Real Estate/Development
Jul. 11, 2006
Who Pays for the Mold?
The attempt five years ago to address toxic-mold levels legislatively and litigiously may have hit a wall, but the potential real estate losses from lawsuits and damaged properties could make bacteria prevention an economic priority.
CREJ Staff Writer
The attempt five years ago to address toxic-mold levels legislatively and litigiously may have hit a wall, but the potential real estate losses from lawsuits and damaged properties could make bacteria prevention an economic priority. The spotlight is trained back on mold, according to industry watchers, to illuminate how lenders react if mold is not covered by insurers in New Orleans.
Toxic mold was the topic of conversation in 2000 because a rash of lawsuits and media stories seemed to appear out of nowhere. Multifamily-housing property owners took the brunt of the abuse as in the case of Fickett v. Davis Management Corp., in which a former resident of a California apartment complex filed suit against the owner, alleging that negligent maintenance caused exposure to toxic mold that led to her husband's death.
But plaintiffs have had difficulty establishing that mold is the cause of a laundry list of medical problems, said Sacramento-based Ronald E. Enabnit, an attorney at Matheny Sears Linkert & Long, which represented Westmont Construction Co. in the $2.3 million mold remediation case Harold v. California Casualty.
"Junk science about memory loss, brain disease and fatigue, where no valid studies support the connection, is not being admitted," Enabnit said.
That didn't mean an end to the cases, though.
"Despite the weaknesses in the causation evidence, many California cases settle," said Gregory Hagen, a partner in the San Diego office of Drath, Clifford, Murphy, Wennerholm and Hagen.
To give owners some protection, the Toxic Mold Protection Act of 2001 directed the California Department of Health Services to adopt permissible exposure limits for indoor mold. Isolating mold impacts proved problematic, however, because damp buildings also encourage dust mites, cockroaches, building material degradation and other problems that have health impacts similar to those attributed to mold.
"After considerable research into this issue, DHS scientists concluded that, although recent studies have strengthened the evidence between living or working in a damp environment and increased risk for respiratory symptoms, the role of mold growth in these complex environments is still unclear," said Norma Arceo, public information officer for the California Department of Health Services. "For these and other reasons, ... science-based PELs for indoor molds cannot be established at this time."
Although scientists failed to provide victims with evidence of direct causation, their efforts succeeded in getting the attention of insurance companies.
Insurers began to exclude mold-related claims on personal and commercial policies.
"By 2005, the insurance companies had completed their risk-management strategy of not paying for mold-related losses," said Dave Dybdahl, president, American Risk Management Resources Network LLC, who has an office in Hermosa Beach.
The Insurance Information Institute said that "mold contamination is covered under these policies 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.
The reason for the exclusion is practical, from the institute's perspective.
"If insurers are now going to be asked to pay claims for something that is not covered in the policy, the price of insurance will inevitably rise. Should the long-standing coverage exclusion for mold be eroded by jury verdicts or judicial interpretations, the basic premises on which the property insurance contract is based will be reversed, and the economic consequences will be severe," the white paper read.
Dybdahl estimated that, before the exclusion, mold damage claims were costing the insurance industry as much as $12 billion a year.
Burden on Owners
The decision to exclude mold-related claims relieved the burden on insurers but left it on property owners. The lack of coverage can be a particular problem for multifamily-housing property owners who have less control over maintenance inside units and more exposure to lawsuits.
"Mold is 10 times as big of a problem for multifamily property owners as it is for residential," Charles Perry Jr., principal of Environmental Assurance Group, said.
To protect owners, the Sacramento-based California Apartment Association developed a set of guidelines for members that includes required notification to tenants and tips on how to maintain, spot and remediate problems early.
"This is an important issue, and we didn't want to wait for the state to come up with guidelines," said Debra Carlton, association senior vice president of public affairs.
Even when the preventative measures are in place, first-party insurance limits covered consequential mold damage to 2 percent of the building with a maximum of $50,000 per building. Third-party general liability for illness resulting from pathogenic organisms is absolutely excluded.
That $50,000 maximum can be a problem for the property owner and, ultimately, the lender if major damage reduces the value of the structure to less than is owed.
Mike Haggerty, principal of Newmark Realty Capital Inc. in San Francisco, explained the lag time that often occurs between when a problem is reported and when the implications trickle down to the mortgage industry.
"We haven't seen the losses yet, but it depends what shakes out from Katrina," Haggerty said.
A Centers for Disease Control report showed that 46 percent of the 422,000 homes studied in New Orleans had visible mold damage. Policyholders are fighting with insurers over who is financially responsible.
"The fact that mold is not covered will be the third shoe to drop," Dybdahl predicted. "It will be banks left holding the bag."
Haggerty speculated that mold insurance eventually could be treated like flood, earthquake or terrorism insurance and specifically required in loan documents.
Perry estimated that less than 1 percent of commercial property owners carry the insurance, which can be relatively expensive, with policies starting at $15,000 per year.
In that 1 percent is California Public Employee Retirement System, which carries its own master insurance program that covers property, liability, pollution - including mold - and terrorism.
For now, Haggerty is seeing insurance with mold addenda on large projects because that is the borrower's business practice rather than at the banker's insistence.
"A lender is many thousands of times more likely to have collateral impaired by mold than a terrorism event," Dybdahl said.
- E-mail JT_Long@DailyJournal.com
Jt Long
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