In response to an explosion of “toxic mold” claims at the turn of the century, universal exclusions for mold, fungi and bacteria related losses were introduced faster and on a wider scale than any exclusion in the history of the insurance business. The exclusions for fungi and bacteria are by far the most onerous total pollution exclusions ever conceived.

These expansive exclusions for a very common cause of loss were slammed into virtually all property and liability insurance policies without instruction manuals on what was being excluded. That left insurance producers and claims adjusters in the dark on the material changes in coverage created by the exclusions. In practice, most producers and claims adjusters missed that anything changed in the insurance policies they worked with on a daily basis. That led to big surprises for insurance buyers when the exclusions were used to deny coverage for losses associated with fungi and bacteria.

To move towards transparency and consistency in the application of fungi/bacteria exclusions, there are some import facts that every claims adjuster should keep in mind.

  • Many commercial “mold exclusions” were drafted to apply to both fungi and bacteria because in virtually every place mold grows, bacteria is found using mold as a food source. To avoid covering mold claims as bacteria contamination losses, ISO excluded claims related to both contaminants.

  • There is precedence case law in some states where bacteria as a contaminant already falls within the standard ISO definition of a pollutant in pollution exclusions. Therefore, a loss involving bacteria may trigger at least two exclusions in property and liability insurance policies, the fungi/bacteria exclusion and the pollution exclusion.

  • Fungi and bacteria exclusions apply to any species or amount of these contaminants. Because the exclusions are silent on type or amount, a speck of either technically triggers the full effect of the exclusion.

  • Mold and bacteria are present in every building.

  • On commercial general liability policies, most fungi/bacteria exclusions have two parts:

    • Part (A) applies to losses starting with the threatened existence of fungi or bacteria in a building. It also excludes bodily injury and property damage from the actual exposure to fungi or bacteria. This part of the exclusion has an anti-concurrent causation clause taken straight out of the ISO flood/war exclusion section in a commercial property insurance policy.

    • Part (B) applies to any insured in the business of cleaning up or assessing fungi or bacteria. This part of the exclusion is a job site exclusion for anyone performing this work. It applies to plumbers, carpet cleaners and janitors, not just to mold remediators.

  • Anti-concurrent causation clauses apply the exclusion to the entire loss if the excluded cause of loss happens before, during or after an otherwise covered cause of loss.

  • In its simplest form the sole purpose of an anti-concurrent causation clause in an exclusion is to eliminate coverage arguments based upon the proximate cause of the loss and ensuing damages not falling under the exclusion.

  • Water or high humidity on drywall will create mold growth in 72 hours at room temperature, and sometimes in as little as 36 hours depending on the conditions.

  • The IICRC S500 Standard and Guidelines for Professional Water Damage Restoration identify three categories of water most often encountered as part of a water loss:

    • Category 1 — supply line water (clean water)

    • Category 2 — contaminated but is not grossly contaminated with bacteria (gray water)

    • Category 3 — contaminated with bacteria; triggers fungi/bacteria exclusions (black water)

    • Category 1 and 2 water can morph into Category 3 water over time

  • Mold is an allergen. Bacteria can actively attack its host and cause death, e.g., Legionnaires disease is caused by bacteria. Insurance companies routinely exclude Legionnaires disease losses, but routinely ignore Category 3 water even though both are associated with bacteria.

  • There are many more Category 3 water insurance claims than claims associated with mold remediation.

  • There are a number of documents that comprise the industry standard of care for mold remediation from IICRC, AIHA, the New York City Dept. of Health and Mental Hygiene, the Environmental Protection Agency, OSHA and other organizations.

  • Claims adjusters who deviate from the industry standard of care documents are unilaterally deciding not to follow the guidance of thousands of reasonable and prudent practitioners who developed the professional standards and guidelines. Avoidable risk is being assumed by the claims adjusters choosing not to follow generally accepted industry standards for water and mold remediation.

Fungi/bacteria exclusions are simply a combination of a total pollution exclusion taken out of a general liability endorsement and the anti-concurrent causation language in the preamble to the flood exclusion that is found in the commercial property insurance policy.

The failure to connect the dots on these two long-standing exclusions results in thousands of severely sublimited claims or excluded claims involving fungi/mold/bacteria/Category 3 water being paid as Category 1 water losses on property insurance policies or covered water damage loses on general liability insurance.

The restoration contractors I speak with are extremely concerned about claims adjusters unwilling to pay for the extra work performed in a Category 3 water loss versus a Category 1 loss. What should be happening in the claim adjustment process is the Category 3 water loss should be paid under the fungi/bacteria sublimit on the property policy or under an environmental insurance policy that is designed to insure fungi and bacteria losses. Environmental insurance policies are readily available to fill the coverage gaps created by fungi/mold/bacteria/Category 3 water losses the same way flood insurance fills the coverage gaps created by flood exclusions. These specially crafted environmental insurance policies have been available to commercial insurance buyers since 2009.

Having technically uncovered fungi/bacteria related claims paid under property and liability insurance policies is a good situation for insurance consumers, fire water damage restoration contractors and their insurance agents. But there are several risks for the insurance companies paying these claims. Because the provisions in fungi/bacteria exclusions mirror long-standing exclusions for pollution and flood, claims adjusters actively undermine the efficacy of pollution and flood exclusions every time they pay an uncovered loss related to mold and bacteria. Another downside for insurance companies is paying uncovered losses as a routine business practice in theory also exposes stock-based insurance companies to shareholder derivative actions for depressed earnings as a result of the practice. This would be especially true when an insurance company has established case law precedence in holding up fungi/bacteria exclusions and then does not apply the precedence case law consistently across all related claims.

All of the stakeholders would benefit from transparency and consistency in the operation of fungi/bacteria exclusions in property and liability insurance policies. Nobody likes surprises in a business built on neutralizing surprises.

Fungi and bacteria exclusions exclude more losses than most claims adjusters realize. Space does not allow a full discussion of the topic, but just a few parameters taken from the most common fungi and bacteria exclusion used in commercial general liability policies illustrate the expansive nature of the exclusion.

  1. In Whole or In Part. In Section A of the exclusion it says: “‘Bodily injury’ or ‘property damage’ which would not have occurred, in whole or in part, but for….” In part must be intended to apply the exclusion to the entire loss if only a tiny bit of the loss was related to fungi/bacteria. As written, without a threshold amount qualifier, a speck of fungi or bacteria involved with a loss should trigger this exclusion.

  2. Threatened Exposure. Under the wording in the exclusion, losses involving the “threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of” a tiny amount of fungi or bacteria on or within a building or structure are excluded. Everybody knows fungi and bacteria are in the building already. Is there really a need to exclude bodily injury and property damage from the threatened existence of materials that are already in the building or structure? The answer is yes if you want to exclude phobia-type losses. Because of this provision, bodily injury or property damages are excluded if a drop of Category 3 water is even alleged to have caused damage—with no physical evidence that it did.

    For example, if a plumber works on a drainpipe leak (Category 3 water) and damages a building, bystanders can allege they could have been exposed to the bacteria-contaminated water and are worried about their quality of life being impaired. As a result of their worrying, all of the bodily injury damage claims associated with the claim are technically excluded by the reference to threatened exposure to fungi or bacteria. The damage to the building is excluded too. Plumbers as a class of business really do not have much in the form of completed operations coverage on the CGL policy as a result of these exclusions. However, the CGL policy in this scenario would still need to defend this loss; only bodily injury and property damages are excluded in Section A of the endorsement, so the duty to defend still stands.

  3. Anti-Concurrent Causation. The anti-concurrent causation provision in Section A reads almost verbatim to the anti-concurrent causation section of the flood exclusion in a property insurance policy: “regardless of whether any other cause, event, material, or product contributed concurrently or in any sequence to such injury or damage.” The drafters of this exclusion were brilliant in adding this provision to the fungi/bacteria exclusion on the general liability insurance policy. They knew that flood exclusions hold up perfectly in property insurance policies because of this anti-concurrent causation provision, and they also realized that pollution exclusions are the most litigated provisions in the history of insurance. To eliminate litigation over what the fungi and bacteria “pollution” exclusion might exclude or not and all arguments about the efficient proximate cause of loss and ensuing damages, the drafters of the fungi/bacteria exclusion simply added an anti-concurrent causation clause to the wording.

  4. “In Any Sequence.” The reference to other causes of loss in any sequence deserves special attention. Category 1 and Category 2 water can morph into an excluded fungi/bacteria loss through the operation of time and temperature. For example, mold could start growing in the standing water of a basement as a result of a water supply line (Category 1 water) leak. Because mold in this case appeared in any sequence to the otherwise covered Category 1 water loss, the entire loss before, during, and after the appearance of mold should be denied under the terms of the fungi/mold exclusion.

Consistency and transparency on claims related to fungi/bacteria are needed in the claims adjustment process. Gap filling coverage exists in both the personal lines and commercial insurance markets. Ignoring the full effect of the exclusions creates coverage gap surprises and undermines future viability of pollution and flood exclusions every time an excluded or sub-limited fungi/bacteria/Category 3 water claim is paid as a simple Category 1 water loss.

 

To achieve consistency and transparency, adjusters need to pay closer attention to Fungi/Bacteria exclusions in both property and liability insurance policies. Failure to do so develops these outcomes and consequences in the claims adjusting process.