Mold Claims Create Coverage Chaos

There’s nothing like a good media expose about David (a homeowner) taking on Goliath (an insurance company) to get the adrenaline flowing. It’s no different with the current debate over mold, mildew, and coverage–or lack thereof–on industry-standard insurance policies.

The Texas case of Melinda Ballard and her fight against Farmers Insurance Group has gained the spotlight, as well as a $32 million recommended award by a Travis County District Court jury. At the time this column was written, the judge had just ordered mediation in the case. Therefore, the actual award may, indeed, be quite different from $32 million. And then there will be the inevitable appeals.

Regardless of the ultimate resolution, the case illustrates how media hype cannot only bring a cause to the forefront, but also create an almost frenetic concern about where and if coverage can be found for such an increasingly insidious destroyer.

Mold, which occurs naturally, is everywhere. But certain types do destroy property and seem to cause serious health problems for people.

Even though the case has not been resolved, some (perhaps prematurely) are calling it a landmark. There have been previous cases about mold, but Ballard appears to be the first national mold case in which a jury recommended that a homeowner recover damages from an insurance company. It also illustrates how seemingly simple claims that aren’t handled quickly and correctly (according to the jury) can grow into monumental causes for not only the claimant but also a large segment of the population.

The case seems to be not so much about mold as about how claims are adjusted. It arose because the insurer–again according to the jury–failed to adequately adjust a water damage claim, which led to toxic mold taking over the home. According to the jury’s responses to a series of questions posed in the judge’s charge, the insurer’s actions, or lack thereof, damaged not only the Ballard home but also caused serious health problems for family members.

In recent months, the number of calls about mold to FCS editors and related questions posted on our Web site ( have spread from homeowners to commercial property to commercial general liability coverage questions. The Texas Department of Insurance is holding hearings on proposed filings by insurance companies to clarify the coverage for mold claims on homeowner forms. And the debate continues.

Is mold covered on standard policies? Should it be? Or does it fall into one of those uninsurable or “better insured elsewhere” categories? Insureds, agents, and carriers are gearing up to address these questions because, regardless of which side you’re on, the question is a real one that stands to result in financial, public relations, and health issues of astronomical proportions.

Yet the question seems to have become, at least for the media, “Is mold covered?” without distinction. Covered for what? The question of mold has to be considered in the context of first-party property and third-party liability claims, as well as the wording on the respective policies that apply.

In the first-party arena for homeowners, the FC&S has contended for some time that the 1991 Insurance Services Office homeowners forms (HO-2 and HO-3) include wording to suggest that mold arising from a covered loss is insured as long as the homeowner takes reasonable steps to repair the property after the covered loss is discovered. In other words, water damage from the accidental discharge of a closed plumbing system is covered. Mold related to that covered loss also is covered as long as the homeowner quickly remediates the damage.

The 2000 and 2001 HO-3 affirmatively state that such losses are covered. The forms do not cover “mold, fungus or wet rot.” However, they do insure losses caused by “mold, fungus or wet rot that is hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure if such loss results from the accidental discharge or overflow of water or steam from within” plumbing and related systems and certain storm and sewer pipes. Seems pretty clear to me.

The ISO homeowners form also provides third-party liability and medical payments coverage. There are exclusions, however, that negate such coverage for the named insured or other residents of the household. In the Ballard claim, this means that medical pay and liability coverage for family members would be excluded.

Mold damage on a commercial property policy plays out in a similar fashion. Fungus is excluded, and mold is a fungus. But the exclusion appears within the group that applies to long-term, wear-and-tear-type perils. So, the question that should be asked is: “What actually caused the damage?” If mold just develops from its natural proliferation in nature, it probably is not covered. But if the mold results from a covered cause of loss–such as a tornado, hail, or covered water damage–the damage from both the original cause and the resulting mold infestation will trigger coverage.

There also is a pollution exclusion, which is similar to that found in the homeowners forms. Even though the jury still is out on whether mold is a pollutant, some individuals and carriers mention the pollution exclusion and mold in the same breath.

The pollution exclusion on the commercial property forms states that damage from the migration of pollutants is covered if caused by one of the specified causes of loss. If mold is a pollutant, it would not trigger coverage in and of itself. The mold (if considered a pollutant) again would have to be caused by one of the specified causes of loss.

The coverage landscape on a CGL basis is more complicated. First of all, the standard CGL form contains exclusions for property damage to the named insured’s completed work and products. Therefore, defective construction claims against contractors for, say, sealing up areas that contain excessive moisture and creating an environment leading to toxic mold in the area where the work was done would be excluded from CGL coverage–for the named insured’s work. The exclusion would not reach mold (property damage) infestation of areas that are not considered the contractor’s work.

In the same vein, claims against salvage or remediation companies that clean up a tornado-damaged building but fail to completely dry it out, leading to toxic mold damage, may be subject to the same exclusions.

There also are exclusions j. (1), (2), (3), and (4), which preclude coverage for property damage to property the named insured owns, rents, occupies, controls, etc. There is no property damage coverage and payment if, say, the owner of an apartment building has to remediate mold or tear down his own building if toxic mold overtakes it.

And then there’s the pollution exclusion. According to one independent agent who called us, at least one major insurer has stated that mold is covered on one of its pollution liability policies. Hmm. That must mean the carrier plans to deny mold-related losses on its CGL policy on the basis of the pollution exclusion. Or maybe it is attaching a mold-specific exclusion?

I can see where this might void coverage for, say, the owner of an apartment building if the mold were considered to be a pollutant and people were injured by it. But I’m not sure the pollution exclusion is a legitimate basis for denial of coverage for a contractor whose work leads to aggressive mold growth and health problems for the inhabitants. The pollution exclusion states that bodily injury and property damages are excluded if they arise from the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’.” Somehow I can’t make the connection to a contractor actually “dispersing” or “discharging” mold spores. Mold does not seep or escape–it multiplies.

And, since the exclusions previously discussed only apply to property damage, I believe that there should be coverage, in many cases, for bodily injury claims on a CGL policy for contractors in at least some situations.

However, knowing that one carrier already is promoting its pollution liability policy as a coverage tool for mold-related claims makes me think that the courts ultimately will dictate just how far all of these exclusions will be used in carving out what is and is not covered.

At the least, Ballard and similar pending cases are only the tip of the proverbial iceberg. In the meantime, everyone with an interest in the property-casualty insurance industry will have something to say on the subject–with the courts, as usual, having the last word.

Diana Reitz, CPCU, AAI, is associate editor of the FC&S Bulletins and Editor of the RF&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The editors welcome comment and questions and may be reached by fax at 859-692-2211 or via e-mail at FCS@NUCO.COM.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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