BY SUSAN LINDEN MCGREEVY
Special to CONTRACTOR
Mold is the fastest growing risk management problem in the U.S.,” says a brochure from the Environmental Risk Resources Association. “Tenants, lenders, contractors, building owners and homeowners have a potential loss exposure to mold damage. Mold will affect more insurance buyers than asbestos.”
If you are in the mechanical contracting business and you have not been in solitary confinement for the last three years, you know of the near-hysteria that has become associated with the issue of mold.
Mold is nothing new to you. Mold and moisture-related damage is frequently found in construction projects. You have probably been called in to remedy water-caused problems that have led to mold damage.
So why is this such big news now? Three words: Personal injury lawsuits.
What kinds of personal injuries are we talking about? Mold, particularly the stachybotrys strain, is claimed to cause effects such as burning eyes, headaches, nausea, nose bleeds, allergic reactions, asthma, exhaustion, sinus infections, cognitive disorders, pulmonary hemorrhage, liver damage, central nervous system damage, brain damage, cancer and death.
It almost does not matter whether there is any truth to the claims. In Texas, where mold claims abound, the Texas Medical Association’s Council on Scientific Affairs has studied the issue and concluded that there is no evidence to support most of the medical claims being made — although inhalation of stachybotrys spores does seem to aggravate asthma and bring on allergic reactions in some people. To this day, no recognized government agency or organization has been able to issue standards to delineate how much fungus or mold is “unsafe,” since mold exists to some extent inside and outside every building.
Escalating to national panic
How and why did mold turn into an industry, sustaining lawyers, consultants and experts, all with their own newsletters and Web sites?
Through the seeds of a few successful lawsuits, nurtured and fed with tender care by the media. Take, for example, Texas, the leading state in mold claims.
Texas is the home of Melinda Ballard, the public relations specialist who created a tidal wave in the PR department over the mold problems in her own home and saw an industry arise in her wake. Mrs. Ballard sued the insurance company for “bad faith” for refusing to honor her claims and was awarded $32 million. Ballard v. Fire Insurance Exchange, No. 99-05252 (Travis Co., Texas Dist. Ct.)
Once the press picked up on this and other similar isolated stories, word quickly spread, and the idea began to take shape that, since mold exists everywhere, just about any property owner could have a mold issue that could give rise to a mold claim.
The tide is beginning to pull contractors into deeper waters.
Martin County, Fla., sued its construction manager for HVAC problems that it said forced it to evacuate the county courthouse and got an $11.55 million verdict against the CM and its surety. With interest, the ultimate judgment was more than $14 million. Centex-Rooney Construction Co. v. Martin County, 706 So.2d 20 (DCA 1997)
In North Carolina, a contractor paid $6.7 million to an owner of a partially completed hotel after a sudden release of water that resulted in mold contamination. 2001 WL 435797 (W.D.N.C. 2001)
Settlements of lawsuits of $70,000-$150,000 are not at all uncommon, just to avoid the litigation cost.
Schools are a particularly large focus of investigation because of their population, general lack of ventilation in off-hours and the expectations of parents:
- In Tennessee, 1,000 students spent a month studying in skyboxes at the Bristol Motor Speedway while their school was studied for mold infiltration.
- In Austin, Texas, voters approved a $49.3 million bond issue to pay for mold removal and preventive maintenance in 91 schools.
These lawsuits and claims will bring in as defendants any vendor or manufacturer of a product that could be linked to the moisture damage.
Since mold and mold-rated damage claims are not new, and we haven’t seen an impact on the construction economy from them before, why should things be different now? Because the volume and dollar amount of insurance claims have grown to the point that the insurance industry cannot afford to absorb the loss anymore, and will be forcing the risk back onto contractors.
Farmers Insurance recently reported that it is now receiving about 100 mold lawsuits, meaning that portion of claims that aren’t resolved, each month and many of them are filed without any effort to work out a claim before running to the courthouse. One law firm in Birmingham, Ala., is said to have at least 200 mold lawsuits pending right now.
Insurers bail out
When the number of claims and lawsuits goes up, the cash of insurers flows out, and its profits go down.
Underwriting losses for 2001 ($53 billion) were nearly double those for 2000, the largest loss in more than 25 years. The losses are still mostly dominated by homeowners’ claims. Homeowners’ losses from mold-related claims exceeded Sept. 11-related losses by $2.4 billion.
Many firms have decided to reduce their coverage, or just stop writing some coverage altogether in some states, such as Texas, California, Missouri and Kansas.
In more than 35 states, insurance companies have successfully lobbied state insurance boards to eliminate mold coverage in their policies, even if the underlying event (such as a burst pipe) that gave rise to the mold is covered, and other damage would be paid for. The flood of lawsuits in Florida caused 50 insurers to ask the state Department of Insurance to let them limit coverage.
On Oct. 4, 2002, in a front-page article, the New York Times reported that Farmers Insurance was canceling 700,000 policies in the state of Texas, at the rate of 58,000 a month. State Farm and Farmers had provided 50% of all homeowners insurance in the state, and insurance rates went up significantly as a result.
Why would an insurer pull out entirely, rather than just try to limit its exposure through policy definitions and exclusions? Because insurers are not favorites of the law, and often they are held liable despite the language of their policies. It is the law in virtually every state that:
“[I]n interpreting an insurance policy, [the court] must apply the general principle that doubts as to the meaning must be resolved against the insurer.” Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 269 (1966).
Even those of us who have not had policies canceled or rates raised due to mold risk will feel the impact of mold-related awards, because the cost of these payments eventually works its way into the economy as a whole.
Construction industry impact
Contractors who have dealt with their insurance renewals of late will undoubtedly have seen increases, some quite substantial. Contractors in the residential arena (including multifamily, long-term care and assisted-living) can expect to see their premiums disproportionately affected, because the longer occupants are in the buildings — particularly lower-immunity occupants such as children, the sick and the elderly — the greater the risk of a claim.
Owners cannot afford to have their properties labeled as “sick buildings.” If they get claims from tenants for personal injuries, or they find that their buildings have plummeted in commercial value, they (or their insurers, if they are lucky enough to have coverage) will probably turn to the team that created the problem. Design professionals, contractors and suppliers, including their sureties, are being aggressively targeted in lawsuits to bear the majority of the liability on claims of property damage and personal injury resulting from IAQ problems.
Claims against contractors will include:
- Breach of contract: Most contract specifications make reference to constructing “watertight” or “airtight” products; to meeting certain industry criteria; to providing “first-class” workmanship; and other phrases that never presented much problem before, but now take on new meanings and increased exposure.
- Third-party beneficiary: Where work was specifically done for a current or future tenant, even if contracted for and paid by an owner, tenants have brought suit against the contractor directly as “intended third-party beneficiaries” of the construction contract.
- Negligence: Since everyone in this country has a duty to try to avoid harming others, the most common basis for lawsuits is the “common-law” duty of care. How far that duty goes and how bad the violation of it is will vary, but now that there is some scholarship that says fungus is potentially “toxic” — no matter how questionable you might consider it — there can be a basis for a court finding that a supplier or installer of anything that could cause or worsen a mold problem had a duty, perhaps a high duty, to safeguard the public at large.
- Implied warranty of habitability: You can expect to see claims by homeowners that, even if the contract didn’t say anything about specific promises, and you as a contractor were extremely careful, you knew that people, including families with small children, would be living in the house day in and day out, yet you held the property out to the buyer as “habitable” when it had an inherent defect that produced mold.
- Strict liability: Although there is still little hard data that would show mold to be inherently dangerous, there are those who believe this already and we don’t know what the future holds. If it were to be categorized as such, courts can hold the manufacturer or installer “strictly liable” (which means that there are very few ways to avoid liability) to the injured party.
- Employee claims: Employees of mechanical contractors who are around these conditions routinely could develop the symptoms now associated with mold exposure. Worker’s comp rates being what they are, this can be an expensive repercussion of mold mania.
- Tenant claims: Anyone who owns or manages property, or rents it with the right to sublease, has to consider the potential exposure of occupants. While some types of facilities have much greater risks than others (nursing homes, day-care centers, schools, hospitals, office buildings, factories, stores), any type of facility where people spend more than an hour on a regular basis can give rise to claims. The internal environment of the facility makes a difference too: kitchens, pools, shower rooms, atria, mechanical rooms all are particularly humid and disproportionately susceptible to mold growth.
Virtually all private construction is financed by third-party lenders, and much public construction is financed through the issuance of bonds. Lenders do not have much stomach for risk. Much of their work is spent in figuring out where the risk is, and doing all in their power to avoid it. Lenders have lost a lot of money recently on ventures that have failed. They are not in a position to go out on a limb, where the risk is having a building they have financed, and which is itself their greatest security, becomes vacant, in default on the loan and unmarketable as a sick building.
The key to the whole problem for the industry, in this writer’s opinion, is insurance. Lenders and bond underwriters will not be allowed to finance construction unless they see that adequate insurance is in place to cover mold-related personal injury claims. However, as we have seen, insurers have been burned so badly that there are few markets for the coverage needed, and even those insurers are setting high standards for their customers to meet.
Yet life, and construction, must go on. The development, design, construction, leasing, lending, insuring and surety bonding industries all depend for their survival on finding a way to break the logjam created by this scare. While eventually Mold Mania will find its own level, as have other similar issues before it, there are plenty of things that all the players in the industry can do now to decrease and manage risk for the short and long term.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to [email protected]. She is Contractor’s contributing editor on legal matters.