$3M Ohio Mold Decision Kindles Coverage Questions

May 19, 2008

Insurance professionals took note recently when a Franklin County, Ohio judge awarded $3 million plus legal costs to a family whose central-Ohio home became overrun with toxic mold, presumably caused by the contractor’s defective construction techniques and means.

Immediately insurance professionals at MyNewMarkets.com and elsewhere begin considering the coverage implications involved in: 1) mold claims and 2) construction defect claims. Is there any chance coverage is available in this or any homebuilder’s/contractor’s commercial general liability policy?

Without having the details of this particular case or of the subject builder’s insurance policies, it is difficult (actually impossible) to discuss the specific details of this case. However these two general liability “hot topics” can be explored from the information available even without the particulars.

Triggering Coverage in the CGL

Before considering these coverage issues, it is helpful to step back and affirm an understanding of the commercial general liability policy’s coverage triggers. For coverage to apply to any Coverage “A” (Bodily Injury” or “Property Damage”) claims in the CGL:
1) There must be “bodily injury” or “property damage;”
2) The bodily injury or property damage must be the result of an “occurrence;”
3) The insured must be legally liable; and
4) The injury or damage cannot be the result of a specific exclusion, an excluded action (an intentional act for example) or an excluded cause (i.e. by an automobile); nor can there be any applicable statutory limitations precluding coverage (i.e. statute of limitations).

Half Way There

In the subject case, a successful argument can likely be made that there was some extent of property damage caused by the mold and the poor construction methods, and potentially even long term bodily injury from the inhalation of the toxic mold. Further, a judge has made a bench statement that the builder is legally liable. Two of the four tests have been satisfied, half way to coverage being available. Yet to be satisfied are the questions: was the injury/damage caused by an “occurrence,” and are there any applicable exclusions?

Qualifying “Occurrence?”

Was the bodily injury or property damage caused by an “occurrence?” The standard ISO commercial general liability form defines occurrence as: “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

“Accident” carries with it the implied application of definite in time and place, and unintended. The second part of the definition has the potential to lead the reader down several different paths (and has done so in different jurisdictions) because of the word “including.”

“Including” within this definition can be interpreted to mean injury as a consequence of simply being around a harmful condition. Such as one or a few individuals suffering bodily injury simply from living near a chemical plant. Further, the injury occurs regardless of the fact that all control systems are working properly and chemical concentrations are well below prescribed levels. The broad view of the term may consider this an “occurrence” simply because the injury resulted from continuous or repeated exposure….

This is a misapplication of the intended meaning of “including.” For there to be a true “occurrence,” by definition, there must first be an accident leading to injury. Simply being exposed to the chemical plant is not enough to satisfy the definition of an occurrence. A sudden and unexpected incident must take place causing the release of chemicals leading to injury or damage in an unbroken chain of events for there to be a true “occurrence.” It’s a question of cause and effect, but there must be an initial cause/incident.

How does each potential claim in the subject case measure up to this defined requirement? Is it an “occurrence?”

Construction defect claim: The news account stated that the south side of the house wasn’t attached to the foundation, incorrect windows were used, and the waterproofing was done incorrectly. Yet, all these “wrongs” can be considered definite in time and place (the waterproofing was incorrectly installed on Tuesday), and the shoddy work may have even been unintentional (the contractor did not realize the foundation had not been attached).

But still, do these actions individually or even collectively qualify as an “occurrence?” Published point/counterpoint arguments differ as to the answer to this question. But for sake of the overall discussion, if the actions and results were unintentional and if the combined damage can be traced back to a particular incident (not to the work itself) that initiated the process, then these do qualify as “occurrences.” Water penetrating the improperly installed waterproofing would be an example of such an incident.

To be clear, the poor quality work (or the defective construction) is not and does not by itself qualify as an occurrence. There must be an accident causing injury or damage. Like the previous example of just living near a chemical plant, the fact that poor work was done does not constitute an accident; some incident must exploit the existing condition for there to be an “occurrence.”

Mold damage claim: Short of using a defective product from the building supply company (which would allow for subrogation), the mold growth can almost certainly be traced back to a particular incident or the first in a line of incidents (repeated exposure). For example, it could be that the rain and water seeped through the windows (which were the wrong size) allowing the growth of mold to begin. The occurrence may be considered the initial inclusion of water into the structure AND the continuous exposure to unwanted water – collectively an “occurrence.” Again, it must be an unintentional action leading to unintended damage caused by an incident occurring or beginning at a definite time or place. The mold damage appears to meet these criteria.

Both defective construction and mold damage caused by action of the contractor have satisfied three of the four coverage trigger tests. Coverage may yet be available from the CGL to pay for or defend against these claims. The last remaining hurdle: are there any exclusions that apply to the injury or claim?

To this point I have given my opinion (which includes the opinions of several well-respected insurance professionals, even some with whom I disagree), now I want yours.

Just a few points to remember regarding policy exclusions related to mold damage: mold does not meet the definition of a “pollutant;” and there are at least two general liability exclusionary endorsements specifically dealing with mold. Feel free to make a case for excluding mold damage from the existing standard exclusions, and if your carriers use any non-ISO exclusionary wording, please pass that along (you do not have to use the company name).

For construction defect claims, look at the standard exclusions found in the CGL. Also, if any of your carriers use their own forms to exclude or limit coverage for this exposure, include that information as it could be important to everyone.

Rules and Conclusion

Your comments and points are a necessary part of this on-going discussion, but there are a few rules to keep in mind in posting your replies:
1) Support your point with policy language and/or claims;
2) Use examples where you feel it is necessary;
3) Don’t make personal attacks on anyone else. Their opinion is as valid as yours, and may, in fact, be right;
4) Don’t take a differing view personally; and
5) No advertising.

All the posts will be important and relevant to the entire insurance community as we work to do a better job for our clients. Who knows, you may change your mind or convince another person to change theirs.

After several days, there will be a follow up article recapping the posts and the findings. Regardless of the outcome we will all be better able to analyze these specific liability questions and liability issues in general.

Questions of coverage applicability for both types of claims have been debated for some time now; the debate will continue long after this discussion; but maybe this will be a means to better understanding for all parties involved. We all look forward to your responses.

Boggs is associate editor of www.MyNewMarkets.com. He can be reached at cboggs@mynewmarkets.com.

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