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California has been dealing with a boom of construction defect cases for the past decade. Now it faces a new and costly twist to such litigation — the mold claim. In the past, a typical construction defect case would often include allegations of water intrusion and resulting damage. Such contentions would claim that the water intrusion was due to improper installation of windows and caulking, improper installation of building envelopes (such as siding, stucco and EFIS systems), poorly installed or performing HVAC units, poor roofing or claims of poor drainage due to insufficient grading and landscaping practices. In the past two years, such claims have had an added punch — the allegation that damage from such water intrusion includes toxic mold. This trend has expanded construction litigation and has raised the cost of such litigation, the potential settlement and verdict value of cases, and the premiums on both homeowners’ and general liability insurance. Prior to the advent of mold claims, construction defect cases typically addressed claims of property damage, and the resolution of the matter concerned the most appropriate and economic “fix” of the problem. Mold claims, however, come in two forms — property damage andbodily injury claims. The two types of claims are notoriously difficult to assess and remediate, and one case may include both property damage and bodily injury theories. In particular, bodily injury claims often include assertions that the claimant has cognitive difficulties as well as respiratory illnesses. However, there is no agreed-upon standard when the presence of mold becomes toxic to human beings. In fact, mold is naturally present in the environment, and the Centers for Disease Control and Prevention has recently noted that there is no clear connection between mold and claimed bodily injuries. California was to complete a study to determine standards regarding mold claims by July (including determinations regarding the presumed safe level of molds in the atmosphere). However, that study is at a standstill due to lack of funding. Given the uncertain scientific basis of mold claims, the litigation of a mold case often turns on the experience of the attorneys litigating the matter and their access to qualified experts — thereby increasing the cost of the litigation. Moreover, mold claims potentially have high settlement and verdict values, because the public is generally quite aware of the issue. Despite the fact that there is no recognized standard regarding whether the presence of mold can have toxic effects on humans, several news stories have been published on their perceived detrimental effects. The high cost of mold litigation has had a seismic effect in the insurance industry. Insurance Commissioner John Garamendi reported recently that 12 insurers have withdrawn from the California homeowners’ insurance market, while the remaining insurers are tightening their underwriting practices (including the use of mold exclusions) and raising their rates. General liability insurers are reacting in a similar fashion. In the meantime, insurers have been facing the cost of litigating mold claims as well as the cost of litigating coverage defenses to such claims. The volatile nature of this area of the law (and its national scope) is perhaps best illustrated by a recent case in Texas. In Ronald Allison v. Fire Insurance Exchange, 03-01-00717-CV, the Texas Court of Appeals reversed a $33 million verdict against the insurer, stating that there was no basis for the $17 million punitive damage award and that there was no evidence that the medical experts proffered by the plaintiffs were sufficiently qualified. Even with the reversal, the insurer is faced with a $4 million verdict as well as extensive litigation costs. Given the proliferation of mold claims, it is likely that more experts will emerge. And as litigation becomes increasingly dependent on expert testimony, the cost of the litigation will rise. In the meantime, insurers will attempt to exclude such claims from coverage either through new endorsements that explicitly exclude mold claims or by use of existing endorsements — such as pollution exclusions. To date, no California court has ruled on the appropriateness of such exclusions in the context of mold claims. However, it is likely that this issue will be the focus of California courts in the not too distant future. Finally, there is the rising cost of mold claims to both property owners and businesses. Once a property is involved in a mold claim, the property owner arguably must disclose such claims to any future purchaser and/or lessee. Similarly, businesses that have notice of potential property damage due to mold must also consider whether the existence of mold and the extent and nature of any required repair places their employees at risk based on the employer’s obligation to provide a safe workplace. Ultimately, unless and until a standard exists regarding both the effects of mold on humans (if any) and the appropriate qualification of experts, mold claims will only increase in both number and overall cost. Eileen Ridley is a partner at Foley & Lardner in San Francisco and is a member of the litigation department, specializing in construction, appellate and insurance dispute resolution. She can be contacted at [email protected]or 415-438-6469.

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