Contractors are the target of nearly 2,000 mold-related lawsuits annually according to a 2003 report from toxlaw.com. When accused of or sued due to mold related injuries or damages, contractors look to their commercial general liability policy to finance their defense and pay any judgment levied against them.

Previous articles focused on the four commercial general liability coverage triggers, the definition of an "occurrence" and whether the commercial general liability policy extends coverage for injury or damage arising out of defective construction. Commercial general liability coverage for bodily injury and/or property damage caused by mold is the topic of this final installment.

Triggering the Need for Coverage

Mold can cause respiratory infections, hypersensitivity in those not normally prone to allergic reaction, infections and possibly death. Additionally mold growth can lead to structural damage, destruction of non-structural real property and the decay of personal property.

Statutes in most states hold the general contractor ultimately responsible for the finished product, regardless of who did the actual work. Agents representing general contractor clients will be called upon to find a source of funds to defend or pay on behalf of these clients when charges of bodily injury and/or property damage caused by mold or leveled.

Before jumping into the coverage review, a quick lesson on mold is a necessary. Understanding the cause of mold may assist in understanding coverage provisions.

Mold Basics

Food, optimal temperatures and water (the mold triangle) must be present for mold to develop, take root and grow. Like the fire triangle, remove any side of the triangle and mold cannot exist or prosper.

Food sources are plentiful in new construction and remodeled structures. Mold thrives on the organic materials present in most building materials including wood (cellulose) and fiberglass insulation. The optimal temperature to incubate and support mold growth is between 60 degrees and 80 degrees Fahrenheit (lower and higher temperatures also allow the establishment and growth of mold). Little can be done on a construction site to avoid these two sides of the mold triangle. Food sources and optimal temperatures (especially in spring and summer months) are unavoidably present.

Proximate Cause

Water infiltration may be the only mold growth factor the contractor can control. Removing moisture from the mold triangle eliminates the possibility of mold, but efforts to block out water often fall short. When mold "takes root," investigating the incident that allowed the water to infiltrate will likely point to the proximate cause of the injury or damage.

Proximate cause is the incident or occurrence (as defined) that leads in an unbroken chain of events to the injury or damage. In short, what lead to the water's presence? The proximate cause of water infiltration can and will impact the CGL coverage.

Once construction is complete there are essentially three sources for the presence of water in areas where it is not intended: 1) the use of defective construction techniques or materials (i.e. improper flashing, poor sealing methods, use of improper materials, etc.); 2) an occurrence or incident causes damage allowing the introduction of water; or 3) the normal wear and tear of building materials leading to the seepage of water into the structure. Only the first is controllable by the contractor.

Only when the proximate cause is controllable by the contractor can they be held legally liable for bodily injury or property damage caused by mold; but will the CGL be the financing mechanism to defend and pay the claim? The following paragraphs will offer an opinion on the availability of coverage in the commercial general liability policy.

Property Damage Coverage

As stated, poor and shoddy workmanship does not qualify as an "occurrence." If the proximate cause of the mold is defective construction methods there must be an accident or repeated exposure to the same harmful condition exploiting the poor construction methods or materials to trigger any expectation of coverage in the commercial general liability policy.

Mold damage ensuing from substandard means of construction MAY be considered an "occurrence," but it is just as likely to be considered the result of an intentional action, or inaction, of the insured contractor. Intentional acts are specifically excluded.

Two exclusions will likely preclude property damage coverage if the mold damage meets the definition of an "occurrence:"
• Damage to Impaired Property or Property not Physically Impaired; and
• Damage to "Your Work."

Both exclusions were detailed in the construction defect discussion. Effectively, they combine to preclude coverage for any property damage to the insured contractor's completed work resulting from defective construction practices and/or mold damage. But these exclusions don't necessarily remove coverage for damage to personal property owned by the building owner or homeowner, or damage to work done by another contractor.

Personal property of others and the work of another contractor damaged during construction are excluded by the "Impaired Property" and the "j.(4)" care, custody and control exclusionary wording. But neither excludes damage to personal property or other real property once construction is complete.

Only damage to the work of the contractor is excluded by the "Your Work" exclusion. For example, if the flooring subcontractor's work results in mold damage to the flooring and the drywall, only the damage to the flooring is excluded by the policy; the mold damage to the drywall may be covered by the flooring contractor's unendorsed CGL for two reasons: 1) the drywall is not the flooring contractor's work and 2) there is no specific exclusion for mold damage in the commercial general liability policy (mold is not considered a "pollutant," so that exclusion does not apply).

Subcontractors may be extended coverage for property damage in the unendorsed commercial general liability policy. However, the general contractor's coverage may not be as broad depending on the definition of their "work." If the CG 22 94 (Exclusion-Damage to Work by Subcontractors) is attached, the entire structure is the general contractor's work and no structural property damage will be covered.

Damage to personal property of others may be covered under any contractor's commercial general liability policy. Provided all four requirements for coverage are satisfied.

Bodily Injury

Bodily injury arising out of the presence of mold is not excluded in the commercial general liability policy. The only caveat is that the mold must be the result of an "occurrence" as defined and detailed previously.

In short, bodily injury claims resulting from the growth and proliferation of mold will be covered provided all four coverage triggers are satisfied:
1) There is "bodily injury;"
2) The bodily injury results from an "occurrence;"
3) The insured is held legally liable; and
4) The injury or damage is not the result of a specific exclusion, an excluded action or an excluded cause.

Whoa! Not So Fast

ISO has promulgated four endorsements that exclude or severely limit the coverage for injury or damage caused by mold. Two are intended for use with the commercial general liability policy and two are designed for the Owners & Contractors Protective Liability (OCP) policy form.

Both the CG 21 67 (used with the CGL) and the CG 31 31 (for the OCP) entitled "Fungi or Bacteria Exclusion" completely exclude coverage for bodily injury or property damage as follows "…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." The policy goes on to exclude any cost to test for, monitor or clean up such fungi or bacteria.

Two other endorsements severely limit the amount of coverage available for mold or fungi damage. Both the CG 24 25 (used with the CGL) and the CG 31 32 (attached to the OCP) are titled "Limited Fungi or Bacteria Coverage." These endorsements specify an annual aggregate limit of coverage available for claims resulting from mold or fungi. Limits are usually minimal ranging between $10,000 and $100,000 in the aggregate.

Underwriters most often use the total fungi or bacteria exclusions to avoid any exposure from mold claims. If the underwriter cannot be convinced to remove the total mold exclusion, negotiate the limited form; at least the insured will be granted some coverage.

Conclusion

This series has touched on several standard exclusions and endorsed exclusions related to mold and defective construction of which agents should be wary. These should be removed when possible:
• CG 22 94 - Exclusion-Damage to Work by Subcontractors;
• CG 21 67 - Fungi or Bacteria Exclusion (for the CGL);
• CG 31 31- Fungi or Bacteria Exclusion (when the OCP is used);
• CG 24 25 - Limited Fungi or Bacteria Coverage (used with the CGL); and the
• CG 31 32 - Limited Fungi or Bacteria Coverage (attached to the OCP).
The Limited Fungi or Bacteria Coverage endorsements are acceptable if they are the only way the underwriter will agree to provide coverage for damage caused by mold. Otherwise, completely removing the mold exclusions is the preferred direction.

Mold and defective construction claims and litigation ebb and flow with media reports and high jury awards. But regardless of the external causes, agents must always arm themselves with knowledge of the exposures and coverage provisions. A close review of your contractor client's policies to confirm no unknown or unwanted exclusions is required. If the contractor is concerned about mold exclusions, separate mold coverages are available from many specialty markets.