Mold: Underwriters Endorsing CGL to Remove Coverage

Contractors are the target of nearly 2,000 mold-related lawsuits annually according to a 2003 report from toxlaw.com. When accused or sued for injuries and damages resulting from mold, contractors look to their commercial general liability policy to find coverage to finance their defense and pay any judgment levied against them.

This three-part series was triggered by a judgment handed down against a central Ohio general contractor in early May and reported on InsuranceJournal.com. Specific information about the contractor’s insurance coverage is irrelevant; the point of these articles has been and is to debate protection, if any, afforded by the CGL for bodily injury or property damage claims caused by mold or defective construction. Nothing presented in this series is intended to infer anything about coverage in the impetus case.

Previous articles focused on the four commercial general liability coverage triggers, and whether the commercial general liability policy extends coverage for injury or damage arising out of defective construction. Mold and the CGL’s response to and coverage for bodily injury or property damage caused by mold is the topic of this final discussion.

Triggering the Need for Coverage

Mold can cause respiratory infections, hypersensitivity in those not normally prone to allergic reaction, infections and possibly death. Additionally mold growth can lead to structural damage, destruction of non-structural real property and the decay of personal property.

Most state statutes hold the general contractor ultimately responsible for the finished product regardless of who did the work. Agents with contractor and general contractor clients will be called upon to find coverage and a source of funds when bodily injury and/or property damage claims resulting from mold are presented against their clients. A quick lesson on mold is a necessary precursor to the coverage debate to follow.

Mold Basics

A food source, optimal temperatures and water (the mold triangle) must be present for mold to develop, take root and grow. Like the fire triangle, remove any one of these three legs and mold cannot exist or prosper.

Food sources are plentiful in new construction and remodeled structures. Mold thrives on the organic materials present in most building materials including wood (cellulose) and fiberglass insulation. The optimal temperature to incubate and support mold growth is between 60 degrees and 80 degrees Fahrenheit (lower and higher temperatures also allow the establishment and growth of mold). Little can be done to avoid these two sides of the mold triangle on a construction site. Food sources and optimal temperatures common in crawl spaces, basements and vented attics are unavoidably present.

Proximate Cause

Water infiltration may be the only mold growth factor controllable by the contractor. Removing moisture from the mold triangle eliminates the possibility of mold. But at times efforts to block out water fail and mold develops and grows. When mold “takes root,” the question of how the water intrusion occurred leads to the proximate cause of the injury or damage.

Proximate cause is the incident or occurrence (as defined) that leads to the injury or damage in an unbroken chain of events. In short, what lead to the water’s presence? The proximate cause of water infiltration can and will have an impact on CGL coverage.

There are essentially four causes for the presence of water in areas where it is not intended once construction is complete: 1) the use of defective construction techniques or materials (i.e. improper flashing, poor sealing methods, use of improper materials, etc.) ; 2) an unintentional error or mistake by the contractor or subcontractor; 3) an occurrence or incident causes damage allowing the introduction of water; or 4) the normal wear and tear of building materials leading to the seepage of water into the structure. Only the first two are “controllable” by the contractor.

Only when the proximate cause is controllable by the contractor can they be held legally liable for bodily injury or property damage caused by mold; but will the CGL be the financing mechanism to defend and pay the claim? The following paragraphs will offer an opinion on the availability of coverage in the commercial general liability policy.

Property Damage Coverage

As stated previously, poor and shoddy workmanship does not qualify as an “occurrence.” If the proximate cause of the mold is defective construction methods there must be an accident or repeated exposure to the same harmful condition exploiting the poor construction methods or materials to trigger any hope of coverage in the commercial general liability policy.

Mold damage resulting from substandard means of construction MAY be considered an “occurrence,” but it is just as likely to be considered the result of an intentional action, or inaction, of the insured contractor. Intentional acts are specifically excluded.

Two exclusions will likely preclude property damage coverage if the mold damage meets the definition of an “occurrence:”
• Damage to Impaired Property or Property not Physically Impaired; and
• Damage to “Your Work.”

Both exclusions were detailed in the construction defect discussion. Effectively, they combine to preclude coverage for any property damage to the insured contractor’s completed work resulting from defective construction practices and/or mold damage. But these exclusions don’t necessarily remove coverage for damage to personal property owned by the building owner or homeowner, or damage to work done by another contractor.

Personal property of others and the work of another contractor damaged during construction are excluded by the “Impaired Property” and the “j.(4)” care, custody and control exclusionary wording. But neither excludes damage to personal property or other real property once construction is complete.

Only damage to the work of the contractor is excluded by the “Your Work” wording. We’ll use a plumbing contractor for our example, since it’s water that is the main catalyst for mold growth.

Assume the plumbing contractor improperly seals a joint during construction. The joint is adequate when the water line is “charged,” and it holds for two months after completion of the house – making it a “completed operation.” Two months after the house is completed and is occupied by the new owner, the joint springs a leak that is not immediately noticeable. A week later, the homeowner begins to notice discoloration of the wall and the drywall is spongy and soft to the touch. The water leak is confimed. It has damaged the insulation, drywall and flooring. What should the plumbing contractor’s policy cover? Everything but the cost to tear out and replace the piping – which is the plumbing contractors “work.” A month later, mold growth becomes evident in the area of the leak and its cause is traced directly back to the plumbing leak. The mold is directly related to the leak and thus the cost to remove and repair any property damage should be covered by the standard commercial general liability policy because there is no specific exclusion for mold damage in the CGL (mold is not considered a “pollutant,” so that exclusion does not apply). All property damage resulting from the leaking pipe is covered by the policy (with the exception of the plumbers “work”), including the cost of fixing the mold damage directly related to the leak.

To find any different is nothing more than torturing the policy to make it say what you want it to say.

Subcontractors may be extended coverage for property damage in the unendorsed commercial general liability policy. However, the general contractor’s coverage may not be as broad depending on the definition of their “work.” If the CG 22 94 (Exclusion-Damage to Work by Subcontractors) is attached, the entire structure is their work and no property damage coverage to the structure will be covered.

Damage to personal property of others may be covered under any contractor’s commercial general liability policy. Provided all four requirements for coverage are satisfied.

Bodily Injury

There is no bodily injury exclusion related to mold in the commercial general liability policy. The only caveat is that the mold must be the result of an “occurrence” as defined and detailed previously.

In short, bodily injury claims resulting from the growth and proliferation of mold will be covered provided all four coverage triggers are satisfied:
1) There is “bodily injury;”
2) The bodily injury results from an “occurrence;”
3) The insured is held legally liable; and
4) The injury or damage is not the result of a specific exclusion, an excluded action or an excluded cause.

Whoa! Not So Fast – Exclusions

ISO has promulgated four endorsements that exclude or severely limit the coverage for injury or damage caused by mold. Two are intended for use with the commercial general liability policy and two are designed for the Owners & Contractors Protective Liability (OCP) policy form.

Both the CG 21 67 used with the CGL and the CG 31 31 for the OCP entitled “Fungi or Bacteria Exclusion” completely exclude coverage for bodily injury or property damage as follows “…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.” The policy goes on to exclude any cost to test for, monitor or clean up such fungi or bacteria.

Another two endorsements severely limit the amount of coverage available for mold or fungi damage. Both the CG 24 25 (used with the CGL) and the CG 31 32 (attached to the OCP) are titled “Limited Fungi or Bacteria Coverage.” These endorsements specify an annual aggregate limit of coverage applicable to claims resulting from mold or fungi. Limits are usually minimal ranging between $10,000 and $100,000 in the aggregate.

Underwriters most often use the total fungi or bacteria exclusions to avoid any exposure to mold. If an agent cannot convince the underwriter to remove the exclusion completely, negotiate the limited form; at least the insured will be granted some coverage.

Conclusion

This series has touched on several exclusions related to mold and defective construction of which agents should be wary. The following exclusionary endorsements should be removed when possible:
• CG 22 94 – Exclusion-Damage to Work by Subcontractors;
• CG 21 67 – Fungi or Bacteria Exclusion (for the CGL);
• CG 31 31- Fungi or Bacteria Exclusion (when the OCP is used);
• CG 24 25 – Limited Fungi or Bacteria Coverage (used with the CGL); and the
• CG 31 32 – Limited Fungi or Bacteria Coverage (attached to the OCP).
The Limited Fungi or Bacteria Coverage endorsements are acceptable if they are the only way the underwriter will agree to provide coverage for damage caused by mold. Otherwise, completely removing the mold exclusions is the preferred direction.

Mold and defective construction claims and litigation ebbs and flows with media reports and high jury awards. But regardless of the external causes, agents must always arm themselves with knowledge of the exposures and coverage provisions. A close review of your contractor client’s policies to confirm no unknown or unwanted exclusions exist is required. If the contractor is concerned about mold exclusions, separate mold coverages are available from many specialty markets.