How To Manage Your Mold Liability

January 22, 2003
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CONWAY, S.C. — What can contractors expect from their liability insurance as far as mold coverage goes? “I do not have good news for you,” said J. Hamilton Smith Jr., Esq., of Young, Clement, Rivers & Tisdale, LLP, Charleston, to a group of contractors here.

Traditionally, contractors protect themselves from claims for bodily injury and property claims by general liability insurance, and from claims for work defects with bonds. Much has changed, at least as far as mold goes. Insurance offers little to no liability protection, and bonds, none at all.

Of course, contractors need to discuss these topics with their attorneys and insurance agents.

The bottom line on mold liability coverage, said Smith: You probably can’t get coverage, but you should at least try to get some.

“The law is a complex beast,” he said. “In simplified terms, [the policy cancellations are] a knee-jerk reaction on the part of insurance companies.” That doesn’t change the fact that mold coverage isn’t largely available.

Are negotiations possible? “You have no bargaining power,” said Smith. Keep in mind, however, that ambiguous terms in policies can be resolved in the insured’s favor.

Mold Exclusions

Most insurance companies are excluding mold due to the cost of legal defense, the number of judgments and settlements, and lack of knowledge on the subject, Smith explained.

In addition, there are no federal or state standards on acceptable levels of mold exposure. Nor are there widely accepted standards/ procedures/methods of mold remediation, he said.

In some cases, Smith said contractors are filing bad-faith suits against their insurance companies for not living up to terms of the contract. However, most exclusions are very difficult to fight.

In “absolute” or blanket exclusions, unambiguous exclusions (“under no circumstances …”) are enforceable. Absolute mold exclusions essentially state, “We will not cover any mold claims at all.”

Ways Around Exclusions

  • First, Smith advised that contractors look at all insurance “products” in the market. “Tell your insurance agent to ‘Look at every single company and tell me which one has coverage.’” Smaller companies might still offer coverage that could include mold, Smith said.

  • Look into stand-alone policies for mold, he recommended, knowing that it’s very specific coverage, and limited. “If you can find one, you will pay a whole lot for a little bit of coverage,” warned Smith. It can be very expensive, with high premiums.

  • The possibility of mold endorsements (riders) also exists. “Again, if you can find one, you will pay a whole lot for a little bit of coverage,” said Smith.

  • Another way is getting an addition to liability, which is similar to getting a stand-alone policy.

  • If you look into pollution legal liability endorsements (riders), they probably will exclude mold anyway. They also have specific mold exclusions.

    If the company doesn’t have specific mold exclusions, general policy coverage could have exclusions and definitions that may limit mold coverage. Smith called these a “quagmire of legalese.” You may need the guidance of a lawyer to get through them.

    Bottom line: Even if your general liability policy (GLP) doesn’t have a specific mold exclusion, its standard exclusions and term definitions may limit mold coverage. Basically, Smith said, a GLP will cover personal injury or property damage to a third person that is caused by the insured’s negligence. There are exceptions and exclusions to this general rule.

    Also, each policy needs to be interpreted and read using its own language and definitions. “Sit down with your attorney and go through your policy,” Smith said. “Have him explain the definitions.”

    A mold claim may or may not be covered, depending on how certain words are defined in your policy, he continued. Therefore, when looking at a policy, discuss definitions of words defined in the policy with your attorney for possible meaning and application to mold issues.

    Here are some general definitions:

    Occurrence — Something that just happens. A broad definition of occurrence is the most favorable.

    Property damage — Again, look for a broad definition.

    Bodily injury — Look for a broad definition.

    Pollution/pollutant — Look for narrow definitions. In this case, the narrower, the better.

    Your work/product — In essence, you want these to be narrow definitions.

    Here are some definitions of exclusions as they relate to mold:

    Pollution — The good news is that some states have addressed this issue and found that mold does not fall under pollution exclusion. The bad news is that in response to this, insurance companies are now defining “pollutant” and “pollution” to include mold and mold spores.

    Your work/product — Bodily injury and property damage are covered in the general contract; faulty work is not. “It’s not a surety for your work,” Smith said.

    Punitive damages — Actual damages reimburse for the actual cost to replace a sofa, etc.; punitive damages are levied to teach someone a lesson. “Get covered for punitive damages if you can,” said Smith. “That can be a big hit.”

    Tips To Consider

    Smith suggests you ask your insurer about:

  • Miscellaneous insurance tips, such as liability umbrella coverage;

  • Contractual indemnity coverage (get a specific clause or policy for this coverage);

  • Mold certification and training; “Show them you participated,” said Smith. Some insurers require this training before writing a stand-alone policy or endorsement. “Y’all being here is helping you in more ways than you think,” he said to the contractor members of the South Carolina Association of Heating and Air Conditioning Contractors.

    Don’t forget to read all policies with your attorney; get him or her to explain their possible meaning, Smith advised.

    The consequences of not having any type of mold liability insurance, he added, is that the contractor can be held liable for damages and must provide his own defense.

    “A corporate shield can protect you,” Smith said. “They can’t take away your house or car. I would advise you getting one. But it’s not impervious.”

    Smith emphasized that insurance “probably will not offer you very much protection from mold claims. There’s still coverage out there, but it’s going away quickly.

    “Your insurance agent and attorney are your only hope when it comes to obtaining insurance coverage,” if it’s possible.

    First, talk to your insurance agent, who is the expert on insurance products, Smith said. Then talk to your attorney, the expert on what the policies might mean.

    Here’s what can be done, according to Smith:

  • “Do good work and document it.”

  • Lobby the state legislature and U.S. Congress for legislation defining acceptable levels of mold, and for legislation requiring coverage for mold.

  • Create your own insurance company. Some contractors laughed, but this actually can be done in some cases. It’s called a captive insurance company.

    Finally, don’t give up hope. “The pendulum will swing back.”

    Publication date: 01/27/2003

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