Vol. 75, No. 3, March 2002

Out of the Dark: The Emergence of Toxic Mold Litigation

by John Mitby & Kevin Trost

Mold claims arising out of water damage to property have significantly increased in the last year. A spokesperson for Farmers Insurance has estimated that mold claims for the year 2001 will be more than five times the number of claims for the year 2000 and total $85 million.¹ Toxic mold has attracted the attention of the public and media as more individuals have started complaining that their illnesses and ailments can be traced to their exposure to certain molds in their homes or workplaces. With these individuals now seeking legal redress for property damage and for their ailments, some attorneys consider that the rapid proliferation of mold lawsuits will soon rival the recent lead paint or asbestos litigation.²

Injured parties have sought recovery through first-party claims against their own property and homeowner insurers and have brought bad faith claims when their insurers have refused to properly address mold claims. There also have been an increasing number of third-party claims brought by injured parties and insurers in subrogation actions against those allegedly responsible for the development of the mold. Among those named in such complaints are contractors whose shoddy construction practices have allowed moisture to seep into building interiors, architects and engineers for substandard building designs, and even lumber companies and paint manufacturers for not providing products that resist mold. These defendants subsequently have sought coverage under their own policies.

Against this backdrop, attorneys for both plaintiffs and defendants are now confronting a variety of insurance policy exclusion clauses that were rarely interpreted with mold in mind. This article provides a brief overview of the toxic mold litigation creeping into the courts and highlights how Wisconsin courts have interpreted standard insurance clauses central to analyzing whether insurance coverage is present.

What is Toxic Mold

Mold is all around us - in the air, in the walls, below the flooring, and above the ceiling tiles. While many varieties of molds are harmless, a few varieties emit poisonous mycotoxins that can cause a range of health problems when a person is exposed to them in high concentrations. So far, the Centers for Disease Control has identified 25 "toxic molds" out of the 3,000 known molds.³ The most well-known of the toxic molds is stachybotrys chartarum, which is a black-colored mold that often is found inside walls. However, significant research remains to be performed on several molds to determine their toxicity. Experts now are evaluating the toxicity of other molds, including cladosporium, commonly found as a form of mildew on walls, and aspergillus, which can be found on wooden furniture.⁴

Toxic mold can become a health risk if it is allowed to grow and multiply inside an environment containing a source of moisture and food. The breakneck pace of construction throughout the 1990s allowed many homes and buildings to be constructed with defects that allow water and moisture to seep into the interior. Once the toxic mold has migrated inside otherwise tightly sealed homes and buildings, it encounters a perfect environment for growth because there are minimal water-evaporating drafts and abundant sources of food. Molds consume cellulose, which is present in such common building materials as wood, paper, ceiling tile, drywall, and cardboard.⁵

When toxic mold has grown and spread, it releases into the environment mycotoxins that can affect human health if present in sufficiently high concentrations. Published studies confirm that exposure to high concentrations of mycotoxins can produce respiratory ailments and irritations of the eyes, nose, and throat, and aggravate asthma.⁶ Recently, however, individuals also have alleged that in severe cases toxic mold has caused bleeding lungs, memory loss, and chronic fatigue syndrome. With few published studies analyzing the extent of toxic mold's health effects, causation of these more serious health effects is a hotly contested issue. As Jon Woods, an associate professor of microbiology at the U.W.-Madison, acknowledged, "A cause and effect link is difficult to establish ... I'm not saying it's not true. I'm just saying it hasn't been proven."⁷

Toxic mold also poses a danger to the property that it grows on and to property near an infestation. Porous items in the vicinity of the toxic mold often must be destroyed because they can harbor toxic mold spores. In extreme cases the toxic mold can become so pervasive throughout a house or building that remediation is impossible. In that situation, the house or building often is razed. In the state of Oregon, a couple whose home was infested with toxic mold allowed a local fire department to use their home for a test burn training exercise for firefighters.⁸

Rise in Mold Litigation

To date, the South has been most affected by mold litigation, because the humid and warm climate is more conducive to mold growth. Not coincidentally, courts in Southern states also have decided the most cases and entered the most jury verdicts for plaintiffs. In Florida, a jury awarded $11.5 million against a builder of a county courthouse where shoddy construction allowed the introduction of toxic mold that sickened county employees.⁹

A Texas case has attracted the most attention to toxic mold. In Ballard v. Fire Insurance Exchange,¹⁰ a couple and their 3-year-old son grew ill after their insurer mishandled a claim for fixing leaking plumbing. The couple had asked their insurer to replace a subfloor in their home after noticing that their floors had buckled from the plumbing leak. A contractor also recommended replacing the floor because of the danger of mold contamination. The insurer refused, and the family later grew terribly ill after mold spread from the subfloor throughout the house. Ultimately, the house had to be razed, because the mold had become so pervasive that remediation was infeasible. A Texas jury found that the insurer had acted fraudulently by not properly handling the leak and mold problems, and awarded the couple more than $32 million in compensatory and punitive damages. The insurer is appealing the verdict.

Wisconsin courts are beginning to confront a rising number of mold claims. A Waukesha County family recently alleged that toxic mold developed from leaky windows in their new home and was the source of their illnesses, including a serious attack on their son's immune system.¹¹ The family had to move from the home and is bringing suit against the persons from whom they purchased the home.¹² A Dane County family sued its insurance company after the insurer failed to reimburse the family for all the personal property it disposed of while remediating the family's mold-infested home.¹³ Potential claims also are in sight: A newly constructed Madison school had to be evacuated and students relocated to other schools for many weeks after mold was discovered in the building walls.¹⁴ See Mold in Wisconsin Schools.

In the wake of several large jury verdicts, insurers are reexamining how mold is treated under their policies. A number of insurers are attempting to more explicitly exclude mold damage from their homeowners' policies in the most heavily affected states. The remainder of this article examines the more common insurance clauses applicable to both first-party and third-party mold claims and how Wisconsin courts have interpreted them.

Mold Exclusion Clause

The Insurance Services Office (ISO) publishes model policies that form the backbone of the policies offered by individual insurance companies. The 1991 HO-3, the most common homeowners' policy, contains the standard policy language at the heart of most homeowners' policies. Coverage is extended for certain structures if there is "direct physical loss" to the covered property. While mold is capable of producing such a direct physical loss, an exclusion clause states: "We do not insure, however, for loss: ... 2. Caused by: ... (3) Smog, rust or other corrosion, mold, wet or dry rot." This exclusion clause is referred to as a "wear and tear" clause, meaning that damage appearing over time and not as a result of an identifiable covered event does not trigger coverage under a policy.

While no Wisconsin cases and few cases nationwide discuss this clause in detail, those jurisdictions that have analyzed it have acknowledged coverage for mold where the proximate cause for the mold was a covered peril under the policy.¹⁵ In other words, if a homeowner's mold damage results from a leaky hail-damaged roof that the insurer paid to replace because hail was a covered peril, the mold remediation generally is covered because the original source of the mold was a covered peril. However, when there is no identifiable source for the mold other than homeowner neglect or inadequate cleaning procedures, the mold source cannot be traced to a covered peril and coverage is routinely denied.¹⁶

The ISO revised HO-3 in 2000 to more specifically address mold damage, and this exclusion clause is likely to appear in newly issued policies. The 2000 HO-3 exclusion reads:

"2. We do not insure, however, for loss: ... (c) Caused by: ... (5) Mold, fungus or wet rot. However, we do insure for loss 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: (a) A plumbing, heating, air conditioning or automatic fire protective sprinkler system, or a household appliance, on the `residence premises;' or (b) A storm drain, or water, steam or sewer pipes, off the `residence premises.'"

This clause explicitly acknowledges coverage for mold damage arising out of certain named perils, such as plumbing leaks, but remains silent as to other traditionally covered perils such as hailstorms. It can be argued that by not mentioning coverage for other perils the policy intends to exclude coverage for mold arising out of those perils not named. However, it is not certain that this language is sufficiently clear to achieve that result. Because the clause does not address mold caused by other covered perils, it can be argued that the clause is ambiguous and, therefore, should be interpreted in favor of coverage. Given that published decisions already have interpreted the predecessor HO-3 clause to allow coverage as long as the mold was caused by a covered peril, courts could reasonably interpret the present clause in the same manner, since there is no explicit language that would interfere with that interpretation.

Pollution Exclusion Clause

An insurance policy that does not include a mold exclusion clause is likely to contain the more general pollution exclusion clause. Both standard homeowners' and commercial general liability policies exclude coverage for damage caused by pollution. The 1991 HO-3 contains the standard pollution exclusion language, denying coverage for losses:

"2. Caused by: ... (e) any of the following: ... (5) Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against under Coverage C of this policy."

Determining if toxic mold falls under this exclusion requires an analysis of whether toxic mold is a "pollutant" and whether there has been any "discharge, dispersal, seepage, migration, release or escape." If both conditions are met, then there is coverage if a covered peril caused the discharge, dispersal, and so on.

The only Wisconsin case to directly address mold in the context of the pollution exclusion clause is one of very few cases nationwide to address the issue and stands in the way of enforcing the clause. In Leverence v. United States Fidelity & Guaranty,¹⁷ several owners of manufactured homes sued the manufacturer and its insurer alleging that the exterior walls in their homes retained excessive moisture. The moisture allowed the growth of mold that posed a risk to health and property value.¹⁸ The Wisconsin Court of Appeals focused on the discharge and dispersal language in the pollution exclusion, stating that the exclusion did not bar coverage because the growth of the mold was the result of water vapor trapped in the walls.¹⁹ Accordingly, the contaminants were not "released" according to the policy "but rather formed over time as a result of environmental conditions."²⁰ Because the mold did not disperse, discharge, and so on, according to the terms of the exclusion, the exclusion did not apply, and the court of appeals did not consider whether mold was a pollutant.

With an additional decade of research and attention to the microbiological aspects of mold, one now could more persuasively argue that toxic mold "releases" or "disperses" into the environment, since it gives off mycotoxins that cause human illness. It is yet to be seen if the Wisconsin Supreme Court will adopt this interpretation over the Leverence interpretation of more than a decade ago. However, a decade of additional scientific knowledge provides a basis for rethinking how mold is considered to cause injury under the pollution exclusion clause.

If a court goes beyond the Leverence interpretation of the discharge/dispersal language of the pollution exclusion clause, the question remains whether mold, and toxic mold in particular, is a pollutant. Wisconsin law provides no direct guidance for whether any mold is a pollutant. However, there is the potential for a comparison to carbon dioxide or lead paint, which were subject to relatively recent scrutiny by the Wisconsin Supreme Court.

In Donaldson v. Urban Land Interests,²¹ there was a challenge to whether the accumulation of carbon dioxide in a particular room in a building constituted a pollutant for purposes of the pollution exclusion clause. The court held that the carbon dioxide did not constitute a pollutant, since it is ever present in the atmosphere and "the respiration process which produces exhaled carbon dioxide is a necessary and natural part of life."²² It consequently refused to consider "carbon dioxide as in the same class as smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste."²³

The Wisconsin Supreme Court distinguished this analysis when it found lead paint to be a pollutant in Peace v. Northwestern National Insurance Co.²⁴ In this case, a tenant sought recovery from the landlord for injuries her son sustained from ingesting lead paint particles.²⁵ In declaring lead paint to constitute a pollutant under the pollution exclusion clause, the court distinguished Donaldson by explaining that lead paint is not universally present like carbon dioxide and historically has been considered harmful.²⁶ It also determined that the flaking, chipping, and deterioration of the lead paint was "discharge, dispersal, release or escape within the meaning of the terms in the policy."²⁷ Accordingly, the pollution exclusion clause effectively barred insurance coverage for the claim.

Toxic mold could be likened to lead paint, since its mycotoxins are harmful to human health and toxic mold is not universally present as is carbon dioxide. However, the fact that even toxic mold generally is not harmful to humans except in high concentrations affords an argument to support opposing viewpoints that would liken toxic mold to carbon dioxide, a nonpollutant, which also is not dangerous in low concentrations.

Conclusion

Plaintiffs and defendants currently have little direct guidance under Wisconsin law for determining whether insurance policy exclusion clauses will operate to exclude toxic mold claims. Hopefully, the recent influx of mold litigation will yield one or more appellate decisions on the coverage issues to assist practitioners in advising their clients on the probability of there being coverage for damage from toxic mold.

Endnotes

¹ Charles S. LiMandri, Epidemic of Mold Litigation Plagues Insurance Industry, Ins. Litig. Rep., July 12, 2001, at 262.

² Toxic Mold: A Growing Legal Issue, United Press Int'l, Oct. 6, 2000.

³ Thor Kamban Biberman, Dormitory at San Diego State Closed Over Toxic Mold, San Diego Daily Transcript, July 2, 2001, page 1B.

⁴ Melissa A. Hortman & Mark S. Mason, The Next Wave, For Def., August 2001, at 51.

⁵ Jennifer L. Reichert, Homeowners, Insurers Spar Over Spores in Toxic-Mold Cases, Trial, Sept. 2001, at 14.

⁶ Wisconsin Realtors Association, What You Need to Know About Mold, Legal Update, no. 1.07 at 4; Federal-Provincial Working Group on Mycological Air Quality in Public Buildings, Fungal Contamination in Public Buildings: A Guide to Recognition and Management (Ottawa, Ontario, Canada: Federal-Provincial Committee on Environmental and Occupational Health, June 1995).

⁷ Paul Gores, Families Blame Mold for Making Them Sick, Milwaukee J.-Sent., July 8, 2001, at F1; see also U.S. Centers for Disease Control, Reports of Members of the CDC External Expert Panel on Acute Idiopathic Pulmonary Hemorrhage in Infants: A Synthesis (Washington, D.C.: CDC, Dec. 1999) (Centers for Disease Control could not scientifically confirm allegations that stachybotrys chartarum was the cause of the pulmonary hemorrhages and deaths of 16 Cleveland, Ohio, infants).

⁸ O'Hara v. Lockram, No. 16-00-12848 (Ore. Cir. Ct. Lane County).

⁹ Centex-Rooney Constr. Co. v. Martin County, 706 So. 2d 20 (Fla. App. 4 Dist. 1997).

¹⁰ Ballard v. Fire Ins. Exch., No. 99-05252 (Tex. Dist. Ct. Travis County June 1, 2001).

¹¹ Gores, supra note 7, at F1.

¹² Droegkamp v. Langdon, No. 01-CV-2803 (Wis. Cir. Ct. Waukesha County Nov. 21, 2001).

¹³ Bodway v. United Serv. Auto. Ass'n, No. 01-CV-1326 (Wis. Cir. Ct. Dane County May 17, 2001).

¹⁴ Lisa Schuetz, Parents Push for Answers about Closing of Chavez, Wis. State J., Dec. 19, 2001, at A1.

¹⁵ Sunbreaker Condominium Ass'n v. Travelers, 79 Wash. App. 368, 901 P.2d 1079 (1995) (mold damage covered if cause was wind-driven rain); Bowers v. Farmers Ins. Exch., 99 Wash. App. 41, 991 P.2d 734 (2000) (mold damage covered when cause was tenant's vandalism); Merrimack Mut. Fire Ins. Co. v. McCaffree, 486 S.W.2d 616 (Tex. Ct. App. 1972) (mold damage not covered when water had leaked over many years from improperly constructed shower stall).

¹⁶ Wisconsin Realtors Association, supra note 6, at 8.

¹⁷ Leverance v. U.S. Fidelity & Guar., 158 Wis. 2d 64, 462 N.W.2d 218 (Ct. App. 1990).

¹⁸ Id. at 72.

¹⁹ Id. at 97.

²⁰ Id.

²¹ Donaldson v. Urban Land Interests, 211 Wis. 2d 224, 564 N.W.2d 728 (1997).

²² Id. at 233-34.

²³ Id.

²⁴ Peace v. Northwestern Nat'l Ins. Co., 228 Wis. 2d 106, 596 N.W.2d 429 (1999).

²⁵ Id. at 111.

²⁶ Id. at 137.

²⁷ Id. at 148

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