Today, environmental impairment liability (EIL) claims related to mold have overshadowed all of the other claims generated by the traditional industrial buyers of EIL policies, most notably in the hospitality sector and high-rise condos. In my experience (from surveys of insurance agents in continuing education classes that I teach across the country titled "Unbelievable Fun with Pollution Exclusions"), fewer than 1 percent of commercial buildings purchase EIL coverage. This means that commercial properties produce a lot of environmental claims that could be covered under EIL policies if those policies were purchased. It also means that 99 percent of commercial buildings are underinsured for claims associated with contamination.
Why the poor market penetration? Relatively inexpensive environmental insurance on commercial property has been available for over 30 years. The poor market penetration of EIL insurance in the commercial property space can be explained by the general breakdown in the insurance distribution channel for environmental insurance products in that class of business. Most of the insurance agents and brokers who work in the commercial property market have not been trained on the effects of pollution, fungi, and bacteria exclusions, and, therefore, they cannot effectively convey the need for environmental insurance to their customer base. Without first establishing a need for EIL insurance based on the predictable effects of pollution/fungi/bacteria exclusions, insurance buyers do not perceive a need to purchase EIL coverage.
In my experience as a wholesale insurance broker, EIL insurance on commercial property has little market penetration because most commercial property owners have never been presented with enough information on the effects of pollution/mold/fungi/bacteria exclusions within their property and liability insurance policies to make an informed decision on the purchase of EIL insurance. The constraint in the marketplace driving poor market penetration is not the price of EIL insurance; EIL policies will be purchased by informed property owners and managers.
Anticoncurrent Causation
For a claim to reach an environmental insurance policy for payment, in most cases that means the traditional property and liability insurance must not have paid for the loss. Mold reaching the number one claims spot did not happen overnight. The current influx of mold claims under EIL policy began in 2005 when insurance companies slipped exclusions for losses related to fungi, mold, and bacteria into virtually all forms of personal and commercial insurance policies.
Lucky for insurance buyers, no one told the claims adjusters how the new anticoncurrent fungi, mold, and bacteria exclusions were designed to operate. As a result, claims involving fungi, mold, and bacteria continued to be paid as ensuing losses from covered water damages. This practice is directly contrary to the purpose of an anticoncurrent causation provision in an exclusion. Ignoring the anticoncurrent causation provisions in fungi and bacteria exclusions has played a significant role in delaying the migration of claims over to EIL policies.
Anticoncurrent causation clauses eliminate coverage for ensuing losses from an otherwise covered cause of loss. Once any amount or type of mold or bacteria becomes involved in any sequence in a loss scenario, the entire loss falls within the terms of the anticoncurrent causation exclusion. In practice, since 2005, most claims adjusters have ignored the anticoncurrent causation language in fungi, mold, and bacteria exclusions. Claims adjusters are very skilled at the use of anticoncurrent causation provisions in flood exclusions.
The Growth of Mold Claims
Water or excessive moisture causes mold growth on drywall at a very high probability within 72 hours at room temperature. To put the frequency of mold-related losses in commercial buildings into perspective, it helps to look at the US market for paper-faced drywall. In my insurance product development research to develop mold insurance coverage in 2003, a major manufacturer of drywall informed me that approximately 10 percent of all of the company's drywall production was being used to replace drywall.
Mold loves damp drywall. Paper-faced drywall is a near-perfect mold food source because it provides cooked wood (paper) and a water reservoir (pressure-dried gypsum) all in one place. It takes extended exposure to water before drywall is damaged to the extent that it needs to be replaced. Based on the 72-hour mold growth on drywall axiom, virtually all of that water-damaged drywall being replaced would be expected to have mold growth on it or in it.
Bacteria-related losses are usually excluded and sublimited by the same exclusion that addresses fungi and mold. In practice, claims adjusters have routinely ignored if water damages were caused by Category 1, 2, or 3 sources. Category 3 water is grossly contaminated with bacteria by definition. A drop of Category 3 water involved in any sequence to a loss event triggers the most common anticoncurrent causation exclusions for bacteria-related losses found in property and liability insurance policies today.
Claims adjusters seem to be discovering the intent of fungus, mold, and bacteria exclusions more often in water damage losses. As a result, more water damage claims are being shut off at the common $25,000 sublimits commonly found in property insurance policies for bacteria and mold-related losses. Bacteria can be an insured "pollutant" in high-quality EIL polices. Category 3 water losses being shut off at $25,000 of recoverable property insurance is also contributing to an increase in EIL claims.
Surprising Findings
I do find these things regarding mold and bacteria-related losses in the insurance business surprising.
Why did it take years for fungi and bacteria claims to reach the top slot for causes of loss under environmental insurance policies? That should have happened within a couple of years of the introduction of widespread fungi and bacteria exclusions in 2005. Expansive anticoncurrent exclusions and sublimits of coverage for damages involving a speck of any type or quantity of fungi or bacteria even being related to a loss event were introduced on a broad scale in 2005.
In addition to these specific policy exclusions, bacteria contamination has been determined by various state courts to be a "pollutant" in insurance policies for decades. Therefore, damages from leaking drains and sewage (Category 3 water) can be excluded by both fungi/bacteria exclusions and a pollution exclusion on the same policy. These double exclusions for Category 3 water-related losses should have driven even more claims over to high-quality EIL policies over a decade ago.
How did such a small market penetration with the environmental insurance product in commercial property result in mold claims eclipsing all the other claims in the traditional market for EIL insurance? The sheer volume of mold claims under the relatively few policies insuring commercial property is surprising. EIL or site pollution policies insure losses arising from contamination on, at, or under the insured site. For years, these insured sites included factories, waste disposal sites, and chemical companies. Why the increase in mold and bacteria loss exposure?
Some point to weather and climate change to explain the surge of mold claims on environmental insurance policies. Severe weather events do create more water intrusion events, and those events lead to mold growth. However, major weather events alone do not explain the increase in mold claims under EIL policies in 2016. Based on the number of mold remediation jobs conducted by fire and water restoration contractors, the frequency of mold claims across the country was down a little in 2016 due to fewer water-related severe weather events in recent years.
Changes in building materials and construction methods could also cause more mold damages. However, the number of construction-defect-related mold claims is decreasing over time. This is most likely a result of improved building techniques and knowledge on how to prevent excessive moisture in buildings. For example, today every contractor seems to know it is a bad idea to install Visqueen polyethylene plastic sheeting on both sides of a wood stud wall or to use construction adhesive to glue exterior insulation and finish system foam directly onto wood siding. Both of these construction techniques contributed to the "toxic mold" insurance crisis between 2001 and 2004. Better building practices have substantially reduced the number of mold claims in new construction.
Maybe there were more mold claims in EIL policies because there were more EIL polices sold to commercial property owners. To some extent, that is true. However, there was not a big increase in the number of EIL polices sold to the owners of commercial properties in 2015 or 2016. I know this from firsthand experience. Six years ago, my wholesale insurance brokerage firm rolled out a custom designed EIL product for clean commercial buildings. The product line is available in every state. The insurance policy is provided by an A+ XV rated insurance company, it features very low comparable rates enabled by innovative boots on the ground loss control capabilities, and it has customized coverages specifically designed to address fungi and bacteria loss exposures. Based on our insurance brokerage experience with that product line, there were not significantly more EIL policies sold covering commercial properties in 2015 and 2016 than in previous years. The increase in mold claims under EIL policies is not entirely explained by an increase in the sale of EIL policies to commercial property owners.
Reasons for Increase in EIL Claims
If the influx of EIL claims on commercial properties cannot be explained by weather events, poor construction practices, or a dramatic increase in the sale of EIL insurance policies to commercial property owners, what else may have caused mold claims? There are two more plausible explanations: EIL polices can cover losses that are not normally covered under property policies, which, if combined with slightly greater sales of these EIL policies, there would be an increase in the number of mold claims under EIL policies. Another explanation is that insurance claims adjusters may have finally figured out how mold and bacteria exclusions and sublimits operate to limit insurance recoveries under standard property and liability insurance policies. A mold/bacteria-related claim does not reach an EIL-type policy if the standard property and liability insurance policies will pay for the loss. More denied mold claims in the standard property and liability insurance policies would spill over more claims onto the EIL polices, if an EIL policy had been purchased.
My educated guess is the primary cause of the increase in mold claims under EIL policies is the combination of these two trends.
Conclusion
EIL policies do provide broader coverage for mold- and bacteria-related losses than traditional property and liability insurance policies, even if those policies did not have anticoncurrent causation fungi and bacteria coverage restrictions. EIL policies cover first-party property damage (cleanup and restoration expenses, loss of rents, and extra expense) as well as third-party liability and defense costs that may also be incurred by the owners of commercial property. First-party property damage—including cleanup and restoration costs and loss of rents—is commonly accompanied by third-party allegations of injury when occupants of a commercial building are exposed to mold and bacteria contaminants.
Considering the frequency of mold-related damages in commercial properties due to wet drywall, broader coverage under EIL policies combined with more excluded fungi and bacteria claims under traditional property and liability insurance policies would logically explain how mold became the cause of so many EIL claims in 2016. Even with these logical explanations, there are still questions that remain unanswered. Where did the other mold- and bacteria-related losses that were not covered under the 99 percent of commercial properties that are not covered under EIL policies end up? My educated guess on that is these already-incurred losses are festering and looking for a home for cost recovery. If the insurance buyer has not already declared bankruptcy from an uninsured fungi-, mold-, or bacteria-related loss, cost-recovery efforts usually end up in court in a search for responsible parties.
Based on the loss results in EIL policies, it appears that the anticoncurrent causation exclusions for losses related to fungi and bacteria in property and liability policies are finally taking hold in claims settlement practices on commercial properties. The big question is when will EIL insurance become an accepted and necessary line of insurance in the commercial property space?
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