Exclusions help insurers dodge the mold bullet

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Architects, contractors, owners left in harm’s way

As mold-related lawsuits produce eye-popping court settlements, commercial insurers are opting out of the fray by excluding mold damage from most lines of insurance.
According to David Dybdahl, president of Middleton-based American Risk Management Resources Network, LLC, insurers realized they were paying $2.35 in mold-related claims for every dollar in premiums from claimants in the cases. Eventually, according to Dybdahl, the impact of mold on the insurance industry will be larger than major disasters such as Chernobyl or even the World Trade Center destruction.
"The difference between this and every other environmental disaster is that this will affect the little guy and the middle market," Dybdahl said, because even small problems can result in big claims.
"The insurance industry is spending $150 million a year on broken hoses on washing machines because of mold," Dybdahl said.
While the initial high-profile mold lawsuit was tried in Texas courts, there are plenty of lawsuits currently filed against business owners in Wisconsin.
Consider the case of Tim Dixon of Cornerstone Property Development, Milwaukee, who was slapped with a lawsuit in April by the purchaser of a condominium unit in the first phase of the Commerce Bluff development in downtown Milwaukee.
The civil complaint mirrored other litigation filed in mold related cases, claiming simply that the newly-constructed condo was not "fit for its intended purpose." The complaint also states that Dixon was in violation of a "limited warrantee covering latent defects due to faulty materials or workmanship."
According to City of Milwaukee assessment records, the condo unit in question declined in value by $10,000, from $185,000 to $175,000, between 2001 and 2002.
An official with the assessor’s office explained that "according to notes from the appraisal, there are some mold problems for that particular unit. The owner has not even moved in, and the unit was not finished."
Dixon contends that, because the building was newly constructed, the mold was brought in with the purchaser’s belongings. However, because mold litigation is really about moisture, that argument may not hold up in court.
While the law suit names only Dixon as a defendant, other parties involved in the construction of the project are nervous.
According to Jim Reed, a project manager with the Commerce Bluff development’s architect, The Kubala Washatko Architects, Cedarburg, the firm is actively trying to fix a moisture problem that may have played a role in the suit.
"There has been an indication of some condensation on the hottest, most humid days of the summer," Reed said. "It is not a winter condensation issue. It occurs only when the unit is being air-conditioned. It leads me to believe that it is the air mixing between a hot roof cavity and an air-conditioned situation inside. It is kind of like bringing a cold pop out of the refrigerator. We have been trying like heck to identify where this happens, and it seems to happen at a couple of electrical boxes that were put in. We are trying to seal that and make sure that the hot and the cold air don’t mix."
Although Reed described the moisture problem as a condensation issue, a Kubala Washatko principal was quicker to implicate the contractor on the project.
"While there were challenges with the project, they were surmounted," Allen Washatko said. "There was a leaking issue that was solved. It was due to some flashing that was not inserted correctly."
Property, casualty, liability and other commercial insurance lines in recent years have included clauses that indemnify the insurance company for any damages caused by mold.
Although the initial wave of lawsuits are leaving the insurers vulnerable for liability, once the exclusions kick in, a mold-related suit will likely result in legal disputes between building owners, contractors and architects.
Chris Kondrick of AON Risk Services of Wisconsin works closely with construction contractors and says subcontractors and general contractors are both in a difficult position when it comes to the mold issue.
The problem is compounded by the trend of constructing tighter buildings that make most any moisture problem a mold incident waiting to happen.
"Insurance companies had been talking about including mold exclusions in policies as early as two years ago," Kondrick said. "The exclusions started showing up on policies in the last quarter of 2001 on the general liability, property and the umbrella coverage."
Insurers, seeing the massive loss potential, opted out of the market in droves, but some formulated additional policies specifically to cover environmental hazards, including mold.
"Shortly after the exclusions started hitting the policies, a few insurers started coming up with solutions," Kondrick said. "Contractors can go out and buy a pollution policy, and while the pollution policy typically excludes mold, the exclusion can be bought back."
However, many in the construction industry view the cost of buying back mold coverage to be expensive, according to Kondrick.
Some of that expense results from the fact that pollution policies cover damages that result from contaminants not normally associated with most construction projects, according to an environmental attorney with Michael, Best & Friedrich, a Milwaukee law firm.
"That is sort of the rub," said Cynthia Smith, who has been affectionately dubbed "The Mold Queen" by her associates. "You wind up buying the entire pollution liability policy.
"You don’t think as a contractor you’d have the need for all that coverage. But you are going to have to buy that policy," Smith said. "You are seeing it as exceptionally expensive if you are the average contractor. Some of the larger companies may be able to purchase it, and because of the nature of their work, they may already have a standard pollution liability policy."
Even when contractors, engineers and architects buy back mold coverage as part of an environmental policy, they can be vulnerable if a claim results from faulty workmanship.
Depending on the way contracts are written, liability for faulty workmanship can flow downhill from the designer to the general contractor to the subcontractor.
"Faulty workmanship is usually not covered by insurance policies," Kondrick said. "It usually ends up as a big disagreement between the owner, the architect, the general contractor and the subcontractors, particularly in cases where policies have mold exclusions.
"Usually, the architects are in a position of power, and they generally say they will be held harmless from any and all losses," Kondrick said. "Since they are in the design business, the only thing they will take responsibility for is design work. If a contractor feels it is the design that caused the problem, it will be up to the contractor or subcontractor to prove that the architect’s design, or choice of materials, is what caused the mold to be there."
The burden of proof in these cases, usually will fall on the contractors, according to Kondrick, which means the contractor may be forced to hire a lawyer and a legal team to prove that his work was not responsible for the mold problem.
"The contractors that are the most worried are general contractors and HVAC contractors," Kondrick said. "Close behind are the roofing contractors, wallboard contractors and those contractors putting up the exterior walls of buildings."
However, according to Smith, the "hold harmless" agreements used by designers and generals are not iron-clad protection against liability in mold-related lawsuits.
"State law prohibits contractors to contract away their negligence, and civil complaints can still be brought in under torte law," Smith said.
In the case in which an architect argued that a clause in its contract meant the contractor must bear the burden of a mold-related claim, "we would argue it was a negligent design," Smith said.
Insurance companies will initially be the most active party pulling additional defendants into lawsuits, Dybdahl said.
The existence of mold exclusions, according to Smith, may also be used against insurance companies in litigation and would not be retroactive. If a product was designed or constructed before mold exclusions were put in place, the designer or contractor would be covered, even if a lawsuit was filed against them after an exclusion was added to their policy.
"I would argue that those new endorsements would not have retroactive application," Smith said. "The way insurance contracts work is that even though the lawsuit was filed after a new contract was in place, it is the policy that was in effect at the time the services were rendered that is applicable."

Jan. 10, 2003 Small Business Times, Milwaukee

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