By Ivy Riggs, Executive Underwriter
Because mold coverage has been readily available for at least a decade, many tend to treat it as a check box on a list of desirable policy features. If the quote you procure allows you to check the box, you’re good to go. Right? Not quite so fast…
Insurance carriers’ terms for providing mold coverage are far from standardized, just as their pricing and underwriting parameters vary widely. What is your insured actually getting for their money? To examine this question in greater detail, this article will focus on how causation emerges as a critical component in evaluating the terms proposed to your client.
For those of you who deal frequently with property insurance, causation is a familiar topic, even the name of the game in some cases. Covered causes of loss may be specifically identified in the policy, or blanket coverage for a broad range of risks may be granted unless specifically excluded. Unfortunately, environmental liability coverage—particularly in the case of Contractors Pollution Liability (CPL)—is not so easily categorized. To understand why, a brief bit of history is relevant.
In the not-so-long ago days before mold coverage was widely available, disgruntled insureds and their attorneys pursued many avenues for finding coverage in first-party property policies. The results were often mixed. However, one publicized case from 2002 (Lexington Ins. Co. v. Unity/Waterford-Fair Oaks) found that the insurer was correct in denying coverage because its pollution exclusion specifically included “fungi” in its definition of “contaminant.” Additionally, the court affirmed that the nature of fungi—reproducing through the release of spores, with or without accompanying mycotoxins—qualified as a “dispersal,” thereby resulting in a “pollution condition” as commonly defined under many environmental liability policies.
Upon this determination of case law, a spike of interest in obtaining pollution insurance ensued. But unlike admitted property markets that intended to exclude mold damage, the excess and surplus lines environmental markets meant to pick up this exposure. The obvious question was how to do it prudently and profitably. But because mold is a naturally occurring substance, the answer was not so obvious.
The causes of mold are well-known: moisture and a food source are both required for its growth. Where these two factors are present, mold will generally develop. Drywall, carpeting, wood and other common building materials can supply a ready food source, but where does the moisture come from? Herein lies the core of the liability problem.
If, for example, your client is a contractor whose work entails moisture/leak prevention—e.g., a plumber, roofer, or glazier—then a careful review of their proposed pollution liability terms is critical. Does their CPL policy contain an exclusion for residential exposures? Does it exclude faulty workmanship or construction defects? Is it silent on mold, or does it provide affirmative coverage that is spelled out in the policy? Is mold coverage granted on a claims-made basis or occurrence basis? Are mold claims subject to a higher deductible or SIR, or to a lower sub-limit than the rest of the policy? Does it restrict coverage to only pre-existing mold that is actively released due to the contractor’s work, or does it apply more broadly to “the presence of” fungi as a result of covered operations?
These last two questions in particular are often related. This is because a carrier that covers “the presence of” mold due to the insured’s covered operations—in other words, an act or omission in their work that caused it to grow—may expect both frequency and severity of loss to be higher. Thus, the broader coverage they grant is often subject to higher deductibles or lower sub-limits than is the more restrictive coverage provided by other markets.
Without clear answers to the above questions, a proposed solution to the client’s concerns may be wholly inadequate. If you are at all uncertain, make it a priority to get these answers directly from your broker or underwriter.
Learn more about other types of environmental exposures.