Mold Insurance and Litigation

by Rick Fedrizzi

The Insurance Information Institute estimates that $3 billion in mold claims were paid out in 2002, the most recent year for which detailed statistics are available. Most states have responded by passing laws allowing insurance companies to exclude mold from coverage, so plaintiff lawyers now target landlords, condominium associations and school districts instead. "I've got seven or eight cases set for trial between now and June," says William Slaughter, a defense lawyer in Ventura, Calif.

Mold-related claims have become a primary concern for the insurance industry. Mold litigation has exploded and the number and size of water-related property claims have skyrocketed. In response, the insurance industry is changing policy language, claims-handling procedures, and loss reserving, while trying to keep the regulators at bay.

Many insurance companies are now grappling with how to address mold claims and many — especially homeowner's policies — are excluding mold from their coverage entirely.

Homebuilders and smaller contractors, like plumbers, are finding it increasingly expensive to get mold coverage, if they can at all.

Claims of Negligence by Building Owners Are Being Upheld by the Courts

When it became obvious in the 1970s that too many Americans were suffering severe injuries or losing their lives in automobile accidents because they weren’t wearing seatbelts, the federal government and the insurance industry moved to mandate seatbelt restraints in all new cars. While the upfront impact of indoor air quality (IAQ) issues may not be as dramatic as the results of poor automobile safety, the effect of litigation emanating from IAQ-related lawsuits is every bit as costly to the insurance industry. 

Every year in the United States, billions of dollars are lost to businesses because of absenteeism, sub-par productivity and health insurance claims.  When it comes to providing a healthy indoor work environment for America’s workforce, many fall down on the job.  Many will argue that the cost of providing this type of environment is prohibitive, the benefits unclear, the results incalculable.  This bottom-line approach is ill founded.  Building owners and managers who follow this scenario are gambling with the future — theirs, their tenants’ and their tenants’ employees.  And while there are no doubt many inter-related and unrelated factors that determine the productivity outcome, this article aims to serve as a none-too-subtle reminder for America’s health insurers, building owners, property managers and Energy Service Companies (ESCOs) that apathy is not the answer; that these problems aren’t going to go away or cure themselves.

According to a 1998 study by Chen and Vine of the Lawrence Berkeley National Laboratory (LBNL), the incidence of commercial buildings with poor IAQ and the frequency of litigation over the effects of poor IAQ is increasing. If so, these increases have ramifications for insurance carriers, which pay for many of the costs of health care and general commercial liability.

The literature search and discussions with insurance and risk management professionals reported in the LBNL paper turned up little specific information about the costs of IAQ-related problems to insurance companies. However, those discussions and certain articles in the insurance industry press indicate that there is a strong awareness and growing concern over the “silent crisis” of IAQ and its potential to cause large industry losses, and that a few companies are taking steps to address this issue. The source of these losses include both direct costs to insurers from paying health insurance and professional liability claims, as well as the cost of litigation. In spite of the lack of data on how IAQ-related health problems affect their business, the insurance industry has taken the anecdotal evidence about their reality seriously enough to alter their policies in ways that have lessened their exposure.

U.S. companies could save as much as $58 billion annually by preventing sick-building illnesses and an additional $200 billion in worker performance improvements by creating offices with better indoor air, say LBNL researchers Fisk and Rosenfeld. The researchers also found that the financial benefits of improving office climates can be eight to 17 times larger than the costs of making those improvements. Their estimates are derived from studies that establish a link between building-related causes and the illnesses in question, but they do not have data on the percentage of these costs paid by the insurance industry, and the estimated benefits covering all building sectors.[1]

One insurance carrier, DPIC Companies, reportedly paid out more than $24 million between 1989 and 1993 for claims related to IAQ illnesses caused by faulty HVAC systems.  The claims involved HVAC systems that over — or under — heated buildings, failed to cool buildings adequately, or failed to adequately ventilate whole buildings, or portions of them. The four most common types of projects in these cases were commercial and industrial buildings, schools and university buildings, condominiums and hospitals.[2]

According to a 1999 article in the Silicon Valley / San Jose Business Journal, the increased public concern over SBS and IAQ-related issues has generated three types of legal activity:

	Claims alleging harm from exposure to indoor air pollutants;
	Disputes over the extent to which such claims are covered by insurance; and,
	Legislative and regulatory initiatives to reduce indoor air quality risk[3]

Litigation alleging harmful exposure to indoor air began in the early 1980s with an initial wave of lawsuits arising from occupational exposure to single contaminants such as asbestos, solvents or pesticides. By the late 1980s, a new type of indoor air quality claim began to appear: assertions by homeowners and commercial occupants that they or their businesses had been damaged by “non-industrial” contaminants.[4]

Chen and Vine reported that the size of settlements awarded to plaintiffs in IAQ-related cases could serve as an indicator of the costs caused by acute building-related problems, as well as of the value that juries place on the damages that building owners, managers and other liable parties owe for neglecting IAQ problems.  However, the majority of these cases are settled out of court.  Thus, there is no way of totaling the costs of litigation from IAQ cases.

Again, absent any hard data, it’s obvious that the escalating insurance costs, and the litigation that is doubtless set in motion to produce them, provide further evidence that better IAQ and prevention of SBS are issues in everyone’s best interests.

Case In Point

In one recent case, the plaintiff and fellow employees sued both the former and current building owners for SBS injuries. The plaintiffs claimed negligence on the part of the building owners for their failure to maintain ventilation systems or to warn occupants of the danger. The court decided in favor of the plaintiffs on all claims against the previous owner, but granted summary judgment for the current building owner on all claims. While the appellate court found for the current building owner in the case of one employee who had resigned before he came into possession of the building, it reversed and remanded the remaining claims based upon the persistence of the employees medical problems after the current owner came into possession.

Plaintiffs are winning many of these cases, and, furthermore, clauses in most insurance policies have prevented the landlords, business owners, etc. from passing the cost on to the insurance companies.[5]  A recent decision of the Wisconsin Supreme Court declared that a property owner could “reasonably expect insurance coverage for personal injury claims arising from build-up of exhaled carbon dioxide in a poorly ventilated building,” was reversed by an appellate court. The court reversed the claim on the basis that highly concentrated carbon dioxide qualified as a “pollutant,” thereby disqualifying the property owner from coverage under the insurer’s “pollution exclusion” clause.

Legal costs in the field of SBS-related toxic torts have the potential to become astronomical. Personal injury claims can cover temporary or permanent physical claims as well as mental and emotional distress. Furthermore, the range of liable persons and the classification under which claims may be filed extend far beyond what one would expect.

“Plaintiffs coming to suffer from SBS have been suing building owners, building managers, architects, engineers, construction managers, contractors, sub-contractors, material supporters and manufacturers allegedly responsible for contaminating the building. Claims normally include several causes of action, including breech of contract, breech of express warranty, breech of implied warranty, strict liability, negligence, breech of covenant of quiet enjoyment by constructive eviction, fraudulent concealment and misrepresentation, nuisance, assault and battery and emotional distress.”[6]

Buildings are supposed to provide secure, safe and healthy conditions and facilitate the well-being and productivity of occupants, owners and managers.[7]  Focusing on the “healthy conditions and well being” clauses, the fundamental objectives of environmental control are to prevent adverse health effects; provide for desired conditions of human response, occupant performance and productivity; and, achieve all by simultaneous control of exposure parameters for thermal, IAQ, lighting and acoustics.

But there exists a three-fold problem, according to an HP-Woods Research Institute (2000) study:

	Anecdotal and speculative data suggest up to 20 percent improvement in “productivity,” and a $50-$200 billion a year savings potential in the U.S.;
	There is a lack of scientifically valid, quantitative data on the effectiveness of Indoor Environmental Quality (IEQ) which includes air quality, lighting, acoustics and thermal comfort on health, performance and productivity; and,
	Fiduciary responsibilities require more credible “productivity data.”

Phrases and acronyms such as IAQ, IEQ, Sick Building Syndrome (SBS) and Building Related Illness (BRI) are tossed around so much that building owners and managers shrug them off. Symptoms associated with SBS include; headaches, nausea, dizziness, respiratory problems, coughing, wheezing, and eye, nose or throat irritation, just to name a few. Of course, there are many other reasons why persons might fall prey to these symptoms, and many of the causes are created outside the workplace. However, the workplace is also the culprit in creating many of these conditions, or at least aggravating existing conditions.

BRI, a more serious condition, is brought on by exposure to the building air where symptoms of diagnosable illness are identified (e.g. certain allergies or infections) and can be directly attributed to environmental agents in the air. BRIs account for a 69 percent increase in requests for investigation by the National Institute for Occupational Safety and Health over the last fifteen years.

For years the focus of pollution prevention has been on the outdoor variety, and rightfully so, with cars, buses, and factories spewing out toxic gases. Much has been accomplished over the past 30 years to reduce and limit the factors that cases “smog alert days” in many urban areas. On these days, people with breathing difficulties are warned to stay indoors, which tends to make us believe that the indoor environment is better for us than choking, eye burning, mixture outside. Yet, indoor air can sometimes be a hundred times more polluted than outside air. But this simple fact tends to be ignored because office space is often at a premium and it’s no simple task to find another place to work, or to move an office. And you really can’t see the effects of poor indoor air. Unless of course, you look closely at ceiling tiles, heating and air conditioning ducts, or the dust particles settling on the floor and furniture. A picture of health is often is not.

Since the nation’s first energy crisis of 1973-74, the amount of fresh air in modern offices has been limited to save energy. Poor air circulation is another major contributor to the problem. At the same time, there is hundreds of toxic chemicals used in cleaning products, perfumes, paints, carpets, computers and furniture. Add to this mix the ozone generated by laser printers and photocopies, and you have indoor smog, containing Volatile Organic Compounds (VOCs). Yet no one reports on “indoor smog days.” Basically, a person ;lands a job goes to work at that job, and the last thing on their mind is the “health” of the building. By the time they find out the building is making them sick, it’s too late. They learn to compensate for it, perhaps take sick time, or leave the office to-ironically- catch a breath of fresh air outdoors. But if it’s really bad, they have to leave the job altogether. If enough of their co-workers are having similar problems, maybe be the whole office relocates. Either way, if you’re a building owner or manager, that’s bad for business.

Although “worker productivity” and “workplace health” are buzzwords today, few worker or their management decision makers understand the quantitative connection with indoor air quality. For example, if sick buildings can be remedied then sick days and lost time (doctor’s appointments, etc.) can be avoided, and ultimately the cost of health insurance can be reduced, adding to the employer’s bottom line and helping the building owner better satisfy his customer. So there is a sound business case for avoiding or correcting SBS and BRI related problems.

A Question Of Economics

As with everything, proper building IAQ is a question of economics. How much will it cost, and what is the payback? But the case for investing in sound IAQ techniques is not easily made. While there have been some clinical, quantifiable studies roving the opportunity costs of IAQ, the industry overall has done a poor job of tying worker productivity drop-off, or improvement, to IAQ issues.

It is at least a three-fold problem:

1. There is a little quantifiable data linking productivity to building IAQ;

2.  

3. To achieve an adequate, sustainable level of proper IAQ, building owners must make a sizeable investment, either during construction or in retrofit; and,

4.  

5. There is much disagreement among the stakeholders in a building’s value chain over what proper IAQ means. The result is that building owners sometimes fail to identify compelling reasons to make the necessary investment.

6.  

The HP-Woods study reports that a systematic approach is needed, whereby evaluation criteria are defined in terms of credible parameters and values, standard protocols are applied (i.e., Building Diagnostics), recognized statistical designs and procedures are used, and valid and reliable data is obtained. But what building owner has the resources or the inclination to undertake what equates to a doctoral thesis? Building owners want answers that are readily available and easy applicable.

ASHRAE Standard 62-1991 specifies minimum ventilation rates and sets IAQ standards intended to minimize the health  risk for building occupants. The standard designates required outdoor air ventilation in CFM (cubic feet per minute) per person. Though these requirements vary from application to application, they generally recommend an average of 15-20 cubic feet per minute (CFM) of outdoor ventilation per person.

The perfect building would allow for adequate ventilation based on occupancy levels, contain no pollutants such as VOCs, formaldehyde, etc. and make maximum use of natural light. Although some come close, the perfect building doesn’t exist. It would simply cost too much to build, or occupy. Yet the costs of NOT building or occupying a safe building can be very high. So high, in fact, they can no longer be ignored.

We know this much: The U.S. Environmental Protection Agency reports that the prevalence of the problem is unknown. A 1984 World Health Organization report suggested that as many as 30 percent of new and remodeled buildings worldwide may generate excessive complaints related to indoor air quality. In a nationwide, random sampling of U.S. office workers, 24 percent perceived air quality problems in their work environments, and 20 percent believed their work performance was hampered thereby.

The U.S. Department of Energy has performed studies that have estimated the potential financial gain from improved indoor environments at between $30 billion and $150 billion annually, including healthcare, sick leave and worker performance. Similar studies have suggested that productivity loss from SBS alone could cost American businesses upwards of $50 billion annually. (EHS Services, Inc.)

Fifty billion dollars is a lot of money. So in the absence of hard data, lets look at some self–evident truths: