Mold Exposures in Bad Faith Litigation by mmcsx

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									   Mold Exposures in Bad Faith Litigation
Published in Mealey's Litigation Report - Mold, June 2002

                     Robert M. Peterson
              Carlson, Calladine & Peterson LLP
              Two Embarcadero Center, 18th Floor
               San Francisco, California 94111
                     Tel. (415) 391-3911
                     Fax: (415) 391-3898
               E-mail: rpeterson@ccplaw.com

                       Mary E. Gregory
              Carlson, Calladine & Peterson LLP
             600 South Figueroa Street, Suite 1410
                   Los Angeles, CA 90017
                     Tel: (213) 356-5900
                     Fax: (213) 613-0664
               E-mail: mgregory@ccplaw.com




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I.      Introduction
Mold claims are on the rise, and many experts predict claims for personal injury and property
damage caused by mold will be the next tort wave, often referred to as the “Asbestos of the New
Millennium.” See “Will Toxic Mold Be the Next Asbestos?” Lawyers Weekly USA, the
national newspaper for small law firms, www.lawyersweeklyusa.com (results of survey of
plaintiff and defense attorneys). The wave has so far traveled along two paths. The first is in the
form of construction defect actions against builders and sub-contractors for personal injury and
property damage caused by water intrusion leading to mold infestation; the second is in the form
of bad faith litigation against property insurers for failure to pay for mold remediation and clean-
up costs after a water intrusion incident. Since the former necessarily implicates liability
insurers for the builders and contractors, both waves will likely have a profound impact on the
insurance industry as a whole. This article focuses on the interplay between claims for first
party insurance coverage for mold damage, and the attendant claims of bad faith conduct arising
out of the claims handling of mold claims.

The mold wave is growing rapidly, and its potential impact on the industry cannot be
understated. In the last year, multimillion dollar jury awards have been assessed in California
(Anderson v. Allstate Ins. Co. (E.D. Cal. 2001), ($18 million remitted to $2.5 million, appeal
pending) and in Texas (Ballard. v. Fire Ins. Exchange, No. 99-05252 (Tex.Dist.Ct., Travis
County, June 1, 2001) ($32 million) and it is estimated some 2000 mold related cases are
wending their way through the California judicial system at this time. Deborah Rosenthal,
“Think Mold: It’s the Next New Thing in Toxic Tort Litigation,” California Lawyer, May 10,
2001.

According to New York’s Insurance Information Institute, mold claims increased 360 percent,
from $34 million in the first six months of 2000 to $157 million during the same period in 2001.
Carrie Kirby, “State Farm Ends Home Policy Sales In state; Insurer Cites Soaring Costs of
Claims,” San Francisco Chronicle, April 23, 2002, at A1. In fact, in April 2002, State Farm
Insurance Company announced it will no longer issue new homeowner’s policies in California
due to the surge in claims costs in the state over the last two years. Id. A key reason for the
withdrawal is the rising lawsuit awards in mold cases and the corresponding costs of
environmental testing and remediation. Id., see also, E. Scott Reckard, “State Farm Won’t Write
New Homeowners Policies,” Los Angeles Times, April 23, 2002. State Farm’s parent company,
State Farm Mutual Automobile Insurance Company of Bloomington, Illinois, lost $5 billion in
2001, compared to a $400 million profit in 2000. Id.

The mold related litigation wave will only grow larger in the near future. Media coverage of the
recent jury awards, underscored by the appearance of Erin Brockovich at hearings before the
California Senate Health and Human Services Committee in support of California’s Senate Bill
732 (now codified at California Health and Safety Code §17920.3, the Toxic Mold Protection
Act of 2001) has been extensive. Special reports issue almost daily from local and national
mainstream media television and newspapers on the hidden dangers of mold. The plaintiff’s bar
and consumer groups have seized upon the trend with Internet sites such as www.mold-


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attorney.com (“Submit Your Mold Case, Free Consultation By E-Mail) and
www.toxicmoldsurvivors.com (“Sometimes It Helps To Know That You Are Not Alone”). One
recent major insurer recently reported it “expects mold claims to reach $85 million by the end of
2001, a five-fold increase compared with the previous year.” Robert W. Mitchell, “Insurer Says
Mold Claims Surge This Year”, National Underwriter, “Hot News”, June 11, 2001.

It is no wonder the new mantra of the plaintiff’s bar is “Mold is Gold.”

The wave continues to grow despite the absence of accepted environmental standards relating to
health and mold levels in buildings. Often, the presence of mold in a home or office building
today is enough to fuel litigation, even though the scientific community has not yet agreed on
what levels of molds must be present to cause a threat to health of the occupants. And despite
the fact most first party property policies expressly exclude coverage for mold, claims for mold
damage are increasingly presented to insurers for payment, and if not accepted, result in claims
of unreasonable conduct, or bad faith, which of course raises the specter of punitive damages.
Though reliable standards as to what levels of certain molds are harmful or not have not yet been
developed, an insured’s bad faith claim relies in large part on the fear that unjustified denial of
benefits claims and attendant failure to remediate molds has purportedly placed the policyholder
in grave physical danger. Thus, as explained further below, the prudent carrier’s investigation
into a water damage claim (which can potentially turn into a mold claim) should be prompt, fair,
and thorough, and the extent of existing damages, whether covered or not, as well as the duties
and responsibilities of the insurer and the policyholder, should be communicated with the
policyholder or his or her representatives as the investigation proceeds.


II.    What Is Mold?

        A.       The Basics
Mold, a member of the Fungi kingdom (which comprises roughly twenty-five percent of the
biomass of the earth) is found naturally both indoors and outdoors and is literally everywhere.
Molds are incapable of producing their own food, and must break down other matter on which to
subsist. It is considered a physical impossibility for the average building to be free of mold
spores, as mold can live on practically anything. Mold spores can enter a building in several
ways - outside air infiltration, water diffusing through the exterior of the building, open doors or
windows, or on materials brought into a building. The mold growth that underlies the recent
wave of litigation, however, is a water driven phenomenon. Basically, mold growth requires
three conditions: moisture, a nutrient source, and an optimum temperature.

Thus, in the context of first party mold claims, mold growth can occur when moisture (usually in
connection with burst pipes, leaky roofs or other forms of water intrusion) saturates a nutrient
source (drywall, carpet, draperies, or personal items) and is allowed to exist at an optimum
temperature. Without remediation, and given enough time to spread, molds can then produce
toxic substances called mycotoxins. Mold Remediation in Schools and Commercial Buildings,
United States Environmental Protection Agency, March 2001; also found at


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www.epa.gov/iaq/molds/index.html. According to the EPA, more than 200 mycotoxins have
been identified from common molds, and many more remain to be identified. Exposure to these
mycotoxins is usually by inhalation, ingestion or skin contact and many symptoms and human
health effects have been claimed attributable to exposure to mycotoxins. These complaints
range from asthma and rashes to chronic liver damage, acute or chronic central nervous system
damage, and cancer.

From a scientific standpoint, it should be noted that the Environmental Protection Agency
reports that more studies are needed to obtain a clearer picture of actual health effects related to
mycotoxins. Id. Some known and studied mycotoxins have been shown to have biological
effects in humans and animals with varying degrees of acute and chronic toxicity, but much of
the research has been done under laboratory conditions, and little is known about the impact of
mold in indoor environments and under "real life" conditions. Dr. Eckardt Johanning,
BioAerosols, Fungi and Mycotoxins: Health Effects, Assessment, Prevention and Control,
(1999). While the toxicity of mycotoxins varies greatly from person to person, in laboratory
experiments the mycotoxins are ingested (as opposed to inhaled) in much higher doses than
scientists believe are found in "real life" conditions, and certain mycotoxins have been found to
be carcinogenic. BioAerosols: Assessment and Control, American Conference of Governmental
Industrial Hygienists (1999). Thus, more research is necessary using humans, as opposed to
laboratory animals, in order to establish causation in the human population.

Despite the fact the scientific community has not reached a consensus on the causal effect
between mycotoxins and health conditions, some courts have allowed evidence of a causal
relationship between mold and health ailments. For example, in New Haverford Partnership v.
Stroot, (Del. Supreme Ct. 2001) 772 A.2d 792, 796, evidence was permitted that plaintiff’s
allergies were caused and exacerbated by exposure to molds. See also Miller v. Lakeside
Condominium Assoc., (1991) 1 Cal.App.4th 1611, 1616 (plaintiff began suffering from allergies
and asthma as a result of exposure to mold). At the present time, however, these courts are in the
minority. No scientific studies have been performed to date that establish a direct relationship
between mold contamination and specific health complaints, and most mold claims in the first
party context are limited to property damage.

In any event, four known strains of mold, known as the “big four,” form the basis for most mold
related health claims and generate the most fear within the general public:

1. Aspergillus: There are over 150 different species of Aspergillus, some of which are said to be
 particularly dangerous to immunosuppressed individuals. Aspergillus can lead to Aspergillosis,
now the second most common fungal infection requiring hospitalization in the United States.
Further, some of the mycotoxins associated with Aspergillus are known carcinogens. These
fungi may be found in soil, grain, and water damaged building materials. See
www.aertotochlabs.com/library.

2. Cladosporium: Commonly found outdoors in temperate climates, Cladosporium strains may
become easily airborne and may survive for long distances. Accordingly, this species is claimed
particularly conducive to allergenic affects on a victim’s respiratory system. This species is an

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important indicator of an outdoor mold infestation as it is more common in outdoor
environments. It may be indicated by discoloration of paint, paper, and textiles. Id.

3. Penicillium: A wide variety of species belong to this genus, making identification difficult. It
is commonly found in carpet, wallpaper, and insulation. Associated mycotoxins are known
carcinogens, and immunosuppressants, and reportedly may cause hemorrhaging in the brain and
lungs. Id.

4. Stachybotrys: Mycotoxins associated with Stachybotrys can be extremely toxic and possibly
 lethal. Air sampling may produce unpredictable results for Stachybotrys, as it is often
interspersed with other fungi that are more easily airborne that Stachybotrys. Better results are
obtained through bulk or surface sampling. Included species may be present in water-damaged
cellulose-rich materials such as ceiling tiles, insulation backing, wallpaper, sheet rock and paper.
 Id.


       B.      Remediation Standards

                1.      New York Guidelines
As of this date, there are still no comprehensive national guidelines for the investigation and
removal of mold in buildings. The de facto national guidelines come from the New York City
Department of Health, (see Guidelines on Assessment and Remediation of Fungi in Indoor
Environments, New York City Department of Health, (April 2000 rev. January 2002), also found
at www.ci.nyc.ny.us/html/doh/html/epi/moldrpt1.html), and recommend the following steps be
taken when mold growth is suspected or claimed in chronically moist or water damaged areas:


                       a.      Environmental Assessment:
Environmental assessment usually includes visual inspection, bulk/surface sampling, air
monitoring and analysis of environmental samples. Guidelines, ¶2.1. During the visual
inspection, “the extent of any water damage and mold growth should be visually assessed.”
Ventilation systems are visually checked, as well as ceiling tiles, gypsum wallboard, cardboard
and paper. Boroscopes (to view spaces in ductwork and behind walls) and moisture meters (to
detect moisture in building materials) may also be used when necessary.

“Bulk sampling” may also be performed as part of a medical evaluation. Guidelines, ¶2.2. Bulk
samples are usually taken from visibly moldy surfaces by scraping or cutting material into a
clean plastic bag. Surface sampling, less destructive than bulk sampling, is usually conducted by
wiping measured areas with a sterile swab or by stripping the suspect area with clear tape.

The New York Guidelines provide that air sampling should not be a part of a routine assessment,
as some methods are prone to false negative results, and therefore cannot be used to rule out
contamination. Guidelines, ¶2.3. Air monitoring may be necessary if an individual has been
diagnosed with a disease that is or may be associated with fungal exposure, if the ventilation
system may be contaminated, or if the presence of mold is suspected, but cannot be identified by

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visual inspection or bulk sampling. If air monitoring is performed, outdoor air samples should
be collected concurrently at an air intake, if possible, and at a location representative of outdoor
air. These outdoor samples can then be compared to the indoor samples to determine if fungi
levels are elevated inside the building.

The results of bulk/surface and air sampling should be evaluated by an expert trained in mold
evaluation. Guidelines at ¶2.4. The presence of a few, or trace, amounts of fungal spores should
be considered immaterial. Amounts greater than trace, or the presence of fragments of fungi,
may suggest fungal colonization, growth or accumulation near the sampled area. Air samples
should be evaluated by comparison (outdoors to indoors), and by fungal type. Differences in the
indoor and outdoor air samples may indicate problematic fungal growth.


                      b.      Remediation
The New York guidelines provide that in all situations where mold is suspected, the underlying
cause of water accumulation must be rectified or fungal growth will reoccur. Guidelines, ¶3.
The goal of remediation is to remove or clean contaminated materials in a way that prevents the
emission of fungi and dust contaminated with fungi from leaving a work area and entering an
occupied or non-abatement area, while protecting the health of workers performing abatement.
Under the New York guidelines, small isolated areas (i.e. ten square feet or less) can be
remediated by regular maintenance staff while large areas (i.e. over 30 square feet) require
consultation with a health and safety professional with experience performing microbial
investigations. Guidelines, ¶3.1, 3.2, 3.3.


                2.      Indicia of Mold Per the Environmental Protection Agency
The EPA has reported that when moisture problems occur and mold growth results, building
occupants may begin to report odors and a variety of health problems, such as headaches,
breathing difficulties, skin irritation, allergic reactions, and aggravation of asthma symptoms.
Mold Remediation in Schools and Commercial Buildings, supra. All of these symptoms may
potentially be associated with exposure to molds. Id. Per the EPA, the types and severity of
symptoms depend, in part, on the types of mold present, the extent of an individual’s exposure,
the ages of the individuals, and their existing sensitivities or allergies. Id. At particular risk are
individuals with weakened immune systems (for example, cancer patients undergoing
chemotherapy or AIDS patients) and the results of exposure can be life threatening.

Unlike New York City, however, the EPA has yet to issue national guidelines for mold
detection, investigation, evaluation or remediation.


               3.      California’s Toxic Mold Protection Act of 2001
On October 8, 2001, California signed into law the Toxic Mold Protection Act of 2001, now
codified at California Health and Safety Code §17920.3. The statute directs the California
Department of Health Services to establish permissible mold exposure limits and set standards


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for identifying and remediating molds. Section 17920.3 also defines real estate disclosure
requirements and grants local agencies the authority to respond to mold complaints. As of May
28, 2002, however, the Department of Health and Safety has not yet implemented the Toxic
Mold Protection Act because it lacks the funding to do so. It is not certain when the Act will be
implemented as the Department is not required to enforce the statute unless it has sufficient
funds in its budget.


                        a.      Standards and Identification
This legislation directs the California Department of Health Services to adopt permissible
exposure limits for mold in indoor environments, based on the latest scientific data and any
existing standards by authoritative bodies. The statute further directs the Department of Health
Services to adopt mold identification standards for the environmental assessment of molds in
indoor environments and mold remediation standards based on the permissible levels of
exposure, the latest scientific data, common industry practices and any existing standards by
authoritative bodies.


                       b.      Disclosure
The statute also requires landlords and sellers of residential and commercial property to provide
written disclosure to potential tenants or buyers, identifying the current presence or prior
existence of mold and disclosing if it exceeds permissible exposure limits as set by the
Department of Health and Safety.


                       c.     Authority
By means of Section 17920.3, the Department of Industrial Relations is authorized to respond to
mold complaints and enforce standards in the workplace. The statute also amends the sub-
standard housing code to include the presence of molds and allows code enforcement officers to
effectively address concerns about molds.


                       d.      Board and Certification
The Act also directs the Department of Health Services to develop standards of education and
certification for mold-testing professionals and mold remediation specialists.


               4.      No Standards Exist Determining Safe Levels Of Mold Exposure
Standards for exposure to potentially harmful substances are referred to as Permissible Exposure
Limits (PELs) or Threshold Limit Values (TLVs) by Cal-OSHA and by the Environmental
Protection Agency, respectively. See “Mold Proposal Goes to Advisory Committee After Slew
of Comments,” Cal-OSHA Reporter, September 28, 2001, Vol. 28, No. 37; and see
www.epa.gov/iaq/molds/table2.html. However, no standards have been established for mold
exposure levels by either agency. See www.epa.gov/iaq/molds/table2.html.


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In fact, various agencies have deemed the establishment of these standards for mold as
impossible: “due to the variances in personal sensitivities and the vast array of molds, it has
been impossible to set exposure limits that can be applied to all humans.” Pamela J. Davis, from
a study prepared for the California State Legislature, “A Mold Primer” Cal-OSHA Reporter,
April 20, 2001. Further, it is not possible to determine “safe” or “unsafe” levels of exposure for
people in general. See www.nyc.gov/doh/html/epi/moldrpt1.html.

Accordingly, claims of dangerous mold levels causing wide ranges of suspected health
conditions for the most part lack scientific basis, but nonetheless are showcased in bad faith
claims relating to mold exposures that result after a water loss, regardless of whether the loss
was covered by the terms of the policy at issue.

The fact that there are no uniform mold investigation guidelines, or widely accepted scientific
data setting forth what mold levels may or may not cause health problems, does not impact the
insurer’s obligation to investigate and address an insured’s claim for damages at the insured’s
properties. Even though a plaintiff may not be able to substantiate his or her claims of health
damage caused by mold in the home, bad faith claims handling can still result in multimillion
dollar awards against insurers. For example, in Ballard, the court excluded the proffered
evidence linking mold to the plaintiffs’ health conditions, but the jury nonetheless awarded
$12,000,000 (of a $32,000,000 total award) in a punitive damage award to punish that carrier for
its claim handling in that matter. The carrier’s obligation is to respond and investigate claims of
damage to insured property promptly and thoroughly.


III.   Mold Claims and Bad Faith

        A.      General Principles of Insurance Coverage and Bad Faith
Under California law, to establish breach of insurance contract in a first party case, an insured
must show that a contractual relationship existed with the insurer, and that the insurer withheld
policy benefits due under the policy. Withholding of benefits may consist of either a complete
denial of benefits (Mariscal v. Old Republic Ins. Co., (1996) 42 Cal.App.4th 1617, 1623); paying
less than the insured believes is due (Egan v. Mutual of Omaha Ins. Co., (1979) 24 Cal.3d 809,
820); or unreasonable delay in payment (Waller v. Truck Ins. Exch., Inc., (1995) 11 Cal.4th 1,
36).

However, erroneous denial of a claim for policy benefits, or other withholding of benefits, does
not constitute bad faith unless the insured can establish that the insurer unreasonably withheld
policy benefits due under a policy. See Neal v. Farmers Ins. Exch., (1978) 21 Cal.3d 910, 920.
Thus, as the California Supreme Court recently held, “the ultimate test of bad faith liability in
first party cases is whether the refusal to pay policy benefits or the alleged delay in paying was
unreasonable.” See Chateau Chamberay Homeowner’s Ass’n v. Associated Int’l Ins. Co., (2001)
90 Cal.App.4th 335, 346 [emphasis in original].

Courts weigh several factors when determining whether an insurer’s conduct is reasonable.
First, an insurer’s failure to evaluate a claim objectively may support an insured’s claim of

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unreasonableness. This occurs when evidence in a claim file establishes the insurer’s bias
towards facts justifying a denial of the claim, at the expense of facts supporting the claim. See
Hughes v. Blue Cross of No. Calif., (1989) 215 Cal.App.3d 832, 845-46. Other factors include
an insurer’s willingness to keep an open mind (see Blake v. Aetna Life Ins. Co., (1979) 99
Cal.App.3d 901, 924) and willingness to reconsider an earlier denial (see Austero v. National
Cas. Co., (1978) 84 Cal.App.3d 1, 35).

Many states have adopted Unfair Claims Settlement Practices to protect insureds rights and
violation of the regulations is often cited as evidence of bad faith. As an example, California
Insurance Code §790.03(h) prohibits an insurance company from “knowingly committing or
performing with such frequency as to indicate a general business practice any of the following
unfair claims settlement practices . . . misrepresenting to claimants pertinent facts or insurance
policy provisions relating to any coverages at issue.” California Insurance Code §790.03(h)(1),
West 2001.

In the context of mold claims, the most frequent complaint is that the carrier delayed in
investigating the water loss, which led to mold infestation, which the carrier later disavowed as
excluded by the policy. Another frequent scenario involves payment of covered damages to the
insured, who later claims the amounts paid were not enough to remedy the actual damage, which
led to mold growth and additional damage. Yet another common fact pattern involves claims by
insureds that the insurer’s investigation failed to take into account the presence of conditions that
might lead to mold, or worse, the carrier knew that conditions conducive to mold growth existed,
but failed to share that knowledge with the insured.

The insured in all of the above scenarios can be expected to later claim that the adjuster
misstated pertinent facts and the insurance coverage provisions, in order to mislead the
policyholder into believing the home was safe.


         B.     Insurer Exposures In Mold Claims
In general, although each mold claim is unique, there are four areas of exposure to claims of bad
faith in the context of the presence of mold growth in an insured property.


                1.      Policy Interpretation
The first area of bad faith exposure involves unreasonable withholding of benefits for property
damage based on an improper interpretation of the policy. Mold is generally excluded from a
property policy unless it is a consequence of an otherwise covered loss and is not otherwise
excluded from coverage. Property policies frequently exclude loss caused by wear and tear,
defective workmanship, deterioration, rot, rust, corrosion, and latent defects, and therefore
exclude mold caused by any of these exclusions. On the other hand, insureds often claim that an
ensuing water loss, from even an excluded cause of loss, is an exception to the policy exclusions
which would otherwise bar the claim. Ultimately, the problem often is decided by judicial line-
drawing, complicated by the “predominant cause” or “efficient proximate cause” doctrines
applied by the courts.

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At this time, there are very few published cases that specifically address the enforceability of the
common exclusions for mold or for damage caused by mold. In each case, the outcome will be
decided based on the actual policy language at issue, and the particular facts of the loss. As can
be seen from the cases discussed below, however, courts tend to focus on an efficient proximate
cause type analysis to determine whether the predominant cause of the loss was a covered, rather
than an excluded, peril under the policy. These cases are provided as examples only, and the
adjuster faced with a mold claim should thoroughly investigate the facts and policy language
implicated in his or her case, and engage coverage counsel if he or she is not familiar with the
law of his or her jurisdiction.

In Bowers v. Farmers Ins. Exch., (2000) 99 Wash.App. 41, a homeowner brought a claim for
mold damage to a rental house when the homeowner's tenants converted the premises into a
marijuana growing operation. The insurer denied the claim based on the mold exclusion. The
insured contended that the damage was covered under the coverage for vandalism or malicious
mischief, which was provided by the policy. The court agreed with the insured and held that the
tenant's vandalism was the efficient proximate cause of the loss and, therefore, the mold damage
was covered.

Likewise, in Sunbreaker Condominium Assoc. v. Travelers, (1995) 79 Wash.App. 368, the court
held that fungus damage would be covered if the efficient proximate cause of the loss was wind
driven rain which was a covered peril under the policy. The fungus damage would not be
covered, however, if the cause of the loss was non-wind driven rain, since that was an excluded
peril under the policy.

In Home Ins. Co. v. McClain, 2000 WL 144115, a Texas appellate court found that the damage
caused by mold and fungi was an "ensuing loss" of covered water damage. This was because the
water entered the house from a leaking roof which pooled in crawl spaces and caused the mold
and fungi to grow. Since the mold and fungi were caused by covered water damage, the court
concluded that the exclusion for mold and fungi did not apply. (McClain was ordered not
published by the Texas Court of Appeals and is not citeable, but is provided herein to show how
courts apply the doctrines at issue in connection with mold claims).

McClain distinguished itself from an earlier Texas decision, Merrimack Mutual Fire Ins. Co. v.
McCaffree, (1972) 486 S.W.2d 616, in which the Texas Court of Appeals held that mold damage
was not covered, pursuant to the exclusion for deterioration, rot, mold or other fungi. In the
McCaffree case, a shower stall had been constructed without a shower pan. The evidence
showed that water had been leaking over a period of many years, which caused fungi to develop
and rot the wood. Therefore, the damage was found to fall within the deterioration/rot/mold
exclusion.

A similar decision was reached in Aetna Casualty & Surety Co. v. Yates, (5th Cir. 1965) 344 F.2d
939. In that case, the insured claimed a loss resulting from the rotting away of joists, sills and
subflooring of a home because the crawl space under the house was inadequately supplied with
vents. The air trapped in the crawl space, subfloors, and sills, which had been chilled by air
conditioning, produced condensation of moisture which resulted in rotting. The policy excluded

                                                -10-
loss caused by inherent vice, deterioration, rot, mold or other fungi or dampness of atmosphere,
but contained an exception for an ensuing loss caused by water damage. The appellate court held
that the rotting caused by the condensation of moisture was not caused by "water damage" within
the meaning of the policy and the claim was properly denied.

In California, the leading case on the application of the efficient proximate cause doctrine is
Garvey v. State Farm & Casualty Co., (1989) 48 Cal.3d 395. Briefly, under Garvey if there are
two concurrent causes of a given loss - one of which is covered and one of which is not- the loss
is covered if the “efficient proximate cause” is not excluded by the policy terms and conditions.
Id. However, if the predominant factor causing the loss is excluded, then the loss is excluded.
Id. Under the Garvey analysis, the insurer must carefully determine the efficient proximate
cause of the loss when applying the policy terms and conditions, and frequently, if the insurer’s
conclusion is later determined to be wrong, the insurer faces the accusation that the conclusion
was reached without support and in conscious disregard of the insured’s interests.


               2.       Investigation
The second area of bad faith exposure arises out of an alleged failure to conduct an adequate
investigation. As a general rule, an insurer presented with a property loss claim should promptly
investigate both the causes of the loss and the damages caused by the loss. An insurer cannot
reasonably and in good faith deny payments to its insured unless it has thoroughly investigated
the foundation for its denial. See Egan v. Mutual of Omaha Ins. Co., (1979) 24 Cal.3d 809, 819.

In the context of water loss and mold claims, disputes regarding whether a carrier conducted an
adequate investigation arise when the carrier allegedly failed to detect mold and therefore did not
assert any coverage defenses, or when the carrier detected mold but inadequately investigated its
scope.


                3.     Remediation
A third area of exposure occurs when the carrier completes its investigation, and agrees to
remediate mold damages (as covered damages or as an accommodation) but then an inadequate
remediation follows. Examples of inadequate remediation might include an incomplete
remediation (e.g. a “band aid” fix), or an overly aggressive remediation that damaged other
property not affected by the mold (e.g. chemical contamination in the home due to the
remediation process).


                4.       Delay In Adjusting the Claim
Finally, a carrier is vulnerable to claims of bad faith if it acts properly throughout the claim
handling, but simply takes too long to adjust the insured’s claim. An example of such delay
would occur if the carrier’s investigation occurs over a several week or month period, and the
insureds are living in the residence during that time. The insured may claim injury (physical or



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emotional) due to the fact the insured lived in the contaminated property while the investigation
was ongoing.


             5.     Common Mold Litigation Claims
To date, common claims include:

1. Failure to investigate for the presence of mold following a water damage claim. Insurers have
a non-delegable duty to thoroughly investigate claims. See Rattan v. United States Auto. Assn.,
(2000) 84 Cal.App.4th 715, 720; Hughes v. Blue Cross of Northern California, (1989) 215
Cal.App.3d 832, 848. Water damage and mold claims in particular may require thorough
investigation as infestations are not always obvious and may require sampling to be detected;

2. Delay in relocating an insured (particularly if there are children or immunosuppressed adults
living in the home) may give rise to liability, with the insured claiming the insurer is more likely
to understand the danger of mold exposure than an average claimant;

3. Failure to fully repair the damage, or opting to repair water- or mold- damaged materials
rather than replace them and perform a thorough remediation may also give rise to liability.
Keep in mind that not only is replacement typically more expensive than repair, but remediation
can be particularly costly. If an insurance company fails to properly replace and remediate
property damage, it might be years before any additional damage might be realized. This would
again present the difficulty of attributing the additional damage to the insurer’s failure to
properly handle the earlier claim; and

4. Failure to follow-up to ensure that any repairs, replacements, or remediation addressed the
underlying problems and that mold is not present at potentially harmful levels.

In such circumstances as those described above, it falls to the claim adjuster, as the person on the
“front line” to conduct an investigation that is fair, thorough, and conducted with the interests of
the insured in mind.


        C.     Do Adjusters Have a Duty to Warn of the Risks of Mold Contamination?
Whether an adjuster has a duty to warn building occupants of the potential dangers of mold is a
developing issue. While there is no established duty either in case law or most policy language
requiring an insurer to warn the insured of mold contamination and the possibility of health risks,
the insured will argue that an insurance company’s duty of good faith and fair dealing obligates
some warning be given to the insured when the insurer knows the risks.

Many times the adjuster is dealing with claimants who know little to nothing about mold
contamination or the health problems that often accompany exposure to mold. In the course of
handling a water damage claim, the question arises whether the adjuster should take any pro-
active steps concerning mold. Should the adjuster investigate the possibility of mold if the
situation warrants it? If mold is found, should the adjuster disclose the mold hazard? The issue

                                                -12-
is particularly pertinent when the adjuster is questioned by the building occupants concerning
mold, the possibility of mold and the hazards involved. The adjuster may also be faced with the
situation where he learns that the occupants are experiencing recurring medical problems which
the occupants have yet to associate with the mold that the adjuster allegedly knows, suspects, or
should suspect to be present.

One school of thought provides an adjuster does not owe any responsibility to disclose anything
to an insured concerning the presence of mold or the health risks. See Everett Lee Herndon, Jr.,
“Do Adjusters Have a Duty to Warn of the Risk of Mold Contamination?” Mealey’s Litigation
Report: Mold, Vol. 1, #10, October 2001. Another option (rather than verbally advising an
insured of possible mold related health issues) is for the adjuster to provide the inspection reports
to the insured and let the reports show whether potential health issues exist, thus allowing the
insured to make the necessary decisions.

On the other hand, an insured may argue that an adjuster or insurance company should never
hide behind the excuse of ignorance or lack of training. There are resources available to the
insurer about mold and the hazards of mold, and an insured may claim that a carrier’s lack of an
appropriate level of knowledge and competence concerning mold contamination, health hazards,
and remediation is not acceptable for a company that impliedly and expressly promises
competent claims handling and adjusting in exchange for insurance premiums. After verdicts
such as that in the Ballard case, an adjuster faced with a mold claim will want to consider
whether he should advise the insured, even in an adversarial setting, of the known or suspected
presence of mold, the hazards involved and the health risks that seem to routinely accompany
exposure to mold. Or, the adjuster can give the mold information to the insured so that the
insured can then seek guidance from someone else.


        D.       Damages Available in Bad Faith Actions
Despite the lack of standards for the presence of mold, and the hard to prove issue of causation,
plaintiffs attorneys are increasingly winning large mold damage claims by portraying affected
homeowners as helpless victims against large, well-financed, insurance corporations. Instead of
arguing science, they blame insurance companies with allegation that they failed to promptly pay
for or adequately repair a mold infestation. While it is still too early to say how much these
claims are costing the insurance industry, the numbers could escalate rapidly based upon the
numerous areas of recovery available to a plaintiff.

If an insured successfully prevails in a bad faith claim, the insured is entitled to not only
contractual damages, but also extracontractual damages. Extracontractual damages refers to
damages recoverable under a tort measure of damages, in addition to damages recoverable under
the contract. Encompassed in extracontractual damages are both compensatory and punitive
damages.




                                                -13-
                1.      Compensatory
Under a tort measure of damages, an insured may recover all damages proximately caused by the
wrong, whether they could have been anticipated or not. See generally California Civil Code
§3333. This may include damages for economic loss, non-economic loss such as emotional
distress, attorneys fees, and in some instances, prejudgment interest.


                        a.      Remediation
Addressing a mold problem must include halting the spread of mold, mitigating damages, and
returning the building to the condition it was in prior to the infestation. Depending upon the
context of the lawsuit, this may include evacuation costs and additional living expenses,
engineering and architectural fees, remediation fees, and given the high costs of remediating a
property, charges incurred in financing the remediation. As a caveat, the insurer must watch for
a plaintiff who decides to perform unrelated upgrades to the structure at the same time, and
request a court offset the cost of any additional work unrelated to the mold damage.


                        b.       Monetary Damages
In addition to economic damages, plaintiffs often seek damages such as lost productivity/lost
earning potential (effects of mold on plaintiff’s health may cause lost productivity on the job);
lost rental income (if plaintiff has to evacuate a rental property); reduction in home value (stigma
damages); personal property losses (abandonment of personal property in the infested area);
attorney’s fees; and interest from the time of settlement or judgment.


               2.      Punitive Damages
Although an insured may be entitled to extracontractual compensatory damages, a higher level of
egregiousness is usually required for the insured to collect punitive damages. The insured must
establish, generally by clear and convincing evidence, that in addition to “bad faith” or other
tortious conduct, evidence of oppression, fraud or malice exists.


               3.     Emotional Distress/Mental Anguish
Emotional distress damages may be available if an insurer’s alleged deceptive conduct was
preformed knowingly. As a result, evidence of potential health effects of mold could be
introduced to show the extent of mental anguish upon a victim. The judge in the Ballard case
admitted what he called a “physicians desk reference” reading of the potential health effects of
mold exposure. Further, the thought of the destruction of one’s home and treasured family
heirlooms can be a terrible mental burden for some people to bear. Finally, certain mycotoxins
emitted by mold spores are believed to be carcinogenic. Whether causation is proven or not,
prolonged exposure to these mycotoxins could create a fear of future illness, such as cancer, or a
marked decrease in cognitive function. Such fears of future illness might be compensated by a
sympathetic jury.


                                               -14-
                4.      Personal Injury
At the present time, most of the potential damages related to mold will be property damages,
since there is no industry standard to prove causation. As a result, it is unlikely evidence of
personal injuries will be introduced at trial. At the Ballard trial, the court excluded medical
testimony on the health effects of mold because the level of proof required does not yet exist.


IV.     Practical Tips to Avoid Bad Faith Allegations
Sound claims handling begins with a solid understanding of the pertinent facts, the applicable
policy provisions, and the controlling law. Although the facts of each mold claim will differ,
almost all of them can be expected to involve a water intrusion issue, since mold and mildew
need moisture to thrive. The most common complaint of insureds is that the insurer applies only
a “band aid” fix to the mold infestation, be it in the scope of the investigation or the scope of the
covered repair. In fact, an insurer’s investigation is critical, and most subject to allegations of
bad faith. The following are recommendations of ways a carrier can take steps to protect itself
from a lawsuit.


        A.     Respond To the Insured’s Claim Promptly
While all claims should be responded to and handled promptly, timeliness on covered water
claims is especially critical. The battle against mold is often won or lost in the first 24 to 72
hours. The sooner mitigation services are initiated, the better the opportunity to reduce the loss.
Water damage is a progressive condition and the longer property stays wet, the worse it gets.
The sooner the water is removed and the property dried out, the less property damage there will
be and any related claim will also be correspondingly minimized.

Another reason for prompt investigation of a water damage claim is so that an adjuster can
document whether mold is already present in the insured’s home. Although mold can begin to
establish colonies within the first 24 to 72 hours, it does not mean that the damage advances to
extensive areas of heavy mold growth or large black spots in that short time. An adjuster should
insist on an immediate site inspection, or advise of the implications of delaying water damage
repairs. Should an adjuster investigate the loss within the 72 hour “time limit” and observe such
extensive mold growth, the adjuster can be relatively certain the mold is not a result of the water
damage giving rise to the insured’s claim for benefits. Michael S. Wilson, “Legal Issues” Toxic
Mold: A Growing Risk? Guy Carpenter Seminar Materials, p. 11., 2001, found at
www.guycarp.com.

An issue also arises if the insured does not give proper notice to the insurance carrier. It may be
difficult, if not impossible, for the carrier to determine if the mold damage was the result of long
term deterioration, which could place it within a policy exclusion. The prejudice to the carrier
that might result from such late notice could justify a proper denial of the claim. If a first party
insured gives timely notice to the carrier, however, and the adjuster fails to promptly investigate
the damage, the carrier may very well place itself in the position of not being able to assert the
mold exclusion in the homeowner’s policy. This is because any delay by the carrier could make

                                                -15-
it impossible for experts to differentiate between any mold damage resulting from an excluded
cause of loss such as deterioration, as opposed to a covered cause of loss such as a broken pipe.


        B.      Make An Immediate Request for Information
One of the most important things an adjuster can do is to take a history from the insured upon
first contact. Most insureds will provide the most truthful and straightforward answers regarding
when the mold developed and over what period of time. In addition, always take photographs of
the residence even if there is no visible mold. These photographs may become important
evidence later in refuting a claim of improper investigation and insufficient remediation.

Request any repair bills or contractor’s estimates in the insured’s possession. Often, the insured
has already involved consultants, or environmental experts, who have prepared their own
estimates.

Finally, inquire as to recent maintenance conducted at the property. This may expose recent
construction that potentially caused the water damage giving rise to the claim. Also, cleaning
solvents commonly used in such activities as carpet cleaning may be the cause of an insured’s
current discomfort (due to chemical sensitivity) as opposed to mold exposure.


       C.      Ask The Insured If Any Residents Are Complaining of Health Problems
The existence of mold in the insured’s home triggers emotional reactions such as fear of illness.
Ask the insured if there are children present in the household, or individuals with weakened
immune systems. If children or adults who are susceptible to mold exposure do reside in the
house, consider advising the insured of the availability of Additional Living Expenses (if an
included policy benefit) while the investigation is ongoing.


        D.     Consider Whether A Reservation of Rights Letter Is Appropriate
It may also be a good idea to issue a reservation of rights at the time a claim is acknowledged.
While the adjuster may have no intent of denying the claim upon first inspection, subsequent
inspections (or the repair process) may establish other contributing causes from non-covered
sources. The insured should be informed of what is at stake. When the insured reports the loss
several months after the event causing the water intrusion, a reservation of rights letter should be
issued based upon late notice because mold could have developed during that time period.

The insurer may also wish to issue a reservation of rights letter when payments are tendered.
Often, mold is remediated during the course of conducting repairs that are covered by the policy,
however, the insured should be made aware that the insurer believes some of the problem was
not caused by the covered incident.




                                                -16-
       E.      Conduct A Thorough Inspection
The inspection is the most critical part of the claim adjustment process, and the area most
vulnerable to a bad faith claim.

Ideally, adjusters conducting water damage investigations should be minimally trained in
identifying the presence of mold. Often the adjuster is the only one who will inspect the home
for damages after the covered even occurs. In a future deposition, an adjuster should be able to
answer that a mold investigation was completed and provide the findings of that investigation.

While the adjuster may occasionally see or smell mold, mold may also be hidden behind walls
and in other inaccessible locations. The presence of mold may be indicated by unexplained
illness. For an adjuster to properly assess the damage and liability exposure, he needs to know if
there is mold present and how and when to look for hidden mold. The adjuster should determine
how much mold there is, whether it poses health risks to the occupants of the building, and
consider retaining experts when necessary.

Of course, all this requires that adjusters be trained in mold investigation. Current belief is that
unless a residence shows more than thirty square feet of contamination, an environmental
professional is not necessary. Mold Remediation in Schools and Commercial Buildings, E.P.A.,
March 2001. The most important thing is that the adjuster inspect the area, and have a contractor
prepare a cost estimate. Delays often occur when an environmental professional samples the air
and property, sends the samples off to a laboratory, and prepares a voluminous report regarding
the results of the testing. The longer the claim is considered without action, the more anxious
the homeowner may become, and charges of bad faith delay of the adjustment process are more
likely.

Part of the training of an adjuster concerns the proper use of experts. An adjuster is taught to call
in experts as needed on a claim, and should always consider obtaining expert assistance when the
situation warrants. The expert is to provide the adjuster with information, assistance and
guidance in cases requiring specialized knowledge, such as mold contamination.

If a consultant is necessary, an adjuster should utilize experienced, credentialed consultants to
avoid later claims of ineffective and inaccurate investigation. The adjuster should speak to his
consultants prior to any site inspection to discuss the purpose and goals of the inspection. A
testing strategy should be in place before the adjuster and consultants are at the home. This
alleviates an insured’s perception that the adjuster and consultant are undecided or unsure how to
proceed with the claim while in the insured’s presence.

Finally, an adjuster should watch for sources of mold not identified by the insured. For example,
Cladosporium easily becomes airborne and may land on an insured’s personal property, such as
clothing, thus surviving after real property remediation is complete. If an insured requests
testing of personal property, the adjuster should consider such a request, and respond
appropriately.



                                                -17-
         F.    Post Payment Advice to the Insured
It is not uncommon for a policyholder to choose to use money received under an insurance
policy for something other than the repairs caused by the property damage. Although an
insurance company generally cannot control how the policyholder uses the funds, the carrier
should advise the policyholder to perform repairs to the water damaged property as soon as
possible regardless of whether mold is involved, and particularly when mold is not involved. In
addition, the policyholder should be advised that the carrier is not responsible for following
through that repairs are completed, and instead that is the policyholder’s responsibility.


V.      Conclusion
The mold issue is one that will continue to impact the insurance industry. It is doubtful that
mold will ever be eradicated from our environment, so the best that the carrier can do is conduct
a prompt and conscientious evaluation of each mold claim, and properly apply the issued policy
to the facts. In so doing, insureds will get the protection to which they are entitled to, and the
carrier will avoid the costs of defending bad faith lawsuits.




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