JAUREGUI TOXIC MOLD ARTICLE -- Admin -- JJauregui

Toxic Mold: Do Insurers Have A Duty to Warn Policyholders or Others of The Potential Health Risks?

Jacqueline M. Jauregui

Introduction

From Parade Magazine to the Center for Disease Control Website, the level of publicity and concern about the health risks associated with molds in homes, apartments and public buildings is on the rise. Insurers find themselves at the forefront of these difficult problems. Thus, their claims professionals must be educated in all the particulars of identifying and addressing mold infestations. For property insurers, these infestations present special challenges. Apart from the significant coverage questions and debates regarding appropriate remediation presented by mold and “sick building” claims, responsible property insurers must also ask themselves what information, if any, about mold-associated health risks they should disclose to the occupants of the mold infested buildings they insure.

The health consequences of exposure to toxic molds are the subject of considerable debate in the scientific community. However, studies promulgated by responsible governmental entities have suggested that certain molds can pose serious health risks for infants and individuals with compromised immune systems. As insurers deal with scores of mold losses, they will likely develop superior institutional knowledge about both the health risks and the mycotoxins involved. Given that eventuality, what obligations does a property or casualty insurer have to disclose possible health risks when it learns of a toxic mold infestation at an insured property?

II.

Factual Background: Stachybotrys Chatartarum and Other Toxic Molds

Building materials that become moist or water damaged from water intrusion, condensation, or plumbing leaks can provide a hospitable environment for stachybotrys and other moisture-thriving molds. The New York City Department of Health outlines a balanced and thoughtful assessment of the known health risks:

There have been reports linking health effects in office workers to offices contaminated with moldy surfaces and in residences of home contaminated with fungal growth. Symptoms, such as fatigue, respiratory ailments, and eye irritation were typically observed in these cases. Some studies have suggested an association between [stachybotrys chatartarum] and pulmonary hemorrhage/hemosiderosis in infants, generally those less than six months old. Pulmonary hemosiderosis is an uncommon condition that results from bleeding in the lungs. The cause of this condition is unknown, but may result from a combination of environmental contaminants and conditions (e.g., smoking, fungal contaminants and other bioaerosols, and water damaged homes), and currently its association with stachybotrys chatartarum is unproven.

Fungi in buildings may cause or exacerbate symptoms of allergies (such as wheezing, chest tightness, shortness of breath, nasal congestion, and eye irritations) especially in persons who have a history of allergic diseases (such as asthma and rhinitis). Individuals with persistent health problems that appear to be related to fungi or other bioaerosol exposure should see their physicians for a referral to practitioners who are trained in occupational/environmental medicine or related specialties and are knowledgeable about these types of exposures. Decisions about removing individuals from an affected area must be based on the results of such medical evaluation, and made on a case by case basis. Except in cases of wide spread fungal contamination that are linked to illnesses throughout a building, building wide evacuation is not indicated.[1]

One significant focus of insurer concern and scientific debate was prompted by a study in Cleveland that suggested a possible relationship between a rare form of pulmonary hemorrhage in infants and fungal infestations, particularly stachybotrys chatartarum. The Center for Disease Control has concluded that, because of problems with data collection and reporting, the association between stachybotrys chatartarum and pulmonary hemorrhage is not established.[2] While scientific debate continues about whether these potent mycotoxins can be fatal to infants, the responsible insurer must navigate the issues surrounding warnings to policyholders or third parties who work or live in a building significantly infested by toxic mold. This article will explore those issues, suggesting a balanced resolution of the insurer’s dilemma.

III.

Insurers and The Duty to Warn

A. Warnings to Third Parties

Only a few courts have allowed third parties injured by an insured or on an insured’s property to assert that the insurer owed them a duty either to warn them of specific risks, or to refuse insurance to a specific person unless a hazardous condition was remedied. Typical situations involve issuing insurance to a dangerous driver or an unqualified pilot whose negligence later causes injury to the third party. In these situations, courts typically find that an insurer had no duty to warn a third party or to refuse insurance to a potentially dangerous policyholder.[3]

Outside the initial purchase context, injured third parties have argued that an insurer’s knowledge of dangers to them gave rise to an obligation to warn them. Cases evaluating these contentions have consistently held that there was no duty towards third parties to disclose known dangers. For instance, in In re A.H. Robbins Co.,[4] the plaintiffs alleged that Aetna, the insurer of A.H. Robins Company (manufacturer of the Dalkon Shield intrauterine device), was aware of deficiencies in the Dalkon Shield, but failed to disclose them to patients who subsequently suffered injuries from the device. The court held these facts did not occasion any duty to disclose known dangers by the insurer. Other cases have similarly held that an insurer had no liability to a third party for a known dangerous condition on property which the insurer did not own or control. [5]

One exception to the general rule that an insurer has no duty to warn third persons or disclose a dangerous condition is found in Seay v. Travelers Indemnity.[6] In Seay, the Texas Supreme Court held that an insurer’s voluntary inspection of industrial machinery gave rise to such a duty. The insurer had certified the machinery to the State Department of Labor, recommending certain upkeep and maintenance, on which the owner subsequently relied. Accordingly, the court reasoned that the insurer owed a duty toward the owners’ employees, requiring that the insurer’s inspections be performed with due care.

In summary, it appears unlikely that courts will hold insurers responsible for warning third parties (such as tenants or employees) about health risks associated with exposure to stachybotrys or other toxic molds present on the insured’s premises. However, under certain circumstances, such as certifying a product or equipment, that duty may arise.

B. Warnings to Policyholder

There is very little case law addressing any obligation on the part of an insurer to warn a policyholder about possible dangers associated with a reported loss. Most of the case law on insurer warnings involves contentions that life insurance companies were negligent in issuing life policies, in changing beneficiaries or raising policy limits, such that the beneficiary of the policy had a motive to murder the insured. In these situations, some courts have found a duty on the part of the insurer to the insured.

In Bacon v. Federal Kemper Life Assurance Co.,[7] for example, the widow of an insured, murdered by one of his business partners, sued Kemper claiming it was negligent in accepting and recording a change of beneficiary on a life insurance policy. The insured’s business partner had sent the company a change‑of‑beneficiary form bearing the forged signature of the insured. The business partner later murdered the insured in an effort to collect the policy proceeds. The court concluded that the insurer had a duty of care to its insured under the circumstances. However, that duty was limited to acting with due care in effectuating a change of beneficiary. The Bacon court went on to note that the insurer had not breached its duty because there was no evidence that Kemper either knew or should have known that its approval of the change of beneficiary request exposed its insured to an unreasonable risk of harm.

The element of knowledge was emphasized as well in the peculiar case of Life Insurance Company of Georgia v. Lopez.[8] In that action, the insured, Mr. Lopez, survived an attempt on his life by his wife and her brother. Shortly before the attempted murder, Mr. Lopez’s wife obtained a life insurance policy on her husband’s life with an annual premium equal to the family’s annual income. After overhearing his wife and her brother plotting to kill him, Mr. Lopez allegedly called his insurance agent and informed him of the conspiracy. However, the company made no inquiry into the situation. After the Unsuccessful attempt on his life, Mr. Lopez sued the insurer. He alleged that the insurer had been negligent in failing to discover the disproportionate relationship between the premiums and his income, and in failing to investigate the conspiracy to murder him after receiving actual notice. Given that there was actual notice of the beneficiary’s murderous intent, the court concluded that the insurer had a “duty to eliminate any motive for effecting the insured’s death, if not by withdrawing the coverage as void for reasons of public policy, then at least by warning the beneficiary that no proceeds would be payable if she in fact murdered the insured.”[9]

The Alabama Supreme Court reached a similar conclusion in Liberty National Life Insurance Co. v. Weldon.[10] In Weldon, the insurer issued a policy on the life of a two‑year‑old child at the request of the child’s aunt, naming the aunt as beneficiary. The aunt then poisoned the child, presumably to collect the insurance proceeds. The Alabama Supreme Court determined that an insurance company held a duty to use reasonable care not to issue a policy of life insurance in favor of a beneficiary who had no “insurable interest” in the continued life of the insured.[11] The court reasoned that this duty exists because an insured faces extreme danger when such a policy issues.

While these life insurance cases shed little direct light on the duty to warn about health risks caused by molds, their emphasis on the insurer’s knowledge of the insured’s jeopardy is significant. The insurer’s property claims representatives, particularly if they are aided by an environmental consultant, likely will know a great deal more about the general health risks associated with mycotoxins than the average insured. Does this superior knowledge create a duty to warn? If it does, what are the contours of that duty?

IV.

A Duty to Protect or Warn under General Tort Law

Tort law generally prescribes that if a person has not created a peril, he or she is not liable for failure to take affirmative action to protect others, regardless of how great the danger.[12] However, if there is some relationship between the two, there may be a duty to act. Such relationships ordinarily do not include insurer and insured; rather, they typically involve landowners and those who enter the premises, or suppliers of goods and those who purchase them. The cases often refer to these as “special relationships.”[13]

However, insurers will doubtless confront the argument that the insurer/insured relationship is a special relationship, occasioning a duty to warn insureds about significant risks to their health caused by toxic mold. Three potential theories could be used to support such a duty.

First, insurance cases discussing the covenant of good faith and fair dealing often describe the relationship between policyholder and carrier as a “special relationship.”[14] These cases, however, impose extra‑contractual liability on insurers. They do not locate a duty to warn or protect the insured from health risks that the insurer did not create. Nevertheless, given the language used to describe the relationship in duty‑to‑warn cases and the use of identical language in extra‑contractual cases, the courts could be persuaded that the insurer/insured relationship in and of itself gives rise to a duty to take affirmative action when the insured is situated in dangerous circumstances.

The second approach emanates from the fact that a contractual relationship exists between the insurer and the insured. Courts have held that a duty of care can arise because of a contract. However, that duty is merely to perform the agreed services in a competent and reasonable manner.[15] Under insurance contracts, the insurer’s contractual obligation is to pay indemnity for covered losses. This obligation likely includes a duty to determine coverage, to scope a loss accurately, to estimate the cost of repairs in a reasonable fashion, and to issue an accurate payment. These contractual obligations, however, are quite removed from the act of warning or advising about health hazards posed by damage to an insured dwelling. Thus, while some courts may find this argument appealing, a plaintiff who asserts it would be creating new law.

The third, and potentially the greatest risk for insurers, flows simply from the courts’ dissatisfaction with the traditional rule that people and institutions have no obligation to come to the aid of others. The rule is regularly criticized in published opinions and is often subverted by expanding the list of “special relationships.”[16] “Duty” is the shorthand term courts generally use to describe the public policies that give rise to liability. Such “policy determinations,” by definition, can be extremely result-oriented.

California jurisprudence surrounding the creation of this kind of duty is a useful touchstone by which to evaluate how a liberal jurisdiction might address this issue. California courts invoke eight distinct factors to make this “policy determination:” (1) the “foreseeability of harm to the plaintiff;” (2) the “degree of certainty that the plaintiff suffered injury;” (3) the “closeness of the connection between the defendant’s conduct and the injuries suffered;” (4) the “moral blame attached to the defendant’s conduct;” (5) the “policy of preventing future harm;” (6) the “extent of the burden to the defendant;” (7) the “consequences to the community of imposing a duty to exercise care;” and (8) the “prevalence of insurance for the risk involved.”[17]

Based on the scientific information available, there appear to be specific classes of insureds or occupants of insured property who may be particularly vulnerable, arguably making harm to them foreseeable. Infants, individuals with respiratory or immune problems, and others with certain medical conditions may occupy a class of plaintiffs whose harm is deemed foreseeable. The degree of certainty that a particular plaintiff has been injured obviously will vary from case to case, depending on the claimed medical condition and its relationship to mold exposure. Similarly, the connection between the insurer’s conduct in not warning an occupant about particular health hazards and the injuries suffered by the insured will vary from case to case, depending on how long the house has been infested with mold, the particular injuries the plaintiff suffered, and the policyholder’s willingness to vacate the home.

The moral blame surrounding any decision not to warn may also depend on the facts. In a “worst case scenario,” where an infant with respiratory difficulties and uneducated parents is living in a property filled with stachybotrys, many people would attach substantial “moral blame” to any decision by a knowledgeable insurer not to warn the parents of the risk to their child. This “moral culpability” could increase the likelihood that a court would find a duty on the part of the insurer toward the insured. In less extreme situations, the “moral blame” factor may be significantly diminished.

Two factors that militate against imposing a duty to warn upon the insurer are the burden on the insurer and the consequences to the community of imposing liability, both of which could be substantial. As a business matter, property insurers underwrite insurance and pay covered losses; they do not provide medical advice or educate employees and policyholders about mycotoxic hazards. Developing medical information about who is at risk and developing microbiological information about which molds are hazardous to whom constitute substantial burdens for the insurer. Educating claims staff in these two highly technical areas is burdensome as well, and not particularly pertinent to most loss adjustments or coverage determinations. Indeed, imposing liability on insurance companies for health problems people suffer resulting from mold infestation will inevitably result in higher insurance prices for the community at large.

Minimizing the Risks for Insurers: A Modest Proposal

As this article has demonstrated, there is some risk in the first-party context that a court will impose a duty to warn policyholders about the health hazards created by molds. However, the arguments against the imposition of such a duty are strong and, in many fact situations, counterbalance the arguments favoring such a duty. Nevertheless, it is easy to imagine a “hard case making bad law,” where such a duty would be imposed. The example of a claims representative having said nothing about a known toxic stachybotrys infestation to an uneducated policyholder whose infant later died of lung hemorrhage comes easily to mind. Under the circumstances, many courts would be deeply averse to finding that there was no duty to inform the policyholder. Such a clear‑cut situation could offer a compelling moral argument for attaching such a duty to the insurer.

The multitude of other less clear‑cut factual situations that claims professionals undoubtedly will encounter has the potential to plunge insurers into a morass of litigation that attempts to distinguish complex medical and microbiological issues that are well beyond an insurer’s expertise. Moreover, the science in this area is still developing, and medical facts about who is at risk for what harm from what molds will undoubtedly change over time.

Under the circumstances, there is no course of action available to an insurer that entirely eliminates the risk of liability for real or imagined physical injury to policyholders and their families. An insurer could assume that it owes no duty to warn anyone, including the policyholder with an infant as noted above, but a bad set of facts could result in a finding of duty and breach. Moreover, it would be naïve to assume that such exposure would not involve damages that exceed those ordinarily associated with the death of an infant (e.g., punitive damages), not to mention the attendant bad publicity. Yet, a decision to warn only policyholders who are, or may be, particularly vulnerable entails intrusion into the policyholder’s privacy (e.g., claims representatives inquiring whether anyone in the household is pregnant, HIV positive, etc.). It will also require claims representatives to develop substantial expertise about vulnerable populations and toxic molds. In addition, asking claims professionals to exercise judgment about which people require warning about what risk from which mold carries significant risk of mistake, confusion, and disparate treatment of claimants.

A better alternative would require insurers to provide basic information, such as that found in the New York City Department of Health Guidelines, to everyone whose house is found to contain any toxic mold. That information, combined with the results of a mold sampling, will enable the policyholder to make informed decisions about seeking medical advice or evacuating the home. Undoubtedly, many policyholders will not belong to any vulnerable group. These may nevertheless overreact to the information or consult with physicians whose suggestions may be excessive. Nevertheless, this approach should reduce the risk of liability, though it may increase the likelihood of unjustified claims for alternate living expense, business interruption or other benefits.

Simple, straight‑forward information, coupled with disclosure of any environmental testing results, should fully inform the policyholder without plunging the claims staff into decisions about which mold warrants what type of warning to which type of policyholder. Therefore, this approach appears to be the simplest and safest for the insurer as well.

The Risks Associated with Warning Policyholders

While this article suggests providing simple, basic information to all policyholders about molds, even that method is not entirely free from risk. For example, section 324A of the Restatement (Second) of Torts imposes a duty of care on a person or institution that “undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of a third person or his things . . .”[18] Liability for this “Good Samaritan” act attaches if the actor: (1) fails to exercise reasonable care which increases the risk of harm; or (2) undertakes to perform a duty owed by some third person; or (3) if the plaintiff suffers harm because of reliance on the actor’s conduct.[19]

The case of Seay v. Travelers Indemnity Co.,[20] illustrates this principle in the insurance context. In Seay, the insurer, Travelers Indemnity, voluntarily inspected boilers at its insured’s premises. Texas law required that the boilers be inspected periodically by certified inspectors and that their condition be certified to the Department of Labor Standards. The Department certified Travelers’ employees to inspect these boilers. If the certified inspector approved a boiler, the Department would certify the boiler for continued operation. Over the years, employees of Travelers inspected the insured’s boilers and reported on their condition to the Department of Labor, as well as to the insured. Certificates of operation issued as a result, and the insured continued to use the boilers. However, when a malfunction in one boiler resulted in the scalding death of the insured’s employee, the employee’s widow sued Travelers for wrongful death.

The Seay court found that Travelers’ inspections were an undertaking under section 324A of the Restatement, which gave rise to a duty of care in inspecting and certifying the boilers. The court reasoned that the purpose of the inspections, as required by the Department of Labor, was to determine whether the boilers were safe to operate. The employer in turn presented evidence that it relied upon Travelers’ inspections both to determine the condition of the boiler and for advice concerning problems and changes. As a result, Travelers was liable for the death caused by a negligent inspection.

Although Travelers had no initial obligation to inspect the boilers, its extensive involvement in certifying the boilers and recommending changes to the insured occasioned liability. Thus, an insurer’s decision to provide advice or warnings concerning health hazards from molds could impose a duty of care to provide accurate information as well.

Unfortunately, providing accurate advice requires analyzing toxicology and medical issues that are far from simple. These involve more than a dozen potentially toxic molds with varying health risks, depending on an individual’s pre‑existing condition and exposure. Thus, providing specific information to policyholders about health risks would require a massive effort, closely monitored to ensure accurate and up-to-date information.

Should an insurer decide to provide basic information about mold hazards that is not specific to any individual, it might also be wise to advise policyholders to check with their doctors to assess any specific cause for concern. By doing so, the responsibility for knowledge of the policyholder’s medical situation and up-to-date toxicology is placed on the doctor, exactly where it belongs. Furthermore, this option minimizes the chance that a danger to policyholders will be aggravated or that policyholders will rely on claims people for what is essentially medical advice.

VI.

Conclusion

The toxic nature of some mold infestations, and the health risks they pose, have become immediate issues for the insurance industry. As with many such issues, a host of new legal and practical questions arise. This dilemma will persist for insurers until public awareness and knowledge on this topic equal the education many carriers are rapidly acquiring. Striking a balance among the competing considerations of avoiding liability, avoiding undue alarm to policyholders and their families or tenants, and the practical realities of property claim adjustment undoubtedly can be accomplished in a number of reasonable ways. The balance suggested by this article should minimize the risks on all three fronts.

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