and Coverage B (Personal and Advertising Injury Liability),
the purpose of the new exclusion is to foreclose “a potential avalanche of mold
claims against liability insurers.”[139]
The new
exclusion states, in part:
2.
Exclusions
This
insurance does not apply to:
Fungi or Bacteria
a. “Bodily injury” or “property
damage” which would not have occurred, in whole or in part, but for the actual,
alleged or threatened inhalation of, ingestion of, contact with, exposure to,
existence of, or presence of, any “fungi” or bacteria on or within a building
or structure, including its contents, regardless of whether any other cause,
event, material or product contributed concurrently or in any sequence to such
injury or damage.
b. Any loss, cost or expense arising
out of the abating, testing for, monitoring, cleaning up, removing, containing,
treating, detoxifying, neutralizing, remediating or disposing of, or in any way
responding to, or assessing the effects of, “fungi” or bacteria, by any insured
or by any other person or entity.
“Fungi” is defined as any type or
form of fungus, including mold or mildew and any mycotoxins, spores, scents or
byproducts produced or released by fungi.[140]
III.
Personal Injury
Plaintiffs
in mold cases may seek tort damages or insurance coverage for myriad health
problems allegedly caused by exposure to mold.
For example, Erin Brockovich (of movie fame) brought a personal
injury/construction defect suit against the builder of her home (as well as the
former owner), claiming that shoddy construction resulted in water leaks and
mold. Brockovich stated that she
suffered from respiratory ailments, facial rashes, chronic headaches, sinus
infections, and other health problems, causing her to miss work.[141]
Other mold plaintiffs have claimed
compromised immune systems from mold exposure,[142]
as well as fatigue, forgetfulness, chronic bronchitis, neurological tremors,
kidney lesions, speech and developmental learning problems, allergies, heart
problems, and emotional distress.[143]
The
question that arises is one of causality: Did exposure to mold cause the injury
alleged?
A. Lack of Scientific Data
“‘Mold’ is the common term for multicellular fungi that grow as a mat of intertwined microscopic filaments” and “[f]ungi are ubiquitous in all environments and play a vital role in the Earth’s ecology by decomposing organic matter.”[144]
However, although molds are
“ubiquitous in the environment, and can be found almost anywhere samples are
taken,” there are “no accepted standards for mold sampling in indoor
environments or for analyzing and interpreting the data in terms of human
health.”[145] Rather, “most studies have tended to be based
primarily on baseline environmental data rather than human dose-response
data. For these reasons, and because
individuals have different sensitivities to molds, setting standards and
guidelines for indoor mold exposure levels is difficult and may not be
practical.”[146]
Exposure to
mold may cause a variety of illnesses, but other than allergies or asthma, such
illnesses are not common to mold exposure in the home. According to the Centers
for Disease Control and Prevention,
Fungi
account for 9% of nosocomial infections, that is, infections originating or
taking place in a hospital. Ingestion of foods contaminated with certain toxins
produced by molds is associated with development of human cancer [e.g., aflatoxin]. Many respiratory illnesses among workers may
be attributed to mold exposures.
Uncommon illnesses that collectively can be called hypersensitivity
pneumonitis are caused by chronic exposures to high concentrations of mold and
are almost exclusively limited to certain agricultural workers in particularly
moldy environments. Common illnesses caused by molds include allergic conditions such as
hay fever and asthma.[147]
A report produced by the American College of Occupational and
Environmental Medicine,[148]
states that molds and other fungi may adversely affect human health in three
ways: 1) allergy, 2) infection, and 3) toxicity.
·
Allergy. According
to the report, the “most common form of hypersensitivity to molds” can lead to
allergic asthma or allergic rhinitis.[149] However, the existence of a “vague”
relationship among mold colonization, mold in foods, and a “generalized mold
hypersensitivity state” is not supported by reliable scientific data.[150]
·
Infection. The
report states that opportunistic fungal infections in which there is deep
tissue invasion “are primarily restricted to severely immunocompromised
subjects.”[151]
·
Toxicity. Some
species of fungi, including some molds, can produce “mycotoxins.” Not all mycotoxins are harmful – for example,
penicillin is a mycotoxin. Mold
plaintiffs frequently allege that inhalation of mycotoxins causes a variety of
symptoms. The report states: “Current
scientific evidence does not support
the proposition that human health has been adversely affected by inhaled
mycotoxins in the home, school or office environment.”[152]
Another important fact is that the mere presence of fungi
that are capable of producing mycotoxins does not establish that mycotoxins are
also present. “The amount (if any) and
type of mycotoxin produced is dependent on a complex and poorly understood
interaction of factors that probably include nutrition, growth substrate,
moisture, temperature, maturity of the fungal colony, and competition from
other microorganisms.”[153] Moreover, mycotoxins are not significantly
volatile, i.e., they do not float
around in the air. Therefore, any
inhalation exposure requires the generation of a fungal “aerosol.”
The report
concludes:
Adverse
effects of molds and mycotoxins have been recognized for centuries following
ingestion of contaminated foods.
Occupational diseases are also recognized in association with inhalation
exposure to fungi, bacteria, and other organic matter, usually in industrial or
agricultural settings. Molds growing
indoors are believed by some to cause building-related symptoms. Despite a voluminous literature on the
subject, the causal association remains weak and unproven, particularly with
respect to causation by mycotoxins. One
mold in particular, Stachybotrys
chartarum, is blamed for a diverse array of maladies when it is found
indoors. Despite its well-known ability
to produce mycotoxins under appropriate growth conditions, years of intensive
study have failed to establish exposure to S.chartarum
in home, school, or office environments as a cause of adverse human health
effects. Levels of exposure in the
indoor environment, dose-response data in animals, and dose-rate considerations
suggest that delivery by the inhalation route of a toxic dose of mycotoxins in
the indoor environment is highly unlikely at best, even for the hypothetically
most vulnerable subpopulations.[154]
B. Rejection of Expert Testimony
Under the
general rule of Daubert v. Merrell Dow
Pharmaceuticals, Inc.,[155]
the admission of expert testimony depends upon whether the testimony will be
reliable and helpful to the court. As is
well-known, the Daubert Court
abandoned the “general acceptance” test for the admissibility of expert
scientific evidence originally established in Frye v. United States.[156] Instead, the Court adopted new standards
based upon the Federal Rules of Evidence.
The Daubert Court held that, under Fed. R.
Evid. 702, the trial court, as gatekeeper, must 1) determine whether the
expert’s testimony reflects “scientific knowledge,” a requirement that goes to
reliability, and 2) whether the testimony will assist the trier of fact to
understand or determine a fact in issue, a requirement that goes primarily to relevance. The Court, emphasizing that the inquiry under
Rule 702 is a “flexible one,” noted a number of factors that a trial court
could consider in determining admissibility: 1) whether the theory or technique
has been tested; 2) whether the theory or technique has been subjected to peer
review and publication; 3) the known or potential error rate for a particular
scientific technique; and 4) the theory’s or technique's acceptance in the
relevant scientific community.[157] The Court noted, however, that “‘[a]
reliability assessment does not require, although it does permit, explicit
identification of a relevant scientific community and an express determination
of a particular degree of acceptance within that community.’”[158]
In Ballard v. Fire Insurance Exchange,[159]
the court rejected the proffer of the plaintiff’s expert testimony, finding it
unreliable. In Ballard, Mr. Allison, the
husband of Melinda Ballard, asserted claims for toxic encephalopathy allegedly
resulting from his exposure to toxic mold.
Allison sought to introduce at trial the testimony of experts that the
mold found at Ballard’s home caused illnesses like those at issue. The insurer moved to exclude the causation
opinions, contending that they were not sufficiently reliable to establish that
molds can cause personal injury.[160] The Texas trial court granted that motion.[161]
In granting
the motion to exclude, the trial court reasoned that the underlying scientific
data was not reliable under the ruling of the Texas Supreme Court in Merrell Dow Pharmaceuticals, Inc. v. Havner.[162] Havner
addressed the admissibility of evidence from epidemiological studies that
“examine existing populations to attempt to determine if there is an
association between a disease or condition and a factor suspected of causing that
disease or condition.”[163] Epidemiological studies provide only
statistical information and cannot establish the actual cause of a particular
individual’s disease or condition. Havner held that evidence from such
studies is generally admissible in toxic tort cases if it shows that there is a
doubling of the risk of injury when exposed to the substance at issue and that there is a high probability
(ninety-five percent) that, if the pertinent studies were repeated, they would
produce the same results ninety-five percent of the time. In Ballard,
the court concluded that the evidence proffered by Ballard’s experts did not
meet the Havner standard and was
therefore not admissible.[164]
The Texas
Court of Appeals affirmed the trial court’s rulings granting the defendant
insurer’s motion to exclude Allison’s causation experts.[165] The appeals court noted that, if an expert relies upon epidemiological
studies, then those studies must meet the criteria specified in Havner.
Because Allison’s experts relied upon such a study, and the study did
not meet the Havner criteria, the
appeals court held that the trial court had not abused its discretion in
excluding the testimony of the experts.
On February 21, 2003, the appeals court denied Allison’s petition for a
rehearing.[166]
Similarly,
in National Bank of Commerce of El Dorado
v. Associated Milk Producers, Inc.,[167]
the Eighth Circuit Court of Appeals affirmed the trial court’s refusal to admit
expert testimony that the plaintiff’s laryngeal cancer was caused by workplace
exposure to aflatoxin. Aflatoxin is a mycotoxin. The appeals court, reviewing the trial
court’s decision for abuse of discretion, concluded that the trial court, in
its gatekeeping role, had correctly determined that the plaintiff’s proffered
expert testimony did not meet the Daubert
standards for reliability and relevance.[168]
But some
courts have permitted juries to consider “expert testimony” on causation issues
involving mold and health. For example,
in Mondelli v. Kendel Homes Corp.,[169]
the Nebraska Supreme Court held that the trial court had abused its discretion
in excluding the plaintiffs’ expert testimony that mold causes injury. In Mondelli,
the plaintiffs alleged that mold resulting from leaking exterior walls in their
home caused breathing difficulties and asthma. The expert would have testified
that, based upon a peer review of the scientific literature, molds are a cause
of asthma and allergic rhinitis. At the
time of the trial, Frye applied, and
the trial court found that there were no accepted standards for environmental
air in residences and that the expert’s testimony would not have general
acceptance in the scientific community.
The
Nebraska Supreme Court reversed, finding that the expert had established the
requisite general acceptance and noting that the expert had a background in
toxicology and biology, had studied numerous publications concerning allergies
and immunology, and had reviewed the test data on the plaintiffs’ home. Based upon that evidence, the court concluded
that the expert’s opinion “was probative on the issue of causation.”[170]
In New Haverford Partnership v. Stroot,[171]
the Delaware Supreme Court similarly affirmed the trial court’s admission of
the plaintiffs’ expert testimony linking mold and health effects, but under Daubert, rather than Frye, as in Mondelli. The plaintiff
Stroot alleged a worsening of asthma symptoms and specified cognitive deficits;
the plaintiff Watson alleged the development of a permanent mold allergy. The court rejected the defendant’s argument
that the expert causation opinions proffered by the plaintiffs were flawed
because the experts had not excluded other possible causes of the plaintiffs’
injuries. The plaintiff Stroot, for
example, was a smoker and had a dog even though she was allergic to dogs. The court noted that one of plaintiffs’
experts testified that he had followed “the scientifically accepted procedure
of obtaining a medical history and a detailed questionnaire from the plaintiffs
[and] . . . then ruled out other possible causes of plaintiffs’ health problems
by reviewing that information together with the blood test results and the data
collected from the apartment buildings.”[172] The court opined that these facts supported
the trial court’s decision to admit the causation opinion, stating that “[t]he
foundation for an expert’s causation opinion need not be established with the
precision of a laboratory experiment.”[173]
It has been
suggested that the more severe and specific the illness or injury alleged, the
less likely it is that a court will admit expert causation testimony.[174] Arguably, the cases do indicate that courts
appear less likely to admit a plaintiff’s expert causation testimony when there
are allegations of brain injury or cancer than when there are allegations of
asthma or respiratory problems. It is
suggested that the more severe the illness allegedly resulting from mold
exposure, the easier it is for a defendant to demonstrate that there is no
credible medical evidence showing such a link -- for example, between mold and
laryngeal cancer.[175] Whether a court relies upon Frye or Daubert to determine admissibility may also be a factor.
IV.
Bad Faith, Punitive Damages, And
Mold Claims
When an
insurer breaches the covenant of good faith and fair dealing generally implied
in an insurance contract, recovery in tort may be possible, based upon a theory
of insurance company “bad faith.” Bad
faith, which involves a finding of “‘deliberate or reckless failure to place on
equal footing the interests of [the insurer’s] insured with its own interests .
. . .,’”[176]
may result in an award of punitive damages against the insurance company. Findings of insurer bad faith in mold cases
have resulted in some initially huge punitive damages awards to plaintiffs. Appellate courts, however, are reversing or
reducing those awards, finding them unreasonable and unconstitutionally
excessive.[177]
For
example, in Ballard v. Fire Insurance
Exchange,[178]
Mary Ballard had a plumbing leak in a bathroom in her twenty-two-room
mansion. Several months later, the
hardwood floor buckled. When the floor did not dry, Ballard contacted her
insurer, Fire Insurance Exchange (“FIE”).
FIE sent out an adjuster, who attributed the damage to slab settling,
which was not covered under Ballard’s policy as compared to water damage, which
was a covered peril under the policy.
Later, a FIE engineer reported that Ballard had two leaks: one in the bathroom and one in the
kitchen. Ballard’s contractor advised
removing the damaged floor in order to avoid the development of mold. Ballard alleged that, despite repeated
warnings about dangerous mold, the FIE adjuster refused to pay for floor
removal. Instead, the adjuster allegedly
wanted to remove only the most severely damaged boards, replace them with plywood,
and cover the replacement plywood with carpet remnants.
FIE offered
to settle the case for $108,316. Ballard
refused to settle because, by the time of the settlement offer, the damage had
already spread to windows, door frames, stairs, and walls and because the
contractor estimated repair costs at between $160,000 and $197,000. FIE engineers then examined the additional
moisture damage, finding the black mold Stachybotrys
atra behind the refrigerator.
Ballard alleged that she, her husband Ronald Allison, and her
three-year-old son became ill from the mold.
Ballard and Allison sued the insurer. The jury originally awarded $12,000,000 in
punitive damages and $5,000,000 in damages for mental anguish, in addition to
actual damages and attorney fees ($2,547,350 to replace the home; $1,154,175 to
remediate the home; $2,000,000 to replace the home’s contents; $350,000 for
past and future additional living expenses; $176,000 for appraisal costs –
reversed by the appeals court; and $8,891,000 for attorney fees).[179]
On appeal, the Texas Court of Appeals held that there was
“some evidence” to support the jury’s finding that the insurer had breached the
duty of good faith and fair dealing under Texas law, which was sufficient to
uphold the jury’s award of actual damages, less the amount for the plaintiffs’
appraisal costs. However, the appeals
court vacated the jury’s punitive damages award and award for mental
anguish. The jury had awarded punitive
and mental anguish damages based upon conduct committed “knowingly and
fraudulently,” as required under the Texas Insurance Code. “Knowingly” is the “actual awareness . . . of
the falsity, deception, or unfairness of the conduct in question.”[180] “Actual awareness is more than conscious
indifference toward another’s rights or welfare.”[181] Although the appeals court determined that
there was “some evidence” from which the jury could have found that the insurer
had breached its duty of good faith and fair dealing, the court found no
evidence that the company “was actually aware that its actions toward Ballard
were false, deceptive, or unfair -- that is, that [the insurer] was more than
consciously indifferent to Ballard’s rights and welfare.”[182]
Under Texas law, if a claimant relies upon a statute
establishing a cause of action “and authorizing exemplary damages in specified
circumstances or in conjunction with a specified culpable mental state,
exemplary damages may be awarded only if the claimant proves by clear and
convincing evidence that the damages resulted from the specified circumstances
or culpable mental state.”[183] However, because the court found “no evidence
of a knowing violation,” it reversed the jury’s awards of punitive and mental
anguish damages, rendering judgment that Ballard take nothing for those claims.[184] On February 21, 2003, the Texas appeals court
denied Ballard’s petition for a rehearing.[185]
In another mold case, Anderson
v. Allstate Insurance Co.,[186]
the Ninth Circuit Court of Appeals reversed an $18 million punitive damages
award because there was no evidence that the homeowners insurer had acted with
malice, oppression, or fraud as required under California law. In Anderson,
a water pipe broke in Anderson’s home, resulting in mold contamination. Anderson sought coverage under his homeowners
policy. However, following a
“contentious” adjustment process, Anderson brought suit, alleging breach of the
implied covenant of good faith and fair dealing. The jury found that the insurer had acted
maliciously and oppressively in not providing full compensation for repairs,
including elimination of the mold. The
jury awarded Anderson nearly $485,000 in compensatory damages and, based upon a
finding a bad faith, $18 million in punitive damages. The district court reduced the punitive
damages award to five times the compensatory damages. The insurer appealed.
Under California law, a duty of good faith and fair dealing
is implied in every insurance contract.
The test in first-party cases is whether the insurer’s refusal to pay
policy benefits is unreasonable, rather than negligent or the result of bad
judgment.[187]
The Ninth Circuit found sufficient evidence in the record for
the jury to determine that the insurer’s conduct was “more than a simple
mistake or legitimate dispute as to coverage and damages” and therefore “could
properly find that [the insurer] breached its duty of good faith and fair
dealing.”[188] The court therefore affirmed the award of
compensatory damages, but reversed the punitive damages award because Anderson
had not met the requisite burden of proof for exemplary damages. A breach of the duty of good faith and fair
dealing does not automatically lead to punitive damages. “‘The conduct required to award punitive
damages for the tortious breach of contract . . . is of a different dimension’
than that required to find bad faith.”[189]
To recover punitive damages under California law, a plaintiff
must establish “by clear and convincing evidence malice, oppression or fraud”
on the part of the insurer.[190] “Malice” is “‘conduct which is intended . . .
to cause injury to the plaintiff or despicable conduct which is carried on by
the defendant with a willful and conscious disregard of the rights or safety of
others.’”[191] “Oppression” is “‘despicable conduct that
subjects a person to cruel and unjust hardship in conscious disregard of that
person’s rights.’”[192]
In affirming the jury’s finding of bad faith, the appeals
court opined that there was sufficient evidence for the jury to find that the
insurer had acted unreasonably in handling Anderson’s claim. In particular, the court noted that the
insurer’s actions of refusing to resolve the coverage issue, refusing to
consider evidence of additional loss, offering settlement while withholding a
final coverage determination, and failing to communicate with respect to
asbestos and mold exposure “all support[ed] a finding of bad faith liability.”[193] However, the court concluded that the
insurer’s conduct did “not reach the level of ‘despicable conduct that subjects
a person to cruel and unjust hardship in conscious disregard of that person’s
rights.’”[194]
V.
Practical Tips For Adjusting Mold Claims
·
Use fair claims-handling practices. An insurer may face its greatest exposure
from potential claims-handling causes of action. The insurer can practically count on
unfounded allegations by insureds of improper claims handling.
·
Investigate promptly.
It is critical that the insurer respond promptly to any water-related
claims. Any delay in responding to a
water-related claim will undoubtedly result in bad faith claims.
All
complaints should be treated seriously because mold grows very rapidly in a
damp environment. In its Guidelines on Assessment and Remediation of
Fungi in Indoor Environments, the New York City Department of Health has
stated that “[a]n immediate response (within 24 to 48 hours) and thorough clean
up, drying, and/or removal of water damaged materials will prevent or limit
mold growth.” The “[e]mphasis should be
on ensuring proper repairs of the building infrastructure, so that water damage
and moisture buildup does [sic] not recur.”[195]
·
Reserve rights.
A full reservation of any and all rights and possible defenses and a
reminder of the insured’s duty to dry out and mitigate the loss is desirable as
soon as the insurer receives notices of any water-related loss.
·
Investigate “water history.” Consider whether the insured property has a
history of mold and maintenance problems and whether the policyholder has made
multiple water-damage claims.
·
Remediate aggressively. Remind the policyholder, in writing, of its
duties to preserve and “[p]rotect the property from further damage” by making
“reasonable and necessary repairs.”[196] Suggest respected contractors experienced in
the drying out of buildings and the prevention or minimization of mold. Follow up to ensure that the insured is
meeting its contractual obligations to prevent or minimize mold.
·
Considering moving at-risk individuals. Where mold damage is at issue, insureds may
want to move out of their mold-contaminated houses. Consequently, they may seek coverage for
moving costs under “alternative living expenses” provisions in their
policies. Depending upon the facts of
each claim, an insurer may, in some extreme instances, want to consider paying
an insured’s expenses for alternative living arrangements during the time the insured’s
house is being repaired.
·
Read the policy.
Remember that the term “all-risk” is not “’synonymous’” with the term
“‘all-loss.’”[197]
q
Is there a “direct physical loss”? When analyzing a property policy, the first
question that must be addressed – before considering any exclusions – is whether
there has been a “direct physical loss” to covered property. It is critical
that an insurance company not overlook this threshold issue.
q
Is there a covered loss? To the extent that there has been a “direct
physical loss” to covered property, the next question that must be addressed is
generally whether that “direct physical loss” was caused by a covered cause of loss not otherwise excluded by the
policy. As noted above, “all-risk”
policies typically exclude coverage for property damage “caused by” mold. At issue then is whether some other, covered
cause of loss caused the particular damage.
·
Hire experienced counsel. If it appears that a claim is going to be
litigated, or is in litigation, the insurer should consider hiring counsel with
strong experience in claims involving construction defects and toxic
torts. “Mold” law is in a state of
flux. Legal expertise will be extremely
helpful in keeping abreast of new developments and selecting experts in this
constantly evolving area of the law.
In addition to the specific issues
related to mold claims, there are some fundamental questions insurers and their
counsel should ask in coverage disputes:
·
Was the property insured?
·
Did the claimant have an insurable interest in the
insured property?
·
Did the loss occur during the policy term?
·
How was the
loss caused? It is important to focus on
the “how,” rather than the “why.”
Insurance claims that go into litigation over causation disputes might
more appropriately be called “fact
suits,” rather than “law suits.”
VI.
Conclusion
Recent data
suggest that homeowner claims for mold losses may have crested in 2002.[198] We predict that we will see fewer and fewer
mold claims from homeowners as new policy language makes very clear that mold
losses are not covered or that mold losses are subject to some reasonable
limit, for example, $5000. However,
Robert P. Hartwig, Senior Vice President and Chief Economist of the Insurance
Information Institute suggests that the next battlefield for mold may be the
commercial arena, implicating various commercial property and liability
insurance policies. Dr. Hartwig sees
apartments, schools, office structures, and municipal buildings as the next
“hot spots.”[199]
To date,
there are no reliable loss statistics with respect to mold-related commercial
general liability claims. Most of those
cases have not yet worked their way through the legal system.[200] But, the number of new liability cases should
be limited. As discussed above, in 2002,
ISO issued a special endorsement to CGL policies, effective May 1, 2002,
entitled “Fungi or Bacteria Exclusion.”
Applicable to both Section I – Coverage A (Bodily Injury and Property
Damage Liability) and Coverage B (Personal and Advertising Injury Liability),
the endorsement expressly excludes from coverage losses for bodily injury or
property damage resulting from mold.[201]
The National Association of Mutual Insurance Companies has
established a website containing litigation updates as well as current news,
education, state legislation, and scientific links. The website is a valuable resource for anyone
who wants to track the news on mold.[202]
ENDNOTES