Snowballing claims, large jury awards and even a Hollywood appearance are leading commentators to declare that toxic mould may be the next asbestos for the re/insurance industry. But times have changed, and this may well not be the case.
Claims for damage related to mould in the indoor environment threaten to become the `next asbestos' in the US. US insurers reportedly spent more than $1bn on mould claims in 2001, roughly five times the cost in 2000. During 2000 and 2001, over 44,000 mould claims were presented in Texas alone, according to the Insurance Information Institute.
As a result, certain major insurance companies have chosen not to issue new homeowners policies in Texas and California. Evacuations of schools and office buildings have occurred, and homes have even been intentionally burned to the ground because of `mould contamination'. Feature stories and special reports on the topic regularly appear on local and national news programs. The US Congress is considering legislation that proposes a national mould insurance program, and requires governmental agencies to establish acceptable levels of mould in the indoor environment.
Origins of mould claims
Mould is a fungus that comprises 25% of the Earth's biomass, and has been in existence for millions of years. It serves many useful purposes including decomposing organic material. We also use it in our medicine, like penicillin, and our food, such as cheese. It exists both inside and outside of homes and commercial structures. Mould requires three things also required by humans to survive: food, temperature and water. The `food' for mould includes standard cellulose-based US building materials such as drywall, wall covering, ceiling tile and carpet backing. Mould and humans also share a preferred temperature range. Therefore, the human indoor environment is perfect for mould growth if the remaining element is provided: water. Water from a leaky roof or pipe, or even excess humidity, is sufficient to sustain mould growth in the indoor setting.
Mould can release microscopic seed-like spores into the air. Additionally, certain moulds produce mycotoxins that can be harmful depending on the individual, the concentration and duration of exposure. Plaintiffs claim that inhalation of mycotoxins causes a variety of illnesses involving respiratory symptoms, such as asthma and allergies, as well as neurological deficits.
Commentators have advanced numerous theories to explain the advent of mould claims. One theory is based upon the `energy crisis' the US experienced in the 1970s. Purportedly, the desire for greater efficiency in energy consumption led to the construction of more energy-efficient buildings. These structures were often fitted with sealed windows and required central heating and air-conditioning systems to closely regulate the amount of outdoor air that was permitted to circulate in the buildings. Additionally, the materials used in the construction of these structures included gypsum wallboard, stucco and wall coverings, all potentially trapping air and moisture inside while also serving as a tasty menu for mould. Another theory notes that certain parts of the US have experienced tremendous population growth. This theoretically led to an increased demand for energy-efficient homes and buildings that were constructed quickly and cost-effectively. This population growth occurred primarily in warmer climates that were perfect for growing mould, and where water penetration of the building envelope was not previously a major concern. Another viewpoint is that the increased volume of mould claims was in response to two jury verdicts handed down against insurers in 2000 and 2001. The cases were tried in California and Texas and involved alleged bad faith claims handling. The verdicts were for $18m and $32m, respectively. This may be the more cynical, and accurate, viewpoint.
These two cases focused the glare of the US media spotlight on mould and resulted in television news stories on the national and local levels. Feature articles have also appeared in the Wall Street Journal, Forbes, the New York Times and USA Today. Hollywood even provided mould with a boost as Ed McMahon, sidekick to former late night talk show host Johnny Carson, and Erin Brockovich, the world's most famous paralegal, brought mould claims.
Mould damage claims
Mould claims typically arise after a water loss at a home or commercial building. Mould growth is often discovered after the suspected water source is `repaired', and frequently occurs in these circumstances because the water source has not been fully repaired, or there remain other water sources not previously identified. Another reason mould growth may occur is that the response to the water intrusion was untimely. Mould reportedly can begin growing if the water is not removed within 48 hours. Further, where substantial mould growth is discovered, `killing' the mould on certain surfaces with bleach may not be effective. Instead, where porous materials are involved, removal of the affected property, including drywall and flooring, may be required. Thus, mould remediation can be quite costly.
The most controversial aspect of mould claims is the extent to which exposure to mould in the indoor environment may result in serious bodily injury. The US Centers for Disease Control (CDC) initially published a study in 1994 linking the presence of mould in the low-income housing of 47 Cleveland, Ohio infants to their afflictions with acute idiopathic pulmonary haemorrhage. Sixteen of the infants died from the condition. After further consideration, the CDC retracted
the findings, citing deficiencies in the study. However, plaintiffs and their counsel seized the initial CDC findings, and the opinions of certain testifying experts, to assert that exposure to mould causes serious bodily injury.
Individuals have different levels of sensitivity to mould that may vary day-to-day, and depend upon the type and concentration of mould, and the duration of the exposure. Moreover, these sensitivities most commonly result in reactions similar to allergies such as sneezing, coughing, wheezing and irritated eyes and throat. Of course, there are many other potential causes for these symptoms including pets, dust and the common cold.
Experts contend that there is presently no scientific basis to link exposure to airborne mould in the indoor environment to serious bodily injury. Nevertheless, certain US courts have permitted expert testimony that mould exposure can cause not only asthma and respiratory ailments, but also permanent cognitive deficits. For example, the State of Delaware's Supreme Court affirmed a judgment in excess of $1m where a 33-year old woman claimed that exposure to airborne mould in her apartment aggravated her asthma and caused permanent memory and concentration deficits. Additionally, public and private research is being conducted concerning the health effects of mould. Therefore, it may only be a matter of time before airborne mould exposure becomes the source of innumerable illnesses allegedly afflicting the American public.
US insurers and their counsel are waging an aggressive battle against plaintiffs' experts who attempt to use `junk science' to connect mould exposure to serious bodily injury. The outcome of this conflict is pivotal in determining whether mould indeed becomes the next asbestos.
Construction industry response
It is suspected that certain construction designs and products may have served to set the stage for mould growth. Construction of `airtight' buildings has reduced the flow of fresh air and created the opportunity for mould to be circulated throughout the building by central air-conditioning systems. Since the explosion of mould claims, building systems have been redesigned, and new mould-resistant materials are being used. More care is being taken to reduce needless exposure of construction materials to water and the outside elements. Insurers are also assisting in this effort, as shown by the recent efforts of the Alliance of American Insurers to participate in discussions to revise the South Carolina State Building Code.
Even the US government has taken note of mould claims. In June 2002, US Representative John Conyers (D-Michigan) introduced proposed legislation, HR 5040, that calls for federal research concerning the health effects of mould, standards for acceptable levels of mould, and criteria for certification of mould remediation contractors. The legislation also would establish a national mould insurance program to provide insurance for those who are unable to otherwise obtain it because of a history of mould problems.
There is a significant question whether standards for mould clean-up or permissible exposure limits can be determined. As previously mentioned, individuals have different levels of tolerance for various species of mould. While mould exists everywhere, levels of concentration indoors can vary significantly at various locations throughout the structure and at different times. Thus, setting an `acceptable' level of mould that applies to everyone, in all circumstances, may not be possible. Nevertheless, the US government is presently funding studies concerning the health effects of mould. The state of California has passed legislation that calls for research to determine whether permissible exposure limits can be set for mould, and a volunteer task force of experts assembled for this purpose in late October.
In addition to opposing unscientific bodily injury causation testimony, insurers are responding in a variety of ways to the influx of mould claims. For example, if insurers delay in responding to water damage claims, mould claims may result. Therefore insurers have trained claims handlers to respond to water damage claims promptly to avoid mould claims. In addition, handlers are better equipped to recognise a serious mould claim and respond accordingly by using the appropriate remediation strategy. Many insurers have entire units devoted to responding to mould claims, in part to assure consistency and control. Most insurers have also responded to mould claims by adding endorsements to exclude or limit coverage for mould. In addition, they are scrutinising potential commercial insureds to determine if proper loss prevention and quality control programs are in place before issuing policies. Certain major carriers have even stopped writing or renewing homeowners policies in states experiencing the highest frequency of mould claims, such as Texas. Rate increases have also been imposed, reportedly as high as 200% in Texas.
US insurers and reinsurers have addressed toxic mould claims as part of construction defect and first-party water damage claims for years. The recent media frenzy over these claims has, however, raised new concerns about how much effect they will have on reinsurers' bottom lines. For reinsurers, the most pressing issues involve: how the increase in toxic mould cases will affect the inventories of closed and open cases; what practical considerations should be used to properly evaluate and price potential toxic mould exposures; and how traditional reinsurance doctrines may interplay with toxic mould cases.
While numerous authors and commentators have likened toxic mould claims to the next asbestos, there is a significant difference that is of paramount concern to reinsurers. Mould claims will not impact multiple years of insurance coverage in the same way as asbestos and environmental claims typically have and continue to do. While more than one insurance policy may be implicated by a toxic mould claim, it is predominantly a situation where policies providing different coverages concurrently respond to the claim rather than, for instance, an asbestos claim which implicates 20 years of historic commercial general liability coverage. The distinction is vitally important as both insurers and reinsurers may address the problems associated with toxic mould claims on a prospective basis without significant concern for a new long-tail loss exposure.
Practical considerations for future pricing
With the focus on future claims, reinsurers have analysed certain practical considerations relating to the underwriting and claims handling of toxic mould claims. As an initial matter, reinsurers are reviewing the internal claims coding procedures that ceding companies employ, so a more refined underwriting analysis can be conducted for toxic mould claims. Since these claims can impact virtually all lines of insurance, some within the reinsurance industry have advocated the use of overlay coding, equipping an insurer with the ability to produce a report that identifies all claims with mould allegations. While the new wave of toxic mould claims may not impact historic insurance programs, there is little doubt that both insurance and reinsurance pricing should be adjusted to account for the increase in claims. The need for information is also particularly important because certain regions of the US (Texas, California and Florida) have exhibited the largest increase in toxic mould cases. The ability to identify such data will aid reinsurers in properly underwriting and pricing future reinsurance certificates.
Insurers are also in some cases assembling data beyond strict statistical information to facilitate their analysis of toxic mould exposures. For example, some insurers are now collecting information addressing the loss prevention methods used by insureds that will likely face toxic mould claims (these proactive actions are more common where the insured has obvious loss exposure such as home or building contractors and remediation contractors). Reinsurers may seek to request such information in an effort to further aid the underwriting process.
In the underwriting process, reinsurers may also seek to track the effectiveness of mould and pollution exclusions now contained in many policies. While first-party policies include exclusions that specifically address mould, claimants throughout the US have questioned the enforceability of such exclusions. In addition, buoyed by the success of claimants' counsel in calling into question the effectiveness of pollution exclusions to non-traditional environmental claims in both the first-party and third-party policy context, attorneys representing toxic mould claimants have also challenged whether pollution exclusions should operate to bar a toxic mould claim. While commentary on the viability of mould and pollution exclusions in this context has been significant, the list of reported decisions has not. Insurers' efforts to address the mould issue have been further hindered because some states have prohibited insurers from adding newly-worded exclusions or have mandated that certain sub-limits be available for mould claimants.
While mould claims can present diverse underlying factual scenarios, questions remain about the application of traditional reinsurance doctrines. Although there has been a significant rise in toxic mould claims, most reinsurers have not employed their own exclusionary language. Underwriting personnel may alter certain certificates to account for particularly high loss exposures for a particular cedant. Nonetheless, two long-standing disputed issues in the reinsurance arena are particularly relevant in relation to mould claims:
This issue has generated case law and significant industry commentary because of its economic impact on environmental and other long-tail, continuous exposure claims. In Affiliated FM Insurance Co v Constitution Reinsurance Corp, 416 Mass 839, 626 NE2d 878 (Ma 1994), the Massachusetts Supreme Court found the language in the facultative certificate unclear on whether the parties intended the contract to include litigation expenses for declaratory relief brought by an insured against its insurer to determine coverage. After being remanded for further handling by the Supreme Court, the trial court allowed testimony on the purpose and function of reinsurance and custom and practice in the reinsurance industry in 1976, when the certificates were issued. The jury concluded that the certificates provided coverage for the declaratory judgment expenses. Since the question of coverage in the mould context may often involve declaratory judgment litigation, reinsurers should continue to closely monitor case law developments that may impact coverage for declaratory judgment expenses.
Another long-standing issue is whether the reinsurance certificate provides coverage for damages that the cedant must pay as a result of bad faith conduct. Ceding insurers often maintain that reinsurance certificates, based upon the implied duty of good faith and the follow the settlements doctrine, should cover such damages. In addition, many certificates include `excess of policy limits' provisions to account for potential bad faith liability. There is also limited case authority holding that a reinsurer may be held liable for bad faith damages where it can be argued that the reinsurer was involved in the claims handling process. Ott v All-Star Insurance Corp, 99 Wis2d 635, 299 NW2d 839 (Wis 1981). With bad faith allegations present in a significant number of first-party mould cases, a reinsurer needs to be keenly aware of how pertinent jurisdictions may address this issue. Specifically, even if the certificate in question provides coverage for extra-contractual liability, it could be interpreted not to cover punitive damages in states that prohibit insurance coverage for punitive damage awards.
Mould problems in North America have not been confined to the more temperate regions, and cases in states such as Illinois and New York have been reported. Again, these cases appear to stem primarily from the building practices and improper remediation. Such practices have led to cases as far north as Canada, although differences in litigation practices between the US and Canada mean that the large jury verdicts such as those handed down in Texas and California will not result. Likewise, the absence of all of the factors, new construction, use of certain construction techniques and materials, climate and litigation practices probably means that regions outside the US will not experience a level of mould claims to the same degree.
Future of mould
Mould may not become the `next asbestos'. Exposure to asbestos causes serious illnesses, including cancers, that can be traced to inhalation of asbestos fibres. Moreover, the cause and effect of exposure to asbestos has been demonstrated by extensive valid scientific evidence. No such biological markers exist that link illness to mould. Additionally, defendants in third-party mould cases are typically small businesses or property owners, not the easily targeted large corporations that existed in the asbestos arena. In asbestos cases, plaintiffs' attorneys can share evidence that exists against defendants that commonly appear in asbestos litigation. Plaintiffs in mould cases will not be able to share proofs as easily against recurring defendants.
Mould and asbestos also differ in that symptoms from asbestos exposure can take decades to appear. There is no long-term latency associated with mould. This allows people suffering from mould sensitivity to remove themselves from the affected area. Without a latency period, fewer people should become ill and there is less of a chance that more serious illness will develop.
Insurance analysts at Standard & Poor's have proclaimed that mould claims peaked in 2001. Thus it appears - at least at this point - that the US mould `crisis' may be only temporary.