In the ever burgeoning arena of mold claims and their often accompanying bad faith allegations, one can quickly get lost in the convoluted and painstaking analyses of policies. Once clear words are now often tortured to uncertainty, allowing new meanings to be added in an effort to locate coverage where none was ever intended. In a world glutted with analysis straight from popular science fiction movies which encourage viewers to question the mere existence of kitchen utensils (after all, in actuality “there is no spoon”), certainly insurance contracts are fair game. Insureds and their counsel continue to dissect exclusions with similar anecdotal, if not analytical, precision to ask questions which also ring of the metaphysical, such as whether the mold is the cause of the loss or if it actually is the loss. It is no wonder that carriers often wake with the same mystified response, desperately trying to ascertain what is the real world versus the arguable illusion of coverage.

The analysis is often further complicated by resulting damages clauses still found in most policies, which while supporting the exclusion for mold damage, arguably give back coverage for any resulting damage. Such conjecture and pained attempts at interpretation and the courts’ varied attempts to wrestle with the national debate invariably leads to the development of new standardized policy forms, as the industry belatedly responds to quell what is often described as a feeding frenzy of claims. Such is now the response for mold exclusions and forms.

The newest generation of Insurance Services Office, Inc. (“ISO”) standardized coverage forms, which were approved in April of 2002, now provide entire sections which specifically address mold exclusions and/or scheduled limits of insurance, and are the industry’s latest and best response to the profusion of mold claims. These new forms offer insurers an opportunity to further clarify the mold exclusion to refine what was previously thought to be clear, simple, non-technical language which excluded mold coverage. But the sheer length of these new sections, if not just the change in verbiage, demonstrate precisely how much more refined the analysis and these new forms have become. These new commercial property forms (i.e. the basic causes of loss form CP 1010 04/02, the broad form CP 1020 04/02, and the special causes of loss form CP 1030 04/02) now offer a new and improved mold exclusion, as follows:

Exclusions

We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

h. “Fungus”, Wet Rot, Dry Rot And Bacteria
Presence, growth, proliferation, spread or any activity of “fungus”, wet or dry rot or bacteria.

But if “fungus”, wet or dry rot or bacteria results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.

This exclusion does not apply:
1. When “fungus”, wet or dry rot or bacteria results from fire or lightning; or
2. To the extent that coverage is provided in the Additional Coverage
– Limited Coverage For “Fungus”, Wet Rot, Dry Rot And Bacteria with respect to loss or damage by a cause of loss other than fire or lightning.

Exclusions B.1.a. through B.1.h. apply whether or not the loss event results in widespread damage or affects a substantial area.¹

These new ISO forms now also define “fungus” as “any type or form of fungus, including mold or mildew, and any mycotoxins, spores, scents or by-products produced or released by fungi.”² And to supplement this new exclusion, the forms now also provide stated limits of coverage (which is referenced in section h.2 above), as follows:

Additional Coverage – Limited Coverage For “Fungus”, Wet Rot, Dry Rot And Bacteria

1. The coverage described in C.2. and C.6. only applies when the “fungus”, wet or dry rot or bacteria is the result of one or more of the following causes that occurs during the policy period and only if all reasonable means were used to save and preserve the property from further damage at the time of and after that occurrence.

a. A Covered Cause of Loss other than fire or lightning; or
b. Flood, if the Flood Coverage Endorsement applies to the affected premises.

2. We will pay for loss or damage by “fungus”, wet or dry rot or bacteria. As used in this Limited Coverage, the term loss or damage means:

a. Direct physical loss or damage to Covered Property caused by “fungus”, wet or dry rot or bacteria, including the cost of removal of the “fungus”, wet or dry rot or bacteria;
b. The cost to tear out and replace any part of the building or other property as needed to gain access to the “fungus”, wet or dry rot or bacteria; and
c. The cost of testing performed after removal, repair, replacement or restoration of the damaged property is completed, provided there is a reason to believe that “fungus”, wet or dry rot or bacteria are present.

3. The coverage described under C.2. of this Limited Coverage is limited to $15,000. Regardless of the number of claims, this limit is the most we will pay for the total of all loss or damage arising out of all occurrences of Covered Causes of Loss (other than fire or lightning) and Flood which take place in a 12-month period (starting with the beginning of the present annual policy period). With respect to a particular occurrence of loss which results in “fungus”, wet or dry rot or bacteria, we will not pay more than a total of $15,000 even if the “fungus”, wet or dry rot or bacteria continues to be present or active, or recurs, in a later policy period.

4. The coverage provided under this Limited Coverage does not increase the applicable Limit of Insurance on any Covered Property. If a particular occurrence results in loss or damage by “fungus”, wet or dry rot or bacteria, and other loss or damage, we will not pay more, for the total of all loss or damage, than the applicable Limit of Insurance on the affected Covered Property.

If there is covered loss or damage to Covered Property, not caused by “fungus”, wet or dry rot or bacteria, loss payment will not be limited by the terms of this Limited Coverage, except to the extent that “fungus”, wet or dry rot or bacteria causes an increase in the loss. Any such increase in the loss will be subject to the terms of this Limited Coverage.

5. The terms of this Limited Coverage do not increase or reduce the coverage provided under Paragraph b. of Covered Causes Of Loss 9., Sprinkler Leakage.

6. The following, 6.a. or 6.b., applies only if Business Income and/or Extra Expense coverage applies to the described premises and only if the “suspension” of “operations” satisfies all terms and conditions of the applicable Business Income and/or Extra Expense coverage form.

a. If the loss which resulted in “fungus”, wet or dry rot or bacteria does not in itself necessitate a “suspension” of “operations”, but such “suspension” is necessary due to loss or damage to property caused by “fungus”, wet or dry rot or bacteria, then our payment under Business Income and/or Extra Expense is limited to the amount of loss and/or expense sustained in a period of not more than 30 days. The days need not be consecutive.
b. If a covered “suspension” of “operations” was caused by loss or damage other than “fungus”, wet or dry rot or bacteria but remediation of “fungus”, wet or dry rot or bacteria prolongs the “period of restoration”, we will pay for loss and/or expense sustained during the delay (regardless of when such a delay occurs during the “period of restoration”), but such coverage is limited to 30 days. The days need not be consecutive.³

Stated limits of coverage have traditionally served both the insurance industry and insureds well in another once hotly debated area of coverage - the back up of sewers and drains. Informed consumers were given the opportunity to choose between purchasing back up of sewer coverage or assuming the risk themselves. Given the success in clarifying and defining those coverages, it is no surprise that the industry is embracing similar strategies to define and limit mold coverages.

Should an insured wish to purchase increased limits, they may do so through the CP 0432 04/02 form, which provides an increased scheduled limit of coverage as follows:

A. In the Limited Coverage For Fungus, Wet Rot, Dry Rot and Bacteria, the amount of $15,000 is deleted and replaced by the amount indicated in the Schedule.

B. If the Schedule indicates that the Separate Premises Or Locations Option applies, then the amount of coverage ($15,000 unless a higher amount is shown in the Schedule) is made applicable to separate premises or locations as described in the Schedule. For each premises or location so described, the amount of coverage is an annual aggregate limit, subject to the terms set forth in Paragraph 3. Of the Limited Coverage For Fungus, Wet Rot, Dry Rot And Bacteria.

C. The coverage provided under this endorsement does not increase the applicable Limit of Insurance on any Covered Property. If a particular occurrence results in loss or damage by “fungus”, wet or dry rot or bacteria, and other loss or damage, we will not pay more, for the total of all loss or damage, than the applicable Limit of Insurance on the affected Covered Property.

D. Under the Limited Coverage For Fungus, Wet Rot, Dry Rot And Bacteria, in the section applicable to Business Income and/or Extra Expense coverage, the number of days (30 days) in both paragraphs is deleted and replaced by the number of days indicated in the Schedule.⁴

Similar exclusionary endorsements and scheduled limits of insurance forms are also available for the commercial general liability coverage part (i.e. the CG 2167 04/02 exclusion and the CG 2425 04/02 scheduled limits endorsement) and the owners and contractors protective liability coverage part and the products/completed operations liability coverage part (i.e. the CG 3131 04/02 exclusion and the CG 3132 scheduled limits endorsement).⁵ Both of these exclusionary endorsements add the following provisions:

2. Exclusions

This insurance does not apply to:

Fungi or Bacteria

a. “Bodily injury” or “property damage” 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.

b. Any loss, cost or expense arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the effects of, “fungi” or bacteria, by any insured or by any other person or entity.

This exclusion does not apply to any “fungi” or bacteria that are, are on, or are contained in, a good or product intended for consumption.⁶

In comparison, the commercial liability, owners and contractors protective liability, and products/completed operations liability scheduled endorsements offer an enticing definition of a new trade catch phrase, “fungi or bacteria incident” which is defined as “an incident 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.⁷ Furthermore, aside from the CG 2425 04/02 form’s additional provisions which serve to exclude coverage for personal and advertising injury, and testing, abatement and associated remediation expenses arising from a fungi or bacteria incident, the CG 2425 04/02 form is identical to the CG 3131 04/02 form which provides scheduled limits as follows:

A. Coverage provided by this insurance for “bodily injury” or “property damage”, arising out of a “fungi or bacteria incident”, is subject to the Fungi and Bacteria Liability Aggregate Limit as described in Paragraph B. of this endorsement. This provision A. does not apply to any “fungi” or bacteria that are, are on, or are contained in, a good or product intended for consumption.

B. The following are added to Section III – Limits of Insurance:

1. Subject to Paragraph 2. Of Section III – Limits of Insurance, the Fungi and Bacteria Liability Aggregate Limit shown in the Schedule of this endorsement is the most we will pay for all “bodily injury” or “property damage” arising out of one or more “fungi or bacteria incidents”. This provision does not apply to any “fungi” or bacteria that are, are on, or are contained in, a good or product intended for consumption.

2. Paragraph 3., the Each Occurrence Limit continues to apply to “bodily injury” or “property damage” arising out of a “fungi or bacteria incident”.⁸

Clearly, these new ISO forms were designed with the hope of allowing the landscape of mold coverage to stabilize and to provide both insureds and carriers a measure of predictability when purchasing coverages and underwriting these potential risks.

The irony of these changes is that policies continue to evolve into longer, more painstakingly detailed contracts, drawing further ire of insureds who enjoy reading their policies about as much as their surround sound stereo instructions. However, in order to administer these forms and successfully underwrite appropriate coverages, carriers must impose clarity even at the expense of brevity. And further still, carriers may be better served to now focus on the next generation of claims waiting in the wings.

As our society embraces newer technologies and emergent business strategies in this era of on-line “super” carriers and the competitive insurance climate, carriers should be proactive in predicting their clients’ future insurance needs and possible claims. What will be the next big EIFS, asbestos, silica, or mold? The industry should be charged with the responsibility of identifying and evaluating the next possible evolution of exposures, particularly those involving first party property claims. For example, with our economy now so dependent on internet services and electronic commercial transactions, how will future claims be handled and policies respond to claims of internet fraud or identity theft? Clearly consumers are becoming more knowledgeable about these issues, with our nightly surplus of commercials charming us with everyday people who have been bilked out of their credit card numbers and consumer ratings. Credit card companies are eagerly rushing forward with advertising and paternalistic strategies apparently designed to protect their customers. And lest we all forget, many of these credit card companies are affiliated with banking institutions who have recently entered into the insurance products arena. In order to remain competitive, insurance carriers must similarly embrace such challenges to provide their customers with a proactive strategy which offers such necessary coverages, or at the very least, notice to their insureds that the policy does not provide coverage. And given the industry’s new found reliance on consumer credit scoring which allows carriers to accept only the most credit worthy customers, isn’t this precisely the same market base that the electronic thieves will focus and prey upon?

Consumers will continue to expect value for their insurance dollar and look to their insurance carriers to stand by them when losses occur. Carriers will continue to look for the static and fair playing field where they may underwrite a statistically predictable risk and earn sufficient premium rates not only to remain competitive, but to also stay in business. But in order to meet the needs of both the consumer and the carrier, it will be the carrier that continues to be charged with the responsibility of predicting future exposures and writing comprehensive policies that detail in clear and precise terms what is to be covered and what will be excluded. So long as the industry meanders down the same well-worn path at a reactive pace, rather than forging swiftly ahead on an anticipatory proactive path, insureds will continue to prevail in their arguments for ambiguity and coverage. Only when the industry offers consumers choice prior to their loss for a reasonably foreseeable risk can the insured be charged with informed decision-making in their denial or purchase of coverage. Until then, we only howl at the wind of change and curse the insured’s counsel who are eager to point out the shortcomings of policies. But usually by the time that we have even noticed that the wind is blowing, the storm of claims has already arrived – carriers should begin preparation for these new categories of loss well before the storm hits, just as they plan well in advance for catastrophic storm teams. Otherwise, before carriers realize that the storm has arrived, they will find themselves standing knee deep in its aftermath with only a good set of waders to see them through.


Endnotes

¹ Includes copyrighted material of Insurance Services Office, Inc. with its permission. Copyright, Insurance Services Office, Inc., 2002.
² Id.
³ Id .
⁴ Id.
⁵ Id.
⁶ Id.
⁷ Id.
⁸ Id.
 
 

For additional information, contact:
Pure Air Control Services
800-422-7873, ext. 802