Mold
There are more than 100,000 species of mold. Most types of mold are not hazardous to healthy individuals though prolonged or excessive exposure can cause or exacerbate asthma or other allergies. Molds sometimes produce chemicals called mycotoxins that can cause illness in sensitive people. The species of greatest concern is Stachybotrys chartarum or Stachybotrys atra which is commonly called black mold.

Thus, it can be difficult to determine what level of exposure is harmful. There are no federal or state standards for what levels of exposure to molds presents significant health risks. There are no federal standards for mold though the EPA published a guideline for remediating mold in schools and commercial buildings. New York City has established guidelines for assessing and remediating mold. In addition, a number of states in the south and west are considering enacting mold-related legislation. For example, the California legislature is considering a number of bills that would establish cleanup standards for mold and mandate disclosure of mold problems when buildings are sold or leased. If these laws are adopted, Phase I ESAs in these states will have to address the possibility of mold infestation.

Molds usually appear because of excessive moisture in a building. The moisture is often a result of construction defects or maintenance problems such as leaking windows or roofs, failed sealant joints, inadequate or missing flashing, leaking pipes, cracks in the siding or poorly designed HIV systems. Mold can grow on materials with a high cellulose content such as drywall sheetrock, dropped ceiling tiles and wood that become chronically moist or water-damaged due to excessive humidity, water leaks, condensation, or flooding.

While mold is not usually addressed in environmental due diligence, it is fast becoming a concern to building owners, contractors, architects and insurers. In the past few years, hundreds of lawsuits have been filed for mold damage to homes, apartment complexes, commercial buildings, schools and courthouses.

One reason for the proliferation of the mold lawsuits is the use of cheaper building materials such as plywood and plasterboard which are more prone to breed molds when wet. However, homeowners are also becoming increasingly aware of the health issues associated with molds and are now filing claims when they discover mold under sinks, under floors and behind wallpaper. One insurer estimates that over $50 million in mold claims this year. Indeed, the Texas Insurance Council of Texas estimated that mold-related claims have risen 135% since 1999. As a result, insurers in Texas have asked the Texas Insurance Commissioner to exclude coverage for mold damage from standard homeowners policies.

Not surprisingly, insurers are seeing an increase in claims under GL policies for damages attributable to toxic mold. Courts have divided on a number of key issues.

One key definitional issue is whether toxic mold can be considered a contaminant or a pollutant? Many courts seem to be refusing to apply the contaminant exclusion in the context of indoor air quality claims. For example, in Donaldson v. Urban Land Interests (564 N.W. 2nd 728), a Wisconsin state court held that injurious concentration of harmful substance in poorly ventilated areas was not a "pollutant". However, in Reliance Ins. Co. v. Moessner (121 F 3d 895), the Court of Appeals for the Third Circuit held that an absolute pollution exclusion excluded coverage for tenant's claim for bodily injury after inhaling lead paint fumes.

Another dispute is whether indoor air falls may be considered "atmosphere" and thus fall within the pollution exclusion. Many courts have held that releases of contaminants into indoor air are not releases into the atmosphere and that the pollution exclusion does not apply.

Another key issue is whether the release of fungal contaminants can be deemed to be "sudden and accidental"? Courts seem to have divided along the same lines with mold as they have with other contaminants. Some courts view the sudden and accidental exception as nothing more than a reiteration of the fortuity requirement contained in the occurrence element of an insuring agreement. However, other courts have limited the exception's application to releases that are abrupt in a temporal sense.

Texas is one the leading states for mold-related lawsuits. For example, a jury in Austin, Texas recently awarded $32 million to a couple who sued their insurer after the company allegedly failed to repair a water leak in their 22-room home in Dripping Springs, Texas. The jury awarded $6.2 million in actual damages $12 million in punitive damages, $5 million for emotional distress, and $8.9 million in attorneys' fees. In December, another insurer settled a mold-related bad-faith lawsuit for $1.5 million in Blum v. Chubb Custom Insurance Co. (No. 99-3563, Nueces Co., Texas Dist. Ct.).

California is another popular venue for mold lawsuits. A California homeowners group recently settled a $1.3 million mold lawsuit against builders and contractors in Club at Wood Ranch v. Roberts Group (No. 21522, Ventura Co., Cal. Super. Ct.). This action followed another California case where a federal jury awarded $18 million to a homeowner against an insurer who declined coverage (Anderson v. Allstate Insurance Co., No. 00-907 (E.D. Cal.)). All but $500,000 of the verdict was for punitive damages. The trial judge subsequently reduced the award to $3 million.

Some of the earliest mold damages cases have been brought in Florida where the humid climate provides good conditions for mold. In 1997, a plaintiff was awarded $11.5 million plus attorneys' fees for mold damage to a Florida courthouse. In Centex-Rooney Construction Co. v. Martin County (706 So.2d 20, Fla. 4th Dist. Ct. App. 1997), the county sued the architect and builders for construction defects in a $13 million courthouse that led to mold damage. 15 workers became sick from the mold. The total value of the verdict exceeded the cost to construct the courthouse.

Thus, when a transaction involves office buildings, hotels, or residential buildings, it is also advisable to expand the scope of the ESA or conduct a Property Condition Report to investigate for the presence of molds.