Coverage Clues: When and To What Degree – Almost two years ago to the day, I wrote a Claims Magazine column about the property and casualty insurance implications of the 2011 tornado season. Unfortunately, because of occurrences of this late spring and early summer, it has become necessary to revisit this topic again.

This year, three tornado systems tore through the Midwest, Texas, and Oklahoma in the last two weeks of May, killing and injuring a number of people and causing estimated insured loss of several billion dollars. According to NOAA's National Climatic Data Center, there is an average of 276 tornadoes each year in the United States. However, averages and statistics matter little to those who are dealing with the destruction in the aftermath of these disasters.

Although much of this damage will be insured, there are issues to consider in determining what is covered and what is not. One of the major concerns for partially damaged buildings, such as those where roofs are torn off or walls breached but the property remains standing, is the occurrence of mold that so frequently follows these types of disasters.

Mitigating Mold

The Centers for Disease Control and Prevention (CDC) recommend that damaged buildings be cleaned up and dried out within 24 to 48 hours after disasters in order to help prevent mold from developing. Building owners are urged to open doors and windows and to use fans to dry out their structures. All porous materials that have been wet for more than 40 hours can remain a source of mold growth, according to the CDC, and therefore should be removed or dried thoroughly. People who are allergic to mold may become short of breath, according to the CDC, and those with weakened immune systems and chronic lung disease may develop mold infections in their lungs. The CDC and the Federal Emergency Management Agency (FEMA) recommend that building owners store items outside of their buildings until insurance claims can be filed.

Prior to the 2002 edition of the standard commercial property form, the exclusion for mold was inferred from an exclusion for "rust, corrosion, fungus, decay…" Mold was not specifically mentioned in the special causes of loss form. Because of that, it could be reasoned that mold arising from another cause of loss—such as a windstorm—would be covered as a continuation of the original, covered loss.

However, after mold damage and insurance coverage (or lack thereof) gained heightened attention because of various successfully filed lawsuits against insurers, standard language was revised to exclude coverage for "fungus," wet and dry rot, and bacteria. Fungus is defined as, among other things, mold or mildew and any "mycotoxins, spores, scents or by-products produced or released by fungi." The exclusion does not apply if the fungus results from fire or lightning and to the extent that coverage is provided under the additional coverage for "fungus" when caused by a peril other than fire or lightning.

This mold exclusion applies to mold that might develop as the result of windstorms such as tornadoes. It also limits coverage for mold that develops as a result of other moisture-related losses, such as water leaks that are hidden from view.

Water-Related Exclusions

This change in language confirms that there is coverage for mold damage if it develops as the result of a covered cause of loss, such as a windstorm or explosion. However, the language limits the extent of coverage to a specified dollar amount that is listed on the form, deleting any uncertainty pertaining to whether and how much coverage exists for resulting mold damage. Insured property limits are available only when the direct cause of loss leading to the mold is fire or lightning.

Other insurance policies may avoid coverage for resulting mold damage entirely by structuring their exclusionary language to include anti-concurrent causation language. Anti-concurrent causation language is used to exclude loss caused directly or indirectly by fungi or mold regardless of whether any other covered cause of loss contributes—either concurrently or in any sequence—to the loss.

In other words, with this type of exclusionary language, there is no coverage for mold in any amount, regardless of whether it was the result of a damage such as that caused by a tornado. This language has been upheld in numerous jurisdictions. Policyholders with this type of language may simply be out of luck for any mold remediation coverage.

Such was the case in a 2010 North Carolina case, Builders Mutual Insurance Company v. Glascarr Properties. The cause of loss was covered water damage, but the exclusion for mold was prefaced with anti-concurrent causation language that stated there would be no coverage for damage "covered directly or indirectly by mold, regardless of any other cause or event that contributes concurrently or in any sequence to the loss." The court ruled that, even though the mold did originate from a covered loss, the anti-concurrent causation language was sufficient to preclude coverage.

Another area of consideration is the requirement in insurance policies that policyholders take all reasonable steps to protect covered property from further damage, and this condition would include the step of drying out and cleaning moist property as recommended by the CDC and FEMA. In areas of widespread destruction, however, it is difficult to quickly clean up and dry out affected items because of the sheer preponderance of damage within the area of the catastrophic windstorm. However, policyholders will be expected to do what they can under such difficult situations to protect the property that they can from further damage. Waiting a month to even begin the drying out process, absent extenuating circumstances, does not seem "reasonable."

The rebuilding efforts from the tornadoes of 2013 will be difficult, but insurance coverage, at least in the area of mold remediation, is much clearer now than it was a decade ago. It is too much to expect that Oklahoma insurance commissioner Doak's quoted wish be true, "To those affected by the tornadoes may your insurance company that you well and cover everything to 100 percent of replacement cost with no hassles or headaches." At the very least, there should be less confusion about whether, when, and to what degree mold remediation will be covered by insurers.

From the July 2013 issue of Claims Magazine

By Diana B. Reitz, CPCU