Toxic Mold Claims: Covering the Bases

The public perception of insurance companies has never been good – they are believed to have deep pockets and little conscience when it comes to paying claims. In the U.S., plaintiffs’ lawyers have taken full advantage of this perception in bringing “toxic mold” litigation before the courts.

Most notably, in Texas, the hub of the mold crisis, the infamous “Ballard v. Farmers Insurance” case saw an award of US$32 million given to the plaintiff for direct damages, punitive damages, emotional distress and legal fees. In this case, the insurer was slapped with a bad faith suit and found at fault for improperly handling a water damage claim which resulted in mold growth throughout the Ballard home.

And Canada has not been immune from mold in the public spotlight. The closing of courthouses in Calgary, Alberta and Newmarket, Ontario, plus the displacement of 179 residents of the Little Saskatchewan reserve in Manitoba from homes infected with toxic mold, are among the most well-known instances. The B.C. “leaky condo” cases have also raised mold as a potential issue by plaintiffs.

The one attempt thus far to certify a class action for mold in Canada, filed on behalf of students in school portables in the Dufferin-Peel Catholic School Board, failed on the basis of the inability to prove a common cause to students’ health issues. Notwithstanding the portable decision, insurers see mold very clearly on the radar screen and are looking for answers to a variety of questions about health effects, exclusions, due diligence in claims handling and proper remediation. Unfortunately in too many cases, the answers remain in short supply.

MOLD TAKES ROOT

One question is, why mold now? “Up until the last 100 years, the kinds of fungi that were the main agents of contamination were not molds, they were rots,” explains James Scott, Ph.D., a professor in the Department of Public Health Sciences at University of Toronto’s Faculty of Medicine. “Rots” are mushroom-based and break down wood, but had little impact on human health. In the past 50 years, the trend has swung towards mold infestation. This is the result of such factors as making buildings tighter and from processed materials to retain energy. Mold grows through a combination of the presence of moisture and lack of ventilation. The length of time it takes for a water damage incident, for example, to lead to mold infestation, is one subject of debate. Some experts peg this at 24 to 48 hours, but a study from the Netherlands recently indicated it might take as long as a week for mold to manifest.

The most common types of household mold include Aspergillus, Fusarium, Penicillium and the infamous Stachybotrys. However, it is next to impossible to determine the exact date of mold infestation, and therefore to link its presence to a specific event. This may seem to act in insurers’ favor, if courts were unable to trace mold back to, for example, a water damage claim. Yet it also opens the door up for claims that are circumstantially linked to an insured event, despite lack of distinct knowledge of where the mold originated.

MOLD MYTHS

While much has been made of mold in the news, with high-profile lawsuits from Ed McMahon and Erin Brockovich leading the frenzy, myths have been as quick to spread.

There is a lack of distinction sometimes made between molds that are harmful and those that humans have lived with for hundreds, even thousands of years, notes Deb Robinson, vice president of sales, customer service and marketing for UAB Group. She says there is much for the industry to learn about mold, so that claims adjusting standards can be put forward based on sound scientific knowledge.

For example, the adjustment of a water claim could vary dramatically based on whether the damage comes from clean water overflowing a sink (so-called “white” water) or from a toilet back-up (so-called “gray” or “black” water depending on the level of contamination).

Old techniques might have involved taking visibly wet floorboards out and closing up the area with new floorboards. However, understanding water’s ability to “wick” through wood, enclosing not yet visible moisture with new boards would actually provide a perfect atmosphere for mold growth. On the other hand, there is also concern of over-reaction and of adjusters or remediators stepping outside areas of expertise in handling water damage claims. Torgny Vigerstad, Ph.D., and director of scientific investigations for Cunningham Lindsey, gives the example of a remediation expert commenting on potential health effects of mold, an area best left to biologist and medical scientists. “We want them [adjusters and service providers] to do due diligence, to recommend experts, but not to draw conclusions.”

Another mold myth is that the issue will not become such a problem here as in Texas, California and other warm climate areas. Canada has its own concerns, varying across the country, notes Scott. Whether it is the wetness of coastal climates or the flooding concerns in central Canada, mold stands to become a big issue if insurers do not take control now.

TOXIC DEBATE

Perhaps the most salient argument surrounding mold is its potential toxicity. “There is no consensus on the health effects,” says Vigerstad. “Probably the best source is New York [Department of Health], which says that mold is an irritant to asthma and other lung diseases, and that exposure is bad for those who already have bad health. Beyond that, you’ll get a very wide range of opinion.”

Unlike asbestosis, where a clear link was shown between exposure and health effects, mold is a mystery, says Glenn Gibson, CEO of Crawford Adjusters Canada. Symptoms have been listed as runny nose, eye irritation, coughing, congestion and respiratory problems. Types of mold that produce mycotoxins have been linked with weakened immune systems.

Scott does note that some types of mold have been shown to increase the chances of allergy development or asthma in children, comparable to living with parents who smoke.

However, health effects-based mold cases in the U.S. have not advanced in the courts due to lack of consensus. And recent fears in Ohio that Stachybotrys was “killing kids” have been refuted by the Centers for Disease Control (CDC). It states, “CDC reviewers and an external panel of experts determined there was insufficient evidence of any association between exposure to Stachybotrys atra or other toxic fungi and idiopathic pulmonary hemosiderosis.” The CDC went on to say that any number of environmental causes could be linked to the children’s illnesses. This case, Vigerstad points out, represents just the kind of hype insurers and adjusters must guard against when handling claims.

SEEKING STANDARDS

What the industry seeks now are reliable, tested standards on which to base claims handling. “People need to know what the due diligence is – no one wants to be in a situation where they recommend improper repairs in a water damage claim,” says Robinson. “What do we do as an industry to make sure that we take the proper steps with this?”

“There isn’t really a lot we have to go on in terms of standards and guidance in Canada,” says Scott. He notes that Health Canada and the Manitoba Department of Labour have come out with some guidance, but “that’s really all we have to go on”.

“A lot of insurers are currently struggling with protocols on water damage claims. You can imagine from our perspective as an adjuster…each customer could have a different protocol,” says Gibson. This will particularly be an issue in flood claims where a specific region is hit with a high number of water damage claims backed by a variety of insurers.

Other aspects of the adjusting process will be challenged, Gibson goes on to say. What constitutes due diligence when a water damage claim is “paid out”, rather than the adjuster or insurer hiring experts? Will mold increase pressure to have 24/7 response to water damage claims? “These things quite often happen on a Friday night at 10 p.m. You can’t wait until Monday to respond.” This means access to insurer systems to verify cover age as well. And, will mold make the traditional water damage claim something that can no longer be adjusted over the phone? Furthermore, there is no standard certification process for mold experts, adds Vigerstad. He advocates tighter controls on what constitutes a “certified” mold professional and a re-certification process.

Gibson says vendor selection will become a key issue as the industry faces the threat of litigation from poorly handled claims. “I’m an adjuster. I’m not a mold expert. I’m an expert at finding the right people to handle a claim.” Particularly in the case of “preferred” or “approved” vendors, insurers recognize that any litigation will encompass not only those vendors, but themselves and potentially adjusters as well. Companies will be looking for experts who have qualifications, experience and the necessary insurance coverage.

Nonetheless, Scott points out, Canada is in many respects leading the way on mold. The Canadian Mortgage and Housing Corp. residential guide on mold has become a source throughout North America. And Canada has more mycologists per capita than even the U.S. “Despite that it [the mold issue] hasn’t been [raised] through the courts, we are leading the way through research and proactive documents”.

MOLD IN THE COURTS

In Canada, mold litigation has not reached the appellate or Supreme Court level, and has been scarce at even the trial court level, says Elizabeth Cummins Seto, law partner at Cummins Seto. Speaking at a recent CIP Society seminar, “Mold, Muck & Toxins”, Cummins Seto noted that insurers will rely on asbestos, sick building and other precedents to assess how the mold landscape will develop.

Insurers could face third-party claims for property damage, but more likely first-party suits for improperly handled claims will be the larger issue. Mold is generally specifically excluded from homeowners’ policies, so that mold caused by poor ventilation, for example, is not covered. But if the mold is the result of an insured event – a fire, storm damage, flood – then the insurer cannot contract out of this exposure. In the case of a poorly handled claim or botched remediation, the insurer, the remediator and others could be on the hook.

On commercial policies, several exclusions could apply, Cummins Seto notes. Work done by the property owner is generally excluded, and some courts may interpret mold as part of pollution exclusions, but, she notes “there is no firm conclusion, scientifically or judicially, as to whether mold is a pollutant”.

The last defense against mold will be on the basis of causation. This is particularly at issue with health-effects claims where evidence is contradictory. “It is becoming very obvious that if we are to have any success in refuting the phalanx of experts on the plaintiff’s side, we will have to spend more money on good research and expert testimony,” she says. Defense lawyers will have to “educate” the courts on the establishment of causation and the problem this presents in mold cases.

As insurers face growing plaintiffs’ bar interest in mold litigation, she says, “there is no certainty in the law…the court is going to strive to find coverage. It will construe the exclusion narrowly and it will construe the coverage broadly.”

Just this fall, the Insurance Bureau of Canada (IBC) released a model mold exclusion for commercial general liability policies and a model endorsement for limited fungi coverage. However, these exclusions have come under some fire (see page 31 of this issue). Reinsurers, through the Reinsurance Research Council (RRC), and no doubt on an individual level, are looking into the issue to determine their willingness to accept any part of this risk and the adequacy of existing and proposed exclusions.

Whether or not the IBC’s exclusions or existing exclusions will stand the test of scrutiny from the industry or the courts remains to be seen. It is unlikely mold will develop into an issue of the same magnitude for Canadian insurers as it has for those in Texas, California or Florida. However, given the need for tighter standards, increased expertise, more thorough claims handling and, of course, the increased cost of defense, including the use of experts in court, mold does stand to put the pinch on insurers’ already-strapped pocketbooks.