Foundation Research Series

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Foundation of the Wall and Ceiling Industry

803 West Broad Street, Suite 600

Falls Church, VA 22046

Phone: (703) 534–8300

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Fax: (703) 534–8307

E-mail: [email protected]

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Web Site: www.awci.org

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Prepared for the

Foundation of the Wall and Ceiling Industry

by

Burr & Forman One Georgia Center Suite 1200

600 West Peachtree Street Atlanta, Georgia 30308 Phone: (404) 815–3000 Fax: (404) 817–3244 Web Site: www.burr.com

No part of this publication may be reproduced in any form by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher. Published by The Foundation of the Wall and Ceiling Industry, 803 West Broad Street, Suite 600, Falls Church, Virginia, 22046. (703) 534–8300. Price: $10.00 August 2003

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Preface

Foundation of the Wall and Ceiling Industry

In the late 1970s, there was a clear recognition among industry leaders for the need to unite and expand the educational and research activities available to contractors, manufacturers, distributors and the public, in general. At the time, there were many issues facing the industry—from a national energy crisis to injuries in the workplace, to unsafe buildings occupied by the public. In response to these issues, the Foundation of the Wall and Ceiling Industry was formed in 1977 with the follow-ing mission statement as an IRS designated non-profit 501(c)3 corporation to pursue educational and research activities benefiting the industry and the public at-large:

The Foundation’s mission is to be an active, unbiased source of information and education to support the wall and ceiling industry.

To fulfill this mission, the Foundation owns and maintains the largest independent library serving the wall and ceiling industry, provides educational scholarships for those pursuing careers in engi-neering, construction and design, provides research support to industry inquiries and publishes research papers.

To obtain additional copies of this research paper or to learn more about the Foundation of the Wall and Ceiling Industry, please contact

The Foundation of the Wall and Ceiling Industry 803 West Broad Street, Suite 600

Falls Church, Virginia 22046 Phone: (703) 534–8300 Fax: (703) 534–8307 E-mail: [email protected]

Important Notice

Mold Litigation: Prevention and Defense is published as a public educational service by the

Foundation of the Wall and Ceiling Industry. This publication does not provide legal advice, is not a “do it yourself ” guide to mold lawsuits and disputes related to mold, is not a substitute for quali-fied, experienced legal counsel, and does not attempt to address the numerous and unique factual issues which inevitably arise in such lawsuits and disputes.

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Introduction

Mold has become one of the hottest topics in tort and construction litigation. Fueled by a few large jury verdicts and many huge claims, constant media attention and aggressive plaintiff ’s attorneys, “toxic mold” lawsuits continue to spread and mold-related claims have shaken the construction and insurance industries. Every player in building construction and building maintenance and opera-tion-owners, contractors, subcontractors, suppliers, engineers and design professionals-must view the risks of mold litigation seriously and actively minimize such risks.

This publication reports the key issues in typical mold-related lawsuits and why “toxic mold” litiga-tion is so prevalent. The discussion covers

■ the anatomy of typical mold claims,

■ how to defend against a mold claim and, most importantly,

■ preventative measures that the subcontractor can employ to protect against the threat of a

mold-related claim and the potentially enormous liability.

The latest developments in state and federal legislation are included. Finally, insurance coverage for mold-related claims is addressed, with particular attention to the subcontractor’s primary “litigation defense” insurance, the commercial general liability (or “CGL”) policy.

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Mold Litigation—Past, Present and Future

Considering the dramatic increase in the number and dollar value of mold-related claims and the corresponding media attention, one might think that mold is a recent phenomenon. However, nei-ther mold itself nor its involvement in construction defect litigation are at all novel.

To the contrary, mold is merely one type of fungus that has always been present whenever three conditions are present: a food source (potentially including any organic material), moisture and suit-able temperature. In addition, the occurrence of mold in buildings exposed to moisture infiltration during or after construction is by no means a recent construction litigation issue. Many past con-struction lawsuits or arbitrations included claims that a concon-struction defect permitted moisture to collect within the structure thereby encouraging the growth and spread of mold on materials that serve as food source and requiring the remediation or replacement of part of the building.

Understanding why “toxic mold” litigation is different, so prevalent and well publicized today is key to avoiding and resolving potential liability.

Why Are “Toxic Mold” Claims Becoming So Prevalent?

Commentators assert that the dramatic increase in the number of mold-related lawsuits can be attributed to reasons such as the following:

■ advanced energy conservation construction techniques that tighten building envelopes and

thereby drastically hinder the escape of water and moisture;

■ proliferation of building materials containing organic sources that serve as a prime “feeding

ground” for, and encourage the spread of, mold;

■ inadequate, insufficient or improper design details, especially in areas where water intrusion is

likely to occur such as roof angles, eaves and building penetrations such as windows and doors;

■ HVAC system design, installation, maintenance and operating practices that result in failing to

control movement of water vapor;

■ shorter construction schedules that sequence finish work before the interior environment can be

conditioned; and

■ inadequate, insufficient or improper protection of construction materials, particularly interior

finishes materials, from the weather or water-based construction processes.

There can be no doubt that these factors have contributed to a rise in mold-related issues in con-struction. However, personal injury is what differentiates “toxic mold” litigation from litigation regarding damage to the building and its contents. Personal injury is the stimulus that ignites media attention, litigation frenzy and large verdicts or settlements.

Media Attention. The significant media attention devoted to mold-related claims has exacerbated

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Section 1

directed to construction, attorney and insurance audiences) and television news programs focused national attention on the issue of the purported health effects of mold. Public celebrities have even stepped into the mold litigation arena with personalities such as Ed McMahon and Erin Brockovich filing mold-related lawsuits. The result has been to create a fear among homeowners and now increasingly among building maintenance personnel and occupants.

Large Jury Verdicts. Of course, the large recoveries being sought (and on occasion obtained) by

plaintiffs in mold-related claims, not only for property damage and remediation but for personal injuries alleged to have been caused by exposure to mold, have encouraged plaintiffs’ attorneys to file lawsuits. Some examples are provided in the chart below.

Verdicts and Settlements

Consider the following verdicts and settlements:

In what is probably the most frequently cited mold exposure case, a woman in Texas was awarded $32 million in an action against her homeowner’s insurance carrier arising out of the carrier’s bad faith han-dling of her claim for mold exposure and remediation.i

In Florida, the Florida District Court of Appeals affirmed a verdict in excess of $14 million in a suit brought by Martin County, Florida, against the construction manager responsible for the construction of a county courthouse arising out of the presence of mold.ii

In Delaware, a jury awarded four tenants more than $1 million as com-pensation for the plaintiffs’ claims of personal injuries associated with exposure to “toxic” molds in the defendant’s apartment complex. The Delaware Supreme Court upheld the award.iii

The owners of a house in California sued the sellers, alleging bodily injuries and property damage as a result of mold exposure. The suit settled for $1.35 million.

i_{The Texas Supreme Court recently reduced the plaintiff’s $32 million verdict, which}

included approximately $18 million in punitive damages, to approximately $4 million with instructions for a further hearing to determine the reasonable amount of the plain-tiff’s attorney’s fees.

ii_{Centex-Rooney Const. Co. v. Martin County, 706 So.2d 20 (Fla. Dist. Ct. App. 1998).} iii_{See New Haverford Partnership, et al. v. Stroot, 772 A.2d 792 (Del. 2001).}

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Lack of Scientific Data Linking Exposure to Mold to Serious Illness. The lack of established and

reli-able scientific data that links or disproves any link between “toxic mold” and serious health hazards has not stifled the proliferation of mold-related lawsuits. Of the tens of thousands of separate species of mold, only a few so-called “toxic molds” are blamed for serious health effects and the scientific basis for such claims is unproven.1_{Despite the claims and differing medical views, the only documented health effect of}

molds is that allergies and asthma symptoms can be exacerbated in some persons.2

Notwithstanding the lack of established scientific data, plaintiffs in “toxic mold” lawsuits have claimed a wide variety of personal injuries, including:

■ Respiratory distress/infection. ■ Chronic headache.

■ Episodic vertigo.

■ Depression/malaise/“fog.”

■ Inflammation, rashes on the face, eyes, throat. ■ Compromised immune systems.

■ Tintinitis. ■ Lethargy.

■ Acute abdominal pain.

■ Central nervous system and brain injury. ■ Cancer.

Such personal injury claims create the potential for high damages, including not only medical expenses but claims for medical monitoring and periodic examinations, emotional distress damages, damages from fear of future illness and punitive damages. As discussed in greater detail below, suc-cessfully defending mold-related claims requires expertly responding to such personal injury claims.

Lack of Applicable Guidelines and Exposure Limits. Despite the rapid increase in the number of

mold-related claims and lawsuits, there are no federal guidelines concerning mold remediation or mold exposure limits. In addition, only two states have adopted guidelines concerning mold expo-sure.3_{As a result, there is little or no guidance available to courts (or the construction industry) for}

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The Critical Role of Medical and Expert Evidence

The potential for claims of personal injury makes medical and scientific evidence the primary issue in “toxic mold” litigation. The most significant litigation issue is whether the plaintiff ’s injuries were caused by mold. However, the courts do not agree on the admissibility of evidence on such issues. The outcome of any mold exposure case involving personal injury or health claims depends in large part upon the testimony of expert witnesses. Plaintiffs must retain experts, often at a significant cost, to establish the causation aspect of the case. The plaintiff ’s expert witness must be able to testify that, in his opinion, the plaintiff ’s alleged injuries were caused by continuous and repeated exposure to the toxic mold. To rebut this testimony, the defendant must also retain an expert witness. Expert witness-es in a toxic mold case can include mycologists, microbiologists, industrial hygienists, neuropsycholo-gists, immunoloneuropsycholo-gists, toxicologists and occupational and environmental medical doctors.

In fact, it is difficult to establish that personal injuries are caused by mold with currently available data. Though mold has been linked to allergic reactions, the claim that mold is “toxic” is question-able and there are no established standards by which to determine “safe” exposure levels or any med-ically reliable ways to establish a causal link between exposure to mold and specific illness.4

Whether an expert will actually have the opportunity to testify before a jury regarding the causation issue remains uncertain, however. The few courts that have addressed the issue of the admissibility of expert testimony concerning the link between mold exposure and bodily injury have issued differing opinions. For example, in Centex-Rooney Construction Company v. Martin County,5_{the Florida District Court of}

Appeals rejected an argument made by the defendant construction manager that the plaintiff’s expert tes-timony regarding the link between mold exposure and adverse health effects should have been excluded. The dispute in Centex-Rooney focused on the construction of a courthouse for Martin County, Fla. Soon after substantial completion of the courthouse, the county found numerous defects in the construc-tion, including exterior wall and window leaks as well as problems with the building’s HVAC system. The county also received multiple complaints of health problems from occupants and visitors of the building. The county ultimately filed suit against the construction manager, Centex-Rooney and others. At trial, the county presented testimony of two “indoor air quality” experts, who both testified regarding the link between exposure to toxic mold and the resulting adverse health effects. A jury ultimately award-ed Martin County more than $14 million in damages and interest. On appeal, the Florida District Court noted that the trial court had properly conducted Frye hearings6_{prior to allowing these experts to testify.}

Furthermore, the County’s two experts testified “about numerous publications accepted in the scientific community recognizing the link between exposure to the highly unusual toxigenic molds and adverse health effects.” Accordingly, the court held that “the County met its burden under Frye of proving by a preponderance of the evidence that the basic underlying principles of scientific evidence were sufficiently tested and accepted by the relevant scientific community.”

Not all courts, however, have similarly admitted expert testimony linking exposure to toxic mold to adverse health effects. For example, the Delaware Superior Court held in Minner v. American Mortgage and Guaranty Company7_{that testimony from the plaintiff’s experts alleging that exposure to mold caused}

certain conditions such as chronic fatigue syndrome and fibromyalgia did not meet the requisite

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dards for admissibility of scientific evidence established by the landmark Daubert8_{case. The}

Centex-Rooney and Minner cases highlight the fact that the key in practically every mold exposure/personal injury case will be the admissibility of the proposed expert’s testimony regarding causation and medical claims.

The Critical Role of Building Forensics

Even before the advent of “toxic mold” litigation, many construction industry lawsuits and arbitra-tions included issues relating to the responsibility for mold that damaged the building or its contents. The second most significant issue in any mold case, and the essential issue in any mold-related case not involving personal injury, is: How did moisture intrusion or accumulation occur in the structure and who should bear responsibility? Answering this question requires an expert forensic analysis of the pathway for moisture intrusion or causes of exposure of building elements to moisture.

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The Anatomy of a Mold-Related Construction Claim

Practically every mold-related construction claim is based on a construction defect. In essence, the plaintiff in a mold-related claim typically contends that a construction defect, whether in the actual construction or design, created a condition that allowed moisture to collect within the building, which contributed to mold growth. As the primary installer of the vulnerable interior materials (and sometimes the exterior cladding as well), the wall and ceiling subcontractor often becomes the focus of attention.

Mold litigation is often referred to as the next asbestos-like time bomb, but in fact there are critical differences diminishing that prospect. A summary appears below:

■ Lack of scientific support for injury claims. Although the causation

of asbestos by exposure to asbestos-containing substances is docu-mented beyond dispute, there is no similar scientific documentation that mold exposure causes serious health hazards of the kinds often claimed.

■ No signature disease. Asbestos-related diseases can be readily

diag-nosed. Mold has no unique disease associated with exposure.

■ Asbestos kills, mold does not.

■ No definitive biological markers for mold.

■ Mold related health effects immediately apparent. Unlike asbestosis,

which takes years to develop.

■ No established permissible exposure limits. Asbestos has specific

exposure limits established by law using scientific findings.

■ No “product manufacturers.”

■ Mold can be the result of a myriad of factors.

Mold-related claims, like other construction defect claims, often involve multiple and diverse parties on both the plaintiff ’s and defendant’s respective sides. While it is estimated that homeowner claims make up approximately 50 percent of all mold-related claims, the trend is definitely moving into larger scale buildings, including both public and private construction projects.9_{Plaintiffs in}

mold-related cases often include property owners (public and private), real estate developers, tenants, employees, school children and various other individuals whose work place may be located within a building that is claimed to be infested with mold. The range of damages alleged by plaintiffs to have been incurred is very broad and includes claims for both property damage (e.g., remediation and repair costs, and damages for loss of use of the property) and present and future bodily injury. One

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need only look to the Hilton Hawaiian Towers, a $95 million luxury hotel in Hawaii requiring mold remediation at an approximate cost of $35 million, as an example of how significant the dam-ages incurred by a potential plaintiff in a mold-related claim can be.

The range of potential defendants in a mold-related case is equally as broad. Typical defendants include owners, landlords, general contractors, subcontractors, material suppliers, architects and engineers. Depending upon the relationship of the plaintiff to the defendant, the nature of the claims asserted in the actual lawsuit varies. Potential claims include the following:

Breach of Contract

On a typical construction project, the owner will directly contract with an architect to provide for the design of the project as well as with a general contractor to perform the actual construction work. As mentioned earlier, a mold claim will likely arise from a construction defect, resulting from either poor or improper construction or poor or inadequate design of the structure. In either case, the owner can assert a simple breach of contract claim against the architect, general contractor or both, for the failure to design and/or construct the project in accordance with the agreement. When pre-sented with a breach of contract claim, the general contractor will, in turn, likely implead the respon-sible subcontractor or subcontractors into the lawsuit under a similar breach of contract theory. Defending a breach of contract claim normally requires showing, by project documentation as well as expert testimony, that the subcontractor has performed the work as designed and within industry standards.

Negligence

The term “negligence” is a term of art in the legal world and is defined as the breach of a duty owed to others to act with due care and in a reasonably prudent manner. In the context of a mold lawsuit, an owner, for example, can assert negligence claims against the architect and the contractor arising out of the failure to use due care in the design and/or construction of the project. Furthermore, an owner could assert a negligence claim directly against a subcontractor who is allegedly responsible for the condition that gives rise to the mold, even though the lack of contractual privity between the owner and the subcontractor precludes a breach of contract claim.

Defending a negligence claim normally requires showing that the subcontractor has not allowed sensitive materials to be exposed to moisture during or after construction or at least that the respon-sibility for preventing such exposure fell on others.

Breach of Express and/or Implied Warranties

Another claim commonly asserted in mold-related lawsuits is a claim for breach of warranty. As dis-cussed more fully below, a contractor typically warrants to the owner in the construction contract that the contractor will, among other things, warrant that the work will be performed in accordance with the plans and specifications. Subcontractors typically provide a similar warranty to general con-tractors. If the owner can establish that the construction defect that is alleged to have caused the

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mold problem is a deviation from what was required by the plans and specifications, then the con-tractor has breached its express warranty to the owner and is potentially liable for the damages. In addition to express written warranties, in many construction settings, the law implies certain ranties that flow from the contractor to the owner including a warranty of habitability and a war-ranty of workmanlike quality. The warwar-ranty of habitability is implied into home building agree-ments and provides that the contractor warrants that the home will be habitable and fit for its intended use. The breach of the implied warranty of habitability claim is very common in home-owner cases involving mold exposure. The plaintiffs in such cases claim that the presence of mold resulting from the contractor’s failure to properly construct the home has rendered the home unin-habitable. Likewise, the warranty of workmanlike quality is a warranty that the law implies in every construction agreement, whether commercial construction or home construction, which provides that the contractor warrants that the construction work has been performed in accordance with industry standards regarding quality and workmanship.

Defending a warranty claim is similar to defending a breach of contract claim and also requires showing, by project document as well as expert testimony, that the subcontractor has performed the work as designed and within industry standards.

Strict Liability Claims

Generally, strict liability claims apply only in the context of defective products that cause bodily injury. Thus, the applicability of strict liability claims in a mold-related lawsuit is somewhat limited. However, if the plaintiff can establish that a certain product fostered or encouraged the growth of mold, then the plaintiff can assert a strict liability claim against the manufacturer of the product. Defending against a strict liability claim normally involves demonstrating that the end user of the product has been instructed in its proper use and warned of any risks associated with improper use or implementation.

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Effective Responses When Litigation Strikes

After a mold claim has been brought, defendants must take effective steps to reduce or avoid liabili-ty. These steps are dictated by the two key issues in typical mold cases: (1) whether plaintiffs’ injuries are caused by toxic mold and (2) whether defendant is responsible (in whole or in part) for the defects or omissions that result in the moisture conditions leading to mold growth. Depending on the litigation path taken with issues (1) and (2), other response strategies include shifting liabili-ty, contesting damages, using appropriate methods of dispute resolution and inducing opportunities for settlement.

Choose the Right Experts

Responding to either of the two key issues in mold litigation cases requires the appropriate and effective use of experts to examine the building and the plaintiff ’s medical evidence.

The inherent weakness in a mold-related personal injury claim is causation, that is, scientific evi-dence to support the assertion that mold caused the plaintiff ’s ill health and the lack of a

dose/response relationship between mold exposure and symptoms allegedly caused by mold. Plaintiffs may claim that they suffer from “multiple chemical sensitivity,” “ecological illness,” “sick building syndrome” or “building-related illness.” These alleged medical conditions are controversial and defendants should argue that the scientific evidence underlying them does not meet the stan-dard of admissibility. The following kinds of experts are key to defending the mold claim:

Industrial Hygienists. Conduct sampling to identify the source of the mold or provide a reasonable

basis to question an alleged source. May also identify appropriate remediation procedures.

Mycologists. Scientists who specialize in fungi and molds can break alleged “cause and effect”

between particular “toxic” mold species (only about 25 of thousands) and various ailments.

Construction Experts. Mold cases are based on allegations that construction defects allowed water

and moisture to seep into a building’s interior, providing a condition for mold growth. Construc-tion experts can inspect and provide commentary relative to a building’s design, construcConstruc-tion and soundness and source of moisture.

Toxicologist/Occupational MD. Medical experts can address the lack of any scientific evidence

link-ing exposure to mold to alleged health effects.

Showing that mold caused personal injury should be difficult given the realities of mold growth and the current state of science. Therefore, defendants should analyze the plaintiff ’s assertions of causa-tion with a critical eye.

Insurance

Defendants faced with a mold claim should promptly notify their insurance carriers to avoid “late notice,” prejudice or waiver of coverage defenses by the insurer. Before notifying an insurer, defen-dants should consider whether there is any basis for arguing that mold is not covered by the policy.

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Others Who Are Responsible

In many cases, there will be third parties that could be wholly or partially responsible for existence or persistence of the mold. Evaluate the efforts that might have been taken by other parties to avoid mold growth and implead those parties who could have but failed to take those steps.

Punitive Damages

Punitive damages are often sought in mold lawsuits that involve personal injury claims. A key recent decision of the United States Supreme Court now has placed some limitations on and defined the criteria applicable to awards of punitive damages. State Farm Mut. Auto. Ins. Co. v. Campbell, 123 S. Ct. 1513 (2003). The Supreme Court held that an award of $145 million in punitive damages on a $1 million compensatory judgment in an automobile accident lawsuit violated due process because the award was neither reasonable nor proportionate to the wrong committed. Therefore, it was an irrational and arbitrary deprivation of the property of the defendant. State Farm at 1526. Although the Supreme Court declined to impose a concrete constitutional limit on the ratio between harm to the plaintiff and the punitive damage award, the court did state that few awards exceeding a single-digit ratio between punitive and compensatory damages (i.e., 1 to 9 or less) would satisfy due process. The most important indicia of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant’s conduct. State Farm at 1521; see BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 575 (1996) (stating three factors that courts should consider when reviewing puni-tive damage awards: (1) degree of reprehensibility of the defendant; (2) disparity between actual harm suffered by the plaintiff and the punitive damage award; and (3) difference between punitive damages award and civil penalties authorized in comparable cases.) The court also stated that a defendant’s other acts, independent from the acts upon which liability in the particular case is premised, may not serve as the basis for punitive damages. Because there are no rigid benchmarks that a punitive damage award may not surpass, ratios greater than a single digit may comport with due process where a particularly egregious act has resulted in only a small amount of economic damages. However, when compensatory damages are substantial, then an even lesser ratio may be appropriate.

Dispute and Oppose Damages

Many plaintiffs sue for pain and suffering, fear of illness or medical monitoring costs. In many states, however, these types of damages are not recoverable without accompanying physical symp-toms. Understanding the limits of a plaintiff ’s request for damages can reduce overall liability and create opportunities for settlement.

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Preventive Measures for Mold-Related Risk

Although there is no method that will completely insulate the subcontractor from mold-related risk, there are several ways that the subcontractor can prepare for and protect against such risk, both prior to and during the course of construction.

Contractual Allocation of Risk

Probably the simplest and most cost-effective method of reducing exposure to mold-related risk is to allocate certain risks through negotiation of the terms and conditions of the subcontract agreement. A subcontract agreement that properly allocates or limits the risk of mold-related liability will prove invaluable in the event a mold-related claim is later asserted by the general contractor against the subcontractor. Although the form of subcontract agreement will vary from general contractor to general contractor, all subcontract agreements contain several key clauses that affect exactly how the risk of mold-related liability is distributed between the parties. Set forth below is a discussion of sev-eral key contractual provisions along with suggestions on how the subcontractor can modify it in an attempt to shift risk away from the subcontractor.

Warranty Clause. Practically every construction agreement between an owner and a general

con-tractor contains a warranty clause. Likewise, most subcontract agreements contain similar warranty clauses or incorporate them by reference. Such clauses must be carefully reviewed to ensure that the warranty provisions are fair, equitable and do not place unreasonable obligations upon the subcon-tractor. For example, the subcontractor should pay special attention to any warranty provisions that could be construed to be either “design” or “performance” guarantees. Ultimately, the subcontrac-tor’s primary obligation under any subcontract agreement is to perform the work in accordance with the plans and specifications provided by the owner to the general contractor. The subcontractor is not a design professional, does not maintain insurance to protect against the risk of faulty or defec-tive design and, accordingly, should not be required to warrant any requirements that relate to design.

With regard to mold issues, the subcontractor should be especially wary of any warranty language, whether contained in the general contract, subcontract or specifications, that obligates him to pro-vide a “leak proof ” or “water tight” building. Assuming the design is prepared in such a manner as to provide for a leak proof building, the subcontractor should achieve such result by performing in accordance with the design documents. However, if the design is faulty and the subcontractor has installed the work per the faulty design, the subcontractor could nevertheless be responsible for mold-related damages if he has guaranteed a “leak proof ” building. Furthermore, leaks (and the ensuing growth of mold) often occur as the result of insufficient maintenance.

The subcontractor should be sure to clarify in any warranty language that its warranty excludes rem-edy arising out of improper or insufficient maintenance by the owner. For example, the subcontrac-tor could add the following language via addendum to qualify its warranty obligations:

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“Subcontractor’s warranty excludes remedy for improper or insuf-ficient maintenance (whether by Contractor or Owner), modifica-tions not executed by Subcontractor, abuse, improper use or nor-mal wear and tear under nornor-mal or abnornor-mal usage.”

In addition to express written warranties, most states recognize that contractors provide certain implied warranties in the course of construction, including the implied warranty that the structure will be habitable and fit for its intended use and the implied warranty that the work will be per-formed in a quality, workmanlike manner. Despite the law’s recognition of these implied warranties, most states allow contractors to disclaim these warranties in writing. Accordingly, depending upon the project, the contractor should consider whether to seek to include language in the agreement that limits any warranties to the express written warranty provided in the agreement and disclaims all other warranties. As an example, the subcontractor could seek to include the following language which would not only limit the subcontractor’s warranty to the express written warranty, but would also limit the general contractor’s remedy for defective materials to the manufacturer’s warranty:

“Notwithstanding any other provision of this Subcontract, the General Contractor or any other Contract Document, the Contractor expressly acknowledges and agrees that Subcontractor does not warrant the ade-quacy, sufficiency or suitability of the plans, specifications or other Contract Documents including, without limitation, any specified sole source or brand-named products, equipment or materials, and

Contractor accepts the manufacturer’s warranty as its sole recourse with regard to such items. Other than the express warranty contained in this paragraph, Subcontractor makes no other warranty whether express or implied.”

Indemnity Clause. Almost every construction agreement, whether general contract or subcontract,

contains an indemnification clause that obligates one party to hold a second party harmless from and against damages incurred by the second party arising out of acts or omissions of the first party. The language of the indemnity clause varies from agreement to agreement and the contractor is cau-tioned to review the indemnity obligations very carefully to determine the extent of the obligation. For example, consider the following two indemnity types of clauses in a general contract: the first clause requires the subcontractor to indemnify the general contractor for damages “arising out of the subcontractor’s work or presence on the project site.” The second clause obligates the subcontractor to indemnify the general contractor “only to the extent caused by the subcontractor’s negligent act or omissions.” Clearly, the first clause contains a much broader obligation.

To illustrate the difference between the two examples in the context of a mold case, consider the example of faulty or defective installation of a window in a building. Water penetrates the building envelope due to improper or missing flashing or caulking. Mold forms within the stud cavity and subsequently on the drywall, and then spreads throughout the building. Even though the mold growth is attributable to the faulty window installation, the drywall contractor could be responsible for indemnification under the first clause above due solely to the fact that the mold is growing on the drywall and, arguably, “arises out of the work” of the drywall installer. Under the second clause,

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however, no indemnity obligation would arise, as the mold growth is not attributable to any negli-gent act or omission of the drywall installer. As the financial impact of the subcontractor’s obliga-tion under the first clause above could be extremely large, the importance of reviewing and, if neces-sary, modifying the indemnity language of a subcontract agreement to ensure the proper allocation of risk cannot be over-emphasized.

Indemnity language is especially important in construction renovation or rehabilitation. The sub-contractor should pay particular attention to any contractual language that requires the subcontrac-tor to accept pre-existing site conditions and, if possible, seek to put the burden of ensuring that the condition of the site meets applicable legal requirements upon the contractor. For example, the sub-contractor could add the following language to its subcontract agreement:

“Notwithstanding any other provision of this Subcontract, the General Contract or any other Contract Document, the Contractor acknowledges and agrees that the Subcontractor is not responsible for ensuring that the condition of the Project site meets all applicable federal, state and/or local laws, regulations, ordinances or codes concerning chemical, haz-ardous or any other form of contamination including, without limitation, mold or fungus contamination, and that Subcontractor shall have no lia-bility whatsoever for the failure of the Project site to meet such laws, regulations, ordinances or codes.”

Waiver of Consequential Damages. The amount of damages that a plaintiff could assert arising

out of a mold-related claim can be astronomical. As mentioned earlier, the Hilton Hawaiian Towers in Hawaii, which was shut down for mold remediation activities, estimates that the costs to remedi-ate the mold along are in excess of $35 million. Depending upon the length of time the remedial efforts take, the lost revenue resulting from the hotel’s inability to house its guests could easily eclipse that amount. Whether the hotel will be successful in any claim against the contractor to recover its lost revenue depends in large part upon whether its construction agreement with the con-tractor contains a waiver of “consequential” damages.

Under general principles of contract law, consequential damages are defined as those damages that result from the breach of the agreement but that are not reasonably foreseeable to the parties at the time of contracting. Typically, consequential damages are not recoverable in a breach of contract action. Direct damages, on the other hand, are those damages that naturally and directly flow from the breach of an agreement and, therefore, are recoverable in an action for breach of the agreement. While the question of whether a hotel’s lost revenue would be considered direct or consequential damages is debatable (the definition of consequential damages varies from state to state), there is no question that a contractor or subcontractor who agrees to accept the risk of consequential damages is often taking on an enormous risk. In the wake of large verdicts by owners against contractors to recover consequential damages arising out of construction defects, many construction industry asso-ciations began to include mutual waivers to consequential damages in their form construction agree-ments. For example, in the 1997 version of the A-201 General Conditions of the Contract for Construction, the American Institute of Architects included such a waiver at Paragraph 4.3.10, which provides as follows:

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Section 4

“Claims for Consequential Damages. The Contractor and Owner waive

Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes:

1. damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such per-sons; and

2. damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except antici-pated profit arising directly from the Work.”

The underlying rationale for including the mutual waiver of consequential damages is that the con-tractor’s fee to be earned on the project is not large enough to justify the potential risk of incurring damages that are many times in excess of the fee. Thus, one method by which the contractor can reduce its potential liability arising out of a mold-related claim is to ensure that the construction agreement contains a waiver of consequential damages clause. The subcontractor should always seek to include as part of its subcontract agreement a waiver of consequential damages similar to the clause quoted above.

Protecting Your Company During Construction

It is essential to protect your company by alerting the owner, owner’s representative and/or general contractor when mold conditions are discovered at the jobsite during the construction process. At the same time, the implementation of an appropriate remediation program should be urged. An example of a notice letter for such circumstances appears on the next page.

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[Date] [Contractor] [Address] Re: [Job Name] Dear _________:

This is to inform you that in the [location], mold has been discovered dur-ing our work at this project. Industry standards, OSHA requirements, proper building practices and our insurance carrier will not allow our car-penters to just remove and replace affected materials. It must be removed by a competent, properly insured, and trained contractor under supervision of a competent expert advisor. We must avoid cross-contamination of the remainder of the building.

With your approval, we should proceed to implement the mold remedia-tion plan steps as agreed at the pre-job conference.

Sincerely, [Subcontractor]

Wall and ceiling subcontractors often encounter pressure from the general contractor or owner to proceed with work under conditions, such as lack of dry-in, where moisture damage and conse-quent possibility of mold has occurred or may occur. Of course, the preferable alternative is to avoid working or continuing to work under such conditions. As a fall-back, the subcontractor would be well-advised to document the instructions and attempt to shift the risk back to the contractor or owner. An example of a letter agreement for such instances appears on the next page.

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[Date] [Contractor] [Address] Re: [Job Name] Dear ___________:

Under your direction we will proceed with the installation of the gypsum board and/or shaftwall on the above project prior to dry in. In doing so, [subcontrac-tor] will not be liable for weather damage to installed gypsum board if it occurs. Should any damage occur to the installed gypsum board, contractor will compensate [subcontractor] to repair and/or replace all affected materials. Any repair or replacement will be tracked by daily work authorizations showing all time and material used for this work. By authorizing and directing us to pro-ceed, you also expressly exempt and release [subcontractor] from any long-term effects due to early installation of gypsum board or shaftwall liner, including mold and related conditions. Any and all gypsum products installed before a controlled environment is established as per the specifications are covered by this release. By signing below, contractor acknowledges agreement with the above statement. We will begin installation of the gypsum board upon return of this letter signed by you below.

Sincerely, [Subcontractor]

Contractor:___________________ Date:_______________________

Dispute Resolution Provisions

Another important contractual provision in any construction agreement is the dispute resolution clause. Most industry model form agreements such as those published by the American Institute of Architects and Associated General Contractors of America provide for arbitration—as opposed to litigation—as the primary dispute resolution vehicle. Arbitration is a binding dispute resolution process whereby the parties to the dispute present evidence and testimony to an arbitrator, or a panel of arbitrators, and the arbitrator thereafter renders a decision on the merits of the claim. In comparison to litigation, arbitration has numerous advantages including, without limitation:

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1. arbitrators who possess construction-related backgrounds and are knowledgeable about the con-struction aspects of the case;

2. arbitration is, on average, less time consuming than litigating the same dispute; 3. arbitration is, in many instances, less costly than litigation; and

4. unlike jurors, arbitrators typically are not swayed by passion or prejudice, can understand and appreciate the position of each party, and are moderate in assessing damages.

While arbitration has its advantages, it is not without disadvantages. For example, in court, whether federal or state, there are established rules of evidence and civil procedure that govern the overall process of litigation, including discovery, and the evidence that may be properly heard by the court and jury and admitted at trial. In arbitration, however, there are very few rules of evidence or proce-dure. Consequently, certain evidence that would otherwise be inadmissible at trial in a courtroom may very well be heard and admitted in an arbitration hearing.

Another disadvantage of arbitration is the limited appeal right. Every person who litigates a matter and receives an unfavorable result is entitled to an appeal of right to the appellate court of proper jurisdiction. The appealing party may cite any one or more grounds as its basis for appeal as provid-ed by common law. Appealing an award renderprovid-ed in arbitration, however, is a much more difficult task. In fact, under the Federal Arbitration Act,10_{there are only four very limited grounds upon}

which an arbitration award may be vacated or overturned. It is often difficult, if not impossible, to establish sufficient grounds for overturning or vacating an arbitration award. The rationale underly-ing the limited grounds for vacatunderly-ing an arbitration award is to advance the public policy and essen-tial purpose of arbitration, which is to avoid litigation.

Avoid Mold-Related Risk During Construction

Immediately prior to and during the course of construction, there are several steps the contractor can take to minimize the risk of becoming subjected to a mold-related claim later.11_Obviously,

pre-venting water or moisture intrusion is the primary step in construction, however, there are several other steps the subcontractor can take to accomplish this task.

Educate your Employees. Explain the facts of mold to your employees. Conduct company-wide

meetings to educate your personnel, from senior project management to field workers, about how mold forms and how it can be distributed throughout a building. Emphasize the key concepts nec-essary to maintaining a dry environment in the building during and after completion of construc-tion. There are many professional courses organized by industry and associations such as the Association of the Wall and Ceiling Industries—International. Document all employee education and training programs and attendees for future use if a claim should arise.

Mold Response Plan. As part of the pre-construction conferences, insist that the construction

manager provide a clear plan regarding how to respond to the first observation of mold. The plan should address responsibilities and authority to act. The owner, owner’s representative and/or gener-al contractor should be advised of the proper steps to follow to properly remediate mold conditions.

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Section 4

Example remediation plans are available from a variety of sources.12_{An example advisory memo}

addressed to the owner appears in Appendix C.

Mold conditions encountered on a jobsite should be treated as “hazardous substances” under sub-contract agreements, which generally require the subsub-contractor to stop work in the affected area and report the condition to the general contractor in writing. See, e.g., A1A A401-1997 at 4.3.3.

Careful Review of Design. One of the most important measures a contractor can take to guard

against creating a “mold friendly” atmosphere is to carefully review the plans, specifications and other design documents. Prior to the commencement of construction, be certain to note and raise questions regarding any areas that may invite moisture intrusion into the building envelope. If the architectural detailing is inadequate, notify the general contractor or owner and the architect and request further information. A subcontractor who rejects inadequate detailing is more likely to sur-vive than the subcontractor who simply “shrug[s] and build[s].”13

Proper Sequencing and Coordination. In today’s construction arena, exorbitant liquidated

dam-ages amounts often force contractors to guarantee delivery of projects with relatively quick, often unrealistic, construction schedules. Accordingly, the need for proper sequencing and coordination of the various trade contractors cannot be over-emphasized. Obviously, installing interior finishes prior to complete dried-in states will likely lead to moisture and mold-related problems later as will not properly conditioning the environment within enclosed buildings.

Keep Building Materials Dry. Although in concept, keeping interior building materials dry seems

simple, in practice it is not done as often as it should be done. Keeping materials such as drywall, ceiling tile, sheating and other natural building materials protected from the weather will signifi-cantly aid in reducing the potential for mold growth. If the construction documents do not provide specifics for materials protection, be pro-active and suggest that the designer account for materials protection in the specifications.

Proper Installation, Maintenance, Test and Balance of HVAC System. An allegation common

to mold exposure cases is that the contractor and/or mechanical subcontractor failed to properly install, maintain, test and balance the HVAC system at the project. Clearly, maintaining proper humidification levels within the building is essential to eliminating the moisture that encourages mold growth.

Document Proper Installation. Important to the contractor’s quality control program is properly

documenting work-in-progress. Good documentation practices will prove very helpful in the event the contractor finds itself in the middle of a mold-related claim after completion of the project. Require field supervisory personnel to document (through daily reports, photographs and even video) the installation of any components that could, if performed inadequately, later lead to water and/or moisture intrusion. Particular areas of importance include installation of windows, doors, flashing and waterproofing as well as other penetrations of the building envelope. Good documen-tation will significantly aid in establishing that the contractor has met his obligation to install the work in accordance with the design documents. It may also assist in fixing the true responsibility for any water or moisture conditions that do occur.

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Insurance Coverage for Mold-Related Claims

With the drastic increase in the number of mold-related claims, it should come as no surprise that insurers, liability and property carriers alike, are taking steps to significantly reduce their exposure to losses associated with mold. Indeed, the insurance industry has already spent an estimated $1 billion on homeowners’ mold-related claims alone and the forecast does not look better as the number of mold-related claims rise.14_{One step insurers are taking is the modification of the typical commercial}

general liability (CGL) and broad-form property policies to exclude mold-related claims altogether. The mold exclusion takes effect in new policies as well as in policies that are being renewed. At least one insurer has filed an endorsement to its CGL liability policy that excludes coverage for all dam-ages (for example, property damage, bodily injury and personal injury) “caused directly or indirectly, in whole or in part, by fungi (including mold, mushrooms or mildew) regardless of any other cause, event, material, product and/or building component that contributed concurrently or in any

sequence to that injury or damage.”15_{Additionally, more than 40 states have either approved}

guide-lines for mold exclusion language or have approved the text of mold exclusions for homeowner’s policies to be issued in their respective states.16_{A sample mold exclusion endorsement to a CGL}

policy prepared by the Insurance Services Office reads, in part, as follows: “This insurance does not apply to:

Fungi or Bacteria

a. ‘Bodily injury’ or ‘property damage’ 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 con-tents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage. b. Any loss, cost or expenses arising out of the abating, testing for, moni-toring, cleaning up, removing, containing, treating, detoxifying, neutral-izing, remediating or disposing of, or in any way responding to, or assess-ing the effects of, ‘fungi’ or bacteria, by any insured, or by any other per-son or entity.

. . .

‘Fungi’ means any type or form of fungus, including mold or mildew and any mycotoxins, spores, scents or byproducts produced or released by fungi.”17

Clearly, the language in the above exclusion is very broad and is intended to exclude all potential liability arising out of the presence of mold.

Insurers are also seeking to avoid their defense and indemnity obligations by relying upon exclusions found in the typical CGL policy. The primary exclusion upon which insurers rely is the “pollution”

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Section 5

exclusion. Fortunately for contractors and subcontractors, most courts have refused to adopt the insurers’ broad interpretation of the pollution exclusion and, therefore, have found that such exclu-sion is inapplicable to mold.

Coverage Under CGL Policy

The typical CGL policy provides insurance coverage for “bodily injury” and “property damage” that is caused by an “occurrence.” An “occurrence” is often defined as “an accident, including continu-ous or repeated exposure to substantially the same general harmful conditions.” Furthermore, to qualify for coverage, the “bodily injury” or “property damage” must take place during the applicable policy period. In a mold-related bodily injury case, however, determining exactly when the “bodily injury” occurs (for purposes of triggering coverage) is not a simple task. Accordingly, the insured must examine its state’s laws with respect to the “trigger” of coverage under a CGL policy. There are several theories regarding the trigger of coverage as it relates to a continuous exposure claim such as a mold-related claim. For example, the “initial exposure” theory holds that the date upon which the plaintiff is first exposed to the harmful condition is the date of “bodily injury” under a CGL policy. Under an “exposure” theory, the “bodily injury” takes place during the entire period that the plaintiff is exposed to the harmful condition, thereby triggering each policy in effect during the period of exposure. Under a “manifestation” theory, the date of “bodily injury” is the date upon which the plaintiff ’s alleged injuries are diagnosed or reasonably capable of being diag-nosed. Careful consideration must be given to these coverage trigger theories as they will determine exactly which policies and corresponding limits of liability will be available to protect the insured subcontractor.

Regardless of when coverage is triggered under a CGL policy, many insurers will likely be inclined to avoid providing a defense and indemnity against a mold-related claim based upon the “pollu-tion” exclusion contained within the policy. A typical pollution exclusion reads as follows:

“This insurance does not apply to: . . .

‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ ... .”

The term “pollutants” as used in the pollution exclusion is typically defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

For years, insurers have attempted to invoke the pollution exclusion to justify denials of coverage in lead paint and asbestos cases, albeit with limited success, and the same can be expected in mold-related claims. Although relatively few reported cases address the applicability of the pollution exclusion to the spread of mold, the questions raised in similar “toxic tort” cases are equally applica-ble in mold-related cases. Specifically, does mold constitute a “pollutant” under the pollution

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exclu-sion? If so, does the spread of mold constitute the “discharge, dispersal, escape or release” of a pollu-tant? Most courts answering these questions tend to restrict their construction of the policy lan-guage narrowly, holding that the pollution exclusion applies to “common sense” notions of “pollu-tion”, such as environmental pollution, rather than indoor air quality cases such as mold-related claims.18_{As one court stated:}

[A] reasonable interpretation of the pollution exclusion clause is that it applies only to environmental pollution, and not to all contact with substances that can be classified as pollutants. We hold that the release of carbon monoxide into an apartment is not the type of environmental pollution contemplated by the pollution exclusion clause.”

Likewise, other courts have refused to adopt insurers’ broad interpretation of the term “pollutants” under the pollution exclusion with respect to claims involving lead paint20_{and carbon dioxide.}21

The courts seem to be equally as hesitant to adopt a broad interpretation of the phrase “discharge, dispersal, release or escape” in the context of indoor air quality cases, including mold exposure cases. At least one court has refused to hold that the growth of mold constitutes the “discharge, dispersal, release or escape” of a pollutant.22_{In Leverance v. United States Fidelity & Guaranty, the Wisconsin}

Court of Appeals reasoned:

“The trial court ruled that the alleged cause of the bodily injuries and property damage was water vapor trapped in the walls, which in turn caused the growth of microorganisms. No contaminants were released, but rather formed over time as a result of environmental conditions. The trial court concluded that the insurance companies’ stance runs contrary to the plain meaning and intent of the policies. We agree with the trial court’s determination that the pollution exclusion clause does not apply.”23

Despite the lack of reported cases in the mold exposure context, the courts’ narrow interpretation of the pollution exclusion in similar cases will aid the insured subcontractor significantly in its defense against a liability carrier’s attempt to deny coverage for a mold-related claim.

Insurance Alternatives

Although the trend among insurers, considering the rapid increase in the number of mold claims, is to exclude coverage for mold-related claims outright, there is one product that could provide poten-tial coverage in the event the subcontractor is faced with a mold-related claim. A “contractor’s pollu-tion liability” (CPL) policy provides, at a minimum, coverage for pollutants brought onto a con-struction site by a contractor as part of its operation on site.24_{These policies typically cover costs of}

clean up and remediation as well as potential liability arising out of the transportation of pollutants. Unlike CGL policies that are form policies typically drafted by the Insurance Services Office and uniformly adopted by the various insurance carriers, each individual carrier typically drafts CPL policies and the language of the policy may vary depending upon the individual carrier issuing the

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policy. Accordingly, the subcontractor is cautioned to carefully review and, if necessary, negotiate the terms and conditions of the CPL policy to ensure that coverage for mold-related claims is pro-vided. “At a minimum, the word ‘mold’ (fungi and microbial matter) needs to be included in the definition of pollutants.”25_{An “environmental impairment liability” policy (EIL) may also provide a}

vehicle for obtaining mold claims coverage. EIL policies are designed to offer coverage for pollution risks that are typically excluded from CGL policies. Although an EIL policy may contain an exclu-sion for mold-related claims, some carriers offer “mold buyback” options for customers who wish to purchase mold coverage with additional premiums.26

Insurance Checklist

Examine the Policy. The subcontractor should review the terms and conditions of its CGL policy

with its insurance agent and/or attorney to evaluate the extent of coverage that is available, if any, for mold-related claims. Analyze in particular any pollution or mold/fungus exclusions. If the CGL policy does not provide coverage for mold-related claims, the contractor should inquire about the availability of coverage for mold-related claims and evaluate the cost-effectiveness of purchasing spe-cific coverage for mold. The subcontractor should also keep in mind that an insurance policy is a simple contract, the terms and conditions of which can be negotiated and/or modified. The sub-contractor is encouraged to discuss with its insurance agent and attorney the potential for negotiat-ing modifications to the policy language with the carrier that ensure coverage for mold-related claims.

Act Quickly in the Event of a Claim. In the event the subcontractor receives notice of a potential

mold-related claim, he should provide written notice of the claim as soon as possible, if not imme-diately, to any and all liability (and property) carriers that may be responsible for providing a defense and indemnification. If the subcontractor’s current liability carrier is different than the lia-bility carrier that insured the contractor during the course of construction of the project giving rise to the mold-related claim, the subcontractor is well-advised to provide notice of the claim to each carrier. Furthermore, if the subcontractor has been named as an additional insured on a sub-sub-contractor’s or supplier’s liability insurance policy, the subcontractor should also provide notice to that carrier.

Notify Other Potentially Responsible Parties. If, for example, the subcontractor has been placed

on notice of a mold-related claim and the claim arises out of work or material performed or sup-plied on the subcontractor’s behalf by a sub-subcontractor or supplier, the subcontractor should provide written notice of the claim to that sub-subcontractor or supplier, advising of the subcon-tractor’s intent to hold the sub-subcontractor or supplier responsible for all costs, damages and expenses incurred in defending against the claim. Typically, this demand should be made pursuant to an indemnification clause contained within the parties’ agreement, however, most states allow a party to assert a common law indemnity claim to recover damages incurred by one party arising out of another party’s acts or omissions. Likewise, the subcontractor should provide written notice to the sub-subcontractor’s or supplier’s liability insurance carrier of the subcontractor’s demand for indemnity.

Document the Claim. The subcontractor is warned not to wait until a lawsuit is filed to begin

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project site and document thoroughly the defect that is alleged to have caused the mold growth. Interview potential witnesses immediately, take detailed notes and take photographs or videos of the condition of the alleged defect. Have an appropriate expert examine the project when the claim first surfaces and before any remediation is conducted.

In Appropriate Situations, Remediate the Problem Quickly. When an owner or contractor

com-plains of a mold-related problem, the subcontractor should act quickly in having a qualified expert inspect the property. Once the results of the inspection are determined and the defect causing the problem is positively identified, the subcontractor should prepare an estimate to completely remedi-ate the mold growth. Assuming the mold growth is the result of faulty or improper construction (and not due to reasons beyond the subcontractor’s control), the subcontractor should work with other potentially responsible parties, such as the mechanical contractor, in negotiating a resolution to the dispute with the owner and/or contractor prior to the institution of legal proceedings. If a lawsuit is filed, the costs that the contractor may incur will increase exponentially.

The subcontractor is cautioned, however, to conduct any settlement negotiations with the knowl-edge of its liability carrier. If the carrier has assumed coverage, then the carrier will play a large role in any settlement negotiations. If, however, the carrier has either reserved its rights with respect to coverage or has outright denied coverage, the subcontractor should provide the carrier with written updates regarding settlement negotiations and, prior to actual settlement, notify the insurer of the intent to settle the claim and provide the insurer with an opportunity to contribute. Under most CGL policies, if an insured makes a payment in settlement of a claim without the consent of the insurer, then the insured is considered a “volunteer” and the insurer is absolved from having to make any payment under the policy, even if coverage of the claim is not questioned.

Pending Legislation—Will It Help or Hurt?

In response to the upsurge in mold-related litigation and insurance claims, as well as the media cov-erage of property damages and alleged personal injury resulting from mold, both state and federal legislatures have initiated a remarkable number of proposed legislative solutions. In 2001 and 2002, more than 23 individual pieces of legislation were introduced in state legislatures. However, few have become law. Currently, more than 20 legislative proposals are under consideration.

For example, on June 27, 2002, Representative John Conyers Jr. introduced H.R. 5040, the “United States Toxic Mold Safety and Protection Act” to Congress. This act, also known as “The Melina Bill,” is the first federal legislative attempt in response to the growing toxic mold problem. The Melina Act calls for research into the area of toxic mold, the establishment of guidelines relat-ing to mold, the removal of mold from public buildrelat-ings and a national insurance program to pro-tect homeowners from losses associated with toxic mold. The Melina Bill was reintroduced on March 13, 2003, as H.R. 1268 and as of March 28, 2003, it had been referred to the House Subcommittee on Housing and Community Opportunity. A summary appears in Appendix A. Although only a few states have actually enacted legislation concerning mold-related guidelines and standards, several states have mold-related legislation pending, including Arizona, California, Connecticut, Illinois, Indiana, Maryland, Massachusetts, Montana, Nevada, New Jersey, New York,

Foundation Research Series

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Foundation of the Wall and Ceiling Industry

803 West Broad Street, Suite 600

Falls Church, VA 22046

Phone: (703) 534–8300

Fax: (703) 534–8307

E-mail: [email protected]

Web Site: www.awci.org

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Table of Contents

Contents

Preface

Foundation of the Wall and Ceiling Industry

Important Notice

Introduction

Mold Litigation—Past, Present and Future

Why Are “Toxic Mold” Claims Becoming So Prevalent?

Section 1

The Critical Role of Medical and Expert Evidence

The Critical Role of Building Forensics

The Anatomy of a Mold-Related Construction Claim

Breach of Contract

Negligence

Breach of Express and/or Implied Warranties

Strict Liability Claims

Effective Responses When Litigation Strikes

Choose the Right Experts

Insurance

Others Who Are Responsible

Punitive Damages

Dispute and Oppose Damages

Preventive Measures for Mold-Related Risk

Contractual Allocation of Risk

Section 4

Protecting Your Company During Construction

Dispute Resolution Provisions

Avoid Mold-Related Risk During Construction

Section 4

Insurance Coverage for Mold-Related Claims

Section 5

Coverage Under CGL Policy

Insurance Alternatives

Section 5

Insurance Checklist

Pending Legislation—Will It Help or Hurt?