Why Killing Mold is not Enough for an Insurance Claim

Michael A. Pinto and Jacob Kooistra | Property Casualty 360

The documents that comprise the current standard of care uniformly emphasize physical removal as the primary means of mold remediation.

Claims adjusters and managers recognize that most home and business policies have caps on the amount paid out to deal with mold remediation.

In the early 2000s, the mold remediation industry was still pretty new. Although some state regulations regarding mold remediation would develop later, no federal mold remediation rules ever came into being. The lack of government control left the industry to establish its own acceptable standards for the proper way to deal with mold contamination.

Who makes the rules for mold remediation?

With no overarching federal control on the growing industry, numerous government agencies, industry associations, and private organizations offered their recommendations related to mold control. Most state regulations have focused on some form of accreditation or licensing for the companies or individuals involved in mold inspections or the control of fungal contamination in buildings. The notable exception to that trend is the state regulation in Texas, which details the acceptable and not acceptable practices for mold remediation.

Over the past 20 years, numerous groups offered their approach to mold remediation. These included organizations such as:

  • American Conference of Governmental Industrial Hygienists (ACGIH),
  • American Industrial Hygiene Association (AIHA),
  • Environmental Protection Agency (EPA),
  • Health Canada,
  • Institute of Inspection Cleaning and Restoration Certification (IICRC),
  • Occupational Safety and Health Administration (OSHA),
  • National Organization of Re-Mediators and Mold Inspectors (NORMI), and
  • The New York City Department of Health.

The primary difficulty with this approach is that even the government agencies were only providing “guidance.” Without the force of law, people were left to pick and choose which recommendations they would follow; or not follow any at all. In response, numerous people reviewed the various guidance documents to identify specific consensus items.

The wide acceptance of common points of intersection from numerous reference materials directly impacted the insurance and legal liabilities associated with mold remediation. The areas of consensus from multiple documents quickly morphed into a de-facto standard of care for the industry. This provided insurance carriers and their clients a mostly level playing field concerning what was acceptable practice for mold remediation in the case of a covered loss.

Mold removal is still vital to remediation

Today, the mold control standard of care has been solidified and clarified for over two decades. However, many consultants and contractors have limited familiarity with the industry reference materials and follow a standardized procedure or practice for all mold projects without understanding whether that particular approach fits within the standard of care.

As many of the experts in fungal contamination control leave the industry, earlier problems of people not understanding or following the industry standard of care are being repeated for a second or third time, creating a serious potential problem for insurers. An agent or adjuster who unwittingly recommends a contractor whose work is outside what has been determined as acceptable industry practice could be liable for more than the covered loss.

The biggest risk in this area is the proliferation of remediation procedures based on some form of treatment of the fungal contamination rather than its removal. There is a constant promotion of products to industry practitioners that spray, mist, fog or foam to remediate mold. However, one of the primary principles of mold control that all of the reference documents and private mold experts agree upon is the need for the physical removal of the fungal contaminants.

This is a critical point, as the documents that comprise the current standard of care uniformly emphasize physical removal as the primary means of mold remediation. A great example can be found in section 4.4 of the current edition of the ANSI/IICRC S520-2015 Standard for Professional Mold Remediation:

Physically removing mold contamination is the primary means of remediation. Mold contamination should be physically removed from the structure, systems, and contents to return them to Condition 1. Attempts to kill, encapsulate, or inhibit mold instead of proper source removal generally are not adequate.

The requirement for physical removal of the fungal contamination is still the most assailed point within the industry. Many individuals argue that fungal contamination can be adequately mitigated through area fogging methods to either neutralize the fungal material or, in rare cases, even claim to chemically break down the physical components. While the advertising verbiage for such products uses terms like “kill,” “destroy,” “eliminate,” “disintegrate” or “obliterate,” they avoid the key phrase from the S520, to “physically remove” the mold.

A broad range of products are currently being sold as remediation alternatives. Some of the more common types of equipment and chemicals promoted for mold remediation that do not require physical removal include ultraviolet light, infrared light, chlorine dioxide, hydrogen peroxide, ozone, sodium hypochlorite (i.e., chlorine bleach), and a wide variety of essential oils.

These products can be applied via sprayers, magnet sprayers, ionized sprayers, binary ionization technology (bit) sprayers, “dry” particle sprayers, vaporizers, foggers, dry foggers, foamers, injectors, robotic light “droids,” ozone generators, hydroxyl radical machines, and more which are currently being peddled as mold remediation devices. Although such products and delivery systems often can be useful during a mold remediation process, none of them are an adequate substitute for physical mold removal.

Learning from past mistakes

Marketing materials describing the benefits of addressing mold contamination inside a wall cavity through a system that avoids removing and replacing drywall can be compelling. Such approaches may be a process a homeowner or business manager is willing to gamble on but should never be recommended or endorsed by someone connected to the claim on the insurance side. Encouraging improper mold remediation, or even appearing to recommend such practices, could easily lead to the client including the insurance company in a legal claim when the remediation efforts fail and lead to ill health effects of the occupants.

Despite the protections for insurers built into the standard policy language regarding fungal contamination, it is still critical for adjusters to understand that there is no “magic bullet” approach to mold remediation that eliminates the difficult task of physical mold removal.

Unfortunately, if mold contamination is on porous building materials, any remediation conducted under the current industry standard of care will require the removal of those finish surfaces. Trying to help the policyholder keep the project costs within the covered amount by steering them to some sort of remediation approach not recognized by the current standard of care is not helpful to the policyholder or the insurance carrier.

The key thing to remember is that chemicals and other treatments can be used in conjunction with physical removal but never as a substitute for real remediation.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

No License, No Contract, No Claim

Jeffrey MacHarg | Fox Rothschild LLP

Can an unlicensed general contractor enforce a construction contract in North Carolina? “No,” and as Judge Conrad explains, “[t]his is an unyielding rule.”

JCG & Associates, LLC vs. Disaster America USA, LLC, 2021 NCBC Order 76 (N.C. Super. Ct. Dec. 9, 2021) involved a dispute between several Brunswick county homeowners and an unlicensed general contractor, Disaster America USA, over home restoration work in the wake of Hurricane Florence.

The initial contracts were between the homeowners and Disaster America USA, who was not a licensed general contractor in NC.  Those contracts were later assigned to affiliate, Disaster America NC, which did have a general contractor’s license.

After delays and disagreements, the homeowners terminated the contracts and sued Disaster America USA for negligence, fraud, unfair/deceptive trade practices, and constructive fraud.  They also sought a declaration that the contracts were illegal and unenforceable because Disaster America USA was never licensed as a general contractor. Assignee, Disaster America NC, counterclaimed against the homeowners for breach of contract and quantum meruit.

In this order, Judge Conrad decided the homeowners’ motion for partial summary judgment. In North Carolina, a party who contracts to perform construction services valued over $30,000 must have a general contractor’s license.  N.C. Gen. Stat. § 87-1. The homeowners argued that their contracts with Disaster America USA were illegal and unenforceable because Disaster America USA was never licensed, and this illegality could not be cured by assigning the contract to a properly licensed entity.  As a result, the homeowners sought summary judgment on assignee Disaster America NC’s contract-based claims for breach and quantum meruit.

Disaster America advanced a series of arguments to try to get around Section 87-1’s licensure requirements.  Judge Conrad rejected all of them.

Disaster America USA first claimed it had permission to use the license of licensed general contractor, JCG & Associates, LLC, pointing out that each of the contracts cleverly listed “DISASTER AMERICA USA, LLC/JCG & ASSOCIATES, LLC” as the general contractor. Putting aside the fact that JCG & Associates (a co-plaintiff) denied even knowing who Disaster America USA was, Judge Conrad rejected this argument, explaining that the contracting party “must be licensed,” and the contracts were with Disaster America USA, not JCG & Associates.

Disaster America then argued that it didn’t need a license under Section 87-1 because these were not construction contracts.  Judge Conrad called this argument “meritless.”  Id. ¶ 19.  The contracts were titled “Construction Agreements” and described things like roof removal, roofing, siding, trim, and other services that were clearly construction work.  Judge Conrad concluded that “[w]ithout question,” Section 87-1 applied and required a general contractor’s license for this type of work.  Id.

Finally, Disaster America USA argued that any illegality was cured when Disaster America USA assigned these contracts to a licensed entity, Disaster America NC.  Citing several cases, Judge Conrad held that the illegal and defective contracts “cannot be validated by the contractor’s subsequent procurement of a license.”  Id. ¶ 16.  Likewise, assignment to a licensed contractor “does not cure the illegal contract.”  Id.

In the end, Judge Conrad relied on the “unyielding” rule that a contract entered into by an unlicensed contractor is illegal and unenforceable by the contractor, and he entered judgment in the homeowners’ favor on Disaster America NC’s breach and quantum meruit claims.

Key Takeaway: When it comes to performing work as a general contractor, North Carolina’s licensure requirements are “unyielding.”  If you don’t have a proper license, you don’t have an enforceable contract, and you have no claim.  No license, no contract, no claim.

California Court Rules Jury Must Resolve Dispute Between Homeowner and Subcontractor Insurer Over When Claim Occurred

Blake Robinson | Davis Wright Tremaine

The California Court of Appeal recently reversed a trial court’s dismissal of a lawsuit, concluding that because there was a dispute over when a homeowner’s claim “occurred” for purposes of an insurance policy, that dispute must be resolved by a jury.

Case Background

Guastello v. AIG Specialty Insurance Co.1 involved a dispute over whether a claim was covered by an insurance policy. The events in question began in 2003 and 2004, when a subcontractor built retaining walls in a housing development. Several years later, the plaintiff purchased a home in the development. Fast forward to 2010, when one of the retaining walls close to the plaintiff’s lot failed and caused significant damage to the plaintiff’s backyard perimeter wall, among other things.

The plaintiff obtained a default judgment of over $700,000 against the subcontractor. The plaintiff then filed a lawsuit against the subcontractor’s insurer, seeking payment on the judgment. The insurer filed a motion for summary judgment, seeking dismissal on the ground that the subcontractor only had a policy with the insurer in 2003 and 2004, but the property damage occurred in 2010.

In response to the motion, the plaintiff filed a declaration in which a geotechnical engineer stated that the retaining wall failed due to the subcontractor’s negligent construction. Significantly, the engineer stated that the damage to the retaining wall and surrounding area began within months of the construction’s completion, including through “continuous and progressive destabilization” of the area. The insurer, on the other hand, submitted evidence that no damage occurred until the retaining wall failed in 2010.

Ultimately, the trial court sided with the insurer, and the plaintiff subsequently filed an appeal.

Occurrence vs. Claims-Made

The appeals court noted that the subcontractor had an occurrence policy, which “provides coverage for damages that occur during the policy period, even if the claim is made after the policy has expired,” as opposed to a “claims-made” policy—which “provides coverage only if the claim is made during the policy period.” Accordingly, the key question was whether the damage that the plaintiff suffered occurred during the 2003-2004 policy period.

In answering that question, the appeals court relied on the “settled rule” that “when continuous or progressively deteriorating damage or injury first manifests itself, the insurer remains obligated to indemnify the insured for the entirety of the ensuing damage or injury.”

Ultimately, the court concluded that—based on the expert declaration—there was evidence from which a jury could find that the damage began occurring shortly after the retaining wall’s completion in 2003. Therefore, the Court of Appeal held that the trial court erred in dismissing the plaintiff’s claim on summary judgment, and the case was sent back to the trial court so a jury could resolve the disputed issue of when the damage began to occur.

Lessons in Insurance

As this case illustrates, both owners and contractors should be aware of the types of insurance policies that they and those with whom they contract have. Whether it is a claims-made or occurrence policy can sometimes make the difference between whether a claim is covered or not.

FOOTNOTE

1   61 Cal.App.5th 97, 275 Cal.Rptr.3d 370 (2021)

Some Insurers Dismissed, Others Are Not in Claims for Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    The insured Developer survived a motion to dismiss by one of several carriers who were asked to defend against claims for faulty workmanship. East 111 Assoc. LLC v. RLI Ins. Co., 2019 N.Y. Misc. LEXIS 5331 (Oct. 4, 2019).

    Developers sponsored a residential condominium project and sold all units. The owners subsequently sought damages for $881,450 for alleged design and construction defects, and asserting causes of action for, among other things, breach of contract, specific performance and negligence. The underlying action settled for $350,000. Developers sought coverage from its insurers. 

    The Developers sued the carriers for a declaratory judgment that they were entitled to a defense. Developers had a CGL policy issued by Mt. Hawley. Developers were also additional insureds in policies issued to subcontractors by James River, Admiral and Selective. The insurers moved to dismiss. 

    The insurers’ breach of contract exclusion precluded coverage for “property damage . . . arising directly or indirectly out of . . . (a) Breach of express or implied contract; (b) Breach of express or implied warranty . . .” Developers argued that the owners’ cause of action for negligence did not fall within this exclusion. However, the negligence cause of action alleged – as did the breach of contract – that Developers constructed the building with design and construction defects and not in accordance with the offering plan. Since all of the alleged “property damage arose directly or indirectly” from Developers’ alleged breach of express or implied contract by their failure to deliver a building free of defects, the underlying action fell within the breach of contract exclusions. Therefore, motions to dismiss by James River, Admiral, and Mt. Hawley were granted.

    The Developers were additional insureds under the Selective policy issued to Walsh, a subcontractor. The underlying complaint carried the possibility that Walsh’s allegedly fault workmanship damaged other parts of the building – which was not, as a whole, Walsh’s work – an “occurrence” giving rise to “property damage” could exist under the Selective policy. Accordingly, the alleged water damage triggered Selective’s duty to defend Developers. 

Montana Supreme Court: Insurer Not Bound by Insured’s Settlement

K. Alexandra Byrd | SDV Insights | October 24, 2019

In Draggin’ Y Cattle Co., Inc. v. Junkermier, et al.1 the Montana Supreme Court held that where an insurer defends its insured and the insured subsequently settles the claims without an insurer’s participation, a court may approve the settlement as between the underlying plaintiff and underlying defendant, but the settlement will not be presumed reasonable as to the insurer. Therefore, an insurer who defends its insured cannot be bound by a stipulated settlement that the insurer did not expressly consent to.

The case involved Draggin’ Y Cattle Company (the “Cattle Company”), a ranching and cattle business that utilized the services of an accounting firm, Junkermier, Clark, Campanella, Stevens, P.C. (“Junkermier”), to structure the sale of real property to take advantage of favorable tax treatment. It was discovered that Junkermier’s employee misinformed the Cattle Company’s owners of the tax consequences of the sale. The Cattle Company’s owners subsequently filed suit against Junkermier and its employee and alleged nearly $12,000,000 in damages due to the error. Junkermier’s insurer, New York Marine, provided a defense for Junkermier and its employee.

The Cattle Company’s owners offered to settle the claims against Junkermier and its employee for $2,000,000, the policy limit of the New York Marine policy. New York Marine refused to give its consent or tender the policy’s limit. Subsequently, Junkermier, its employee, and the Cattle Company entered into their own settlement agreement for $10,000,000. The settlement was contingent upon a reasonableness hearing to approve the stipulated agreement.

New York Marine moved to intervene and challenged the stipulated settlement. The trial court, relying on Tidyman’s Mgmt. Svs. Inc. v. Davis, 330 P.3d 1139 (Mont. 2014), held that New York Marine had effectively abandoned its insured when it had refused to settle the claim in good faith and therefore it was “as if it had breached the duty to defend.” The trial court concluded that the settlement was reasonable and entered judgment against Junkermier.

On appeal to the Montana Supreme Court, New York Marine argued that a stipulated judgment, entered into without the insurer’s consent or participation, is only reasonable when the insurer has refused to provide a defense, effectively abandoning the insured. New York Marine noted that it provided its insureds with a defense throughout the relevant proceedings.

The Montana Supreme Court agreed with New York Marine and held that if parties decide to settle without the insurer’s participation, a court may approve the stipulated judgment as between the underlying plaintiff and the underlying defendant, but it will not be presumed reasonable as to the insurer. The judgment against Junkermier and the proceedings were reversed and remanded to the lower court for further proceedings.

This case underscores the importance of involving coverage counsel in settlement negotiations when a defending insurer refuses to agree to a reasonable settlement. Montana policyholders should also consider whether a declaratory judgment action is necessary if their insurer has reserved its rights as to any indemnity owed.