Once upon a time, mold was a problem at work only if you avoided cleaning the office refrigerator for too long. Lately, though, it's becoming the hottest topic in property/casualty insurance, as lawsuits claiming health-related damages from toxic mold spread from residences to offices and other commercial buildings. And with insurance coverage already difficult to obtain, and expensive when available, companies may face some unpleasant choices about how to protect themselves.
Some corporate risk managers are closely watching the federal suits filed against IBM Corp. in North Carolina, where several employees allege they experienced mold-related illnesses following an April 2000 flooding incident at the Research Triangle Park campus. Also under scrutiny is a class-action suit by two United Airlines employees alleging that mold constitutes a major health hazard in Concourse B at Denver International Airport.
"I guarantee you this is the last thing the CEO of IBM wants to think about," says Robert Hartwig, chief economist for the Insurance Information Institute (III). IBM's problem will quickly entangle other companies as well, he notes, because "a mold suit like this often ignites a chain of litigation," eventually involving a building's designer, for example, or the maker of construction materials.
In fact, these lawsuits could make the threat of mold-related litigation more real for just about any company with walls, ceilings, and floors. "It's not a big stretch from thinking about mold at home to [thinking about] mold in an office," says Ira Whitman, a former Ohio state environmental-protection official who now runs The Whitman Cos., an environmental-management firm. Mold and other water-damage issues now consume about 60 percent of the indoor environmental group's time, up from 5 percent in 1998, although so far all of Whitman's clients have been associated with commercial or public buildings.
What makes this so worrisome for companies is that insurance for mold damages is largely unavailable. After a huge rise in mold-related homeowner claims during the past three years, mainly in Texas, California, and Florida, property/casualty insurers moved to exclude damage from mold, microbial matter, and fungi from environmental policies.
The tipping point in mold litigation is the case of the Ballard family, who eventually abandoned their expensive but mold-filled home in Dripping Springs, Texas, after the husband, an investment adviser, became seriously ill. In the well-publicized case, the family sued Farmers Insurance Group, claiming it had mishandled claims over the years.
The jury found that the insurer had acted in bad faith, and awarded damages of $32 million. Although that amount was recently sliced to $4 million, it raised eyebrows. "If people were being awarded $3,000, we wouldn't be having this conversation," says Hartwig. It's the prospect of big-ticket awards from juries that attracts most attorneys to the issue, he says.
These days, even when companies can get coverage for mold, it's as a stand-alone policy with a high premium. Whitman himself has had his insurance hiked significantly to reflect mold-related changes in coverage.
And he's one of the lucky ones. Insurance brokers estimate that 15 to 20 percent of formerly covered companies have sought to restore mold coverage via stand-alone insurance, and they aren't sure how many have been successful so far. Companies with a history of mold problems may not be eligible for coverage at all. Any company that is covered should adopt strict measures for preventing mold, or treating it if it appears, and must communicate those measures to employees. Further, to cover specific mold-related needs, "you have to buy the right insurance, and you have to meet the triggers of the policy," notes Julie Hespe, chief underwriting officer for AIG Environmental, a unit of American International Group and the oldest and largest writer of environmental policies.
When companies do get the coverage, the total premiums are generally pegged at between 2 and 10 percent of the coverage limit chosen. Russ Nassof, president of Phoenix-based Environomics, which handles mold-related claims for both insurers and their clients, says that while some companies have chosen to go without the coverage, others vulnerable to mold claims feel forced to try to obtain a policy. Besides AIG, those writing mold policies include Chubb, the Gulf Insurance Group unit of Travelers, Liberty Mutual Insurance, XL Capital of Bermuda, and Zurich Financial Services Group.
A Texas "Export"
"Over the past two years," says Rachel Jakubovitz, senior resource consultant for Willis Environmental Practice, a unit of insurance broker Willis Group Holdings, "the situation has morphed to where underwriters can finally get their arms around the coverage, and can offer it." In part, she believes that is because litigation recently "hit a plateau."
An explosion of new claims and big losses in commercial buildings, or heavily publicized jury verdicts, could change all that. Also, estimating the cost of cleanup has continued to be problematic for insurers, since few standards now exist in that area.
Texas has been the real hotbed of most litigation so far. Claims there have been huge, running well into the billions in 2002. But Texas's peak month was July 2002, when 24,383 claims were paid, resulting in $215.4 million in losses, according to the III. Still, the moderate decline in claims in the succeeding months, suggests Hartwig, is hardly a promising sign for insurers. Only half-jokingly, he says he sees attorneys "exporting" their mold-related litigation — especially moving to file more claims against commercial defendants in other states — now that they have worked through the Texas home-insurance market.
Hartwig says that the lawyers see corporations as "the quintessential deep pockets," with liability limits often in the tens or even hundreds of millions of dollars. And plaintiffs suing companies can seek compensation for personal injuries and violations of federal air-quality rules, among other things, while also making workers'-compensation claims. If there's a mold exclusion in the property/casualty policy, of course, that's the company's problem.
Juries and Hard Science
There's general agreement that mold can be hazardous to health, especially for the lungs, and that it aggravates allergies. The approach many defense attorneys take in court, though, is to point out how few solid medical links tie mold to the specific diseases that plaintiffs may have contracted. A July 2002 report from the Centers for Disease Control and Prevention, for example, says that illness can result "when people are exposed to extensive mold growth indoors." But the report also states that there is "inadequate evidence that molds caused people to become asthmatic," adding: "we do not know whether molds cause other adverse health effects, such as pulmonary hemorrhage, memory loss, or lethargy."
Environomics's Nassof, who frequently serves as an expert witness in mold-related litigation — 90 percent of the time on the defense side — thinks that "you lose the jury when you start talking about hard science; all they see, unfortunately, is someone who claims to be sick."
Nassof thinks office-related cases are likely to increase, although they won't reach the level of homeowner suits. He sees even more potential for suits involving the health-care and hospitality industries. (Several hotel-related cases have been filed around the country, including some growing out of a mold-damage issue at Hilton Hotels Corp.'s Hawaiian Village in Honolulu. Hilton declines to comment about the case, noting that it is both a defendant and a plaintiff in various suits.) Manufacturing plants, which generally are well ventilated and better regulated, are less-likely areas for mold litigation, he says.
The number of mold-damage claims isn't calculated by the insurance industry. One reason, says the III's Hartwig, is that mold comes up in multiple types of litigation, including workers' comp, personal injury, product liability, and defective construction. Further, insurers report their results by line of coverage, not by cause of loss. And for their part, insured companies often don't want to talk about mold "because they don't want people to think they have issues," says Hartwig. "But the truth is that there are issues in every building, and the best thing you can do is to respond to them promptly."
At Engineering and Fire Investigations, a unit of claims adjuster GAB Robins, only 20 percent of its mold-related engineering work used to be for commercial buildings. "But recently the amount of commercial has doubled," and now constitutes about half of EFI's $8.5 million of mold-related work, says EFI president and CEO Michael Thompson.
The Risk of Going Bare
Simply deciding not to purchase stand-alone mold insurance is, of course, an option for companies. Indeed, says Hartwig, "if they don't have the coverage, claims — and litigation — fall off." But going bare comes with real risks. Consider what is facing IBM in North Carolina, and the city and county officials who operate Denver International Airport.
In addition to several workers'-comp complaints relating to IBM's Building Nos. 61 and 205 at Research Triangle Park, the company is confronting federal-court claims from senior financial analyst Julie Ord, now on disability leave, and program manager Linda Allen. The two claim that in the wake of flooding one weekend in April 2000 at the campus, they contracted toxic encephalitis, a swelling of internal organs, along with fatigue, memory loss, vertigo, and respiratory ailments.
The local newspaper launched a study of the "sick buildings" at IBM, where, the plaintiffs claim, the company delayed cleaning up waterlogged carpets. Charlotte attorney Martin Horn, who represents Ord and Allen, says the 25-year-old buildings have problems with their flat roofs and their heating and air conditioning. "You can't just let mold and fungus grow; you wouldn't do it in your clothes or in your house," he says. (Citing its policy against commenting on pending litigation, an IBM spokesman will say only that the company's "first priority is, and always has been, the health and safety of our employees.")
In Denver, United Airlines employees Terri Crandall and JoAnn Hubbard allege in a suit—representing a class of "thousands of others" who worked at and passed through Denver International—that health hazards resulted from raw-sewage leaks in Concourse B, and extensive mold, "covering an entire wall...an area of growth at least 20 feet high by 80 feet long in the Center Core, Basement Level," to name only a few claims. (A spokesman for the airport says he won't comment on the litigation beyond saying that "there is no danger to the traveling public out here.")
George Lang, an attorney representing the plaintiffs, notes that the litigation has evolved. On the plaintiffs' side, there is "a better understanding of the injuries related to mold," he says (contradicting the claims made by defense attorneys). "On the defense side, the litigation has evolved because of the resistance of insurance companies to paying for this additional damage."
Insurers say the inability to prove mold as a causation of disease will keep this issue from becoming the next asbestos. As for companies faced with a choice of whether to buy mold insurance, Environomics's Nassof says that eventually it will be a simple call. Like lead-based paint, leaking gasoline tanks, and other once-threatening environmental issues, mold one day will gain "acceptability as another line item on a due-diligence checklist when buying insurance," he says. "It needs to be checked off."
Roy Harris is a senior editor of CFO.
Man vs. Mold: A Checklist
- Insure proper construction and maintenance of the building's "envelope systems" — roofs and curtain walls — to prevent water infiltration.
- Properly design, install, and maintain heating, ventilation, and air-conditioning (HVAC) systems to control temperature, humidity, and air distribution.
- Maintain the building's HVAC systems to minimize biological contamination inside the ductwork.
- Properly operate and balance HVAC systems to provide adequate air distribution, outside air, and building exhaust, maintaining a positive pressure for the building.
- For any "water event" — whether a pipe leak or break, flooding, sewer backup, sprinkler discharge, or moisture infiltration — provide immediate cleanup, repairs, and any needed dehumidification.
- Prepare a formal written mold-management plan, and assure that it is communicated to employees.
Source: Michael Thompson, Engineering and Fire Investigations unit of GAB Robins
A Brief History of Mold
The key to control is water management.
The issue of mold litigation involving nonresidential buildings may be new and fairly limited so far, but the mold fungi themselves are primordial — and ubiquitous. About a quarter of the earth's biomass is bacterial mold in its thousands of forms, few of them considered toxic.
Inside a building, water and poor ventilation are mold's great enablers. As mold spreads, it can break down gypsum, ceiling tiles, wood products, and other materials with cellulose. "The claim comes in as mold," says AIG Environmental chief underwriting officer Julie Hespe, "but when we talk to people about covering them under our environmental policies, we talk to them about water and mold."
The role of ventilation is especially critical in today's so-called tight buildings, in vogue since the energy crisis of the 1970s. "You don't have the air flow you used to have," says Hespe. "Tight buildings might be better at preventing mold intrusion, but tight buildings won't let the moisture out."—R.H.