Section 7.24: Mold as a Covered Peril (LRGS)

Mold/Fungi as a Covered Peril:

Loss Recovery Guide with Standards: Section 10.20.h

February 3, 2003

Home I Loss Recovery Guide with Standards Ip1m-Links

Over the past year, William Yobe & Associates / p1m has consulted with hundreds of restoration vendors, and adjusters throughout the country on whether mold formation after a water loss is covered within a standard HO-3 insurance policy. And, we have directed those with questions to Section 10.20.h Molds as a Covered Peril: within the Loss Recovery Guide with Standards (LRGS), their state's department of insurance and the Insurance Information Institute (III) website: www.iii.org.

The III states...

"From the insurance perspective, damage from mold, like rust, rot and mildew is specifically excluded in the standard homeowners policy. Mold contamination is covered under the homeowners policy only if it is the result of a covered peril. For example, the costs of cleaning up mold caused by water from a burst pipe are covered under the policy because water damage from a burst pipe is a covered peril.

But mold caused by water from excessive humidity, leaks, condensation or flooding is a maintenance issue for the property owner, like termite or mildew prevention, and is not covered by the policy. Most people routinely clean up mold before it grows large enough to become a hazard. Caught early, mold usually can be removed by a thorough cleaning with bleach and water."

In addition, we recommend that vendors, adjusters, and consumers also review the III’s presentation Mold and the Insurance Industry: Truth and Consequences PDF or PowerPoint so they have a better understanding on the economic implications of mold.

Insurance Services Office (ISO):

During 2002, 35 states adopted the Insurance Services Office (ISO) www.iso.com new HO-3 insurance policy, and we see light at the end of the tunnel on policy issues and the economics implications mold has on the property and casualty industry, and consumers within these states. However, we still see problems with the proper interpretation of the following phrase Mold contamination is covered under the homeowners policy only if it is the result of a covered peril.

Therefore, we encourage insurers to properly train their property adjusters on building sciences, construction methods, what constitutes sudden and accidental losses, moreover, how ensuing loss provisions affect mold coverage. In addition, adjusters and restoration vendors should have a basic understanding on water loss investigative strategies, as well as subrogation issues and how they relate to water losses.

Due to the high demand on the determination of mold as a covered peril, we have elected to include Section 10.20.h Molds as a Covered Peril: from the Loss Recovery Guide with Standards (LRGS) within this article, along with interpretations.

The objective of Section 10.20.h is to provide adjusters and vendors some basic investigative strategies when searching for the determination of whether mold formation is the result of a covered cause of loss.

7.20.h) Molds as a Covered Peril:

Molds are generally excluded within a standard insurance policy, and would not be covered based on a continual water/moisture source, thus a building maintenance problem. (i.e. roof leak, equipment malfunction, water leak, drain leak, etc.)

Mold remediation procedures could be covered under an insurance policy when a covered peril caused the mold formation. While an absolute mold exclusion within an insurance policy would not cover mold remediation.

When molds have formed within 24-hours of a water loss, an evaluation of the water or moisture source could be used to determine the cause of the mold. Moreover, the determinations of a pre-existing mold Vs post-mold (age) is not probable through testing, and could be controversial.

When evaluating a water loss site involving controversial mold formation, the following suggested questions could be evaluated:

Is the mold from a pre-existing condition, that was in a dormant stage and as the humidity increased the dormant molds or fungi were reactivated?

Is the area of mold formation below an existing water source; bathroom, apartment, HVAC system, window, door, etc.?

If the mold formation is at or below a window or door, are the doors and windows properly sealed, caulked, etc.?

If the mold formation is below a HVAC system, is the HVAC under warranty, is there a current maintenance contract in force? Did the equipment malfunction?

If the mold formation is below ground level e.g. crawl space, basement, is the mold due to surface water, are the french drains clogged, is the mold at floor level, at the floor joists, or mid-way between the floor and joists, resulting in possible hydrostatic pressure?

If the mold formation is at and/or just below the floor joists in a basement, is there a door or window directly above the mold formation, was the door or window recently installed, or maybe the door or window is old and needs repaired or replaced?

The aforementioned scenario of questions represents a brief listing of how and why mold formation could or could not be covered under an insured against peril. When evaluating the water (moisture) source, the overall picture should be evaluated and the investigative approach should be a process of elimination. When in doubt about the water or moisture source responsible for mold formation, a competent person should be consulted.

When mold is present, occupants should be informed of potential health risks as described in the LRGS.

When in doubt about the insurance coverage of molds, the policyholders insurance agent and adjuster should be consulted.

Section 10.20.h) Interpretation Part 1:

Section 10.20.h Mold as a Covered Peril should be broadly viewed to provide awareness and action, considering mold formation are the direct result of latency.

The term, latency-as-used above, defined; Potential, - what does not have being or effect but is likely soon to have, Abeyant, - what is for the time being held off or suppressed, Latent, - a power or quality that has not yet come into sight or into action but may at any time, Dormant, - the inactivity of something, Quiescent, - temporary being or effect but is likely soon to have.

Although, equipment malfunction is listed as an exclusion within Section 10.20.h, equipment that malfunctions, causing water and mold formation could be a covered if the malfunction was sudden and accidental. However, the reason "equipment malfunction" is listed as a probable exclusion is due to equipment age and/or routine maintenance that could have been correctly or incorrectly performed, or never performed.

When a vendor or adjuster is confronted with a questionable equipment malfunction, they should be alerted (CB) that probable subrogation and/or claims denial is possible and the adjuster, owner, and vendor should preserve the "equipment malfunction" evidence for possible cause & origin and/or forensic evaluation.

The words could 1s defined as; Possible, maybe, all venues should be evaluated.

The overall objective of Section 10.20.h is to provide vendors and adjusters some basic questions they should ask themselves when evaluating minor to moderate mold formation using the process of elimination. However, when using the process of elimination for the cause of mold formation, one must fully understand that the structures age and geographical location will have a significance on the structures design and construction type, which could alter the basic questions highlighted in Section 10.20.h. Furthermore, Section 10.20.h states, When in doubt about the water or moisture source responsible for mold formation, a competent person should be consulted.

A competent person shall mean a person who is capable through training, education and/or experience to instruct on the matter or matters at hand.

Although, WYA and p1m believes only professionals should be involved with cause & origin, forensic or mold formation evaluation (i.e. engineers, industrial hygienist, etc.), the LRGS elected to use the terminology of competent person as a minimum guideline, as used within the Federal Code of Regulations on some of their safety standards. [LRJ Volume II, Issue I]

Section 10.20.h) Interpretation Part 2:

In the last issue of the LRJ, we stated mold formation is the direct result of latency. In exact terms, latency in relation to mold formation means, when there is mold and/or water, and specific measures are not taken within an appropriate amount of time, the potential for mold formation is evident in the built environment.

We also stated an evaluation of the situation, using the process of elimination is essential when determining minor to moderate mold formation.

In this issue, we are going to provide the interpretation of the following sentence within Section 10.20.h, Mold remediation procedures could be covered under an insurance policy when a covered peril caused the mold formation.

Most policies include a mold exclusion, which generally reads as follows: We do not pay for loss caused by contamination or deterioration, including corrosion, decay, fungus, mildew, mold, rot, rust or any quality, fault, or weakness in covered property that causes it to damage or destroy itself. We do cover any resulting loss caused by a specified peril or breakage of building glass.

On the surface, the insurance coverage of mold formation in the above phrase appears to excluded mold in any form, however, the phrase does state insurers cover any relating loss caused by a specified peril.

To better understand the mold exclusion used in most policies, William F. Stewart, a partner in the law firm of Cozen and O’Connor says, insureds have two arguments at their disposal to challenge the mold exclusion.

"First, where an insured peril (e.g. water) and an uninsured peril (mold) contribute to cause damage, the loss is covered. According to Stewart, the concurrent cause analysis a/k/a 'efficient proximate cause' has been adopted by most U.S. jurisdictions in one form or another, with Texas and Washington applying a variation of this concept to mold damages.

Second, the mold exclusion is based on an insurance contract construction known as "ejusdem generis". Which means, where descriptive terms are grouped together, they should be interpreted to show some common design or intent. The mold exclusion in its present context is surrounded by natural occurring loss types that happen over a period of time. However, mold from a covered water loss is fortuitous (accidental) and is not gradually forming as used in the exclusion phrase, where it is surrounded by contamination and deterioration forms that are."

Texas is the first state where insurers have challenged the mold exclusion in its present context, requesting the Texas insurance commissioner to enact an absolute mold exclusion, or first-party context clarification on mold. Meaning, mold in any form or from any result would not be covered under an absolute mold exclusion. Furthermore, an insurance policy change of this magnitude, if successful, could be requested by every insurer in every state, resulting in consumer groups and trial lawyer associations to vigorously challenging insurance companies in Texas. [LRJ Volume II, Issue II]

Section 10.20.h) Interpretation Part 3:

Within Molds as a Covered Peril, interpretation Part 3, we are going to focus on the terminology sudden and accidental which was a chief concern with insurers in Texas, considering the Texas standard HO-B policy included coverage for accidental water discharges, and was changed with insurance commissioner Jose Montemayor’s decision to add "sudden and accidental" to the states HO-B policy starting January 1, 2002. Furthermore, Texas commissioner Montemayor clarified what "sudden and accidental" means within the states HO-B policy:

Sudden and accidental includes a physical loss that is hidden or concealed until detectable. A hidden loss must be reported to the insurance company within 30 days of discovery. (Texas HO-B policy)

When we review the state of Texas explanation on sudden and accidental, we see a clarification that prevents gray areas, mainly hidden damages. When we review the state of Louisiana's recent explanation on mold, they clarify that if mold is caused by a covered loss, then mold is covered, however, they state in their January 18, 2002 news release that "... homeowner’s policies in Louisiana do not provide coverage for seepage of water or for damage arising from wear and tear or the failure to do proper maintenance" which in our opinion leaves a gray area for hidden conditions.

The determination of sudden and accidental in most all states is generally clear cut, however, the seepage of water or the wear and tear or the lack of proper maintenance when confined or hidden is not always clearly defined, resulting in a gray area for those not familiar with an insurers policy issues or an insurers operating procedures.

An example of hidden conditions being a gray area, we will use two water damage losses in Pennsylvania:

Example A: Homeowner’s main water line from the street breaks, flooding basement. Insurer states they will pay for loss if water pipe broke within the envelope of the structure, which includes the cement block area where the water line enters the property.

Example B: House has horizontal HVAC mounted in attic with drip pan, which has a 1/2" PVC drain pipe, where the drain pipe clogs, causing ceiling to collapse and goes undetected over long weekend while homeowner is out of town. Insurer denies claim based on lack of maintenance. Agent gets involved and an annual maintenance contract for the HVAC was produced by the homeowner, resulting in coverage for the homeowner and subrogation against the HVAC contractor who performed the annual maintenance, as well as against the HVAC contractor who installed the drip pan with a 1/2" PVC pipe.

When comparing example A with your typical HO-3 all perils policy, we notice that some policies have listed deterioration as an exclusion, while other policies state they do not cover loss consisting of or caused by rust or other corrosion. However, the policy for this loss clarifies seepage as continuous or repeated seepage or leakage over a period of weeks, months or years, of water steam or fuel, thus a covered loss since the broken or burst pipe was noticed within hours after it happened.

In example B, when the homeowner provided evidence that they did meet the terms and condition of their policy by having their HVAC system annually maintained by a professional contractor, the loss was covered and the insurer invoked a third party liability case under their rights to subrogate.

Since sudden and accidental can cause controversy, we have researched what legally defines sudden and accidental and are still somewhat confused. However, if a policy specifically defines "sudden and accidental" the confusion should be eliminated.

We do not cover loss: (4) Caused by constant or repeated seepage or leakage of water or steam over a period of weeks, months or years from plumbing, heating, air conditioning, or fire protective system, or a household appliance. However, there is coverage if the loss is sudden and accidental. [Pennsylvania Homeowners Policy]

When reviewing mold claims as sudden and accidental we have found the following:

"Another key issue is whether the release of fungal contamination’s can be deemed to be sudden and accidental? Courts seem to have divided along the same lines with mold as they have with other contaminates. Some courts view the sudden and accidental exception as nothing more than reiteration of the fortuity requirement contained in the occurrence element of an insuring agreement. However, other courts have limited the exception’s application to releases that are abrupt in a temporal sense." [Legal Comment, Lawyer Unknown] [LRJ Volume II, Issue III]

Absolute Mold Exclusion:

Some insurers have elected the absolute mold exclusion in lieu of implementing the revised ISO HO-3 policy. When reviewing the absolute mold exclusion, foreseeable problems could result in the courts providing interpretation.

With the HO-3 being an all perils policy, stating which perils are not covered, and when mold, regardless of the peril is excluded, the perils of storms and fires that result in mold formation could result in confrontation.

Example: Storms (i.e., hurricanes, tornadoes, and microbursts) are generally followed by days of additional rains and winds. Therefore, no matter how fast an insurer and/or loss-mitigation vendor responds, temporary protection could allow further water intrusion, leading to possible mold formation. In this case, would resulting mold formation fall on the responsibility of the loss-mitigation vendor? Or, would the resulting mold formation fall within ensuing loss provisions?

Then we have fires, where water is the most common means of suppression. And, if insurers and loss-mitigation vendors respond quickly, and properly mitigate the loss site, mold formation should be prevented? However, what if there is forensics involved, where the loss site or certain rooms within cannot be disturbed for 48 to 72 hours. Would the mold formation, when the direct result of forensic delays fall within ensuing loss provisions? In addition, if mold does form through the result of the forensic investigation, and additional mold is discovered, would the removal of all molds fall within ensuing loss provisions?

When viewing mold and your typical insurance policy, it is evident; there are issues that will surface, causing confrontation between insured and insurer. However, insurers can perform roundtable strategy sessions, where all stakeholders (i.e., insured, insurer, vendor, etc.) share thoughts and ideas. A strategy of such would provide solutions that allow actuaries to properly tabulate the costs. Moreover, where underwriters can properly price a policy, as well as provide adjusters the tools needed to avoid costly bad faith.

In conclusion, insurers must understand -- mold is a safety to life and property issue, as well as an economic issue that affects real estate and banking. Therefore, mold should be properly addressed with options as found within the new ISO HO-3 policy. In addition, the proper training of adjusters on relating building sciences, construction, and drying with microbial strategies, as well as the interpretation of sudden and accidental, and ensuing loss provisions is needed.

Liability Disclaimer:

Since each loss poses different post-conditions, requiring different protocols (i.e. special thoughts, treatments, applications, approaches, etc.), the publisher, authors, Executive Committee for Change, Technical Committees, or sources herein, disclaim any liability, be it injury to property, life, or financial record, of the contents, recommended products, or recommendations contained within.

The information compiled within this article could be time sensitive requiring revisions and updates periodically. Furthermore, the information contained within this article and product recommendation is not intended to offer legal advice, or be a substitute for legal advice.