Mold Litigation – the Monster in the Closet

“Mold is a monster with many tentacles that we just can’t sweep under the rug.” The emerging issue of black mold, brought to international attention in several big-dollar Texas lawsuits against insurers, is making its way to Canada, was the view of speakers at a recent Canadian Litigation Counsel seminar held in Toronto. Lawyers from the national affiliation of litigation firms, as well as scientific experts, told a packed forum that Canadian insurers can no longer view mold litigation as a U.S. problem.

The “many-tentacled” monster referred to by Claude Laporte of law firm Gascoe Goodhue Provost in Quebec has already reached into that province. One insurer saw $1,800 in sewer back-up damage turn into a $30,000 mold clean-up bill, he notes. In the last two to three years, North America has seen between 9,000 and 10,000 new mold lawsuits, about half of which have been bad faith suits aimed at insurers, reports Julie Welborn, senior vice president of claims with Zurich North America Canada. Farmers, the third-largest property and casualty insurer in the U.S., handled 12 mold claims in 1999, 499 in 2000, but expects more than 10,000 for 2001.

Homeowners insurance rates in Texas, where the problem is most significant, have skyrocketed, with the largest insurers choosing not to write new business there at all. Mortgages are now in peril, as homeowners lack the necessary insurance coverage, and the Texas insurance commission reports there are 50,000-60,000 open mold claims in the state.

What is mold?

Everyone knows about common molds, the bread left out too long turns green or the microscopic particles naturally occurring in the air. However, the so-called “black mold” that has insurers worried is far more dangerous.

Certain fungi can penetrate cement blocks one-foot thick, says Dr. Thomas Rand, a mycologist with St. Mary’s University in Halifax. Moisture problems caused by dampness entering through eaves, windows, doors, drainage, ground water or defective flashing or roofs, as well as condensation, can lead to mold infiltration in buildings. It may appear on surfaces, in wall cavities and above ceilings, in drapery, upholstery, or even in dust molecules. “The most important factor stimulating mold growth is water”, says Dr. Rand, and condensation is the biggest threat.

Part of the problem, explains David Liblong, of law firm McCague Wires Peacock, is that following the energy crisis of the 1970s, buildings are now “sealed”, leading to greater moisture buildup. A building exposed to “wetting” for as little as 24 hours can show visible mold, Dr. Rand confirms.

And, mold is not just a threat to buildings, he asserts. Studies have shown “clearly and unequivocally” a link between mold in buildings and a variety of negative health effects, ranging from headaches and rashes to upper respiratory disease. While he cautions that there is not clear evidence that mold “causes” asthma, a 1989 study by Jack Spengler does show that children exposed to mold are 50% more likely to suffer this disease than those who are not.

“Scary” claims

Health issues surrounding mold include those in the vascular, nervous, cutaneous, digestive, respiratory and urinary systems, potentially, says Phil Chapman, of law firm Huestis Ritch. But there is no consensus on exactly what effects might be traced back to mold, and it is still difficult to know at what level mold will be harmful, or, “how much mold is too much?”

Potentially, any health problem could be traced back to mold, and at any point in the future – claimants could be filing based on mold issues years, even decades prior. While the Supreme Court of Canada established a “but for” precedent in such cases, meaning that injury would not have happened but for the exposure, interpretations have often been broader in the past, Chapman says. However, the onus is still on the plaintiff to prove causation. That said, U.S. court rulings on damages in civil law tort cases already have been “scary”, he says, and in Canada, mold may reach the same level as fibromyalgia cases.

“Mold claims certainly have the potential to outstrip the litigation we’ve seen in asbestos and lead paint claims,” says Liblong. Although there is no precedent in Canada, as pending cases have yet to reach trial, the potential for claims is huge. Not only could insurers see bodily injury and medical expense claims, but they could face costs for investigation, testing, containment and remediation, physical damage, loss of use of property and relocation, diminuation of property value and even loss of earnings.

Previously, mold was viewed as normal “wear and tear” on a building, Liblong adds. “Mold was seen as a naturally occurring phenomenon…given the dollars involved, that kind of thinking is under attack.” Costs for testing for mold alone can be $1,500 to $3,500, but clean-up can top $30,000, he says.

Coverage issues

Mold spawns many questions for insurers from a coverage perspective, says Liblong. Is mold a physical loss or damage (is it a peril or property damage)? In cases south of the border, U.S. courts have in some cases called any loss a “damage”, rather than concentrating on the loss being physical, he says.

Is the “date of occurrence” based on first sighting, first exposure or when symptoms occur? What is the trigger? There are “serious evidentiary issues” in determining occurrence, because technically the onus should be on the claimant to prove the time of occurrence, but courts have not always placed this burden on the claimant, Liblong notes. Courts could take a “triple trigger” view, accepting the first exposure, continuing exposure and manifestation each as components of occurrence.

Insurers will also need to address whether mold is the “peril” or the “damage”, meaning is mold the cause or the effect of the problem, adds Liblong. Essentially, insurers “run the risk of courts making the facts fit the coverage” in an attempt to see claimants paid when it comes to these coverage issues, he explains. And, insurer attempts to use exclusions to black mold claims have not fared well in the U.S., Liblong observes. Pollution exclusions have been cast out, with courts noting that mold does not fit the definition of pollution as a “discharge, release or escape”. Even “absolute” pollution exclusions do not account for the fact that mold is a living organism, “closer to a rattlesnake than smoke belching from a factory”, says Sean Lerner, of law firm Whitelaw Twining. The absolute exclusion also does not apply to “finished projects”.

Some insurers are looking at a “total pollution exclusion” that would better account for mold, Lerner notes. “An industry answer could simply be to modify the definition of pollution to include living organisms.”

A Supreme Court of Canada decision in a case titled “Derksen” suggests that each such case will turn on the specific policy wordings, and insurers must be very clear about exclusions. The court did offer suggested wording exclusions, which Liblong thinks will provide a good guideline for insurers to avoid their own wordings being seen as ambiguous, and therefore void, by the courts. “The best course of action is to pick up the wordings we got in Derksen,” he suggests.

Precedent setting

Whether or not insurers can come up with mold exclusions that fly with regulators and the courts, there are still existing mold concerns under existing policies to be considered. The decisions in U.S. courts against Chubb and Farmers show that insurers need to be diligent in the investigation and remediation of water damage claims, or they will be hard hit if mold claims arise later, says Liblong.

Welborn agrees, arguing that the Farmers case was “truly the result of bad claims handling”. Insurers need to look at water damage claims quickly and seriously, she says, and should consider having a “mold team” and on-hand experts to deal with these claims.

While “science in the area of mold is unsettled”, leaving openings for defense lawyers to dispute expert testimony in mold lawsuits, past U.S. cases have shown just how vulnerable insurers are, says Andrea Schillac i, of New York law firm Hurwitz & Fine. “The numbers are just astronomical”, especially in the Farmers case, where a good portion of the US$32 million verdict was in punitive damages. This is “a real warning to the industry in terms of how these claims should be handled,” she observes.

However, insurers have not been totally unsuccessful in defending mold lawsuits. In the “Tarp” case, in 1999, the courts found the plaintiff’s were negligent because of changes they made to the property that were found to be the cause of the mold, and the plaintiffs had to pay defense legal costs of US$650,000, Schillaci explains. Such a verdict against plaintiffs should serve as some deterrent against frivolous suits.

Nonetheless, the picture remains bleak, and not just for insurers. In cases involving large commercial structures everyone is being sued, including insurers, architects, bonding companies, construction companies and more, she says. “These are cases with tremendous jury appeal” because they are very visual and because everyone can relate to the symptoms plaintiffs claim to have.

One Canadian case does show that the potential exists here for large awards to plaintiffs, notes Maria Henheffer, of law firm Barry Spalding Richard in New Brunswick. She recently concluded a personal injury mold case for a man working in a contaminated building. Mold had been caused by excessive condensation, which persisted despite remediation efforts. The result for the defendant was lifelong health issues including respiratory, digestive, skin and even memory problems. Multiple defendants in the case included the builders and building owner. Says Henheffer, “the cost of this litigation was absolutely phenomenal”.