MOLD LIABILITY CLAIMS AND THE INSURANCE ASSET:

ANALYSIS AND COMMENTARY ON TRADITIONAL BATTLEGROUNDS

Presented By
James P. Magee, Esq.

Mealey's Mold 101 Conference

New Orleans, Louisiana
April 27, 2004

A. Introduction

Over the past decade, we have witnessed an undeniable proliferation in mold related claims and lawsuits. Covering both property damage and bodily injury, mold claims have been hailed by many as the second coming of asbestos for plaintiffs' attorneys, with massive jury verdicts forcing the insurance community to sit up and take notice. Rightly or wrongly tagged, mold claims mean potentially significant plaintiff awards. In the face of this growing trend, the question presented to the insurance and risk management industry is- who is going to bear the costs of defending, investigating, and remediating mold claims? It is clear that, under the right circumstances, mold claims present insurers with the potential for substantial exposure in terms of both policy pay-outs and bad faith claims. Additionally, insurers everywhere have been saddled with additional risk management costs under their duty to defend insureds, greatly increasing their internal costs and likely forcing insurers to raise their rates to cope and prevent diminished profits to the fullest extent possible.

With this epidemic in mind, there are numerous coverage issues for insurers to consider when faced with a mold related claim. When did the claim arise? Is the claim excluded under the policy? Is there a way around an applicable exclusion? In this article, all of these issues will be discussed, if not answered, in hopes of providing insurers and those on the periphery of the growing mold claims front a better understanding of what factors are involved in mold insurance coverage.

B. CGL and Property Damage Policies and the Application of Mold/Fungi Claims: Basic Policy Provisions and Applications

There are generally two policy types implicated in mold claims; first part property damage policies, and third party comprehensive general liability/commercial general liability policies.

First-party policies, be it a homeowners policy or a commercial property policy are intended to insure a property owner for all risks of damage against his or her property unless the claimed damage is otherwise excluded. Because most claims against a property damage policy are brought directly by the policy holder for damage to the policy holder's own property, claims against property damage policies in this context are referred to as "first-party" claims.

CGL policies are intended to insure a person or business against damages incurred by others. A CGL policy typically covers damages for bodily injury and property damage suffered by a third-party where the damages are caused by the fault of the insured. As a result, claims against CGL policies are referred to as "third-party" claims.

1. Requirement of "Occurrence"

Both policy types tend to be "occurrence-based" policies and not "claims made" policies. Occurrence-based policies provide coverage only if it is shown that the claim is the result of an insured "occurrence" happening within the policy period. This distinction is made in contrast to policies for which coverage is made on a claims-made basis, which provide coverage based simply upon the fact that a claim was made against the policy during the policy period. When dealing with an occurrence-based policy, it must be established that an "occurrence," as defined by the policy, actually took place. The policies typically define "occurrence" as "an accident or a happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury or property damage during the policy period."

2. Trigger- Which Policies Are Applicable to the Claimed Loss?

Determining when an "occurrence" takes place is crucial in knowing what policy or policies are implicated to cover a loss. This issue of which policy or policies apply to a claimed loss hinges on the time of the occurrence, an event commonly referred to as the coverage "trigger." The coverage trigger, additionally known as the "date of loss", is the point in time that the damage is considered to have occurred, thereby establishing which policy or policies are applicable to cover an insured loss. In insurance coverage matters in general, courts have taken varying approaches with respect to determining the appropriate coverage trigger. As insurance coverage law is ultimately a state law issue, different states apply different trigger methods under similar circumstances. Despite the varying treatments among different jurisdictions, the coverage trigger determination is always crucial as it holds the ability to implicate or completely exonerate an insurer based simply on the timing of the occurrence.

Historically, insurance claims have fallen under one of four coverage trigger theories. Specifically- courts have utilized any one of the following, "exposure" theory, "manifestation" theory, "continuous trigger" theory, and the "injury-in-fact" theory. It has also been the case that different jurisdictions have applied different theories under seemingly identical circumstances. Because of the disparity in treatment, there is no hard and fast rule on which theory applies in a particular claim. Because of this lack of uniformity, it is important for anyone involved in mold coverage litigation, or any coverage litigation for that matter, to have at least a general understanding of the various theories.

Under the "exposure" theory, the policy implicated is the one in effect on the date that a claimant or property is exposed to an injury-causing agent. Under this theory, the trigger date is generally considered to be the date on which the ultimate mold causing factor occurred. For example, in a property damage claim, if the ultimate cause of mold were determined to be the result of a faulty roofing repair, the trigger date would be the date of the faulty roofing work. In a bodily injury claim, trigger would occur at the point of exposure to the mold.

Under the "manifestation" theory, the time that a loss is discovered determines the effective policy on the risk. Under this theory, coverage would be triggered at the time the mold related property damage or bodily injury is discovered. In contrast to the exposure theory, the trigger date under the manifestation theory does not consider the date of the occurrence of the mold's ultimate cause. Analyzing coverage trigger in a property damage claim under the manifestation theory, even though a faulty roofing installation may be the ultimate cause of mold growth, coverage would not triggered until the mold is discovered. For bodily injury claims, coverage is not triggered until the manifestation of the injury or disease.

The "injury-in-fact" theory provides coverage under the policy in place at the time that the bodily injury or property damage actually occurs. This inquiry can become complicated in mold claims. In the case of "latent" disease or damage, the injury may be sustained at an undeterminable date well before it is ever discovered. The same is true of mold related property damage. As mold growth occurs gradually over time, mold contamination may exist for a significant amount of time prior to its ultimate discovery. As a result, under both property damage and bodily injury claims, utilizing the injury-in-fact theory would require an extensive, and likely costly, factual determination to pin-point the actual date of injury.

The "continuous trigger" theory is the most far reaching of the four trigger theories. The continuous trigger theory provides that all policies on a risk, from the time of initial exposure through the manifestation of the injury or damage are applicable thereby triggering the greatest number of policies and providing maximum coverage. Under the continuous trigger theory, if multiple policies are in place over the course of time from the initial exposure to manifestation, all of the policies will be triggered.

a. Property Damage Trigger Issues

At this point, it would seem that trigger issues for mold related property damage claims are not necessarily unique simply due to the involvement of mold. Therefore, they appear to be similarly treated to other types of property damage claims where actual damage may begin prior to discovery. When dealing with property damage claims, courts tend to apply either the exposure theory or the manifestation period.

In Parr vs. Zurich American Ins. Co., 669 N.W.2d 401, (Minn. Ct. App. 2003), a Minnesota court applied the exposure theory in a third-party claim against a roofing contractor. In Parr, property owners hired a roofing contractor to replace a roof on their home. The contractor performed the roofing work on May 1 & 2, 1999. After the work was completed, the property owners noticed that a vent cap on their roof had been damaged. The roof cap was subsequently replaced by the contractor on May 18, 1999. However, in making the repair, the contractor used the wrong sized roof cap which resulted in a blockage of the vent and eventually led to extensive mold damage.

In December of 1999, the property owners discovered large amounts of mold growing

behind their walls, under their floors and in their attic which had been caused by an excess of condensation due to the obstructed vent pipe.

The property owners brought suit against the contractor and against the contractor's

employees individually. After no answer was filed by one of the employee-defendants, the property owners took a default judgment in the amount of $600,000.00. Shortly thereafter, the property owners brought a garnishment action against the contractor's insurer.

The insurer had issued a one year CGL policy to the contractor on April 29, 1999, which was subsequently cancelled on July 31, 1999 due to the contractor's failure to make timely payments. During the garnishment proceeding, the insurer filed a motion for summary judgment denying coverage in which it argued that the policy was not triggered because the CGL policy stated that the insurer would only pay for property damage which "occurr[ed] during the policy period." The policy defined an "occurrence" as an "accident," including continuous or repeated exposure to substantially the same general harmful conditions." The insurer further argued that, because the mold did not develop until after the policy had expired, there was no coverage. The court disagreed and found that the policy was triggered when the insured conducted the faulty work.

In New Orleans Assets, L.L.C. v. Travelers Property Casualty Co., Civ.A.01-2171, 2002 WL 32121257 (E.D. La. Sept. 12, 2002), the manifestation theory was utilized to establish the coverage trigger in a first-person property damage claim. In New Orleans Assets, the plaintiff was the owner of a commercial building in New Orleans. The property was insured under a policy issued by the defendant insurer with a coverage period of August 15, 2000 to January 1, 2001. Plaintiff discovered mold contamination in the building on July 28, 2000, before the policy was effective. On October 19, 2000, plaintiff informed its insurer of the contamination. After conducting testing and evaluations, the insurer denied coverage. Plaintiff, accordingly, filed suit. Plaintiff argued that, although mold was discovered prior to the coverage period, additional mold was detected during the policy coverage period, thereby triggering coverage under the August 15, 2000 to January 1, 2001 policy. The court disagreed, finding no coverage on summary judgment. The finding of no coverage was due to the fact that the loss occurred before the policy period. In so ruling, the court utilized the manifestation theory, stating that the insurer on the risk at the time that the damage is discovered is liable for the entire loss, even if the property damage progresses after the policy expires. Because the loss had manifested itself prior to the coverage period, the policy did not apply.

James Pest Control, Inc. v. Scottsdale Ins. Co., 99-1316 (La. App. 5^th Cir. 6/27/00), 765 So.2d 485, involved a claim against a pest control contractor's CGL policy for damages caused by termite infestation. Although not a mold claim, damage from termites often occur well before eventual discovery and should be analogous to a mold property damage claim. In James, the court applied the manifestation theory. The court reasoned that, though the injury in fact may have occurred prior to discovery, the infestation in the property did not become "damage" triggering coverage until discovered by the homeowners.

However, in Ellis Court Apartments, L.P. v. State Farm Cas. Co. , 72 P.3d 1086, (Wash. Ct. App.2003) a Washington state court refused to apply the manifestation trigger rule in determining coverage in a water damage claim. In Ellis, a condominium suffered substantial structural damages due to water intrusion. The property owner lodged a claim with its property insurer which was denied on the basis that the claimed loss did not occur within the coverage period. The property was insured by State Farm from July, 1993 through September, 1999. The property owner made its insurance claim in May 2000. The insurer declined the claim, asserting that the date of loss was the date that the property owner was aware of the damage, which fell after the expiration of the policy period. The court disagreed, applying the injury-in-fact theory and holding that the policy was triggered when the damage began. Because it was determined that the injury occurred during the policy period, the court found the policy applicable.

In addition to using the manifestation and exposure theories, courts have used the continuous trigger theory when dealing with environmental property damages claims. Under this approach, every policy in place on a loss from, exposure to manifestation, would be triggered.

b. Bodily Injury Trigger Issues

To date, very few courts have addressed the trigger issue with respect to mold exposure bodily injury claims. Bodily injury claims resulting from mold exposure, however, would appear to be sufficiently analogous to asbestos actions to allow their use for guidance on the subject. In considering coverage triggers in asbestos actions, many courts have utilized the continuous trigger theory because those claims for progressive injuries. However, more conservative courts have applied the exposure theory and manifestation theories, triggering coverage based upon the point in time at which the claimant either was exposed to the harm causing agent or discovered the injury

In 2002, the federal court in the Eastern District of Louisiana applied the exposure theory in a mold bodily injury claim to deny a CGL's insurer's motion for summary judgment. In Liberty Mutual Fire Insurance Co. v. Ravannack, 00-1209, 2002 WL 441334 (E.D. La. Mar. 19, 2002), the court denied summary judgment for a CGL insurer finding that the alleged mold related bodily injury resulted from exposure to mold during the coverage period, despite the insurer's request for use of the manifestation theory which would have placed the trigger at a point well before the policy period.

In 1999, the plaintiffs discovered that water had entered their home and saturated the carpeting. Upon this discovery, the homeowners hired an inspector and learned that the moisture had entered the house through the exterior insulation and finish system. The moisture caused extensive structural damage, wood decay and mold.

The homeowners filed suit against the builder and subcontractor who, in 1992, had built the home and installed the insulation system. Suit was also filed against both companies' respective CGL insurer. Included in the suit were claims for bodily injuries sustained by the plaintiffs' children as a result of the children's exposure to the mold.

The subcontractor's CGL insurer moved for summary judgment, claiming that no coverage for the damages existed as the policy was only effective from January 18, 2000 through January 18, 2001, several years after the home was constructed.

Denying the motion, the district court noted that the children were continuously exposed to mold while they lived in the house. The court reasoned that the exposure period included the period that the policy was in effect, despite the fact that the policy was not in place when the home was built.

In Armstrong World Indus. v. Aetna Cas. & Sur. Co., et al , 52 Cal. Rptr. 2d 690 (Cal. Ct. App. 1996), a California court found that a continuous trigger was applicable for an asbestos bodily injury claim. Specifically, the court found that there was sufficient medical evidence to establish that the claimants suffered actual injury when they were first exposed to the asbestos. However, the court also found that the damage existed continuously during the latency period, through actual manifestation of the disease, and ended with the victim's death. In light of the latency aspect of asbestos diseases, the court found it appropriate to apply a continuous trigger to these injuries. Because the development of mold related bodily injuries may be analogous to bodily injuries in asbestos claims in terms of latency, it is possible that courts will apply the continuous trigger for mold bodily injury claims as well.

C. Exclusions

Once the coverage trigger has been established and the relevant policy or policies are implicated, it must be determined whether or not the claimed loss falls under any of the policy's exclusions of coverage. Virtually all insurance policies have exclusions which insurers have used in attempts to exclude mold claims. These exclusions, along with a sampling of some of their interpreting cases will be discussed in greater depth below.

1. CGL Exclusions-Traditional Battlegrounds

a. Pollution Exclusion

Historically, the most heavily cited CGL coverage exclusion in the mold context is the "Pollution Exclusion." There are two incarnations of the Pollution Exclusions, one introduced in 1973 and a replacement introduced in 1986.

The 1973 Pollution Exclusion provides that the insurance does not apply:

To bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalies, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or water or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

Because of the last sentence's exception for discharges which are "sudden and accidental," the 1973 exclusion is commonly known as the "sudden and accidental" exclusion.

In 1986, the ISO made major changes to the pollution exclusion. Most notably the "sudden and accidental" language was removed. Under the 1986 revision, the pollution exclusion was amended to provide that the insurance does not apply to:

"Bodily injury" and "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured;

(b) At or from any premises, site or location which is or was at any time used by or fror any insured or others for the handling, storage, disposal, processing or treatment of waste;

(c) Which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for any insured or any person or organization for whom you may be legally responsible; or

(d) At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations:

(i) if the pollutants are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor; or

(ii) if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants.

Subparagraphs (a) and (d)(I) do not apply to "bodily injury" or "property damage" arising out of heat, smoke or fumes from a hostile fire.

As used in this exclusion, a hostile fire means one which becomes uncontrollable or breaks out from where it was intended to be.

(2) Any loss, cost or expense arising out of any:

(a) Request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or

(b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants;

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

The 1986 exclusion is typically referred to as the "absolute" exclusion.

Presently, the majority of claims will involve the 1986 absolute exclusion, due to the fact that it has been the most recent, effective exclusion.

i. Mold as a "Pollutant"

In order for the absolute exclusion to apply, there must be a finding of (a) a "pollutant" and, (b) a "discharge, dispersal, seepage, migration, release or escape" of a "pollutant" within the meaning of the policy. Therefore, the two main points of inquiry are- is mold a "pollutant," and if so, has there been a "discharge" or "dispersal"?

The pollution exclusion arose in the 1970's in response to concern about pollution claims attributable to various environmental catastrophes that occurred during the 1960's. As a result, courts have generally concluded that the exclusion was intended to eliminate coverage for damages associated with traditional environmental pollution. Because of the original intentions of the pollution exclusions, insurers have found themselves trying shoehorn the exclusion to apply to mold and other non-traditional pollutants. As a result, many courts are hesitant to apply the pollution exclusion outside of the traditional environmental or industrial pollution setting.

The cases that find that the pollution exclusion does not preclude coverage for non-traditional pollutants often rely upon language contained within Pipefitters Welfare Education Fund v. Westchester Fire Insurance Company, 976 F.2d 1037, (7th Cir. 1992). Specifically, courts have relied upon the language stating: "without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results." Cases specifically addressing the issue of whether mold is a "pollutant" are rare, but there are a few, as well as others involving other non-traditional pollutants which help to provide guidance.

Keggi v. Northbrook Property and Casualty Ins. Co. , 99-0566, (Ariz. Ct. App. 2000), 13 P.3d 785, addressed the application of the absolute exclusion in a claim for bodily injury arising from exposure to bacteria contained in drinking water. The plaintiff filed suit when she became ill after drinking water served by the insured which contained both total and fecal coliform bacteria. The insurer denied coverage, citing an absolute pollution exclusion contained within the policy. The policy defined "pollutant" as "...any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste..." The insurer argued that the bacteria was a "pollutant" under the "irritant or contaminant" language contained within the policy's definition of "pollutant." The court rejected the insurer's argument and found that the absolute pollution exclusion was not intended to apply outside of the traditional environmental pollution scenario. The court noted that the terms "contaminant" and "irritant" were so broad that there is virtually no substance or chemical in existence that would not irritate or damage some person or property. Because of the potential all-encompassing scope of "contaminant" and "irritant," the court found that public policy precluded such a broad application. In so doing, the court relied heavily on the Pipefitters case, stating:

[w]ithout some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results. To take but two simple examples, reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the spilled contents of a bottle of Drano, and for bodily injury caused by an allergic reaction to chlorine in a public pool. Although Drano and chlorine are both irritants or contaminants that cause, under certain conditions, bodily injury or property damage, one would not ordinarily characterize these events as pollution.

Based on Keggi, there is a strong argument that mold, a non-traditional environmental pollutant would not be a "pollutant" as defined under the absolute exclusion.

A recent Louisiana case took up the applicability of the pollution exclusion in a mold related personal injury claim. In State Farm Fire and Cas. Co. , v. M.L.T. Constr. Co., Inc. , 2002-1811 ( La. App. 4^th Cir. 6/4/03 ); 849 So. 2d 762, an office worker filed suit against a roofer and his CGL carrier after sustaining personal injuries from mold growth caused by the roofer's defective work. Shortly after the roofing work was completed, a heavy rainstorm hit the area. During the storm, the roofing system failed, causing large amounts of water to enter the building, eventually resulting in mold growth. The plaintiff was subsequently exposed to the mold spores which caused her to develop respiratory problems and other ailments. The CGL carrier denied coverage, and argued that the damage was excluded under the absolute pollution exclusion. The court found the exclusion inapplicable and found that the damage was covered. Although the CGL carrier raised the pollution exclusion, the CGL carrier did not argue that the exclusion was applicable due to mold's status as a pollutant. Instead, the insurer argued that the "pollutant" was the rainwater which had entered the building. The court found that the rainwater was not a pollutant under the policy and, therefore, the exclusion did not apply.

Other courts, however, have applied the pollution exclusion to preclude coverage in the context of non-industrial environments. In Assicurazioni Generali S.P.A. v. Neil, 160 F.3d 997 (4th Cir. 1998), the Fourth Circuit, applying Maryland law, determined that the pollution exclusion barred claims for carbon monoxide poisoning.

A recent Wisconsin case has also dissented with the notion that the pollution exclusion should only apply in traditional environmental pollution, holding, in apparent contradiction to Keggi, that bacteria are "pollutants." In Landshire Fast Foods of Milwaukee, Inc. v. Employers Mut. Cas. Co., 03-0896 2004 WL 135412 (Wis. Ct. App. Jan. 28, 2004), an insured brought a declaratory judgment action against a CGL policy issuer to compel coverage under a CGL policy. The case arose out of a claim for losses resulting from a bacterial outbreak at a food processing facility. The insurer claimed no coverage under a pollution exclusion, arguing that the bacteria was a "contaminant" under the policy's definition of "pollutant." The policy in place defined "pollutant" as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." The insured conceded that bacteria was a "contaminant," but denied that it was the kind of contaminant excluded by the pollution exclusion, asserting that the policy language only excluded inorganic matter. The court disagreed and found that the term "contaminant" included "inorganic matter," stating "...the term "contaminants" in (the insurer's) pollution exclusion, when given its plain meaning, incorporates bacteria...."

ii. "Discharged, Dispersed, or Released"

Under the pollution exclusion, in addition to proving that a particular substance is a

"pollutant," a carrier must show that the pollutant was "discharged, dispersed, or released." Therefore, assuming that a particular court would find mold to be a pollutant, in order for the pollution exclusion to apply, it must also be shown that the mold was "discharged, dispersed, or released." In Peace v. Northwestern Nat. Ins. Co., 596 N.W.2d 429, (Wis. 1999), the court addressed whether the absolute pollution exclusion barred coverage for an injury arising from ingesting lead in paint when the paint chips and breaks down into dust and fumes. The court concluded that the plain language of the policy covered the release of paint from a wall or a ceiling. Conversely, the Sixth Circuit, in Meridian Mutual Insurance Company v. Kellman, 197 F.3d 1178,(6th Cir. 1999), rejected the application of the pollution exclusion in a situation in which a contractor had performed construction work at a high school. In Kellman, a teacher alleged that she developed respiratory injuries caused by fumes from chemicals used to seal a floor in the room directly above her classroom. All of the parties agreed that the sealant was a "pollutant" under the policy. They disagreed, however, as to whether there had been a "discharge, dispersal, or release," as required under the exclusion. In determining that the exclusion was inapplicable, the court stated:

The exclusion contains environmental terms of art because it is intended to exclude coverage only as it relates to environmental pollution. When a toxic substance is confined to an area of intended use, it does not come within the exclusion clause. The primer/sealer was used in its intended manner inside (the high school). The fact that the fumes from the primer allegedly injured (the teacher) one floor below does not turn the fumes into environmental pollution within the meaning of the total pollution exclusion clause.

b. Potential Exception to the Pollution Exclusion: -Products-Completed Operations Coverage

Standard CGL forms contain products-completed operations coverage. In a very general sense, products-completed operations coverage provides protection against liability resulting from services, materials or structures which an insured erects or installs. The purpose of the products-completed operations coverage is to provide contractors and other insureds with protection from claims for bodily injury and property damage caused by their work after the construction is completed.

A typical CGL policy defines a "products-completed operations hazard" as:

a. "Products-completed operations hazard" includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:

(1) Products that are still in your physical possession; or

(2) Work that has not yet been completed or abandoned.

b. "Your work" will be deemed completed at the earliest of the following times:

(1) When all of the work called for in your contract has been completed.

(2) When all of the work to be done at the site has been completed if your contract calls for work at more than one site.

(3) when that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.

When a CGL policy contains a products-completed operations coverage, there are split opinions over whether the absolute pollution exclusion still applies where the damage is the result of the completed operations.

In West American Ins. Co. v. Tufco Flooring East, Inc., 409 S.E. 2d 692 (N.C. Ct. App. 1991) a third-party chicken processor brought suit against a floor re-surfacing contractor and the contractor's CGL carrier for damages caused to the third-party processor's chicken. The third-party processor hired the contractor to re-surface the floor at the third-party's facility. After completion of the re-surfacing work, fumes were emitted from the flooring material harming the processor's chickens and making them unfit for consumption. The CGL policy at issue contained an absolute pollution exclusion. The insurer argued that there was no coverage under the policy due to the pollution exclusion. The processor claimed that the damage was covered under the products-completed operations clause. The court agreed with the processor and found that, despite the presence of the pollution exclusion, coverage under the policy was reinstated through the products-completed operations coverage, stating that "the scope of the completed operations coverage include[d] all property damage occurring away from premises the insured own[ed] or rent [ed] and arising out of the insured's work, so long as the work [was] completed before the property damage ha[d] occurred."

In determining that the pollution exclusion did not apply in the face of completed operations coverage, the court noted the existence of commentary from the International Risk Management Institute, a group which researches and analyzes commercial liability provisions for the insurance industry. The International Risk Management Institute had described the interrelationship of the pollution exclusion clause and the completed operations coverage as follows:

An exception for pollution liability falling within the products- completed operations hazard is inferred by the exclusion, and ISO has stated that the exception is intended. This exception does have important coverage consequences. If a pollution release causing bodily injury or property damage results from the insured's product or completed operation, the insured's liability to injured parties is covered. Gibson & McLendon, Commercial Liability Insurance, Volume I, Section V, V.E.1 (1985)

Additionally, the court considered annotations to the pollution exclusion clause issued by ISO of America which stated that the pollution exclusion is overridden by completed operations coverage.

However, there are factors in Tufco Flooring which may isolate its application. First, the pollution exclusion clause involved in Tufco Flooring applied only to claims arising from work in progress. Specifically, the pollution exclusion excluded claims "arising out of the... discharge, dispersal, release or escape of pollutants...at or from any site or location on which you [the insured]...are performing operations." Secondly, a flyer was sent to the insured with the policy wherein the insurer expressed its intention not to subject the completed operations coverage to the pollution exclusion clause. Specifically, section II of the flyer, entitled "Broadening of Coverage," stated with regard to "pollution liability coverage" that the policy provided "[c]overage with respect to...[n]on-sudden or gradual emissions of pollutants...[d]ue to the products-completed operations hazard..." Because of the insurer's acknowledgment that the pollution exclusion was not meant to apply in a products-completed operations scenario and because of the language of the pollution exclusion limiting its application to ongoing operations, other courts may not apply Tufco Flooring to override the pollution exclusion in all claims involving completed operations.

In fact, jurisdictions are split on the issue and some have specifically held that a products-completed operations clause cannot override a pollution exclusion. In Gregory v. Tennessee Gas Pipeline Co., 948 F.2d 203 (5th Cir.1991), the Fifth Circuit found that the pollution exclusion applied to exclude products-completed operation hazards. Crescent Oil Co., Inc. v. Federated Mutual Ins. Co., 428 P.2d 869, 874 (1995), found that the products-completed operation hazard does not include the hazard of leaking gasoline in the face of a pollution exclusion.

c. Other CGL Exclusions and Issues

i. Owned Property Exclusion

Most CGL policies contain an "owned property" exclusion which prevents coverage for the "damage to or destruction of...property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control." The owned property exclusion contained in a CGL policy would, at first blush, seem unnecessary due simply to the nature of a CGL as insuring against harm caused by the insured to a third-person. The main purpose of the owned property exclusion is to clarify the scope of the CGL and prevent any attempts by an insured to turn the CGL into a first-party property damage policy. To date, there are no known cases involving the application of the owned property exclusion to mold claims. There is, however, existing case law upholding the owned property exclusion in property damage claims brought against one's own CGL carrier.

ii. Duty to Defend and Indemnify- Future CGL Issues in Regulatory Proceedings.

Most, if not all, CGL policies provide that an insurer has a duty to defend its insured. The duty to defend requires an insurer to defend its insured against in any suit in which, based upon the allegations, there is the potential for coverage. Specifically, CGL policies typically provide that the insurer "shall have the right and duty to defend any suit…and may make such investigation of any claim or suit as it deems expedient." Based upon the text of the "duty to defend" clause, a prerequisite for application of the duty to defend is that there must actually be a "suit." In the context of a mold claim, this provision may prove itself an issue where demands other than standard lawsuits arise. The most obvious scenario where the lack of a suit would be at issue is where a demand for mold remediation is made by a public agency or through a regulatory proceeding. Although federal laws do not yet require the remediation of mold, this could change in the future. Additionally, there may be remediation requirements set by the various states which would apply, thereby making the duty to defend and indemnify a contested issue.

Presently, the majority view is that a regulatory proceeding or remediation order will give rise to the duty to defend. See Johnson Controls, Inc. v. Employers Ins. of Wausau, 665 N.W.2d 257, (Wis. 2003), finding that the receipt of a potential responsible party letter from the EPA constituted a "suit" and invoked the insurer's duty to defend. See also Aetna Cas. and Sur. Co., Inc. v. Pintlar Corp. , 948 F.2d 1507 (9^th 1991) which held that the receipt of an EPA potential responsible party letter required the insurer to defend. Additionally, in SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305 (Minn.1995), the Minnesota Supreme Court found that the term "suit," as used in a CGL policy, with regard to the duty to defend, included action taken by the Minnesota Pollution Control Agency in the form of a Request for Information Letter, which instructed the insured to provide information regarding its chemical storage and potential chemical leaks at the insured's facility.

Although the majority of states have found that insurers have a duty to defend an insured in regulatory actions, this view is not uniform, and there is a small but noteworthy dissent. Specifically, California does not apply the duty to defend in regulatory and agency actions. In Foster-Gardner, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 959 P.2d 265 (Cal. 1998), the California Supreme Court found that an order issued by state Environmental Protection Agency (EPA), pursuant to state "Superfund" law, which directed the insured to remediate pollution caused by its fertilizer and pesticide business, did not constitute a "suit" within meaning of comprehensive general liability (CGL) insurance policies. As a result, the insurer had no duty to defend.

In addition to the duty to defend an insured in suits, most CGL policies provide a duty to indemnify the insured for damages awarded at trial. A similar issue to the duty to defend arises as to whether regulatory fees constitute as "damages" under a CGL policy. The basis of the dispute is that fees imposed by regulatory agencies do not fit the standard definition of damages. As with the duty to defend, the majority of states interpret "damages" to cover administrative fees and penalties. There is, however, one major dissenter. Once again, California does not interpret the duty to indemnify damages to include administrative penalties.

This issue arose in Certain Underwriters at Lloyd's of London v. Superior Court of Los Angeles, 103 Cal. Rptr. 2d 672 (Cal. 2001), where the California Supreme Court held that a CGL policy which contained a duty to indemnify the insured for all sums that the insured would become legally obligated to pay as damages did not impose a duty to indemnify the insured for expenses assessed in an administrative proceeding brought by regional agency under environmental statute.

2. Property Damage Claims- Homeowners & Commercial Cover Applications and Exclusions

Most property insurance policies provide coverage for all risks. As a result, any physical loss to a home or building that is not specifically excluded is covered. When viewed in this broad light, the question is not what is covered, rather, the question is, under the policy, what is not covered? In limiting the spectrum of losses covered by homeowners and commercial property policies, insurers have asserted a variety of exclusions in attempts to limit their exposure in mold claims.

a. Rust, Rot, Mold or Other Fungi

One of the most commonly cited exclusion is the "rust, rot, mold or other fungi"

exclusion, also known simply as the "mold exclusion." The mold exclusion typically states: "We do not cover loss caused by: (2) rust, rot, mold, or other fungi..."

b. Water Damage

While being the most obviously applicable, the mold exclusion, is not the only exclusion applicable in a mold claim scenario. Most policies exclude losses from certain types of water damages. While water damages are generally covered from burst pipes are generally covered (though not the damage to the pipe itself), it is common for policies to exclude damages caused by flood, surface water, waves, tides, tidal waves, the overflow of any body of water, damage caused by spray, wind driven water, and water which backs up through sewers or drains. As mold growth results from water and moisture, mold growth resulting from an excluded water damage would fall under this exclusion.

c. Continuous Seepage

In addition to the water damage exclusion, some policies exclude water damage resulting from leaks based upon the method of the release. Known as the "continuous seepage exclusion," most standard homeowners and commercial property policies exclude damages caused by "constant or repeated seepage or leakage of water or steam over a period of weeks, months or years, from within a plumbing, heating, air-conditioning or automatic fire protective sprinkler system or from within a household appliance." As a result, a typically covered water loss from a burst pipe could be excluded under the continuous seepage exclusion depending simply on the length or the source of the leak or seepage.

d. Faulty Workmanship

Another applicable exclusion is the "faulty workmanship" exclusion, which precludes coverage for damage resulting from "faulty, inadequate or defective...design, specifications, workmanship, repair, construction." Under the faulty workmanship exclusion, mold damages would be excluded if resulting from the faulty work of a contractor, builder or architect.

e. Settling or Cracking

Additionally, many policies exclude coverage for damages caused by "settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls floors, roof or ceilings." Under this exception, if a mold is caused by a ruptured pipe resulting from a settling foundation or the expansion of pavement, the mold loss would be excluded.

3. Causation, "Efficient Proximate Cause" and "Ensuing Loss Clauses"

While there are a myriad of exclusions which may apply in a mold claim, determining the actual cause of a loss is the real key in coverage disputes. More often than not, causation is central issue in coverage disputes. Despite the existence of coverage exclusions, policy holders and claimants often point to causation in an attempt to navigate their way around the problem in hopes of saving coverage. The most noteworthy avenues which policyholders have taken to avoid exclusions are the "efficient proximate cause" doctrine and the "ensuing loss" clause.

The "efficient proximate cause" doctrine is a function of causation which relies on the ultimate cause of a loss to determine its coverage status and the applicability of an exclusion. The efficient proximate cause doctrine provides that, when a claimant or insured can identify the proximate cause of a loss as a covered peril or a confluence of a covered peril and an excluded peril, coverage for the loss exists even if subsequent damages are expressly excluded from coverage . Under this theory, when a claim is made for excluded mold related damages, coverage may be found if the mold damage is found to have been the result of a covered loss.

Although this theory would seemingly provide an avenue for claimants whose mold damages are the result of an otherwise covered risk, courts have not uniformly found this to be the case. In some jurisdictions, courts have enforced a mold exclusion to prevent coverage, despite the fact that a mold loss was the result of a covered peril. As stated previously, insurance law is a function of state law. As a result, there is the potential for as many different applications of the law as there are states in the union. Though they align at times, they often disagree. However, when dealing with an exclusion issue, one of the first issues to be considered is causation of the loss and, thus, application of the efficient proximate cause doctrine.

In Home Ins. v. McClain, 05-97-01479-CV 2000 WL 144115 (Tex. App. Feb. 10, 2000 ), a Texas appellate court held that a mold exclusion did not apply to mold losses arising from a leaking roof. The court found that water from the leaking roof was a covered loss which caused the mold. As a result, the loss that followed the water damage was from water and, therefore, not excluded. This finding was despite the fact that mold was an otherwise excluded loss under the policy.

In Kelly v. Farmers Ins. Com, Inc. 281 F. Supp. 2d 1290 (W.D. Okla. 2003), the plaintiff entered the closet of an unoccupied bedroom in her home and found mold growing on the walls. Plaintiff immediately contacted her homeowners' insurer. Upon inspection by the insurer, it was decided that the damage was the result of a ruptured pipe which has burst the previous winter. The insurer authorized coverage for the claim and instructed the plaintiff to repair the damage as soon as possible.

After an unsuccessful remediation attempt, the insurer declined coverage based on both water damage and mold exclusions contained within the policy. The policy did, however, cover damage from burst pipes. Applying the efficient proximate cause doctrine, the court found that, despite the water damage and mold exclusion, the damage was the result of the burst pipes, a covered peril, and therefore the loss was covered.

In Bowers v. Farmers Ins. Exch. 991 P.2d 734 (Wash. Ct. App. 2000), an insured property owner filed a claim for mold damage to a rental house owned by the insured. The mold growth occurred as a result of the tenant turning the house's basement into a hothouse for growing marijuana. The tenants' illegal drug growing operation eventually resulted in mold growth spreading throughout the house. The insurer denied coverage for the loss claiming the damage was excluded under the policy's mold exclusion. The owner filed suit. In reviewing the applicability of the mold exclusion, the court, applying the efficient proximate cause doctrine, determined the cause of the damage to be vandalism, a peril which was otherwise covered under the policy. Because the mold resulted from a covered peril, under the efficient proximate cause doctrine, the mold damage itself was covered.

Based upon the foregoing cases, it would appear that all mold claims are covered if they can be attributed to a covered loss. However, courts are not always so quick to discard mold exclusions when mold is caused by a covered peril. There are some jurisdictions which ignore the efficient proximate cause doctrine and allow insurers to specifically exclude losses even if caused by a covered peril.

Recently, a Michigan court, in Dahlke v. Home Owners Insurance Company, 239128 2003 WL 23018291 (Mich. Ct. App. Dec. 23, 2003), found a mold loss excluded by a mold exclusion although the loss was the result of a winter thaw, an otherwise covered peril. Under the efficient proximate cause doctrine, the mold growth would be covered as a result of a non-excluded risk. The policy, however, contained a clause stating "[w]e do not cover loss to covered property caused directly or indirectly by any of the following, whether or not any other cause or event contributes concurrently or in any sequence to the loss:...Rust corrosion, or electrolysis, mold or mildew..." Because the policy specifically removed application of the efficient proximate cause doctrine for mold damage, the court found no coverage.

In addition to Dahlke, the U.S. District Court for the District of Arizona in Cooper v. American Family Mut. Ins. Co., 184 F. Supp. 2d 960 (D. Ariz. 2002), applying Arizona state law, declined coverage for mold damage caused by a covered peril. The policy at issue covered water damage, the ultimate cause of the mold, but contained the standard homeowners policy mold exclusion. In addition, the policy provided that "[s]uch a loss (i.e. mold) is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss," thereby eliminating the application of the efficient proximate cause doctrine for mold claims. Noting that Arizona does not recognize the efficient proximate cause doctrine, the court found that the mold loss was excluded.

While there is no dispute that the efficient proximate cause doctrine generally applies to first-party policies, some jurisdictions have refused to apply the doctrine in third-party CGL claims. In Utica Mut. Ins. Co. v. Hall Equipment, Inc. , 73 F. Supp. 2d 83, (E.D.Mass. 1999), the Eastern District of Massachusetts, applying Massachusetts state law, held that the application of the efficient proximate cause doctrine was limited to first-party claims and should not be applied when in the third-party context. See also Larsen Oil Co. v. Federated Service Ins. Co., 73 F.3d 1279 (9^Th Cir. 1995), citing Utica.

Despite Utica's holding to the contrary, other jurisdictions do apply the efficient proximate cause doctrine in third-party claims. State Farm Mut. Auto. Ins. Co. v. Partridge109 CalRptr. 811, (Cal. 1973) applied efficient proximate cause analysis in a third party claim. In Employers Casualty Co. v. St. Paul Fire & Marine Ins. Co., 52 Cal Rptr. 2d 17, (Cal. Ct. App. 1996), a California appellate court also considered the application of the efficient proximate cause doctrine in a third-party claim.

Alongside the efficient proximate cause doctrine, claimants have attempted to use the "ensuing loss" provision to avoid exclusions. Unlike the efficient proximate cause doctrine, which is a legal doctrine, ensuing loss provisions are clauses which must be included within a policy to be effective. An ensuing loss provision is a policy provision which often follows an exclusion and provides that losses resulting from excluded perils are covered despite the fact that they were caused by an otherwise excluded loss. Numerous courts across the country have interpreted an ensuing loss provision to apply to a situation where there is a "peril," i.e., a hazard or occurrence which causes a loss or injury, separate and independent, but resulting from an original excluded peril. Under an ensuing loss clause, this secondary damage, though resulting from an excluded peril, is covered unless otherwise excluded. It should be noted however, that although subsequent damages resulting from an excluded peril may fall under the ensuing loss provision, they will still be subject to other standing exclusions. As a result, mold growth that results from an excluded risk such as water seeping into a building due to holes caused by mice (which would qualify as an excluded mouse-caused damage), while mold damage would be an ensuing loss of the mouse-caused damage, the mold damage would still be subject to a mold exclusion.

The case of Feiss v. State Farm Lloyds, H-02-1912 2003 WL 21659408 (S.D. Tex. May 20, 2003 ), centered around the application of an ensuing loss clause in a mold property damage claim. In Feiss, property owners discovered mold growth which was ultimately attributed to a water leak in the residence. A claim was filed against the homeowner's property insurer, which was denied based on a mold exclusion. Suit was filed claiming (a) the mold exclusion did not preclude coverage because the mold was a water damage and (b) the mold was an ensuing loss caused by the water leak. Essentially, the plaintiff argued the efficient proximate cause doctrine twice, with the second instance couched as ensuing loss. Despite the fact that the mold was attributed to a water leak, which was not an excluded loss, the court found that the mold exclusion precluded coverage. Additionally, the court refused to renew coverage under the ensuing loss provision. The policy excluded damages caused by:

(1) wear and tear, deterioration or loss caused by any quality in property that causes it to damage or destroy itself.;

(2) rust, rot, mold or other fungi;

(3) dampness of atmosphere, extremes of temperature;

(4) contamination;

(5) rats, mice, termites, moths or other insects.

We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under the policy.

We do not cover loss caused by or resulting from flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of these whether or not driven by wind.

Despite the ensuing loss clause covering water damage, the court found no coverage because the water damage had to be the result of one of the excluded losses, not the other way around. In Feiss, the mold was caused by a water leak, an otherwise covered peril (although the mold damage was later excluded due to the mold exclusion). In finding that the ensuing loss provision did not revive coverage, the court noted that, had the mold damage led to water damage, the water damage would have been covered, despite the causal connection to an excluded risk

D. Market Forces and the Industry's Response

1. New Exclusions and Aggregate Limit Options

When faced with mold claims, insurers have taken the position that no coverage exists based on the historical exclusions. Despite their position, insurers have sought to clarify their position and eliminate mold damage coverage issues through the creation of new mold-specific exclusion endorsements, additional aggregate limitations, and the development of specialty coverage products.

a. CGL Fungi or Bacteria Exclusion Endorsement

Dubbed the "Fungi or Bacteria Exclusion Endorsement," insurers are now attempting to specifically exclude costs associated with mold remediation and personal injury. The new Fungi or Bacteria Exclusion promulgated by the ISO (No. 21 27 04 02) reads as follows:

FUNGI OR BACTERIA EXCLUSION

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE PART

A. The following exclusion is added to Paragraph 2., Exclusions of Section I - Coverage A - Bodily Injury And Property Damage Liability:

2. Exclusions

This insurance does not apply to:

FUNGI OR BACTERIA

a.. "Bodily injury" or "property damage" which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any "fungi" or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.

b. Any loss, cost or expenses arising out of the abating, testing for, monitoring, cleaning up, removing, containing treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the affects of, "fungi" or bacteria, by any insured or by any other person or entity.

This exclusion does not apply to any "fungi" or bacteria that are, are on, or are contained in, a good or product intended for consumption.

B. The following exclusion is added to Paragraph 2., Exclusions of Section I - Coverage B - Personal and Advertising Injury Liability:

2. Exclusions

This insurance does not apply to:

a. "Personal and advertising injury" which would not have taken place, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any "fungi" or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury.

b. Any loss, cost or expenses arising out of the abating, testing for, monitoring, cleaning up, removing, containing treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the affects of, "fungi" or bacteria, by any insured or by any other person or entity.

C. The following definition is added to the Definitions Section.

"Fungi" means any type or form of fungus, including mold or mildew and any mycotoxins, spores, scents or byproducts produced or released by fungi.

The new ISO exclusion endorsement No. 21 27 04 02 described above expressly excludes personal injury and costs associated with remediation.

b. Homeowners Mold Exclusion and Limitation Endorsement

In addition to the new CGL fungi and bacteria exclusion, there is also a new homeowners policy exclusion which removes application of the efficient proximate cause doctrine to most mold claims, provides limited coverage for mold remediation arising out of covered water damages, and excludes property damage and bodily injury damages arising out of or aggravated by mold.

This exclusion (mold exclusion) applies regardless of whether mold, fungus, wet rot, dry rot or bacteria arises from any other cause of loss, including but not limited to a loss involving water, water damage or discharge, which may otherwise be covered by this policy, except as specifically provided in Section I, Conditions - Mold, Fungus, Wet Rot and Dry Rot Remediation as a Direct Result of a Covered Water Loss.

Section I, Conditions - Mold, Fungus, Wet Rot and Dry Rot Remediation as a Direct Result of a Covered Water Loss goes on to provide limited coverage for mold remediation where the mold is the result of a covered water damage, stating; "...In the event of a covered water loss...we will pay up to $5000.00 for mold, fungus, wet rot or dry rot remediation.

Also included in the new homeowners endorsement is an exclusion for bodily injury and property damage which arises out of or results from mold, fungus, wet rot, dry rot or bacteria. Coverage is not available for any liability of the insured imposed by any governmental authority for bodily injury or property damage arising out of mold, fungus wet rot, dry rot or bacteria. This last provision excluding coverage for property damage and bodily injury damages resulting from mold exposure appear designed to prevent the application of an ensuing loss provision to otherwise covered losses resulting from mold exposure.

c. Limited Fungi or Bacteria Coverage Endorsement

In addition to the mold or fungi exclusion, the ISO has promulgated a "Limited Fungi or Bacteria Coverage Endorsement" which provides for a separate aggregate coverage limit for bodily injury or property damage resulting from a "fungi or bacteria incident." Contained within ISO endorsement No. 24 25 04 02, the "Limited Fungi or Bacteria Coverage Endorsement" states:

LIMITED FUNGI OR BACTERIA COVERAGE ENDORSEMENT

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE PART

Schedule

Fungi and Bacterial Liability Aggregate Limit $____________________

A. The following exclusion is added to Paragraph 2., Exclusions of Section I - Coverage B- Personal And Advertising Injury Liability:

2. Exclusions

This insurance does not apply to:

a. "Personal and advertising injury" arising out of a "fungi or bacteria incident."

b. "Any loss, cost or expense arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the effects of "fungi" or bacteria, by any insured or by any other person or entity.

B. Coverage provided by this insurance for "bodily injury" or "property damage" arising out of a "fungi or bacteria incident", is subject to the Fungi and Bacteria Liability Aggregate Limit as described in Paragraph C of this endorsement. This provision does not apply to any "fungi" or bacteria that are, are on, or are contained in, a good or product intended for consumption.

C. The following are added to Section III - Limits of Insurance:

1. Subject to Paragraphs 2 and 3 of Section III - Limitations of Insurance, as applicable, the Fungi and Bacteria Liability Aggregate Limit shown in the Schedule of this endorsement is the most we will pay under Coverage A for all "bodily injury" or "property damage" and Coverage C for Medical Payments arising out of one or more "fungi or bacteria incidents." This provision does not apply to any "fungi" or bacteria that are, are on, or are contained in, a good or product intended for consumption.

2. Paragraph 5, the Each Occurrence Limit, Paragraph 6, the Damage To Premises Rented To You Limit, and Paragraph 7, the Medical Expense Limit of Section III - Limits of Insurance continue to apply to "bodily injury" or property damage" arising out of a "fungi or bacterial incident."

D. The following definitions are added to the Definitions Section:

1. "Fungi" means any type or form of fungus, including mold or mildew and any mycotoxins, spores, scents, or byproducts produced or released by fungi.

2. "Fungi or bacterial incident" means an incident which would not have occurred in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any "fungi" of bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.

As the new exclusions and aggregate limit endorsement are new, it would seem that their future interpretations and applications would be uncertain until tested with the courts. Because of the inclusion of fungi as a defined "pollutant," the difficult job of interpreting "pollutant" may have been done away with. As a result, courts may no longer have to grapple with the issue of whether mold and fungi are sufficiently analogous with traditional pollutants to fall under the exclusion. Based upon existing case law stating that a defined term contained within an insurance policy will prevail, the outlook for the new pollution exclusion appears bright.

In Lexington Ins. Co. v. Unity/Waterford-Fair Oaks, LTD., 399CV1623D 2002 WL 356756 (N.D. Tex. Mar. 5, 2002) the Eastern District of Texas upheld a pollution exclusion in a mold claim where, unlike the absolute pollution exclusion, "pollutant" was defined to specifically include fungi. As a result, the court was not forced to consider whether mold was a pollutant as the policy specifically defined it as such. Under this set of circumstances, the court stated that, "[w]hen terms are defined in an insurance contract, those definitions will control."

In addition to Lexington, in 1996, the U.S. Fifth Circuit Court of Appeal, in Am. States Ins. Co. v. Nethery, 79 F.3d 473 (5^th Cir. 1996) held that paint fumes, regardless of whether they would typically fall under the definition of "pollutant" were, nonetheless, "pollutants" as the policy in question specifically included fumes within the definition of "pollutants."

d. Pollution Legal Liability Policies, Environmental Impairment and Contractors Pollution Policies- Voluntary Exposure to Mold Risks on the Insurance Industry's Terms

Along with limited fungi or bacteria coverage endorsements and fungi or bacteria exclusions which are meant to prevent or limit mold exposure under standard policies, new products are arising specifically to cover mold damages. Pollution Legal Liability Policies (PLL) and Contractors Pollution Liability Policies (CPL) are modifying their definition of "pollutant" to expressly include fungi and bacteria. The result of this change is to provide coverage for mold claims through specialized policies, while reducing an insurer's mold damage exposure under standard policies. Because of the specialized nature of the PLL and CPL, insurers will find themselves with mold exposure on their terms, based upon policies in which they consent to cover mold as an insured peril.

E. Conclusion

The world of insurance coverage litigation in the mold claims context does not have a shortage of contested issues. Until the market is dominated by successful and proven exclusions, insurers and insureds will continue to find themselves dealing with mold claims coverage litigation.

The information contained in this document covers several topics in a general overview. This document is not intended to and does not constitute legal advice. Questions involving particular situations of a legal nature should be directed to an attorney.