Once upon a time, mold was a problem at work only if you avoided cleaning the office refrigerator for too long. Lately, though, it's becoming the hottest topic in property/casualty insurance, as lawsuits claiming health-related damages from toxic mold spread from residences to offices and other commercial buildings. And with insurance coverage already difficult to obtain, and expensive when available, companies may face some unpleasant choices about how to protect themselves.
Some corporate risk managers are closely watching the federal suits filed against IBM Corp. in North Carolina, where several employees allege they experienced mold-related illnesses following an April 2000 flooding incident at the Research Triangle Park campus. Also under scrutiny is a class-action suit by two United Airlines employees alleging that mold constitutes a major health hazard in Concourse B at Denver International Airport.
"I guarantee you this is the last thing the CEO of IBM wants to think about," says Robert Hartwig, chief economist for the Insurance Information Institute (III). IBM's problem will quickly entangle other companies as well, he notes, because "a mold suit like this often ignites a chain of litigation," eventually involving a building's designer, for example, or the maker of construction materials.
In fact, these lawsuits could make the threat of mold-related litigation more real for just about any company with walls, ceilings, and floors. "It's not a big stretch from thinking about mold at home to [thinking about] mold in an office," says Ira Whitman, a former Ohio state environmental-protection official who now runs The Whitman Cos., an environmental-management firm. Mold and other water-damage issues now consume about 60 percent of the indoor environmental group's time, up from 5 percent in 1998, although so far all of Whitman's clients have been associated with commercial or public buildings.
Stand-Alone Coverage
What makes this so worrisome for companies is that insurance for mold damages is largely unavailable. After a huge rise in mold-related homeowner claims during the past three years, mainly in Texas, California, and Florida, property/casualty insurers moved to exclude damage from mold, microbial matter, and fungi from environmental policies.
The tipping point in mold litigation is the case of the Ballard family, who eventually abandoned their expensive but mold-filled home in Dripping Springs, Texas, after the husband, an investment adviser, became seriously ill. In the well-publicized case, the family sued Farmers Insurance Group, claiming it had mishandled claims over the years.
The jury found that the insurer had acted in bad faith, and awarded damages of $32 million. Although that amount was recently sliced to $4 million, it raised eyebrows. "If people were being awarded $3,000, we wouldn't be having this conversation," says Hartwig. It's the prospect of big-ticket awards from juries that attracts most attorneys to the issue, he says.
These days, even when companies can get coverage for mold, it's as a stand-alone policy with a high premium. Whitman himself has had his insurance hiked significantly to reflect mold-related changes in coverage.
And he's one of the lucky ones. Insurance brokers estimate that 15 to 20 percent of formerly covered companies have sought to restore mold coverage via stand-alone insurance, and they aren't sure how many have been successful so far. Companies with a history of mold problems may not be eligible for coverage at all. Any company that is covered should adopt strict measures for preventing mold, or treating it if it appears, and must communicate those measures to employees. Further, to cover specific mold-related needs, "you have to buy the right insurance, and you have to meet the triggers of the policy," notes Julie Hespe, chief underwriting officer for AIG Environmental, a unit of American International Group and the oldest and largest writer of environmental policies.
When companies do get the coverage, the total premiums are generally pegged at between 2 and 10 percent of the coverage limit chosen. Russ Nassof, president of Phoenix-based Environomics, which handles mold-related claims for both insurers and their clients, says that while some companies have chosen to go without the coverage, others vulnerable to mold claims feel forced to try to obtain a policy. Besides AIG, those writing mold policies include Chubb, the Gulf Insurance Group unit of Travelers, Liberty Mutual Insurance, XL Capital of Bermuda, and Zurich Financial Services Group.
A Texas "Export"
"Over the past two years," says Rachel Jakubovitz, senior resource consultant for Willis Environmental Practice, a unit of insurance broker Willis Group Holdings, "the situation has morphed to where underwriters can finally get their arms around the coverage, and can offer it." In part, she believes that is because litigation recently "hit a plateau."
An explosion of new claims and big losses in commercial buildings, or heavily publicized jury verdicts, could change all that. Also, estimating the cost of cleanup has continued to be problematic for insurers, since few standards now exist in that area.
Texas has been the real hotbed of most litigation so far. Claims there have been huge, running well into the billions in 2002. But Texas's peak month was July 2002, when 24,383 claims were paid, resulting in $215.4 million in losses, according to the III. Still, the moderate decline in claims in the succeeding months, suggests Hartwig, is hardly a promising sign for insurers. Only half-jokingly, he says he sees attorneys "exporting" their mold-related litigation — especially moving to file more claims against commercial defendants in other states — now that they have worked through the Texas home-insurance market.
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