Why Mold Is Not Excluded by Pollution Exclusions in Liability Insurance Policies

Mold Exclusions Cause Unanticipated Coverage Gaps

By: David J. Dybdahl, CPCU, ARM, MBA
American Risk Management Resources Network, LLC

Mold Damages Will Evolve From First Party Claims to Third Party Claims in 2003
As tens of thousands of property owners seek funds to pay for expensive mold remediations, mold exclusions are destined to transform many insurance claims on homeowners and all risk property insurance policies into liability claims against contractors, engineers, architects, building product suppliers, real estate professionals and landlords. Even insurance agents, brokers and lawyers who advise clients on risk management and insurance issues will be brought into the fray for failing to procure the proper insurance covering mold losses for their clients.

In 2003, virtually all property and liability insurance policies will contain mold, microbial matter or fungus exclusions. These exclusions are commonly referred to as “mold exclusions” although the definition of the materials excluded goes beyond mold. These new mold exclusions apply to new loss events incurred during the policy period.

Residual Liability Insurance Coverage For Mold Related Damages
Even with the new mold exclusions on their 2003 policies, most businesses will have some residual liability insurance protection for historical mold related losses. This is because most businesses purchase “occurrence” based liability insurance. In occurrence based liability insurance coverage, the policy in force when the accident took place or when the loss occurred including continuous or repeated exposure to the cause of the loss, is the policy that will apply to the loss. Liability insurance policies purchased prior to May 2002 will most likely be silent on the subject of mold. Keep in mind general liability policies will also have an absolute or total pollution exclusion, which may be used by the insurance company to deny the claim.

The residual coverage in old occurrence based general liability policies will become considerably less valuable over time as it becomes more and more likely that a new water intrusion event that leads to mold growth will be incurred during the coverage period of a liability insurance policy that has a separate mold exclusion endorsed on to it.

In mold related damages, setting the date of loss and which policy should apply will be an inexact process. Arguably the date of loss may be the date the building was constructed, the date water first entered the building, the date the mold was discovered, the period of time the mold was growing or a combination of these coverage triggers. The discussions on which insurance policies apply will be reminiscent of those held over pollution and asbestos losses and will vary by state.

The new ISO Commercial General Liability coverage form attempts to clarify which policy will apply to a loss that occurs over time. However, due to the nature of some mold related losses, where there is subsequent damage each time there is a water event or the humidity reaches a certain level there will no doubt be considerable debate on which policy or policies should apply to the loss.

Without separate mold exclusions on old general liability policies, some insurance companies may still attempt to deny mold related damages under the pollution exclusions that universally appear in general liability insurance contracts.

Mold Is Not A Pollutant In The Absolute Pollution Exclusion
In my opinion, mold related damages should not be subject to the absolute pollution exclusion for the following reasons:

Mold does not a release or escape within the intent of the pollution exclusion.
Mold is not a waste.
The proximate cause of mold is water and water does not fit the definition of a pollutant in the policy.
Mold is a naturally occurring, living material that does not fit the definition of a pollutant within the insurance policy.
Environmental Impairment Liability (EIL) insurance policies were specifically developed to fill the gap in insurance coverage created by the pollution exclusion in general liability insurance contracts. Some EIL policies specifically exclude naturally occurring substances from the definition of “Pollutants”. This is evidence that senior insurance underwriters looking into the need for environmental insurance thought naturally occurring substances were not excluded under the absolute pollution exclusion in the general liability policy. Therefore there was no need to cover naturally occurring materials (molds) as pollutants within the environmental insurance contract. This evidence tracks back to at least the early 90’s.
Underwriters were not addressing mold as a separate loss exposure or coverage issue until late 2001.The training materials used in the insurance industry to illustrate the intent of pollution exclusions are silent on mold as a potential pollutant in liability insurance contracts.
If pollution exclusions excluded mold, then there would be no need for separate mold exclusion on new liability insurance policies.

No Residual Coverage In Claims-Made Insurance, Professionals Have Uninsured Loss Exposures
The effect of a mold exclusion on claims-made liability insurance is dramatically different than on occurrence based liability insurance. On a claims-made policy, a mold exclusion on the renewal of the policy is in effect a full prior acts and a prospective work exclusion for all mold related damage claims. For example, an architect with a mold exclusion on the renewal of their professional liability insurance would not have insurance for a defective design of a vapor barrier that causes water and mold to accumulate in walls. This would be true regardless of when the loss occurred, when it was discovered, when the design was completed or when the building was built.. The professional liability insurance policies of insurance agents/brokers, real estate brokers, lawyers, architects and engineers are all written on a claims-made basis.

Many risk advisors including insurance agents, brokers and lawyers will likely face a full prior and prospective acts “mold related damages exclusion” on their professional liability insurance coverage in 2003. More than ten million mold exclusions have been delivered in the past six months on commercial accounts and only a few hundred environmental insurance policies covering mold have been sold to date. Therefore, risk advisors already have nine months of incurred but not reported professional liability claims exposure for their client's uninsured mold losses. These potential professional liability claims will be retroactively excluded under their professional liability insurance policy if it is renewed with a mold related claims exclusion.

Mold has created unprecedented professional liability loss exposure for insurance agents and brokers. In addition to the introduction of mold related exclusions on insurance agents professional liability insurance, there will be unprecedented claims frequency in this area. Next year there will be hundreds of thousands of water damage/mold claims that will be uninsured for the first time. Our research in ARMR.net indicates there could be one uninsured water damage/mold claim for every 2 1/2 licensed property and casualty insurance agents in the United States. Most of these claims will be relatively small but they will still strain the agent’s relationship with a client. The average mold claim in Texas is $22,000. No agent wants to tell their client they are not covered for a loss, especially one for twenty thousand dollars. Some of these mold losses will be more significant and potentially expose insurance agents to professional liability for failure to advise the client of the loss exposure and failure to procure the appropriate environmental insurance covering mold.

In the age of the Internet it will be more and more difficult for an agent to create a successful defense by saying they did not know mold insurance was available or how to obtain it. A recent search on Google for the key words “mold insurance” produced one hundred and seventy two thousand hits. The entire commercial mold insurance market was summarized within the first page of search results. To avoid having their own mold related professional liability losses, all risk advisors should implement a mold claim loss control procedure by advising their clients on the hazards of mold and offering the appropriate environmental insurance covering mold if it is available. The mold insurance market is in constant state of flux as underwriters introduce more coverage into the market place in various policy forms as other underwriters move to exclude all claims for mold damages.

A summary of the current mold insurance market for commercial accounts is shown in the website of the Environmental Risk Resources Association at www.erraonline.org. ERRA also offers a turnkey seminar series for insurance agencies that want to actively manage this new professional liability exposure. Information on these seminars is at www.erraonline.org/moldeoseminar.html.

Conclusion
Mold exclusions will transform property insurance claims into liability insurance claims in 2003. Mold exclusions on liability insurance policies will eliminate insurance coverage for new occurrences but most business will have some residual liability insurance protection in place. In the absence of a mold exclusion, mold claims may also be denied under the terms of the pollution exclusion in liability insurance contracts. However, there are a number of arguments that can be made as to why mold is not a pollutant within the context of the standard pollution exclusion. Organizations with loss exposure to mold related damages should actively seek to fill the insurance coverage gap created by mold exclusions with appropriate insurance coverage. Commercial insurance covering mold related damages is available today for building owners, contractors and environmental consultants through the environmental insurance underwriters. Some homeowner insurance companies are currently offering buy backs for mold coverage.

Risk advisors who fail to advise their clients on the hazards of mold related damages and fail to offer appropriate insurance covering mold risks face the most severe insurance coverage gaps. This risk can be managed by advising clients on their exposure to mold related damages and offering the appropriate insurance to cover this loss exposure.

David Dybdahl is an independent risk management consultant specializing in environmental risk management. For more information, contact David at dybdahl@armr.net or 608-798-1427. The views and observations contained in this paper are his own and do not reflect the views of the Environmental Risk Resources Association or it's members.