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Mold on Hold

A year ago, the mold crisis looked as if it would follow the course of many past environmental problems — lawsuits, then laws, then years of cleanup. But the litigate-regulate-mitigate cycle isn't running on schedule for mold, and it's unclear how or when the issue will be resolved.

There are many reasons for this continued uncertainty. For one, the courts are sending mixed signals about the future of mold liability suits. For another, most state legislatures have yet to take a clear stand. Congress has not mandated any mold regulations, and even in activist California — one of the states that has had the most claims — legislators have asked the state's environmental protection agency to set standards but have not given the agency any money to do the job. Finally, scientists at the Centers for Disease Control and other experts say the nature of mold itself may make setting permissible thresholds impossible.


Whether the problem is ground contamination or lead paint, lawsuits with large payouts have typically preceded cleanup. But the plaintiffs in the highest profile mold lawsuit recently suffered a stunning setback. In December, a Texas appeals court reduced a $32.1 million landmark award in May 2001 to just over $4 million.

Plaintiffs Ronald Allison and Mary Melinda Ballard of Dripping Springs, Texas, had charged that a unit of Farmers Insurance Group of Los Angeles had not paid promptly on a water-damage claim, and as a result a dangerous mold had spread throughout their $3 million home, rendering it uninhabitable. The reduced award covers only damages that resulted from Farmers' allegedly slow payouts, and specifically excludes money for emotional distress and punitive damages.

Defense lawyers seem encouraged by the reduction of the Ballard award. “This decision on appeal is a reminder that, even if you find mold in your house, you won't automatically receive a big-ticket verdict,” says Robyn Ice, a toxic tort litigation partner at the New York office of law firm Alston & Bird, whose clients include apartment owners and managers and national construction companies. “Plaintiffs still have to show evidence of injury and prove causation.”

Another trend, however, may not be so encouraging to owners. Even before the new Ballard decision, lawyers say they began to notice a decline in the number of mold suits aimed at insurance companies and an increase in complaints against builders about alleged systems failures and construction defects. At the same time, they also are seeing more suits against companies that own or manage multifamily housing or commercial space.

Case reports suggest that an increasing number of mold lawsuits are targeting apartment complexes and other multifamily dwellings specifically, according to attorney Ice. Consequently, much of the litigation involves multiple plaintiffs, including children and elderly persons. Some multiple-plaintiff mold cases have been filed as class actions, which can increase the costs of defense, settlement or judgment, she adds. According to Ice, approximately 9,000 mold lawsuits have been filed and are in varying stages of litigation.


Another unusual feature of the mold crisis is that it's proven to be difficult to regulate. So far, only a handful of states have passed mold prevention laws. A number of states, including Maryland, Virginia and Texas, are reportedly considering mold legislation this year. At the federal level, U.S. Rep. John Conyers Jr. (D-Michigan) is reintroducing a bill to protect homeowners from catastrophic losses, which failed to pass last year.

The bill would require the government to address the mold issue on a number of fronts, and would include the creation of a national mold insurance program. The bill, however, would not compensate owners of commercial property for catastrophic losses due to mold.

One reason the mold threat is not being treated the same way as lead or asbestos is the limited knowledge scientists have on the subject. Unlike those inorganic substances, mold is an organism that grows in more than 1,000 varieties in the U.S. There remains a lack of agreement among scientists regarding what levels and varieties of mold are dangerous. Some environmental experts are skeptical that regulators will ever be able to set permissible levels for mold.

“The difficulty you've got is that it isn't like asbestos, [where] we can get to a certain fiber count and that's the bad sign,” says Robert Taylor, executive vice president of Citadel Environmental Services of Glendale, Calif. “With mold and microbial issues, everybody reacts to all molds differently, not only to different molds but different counts of mold.”

The Centers for Disease Control and Prevention reached the same conclusion in a report to Congress last July. Dr. Stephen Redd, the CDC's chief of air pollution and respiratory health, told a congressional committee that although many respiratory illnesses seem to be related to mold exposure, “setting standards and guidelines for indoor mold exposure levels may not be practical.”

A Costly Solution

Beyond the clinical difficulties, the weak economy appears to be discouraging politicians from addressing the complicated problem. California, the leader in mold regulation, still has not allocated money for the Department of Health Services to pursue the legislature's 2001 mandate to set permissible standards for mold.

Still, attorney Daniel Sitomer of Sitomer & Hogan, a White Plains, N.Y.-based real estate environmental law firm that specializes in emergency management, believes some type of regulation is possible, particularly when it comes to the certification of unlicensed mold inspection and remediation firms. “I think it is potentially a problem that can be regulated, if the government chooses to do it,” he says. “Unfortunately, it's going to be very expensive.”

So far, insurance coverage is the only mold-related issue that regulators have acted with some dispatch to resolve. In 35 states, insurance commissions have allowed insurers to stop covering mold damage and liability in their ordinary property policies and write environmental policies that include mold. Eric Schake, a managing director at New York-based insurance services firm Marsh Inc., estimates that such policies can add about 20% to an apartment owner's total insurance costs. Even without environmental coverage, insurance costs per unit now range from $200 to $500, Schake says.


The additional costs of mold insurance policies leaves owners highly motivated to head off mold problems, rather than wait for the courts and regulators to order mitigation. Some property owners have undertaken extensive and expensive remediation, even without any legal requirement to do so.

Although mold is cheaper to dispose of than asbestos — once it's out of the building, mold-infested building material is no longer considered a hazard and can be dumped anywhere — overall remediation costs are sometimes higher, says Shawn Regan, vice president of Pittsburgh-based PDG Environmental.

Thomas Patriarca, a broker with Grubb & Ellis in Los Angeles, says that an owner in Los Angeles held up the sale for six weeks of a $1.05 million, 10,000 sq. ft. space that had been used for meat-packing in order to repair a moldy patch in a wall — at a cost of $35,000. That figure is not unusual, according to Insurance Information Institute statistics. The average cost per mold claim in Texas was $34,528 in the second quarter of 2002.

But the trouble faced by Patriarca's client pales compared with the saga of Hilton Hotels' 453-room Kalia Tower on Waikiki Beach in Honolulu. Even without any official order, executives closed the hotel's guestrooms last July after housekeepers discovered eurotium mold in an undisclosed number of units. Today, the rooms in the $95 million high-rise remain closed, and Hilton executives estimate that costs related to remediation and renovation are likely to top $55 million by the time the tower reopens.

According to filings by the U.S. Securities and Exchange Commission, Hilton's insurers had not yet decided as of third-quarter 2002 whether they would pay claims for damages or business interruption. A Hilton spokeswoman says the hotel is planning to re-open in the second quarter of this year.

Building Materials Play Unwitting Role

Why would mold strike a one-year-old building such as the Kalia? Experts say that newer buildings tend to have more problems with mold than older ones. While mold has always been an occasional problem as long as people have lived in houses — in the Bible, God gives Moses some good advice on how to deal with mold — the well-insulated walls of post-energy crisis buildings often trap moisture as well as heat. To make matters worse, newer building materials, including drywall with cellulose can sometimes act as a medium for breeding mold. Old-fashioned plaster walls don't.

Now, some owners are avoiding potential problems by choosing materials and techniques that make mold infestation less likely. For example, St. Louis-based Colliers Turley Martin Tucker, which manages 75 million sq. ft. of retail and office space in the Midwest, uses paint that includes biocide and builds walls with moisture-resistant drywall. The project manager also makes sure that drywall is not built flush with the concrete floor. “That way, if the floor does get wet, it will prevent the moisture from sucking up into the drywall, which can cause a mold problem,” says Jay Glasgow, vice president and project manager.

Glasgow says his crews also are responding more quickly to reports of leaking pipes and windows than they have in the past. They also are keeping close tabs on water-damaged areas long after the problem is fixed. “We spend a lot more time now after the clean-up monitoring for mold growth,” Glasgow says.

Adjusting the Lease Language

Apartment managers are looking at other ways of protecting themselves. One way is to add riders to new leases that include language drafted by multi-housing trade groups such as the National Multi Housing Council. The language describes mold as a naturally occurring substance that grows in areas of excess moisture and requires tenants to acknowledge their responsibility to notify their landlords promptly if they observe leaks or other moisture accumulation, according to Ice of Alston & Bird.

Prospective buyers protect themselves by hiring consultants to inspect for possible mold problems before they close a deal, according to environmental inspection firms. EMG Inc., a national due diligence firm that inspects between 5,000 and 6,000 commercial properties annually, now includes mold and moisture observation as part of its regular environmental report, says Jeffrey Boggs, technical director for environmental services for the firm based in Hunt Valley, Md.

And in California, Citadel Environmental Services now receives hundreds of calls for mold inspections every week, according to Taylor. “We get people asking to look at very expensive homes who will actually walk away after a walk-through [inspection] if there's a problem.”

Bennett Voyles is a New York-based writer.

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