United States: California Passes Legislation on Mold Remediation Obligations, Permissible Mold Exposure Levels & Duties to Disclose Mold

The California legislature recently enacted the Toxic Mold Protection Act of 2001 (Cal. Health & Safety Code §§ 26100 –26156; Chapter 584 of the Statutes of 2001), the first legislation of its kind in the United States, addressing some of the many legal and scientific issues surrounding toxic molds in indoor environments. For some building owners, tenants, and insurers, the Act's impact will be delayed, while for others it will be immediate and substantial. The Act raises many potential new problems and may affect industries which, to date, have not felt the financial impact of the rising wave of mold litigation and claims.

The first effects of the Act will be felt by owners and managers of commercial and industrial buildings and commercial and industrial tenants, which is to say most major businesses in California. While many obligations the Act creates are deferred until after a series of guidelines have been developed, the Act appears to impose on commercial and industrial landlords and tenants in the near future obligations to remediate both known mold and known water intrusion conditions. The next impact will be on the property carriers who insure those owners and tenants, to whom they will doubtless look for funding, as well as on developers and managers of commercial and industrial properties (and their casualty insurers). Owners and tenants who have paid significant sums to remediate mold or water problems caused by inadequate construction or maintenance will undoubtedly pursue recovery from those sources as well.

In time, residential landlords, developers of residential real estate, sellers of commercial and industrial real estate, real estate brokers and agents, and their insurers will experience the effects of this legislation. There is a strong probability that hospitals, clinics, schools and nursing homes may suffer particularly challenging consequences as a result of this legislation. Insurers underwriting these risks need to be particularly aware of the potential problems these institutions may face.

The Act does not appear to contemplate the creation of standards for single family residential construction. However, it is certainly possible that developers, insurers and sellers of single family homes will face arguments that the standards are applicable.

The Act authorizes California's Department of Health Services (DHS) to establish a task force which will work with the DHS to evaluate four issues and develop standards for each.

The standards will address:

1. Permissible mold levels in indoor environments. As a preliminary matter, the DHS is to consider the feasibility of adopting limits to permissible exposure levels indoors.
2. Practical standards to assess the health threats posed by the presence of mold.
3. Scientifically valid methods to identify the presence of mold.
4. Practical guidelines for the remediation of mold.

The Act instructs the task force to avoid any significant health risk to the general public, to balance the protection of public health with technological and economic feasibility, when possible, and to use the latest scientific data.

Significantly, the standards are to be aimed at protection of the general public, so it appears they will not legislate mold exposure levels designed to protect highly vulnerable populations. However, in formulating the guidelines, the DHS is to "consider" adverse health effects on populations which are thought to be particularly vulnerable to mold-triggered health problems, such as infants and the immune compromised, as long as those vulnerable groups constitute a "meaningful portion" of the general population.

The Act contemplates a fairly long development process for creation of the guidelines. The DHS is to report to the legislature in July 2003 on its progress. No guidelines go into effect until at least six months after they are finalized, so those industries and institutions whose obligations depend on the guidelines clearly have substantial "breathing room" to prepare. This includes everyone but owners and tenants of commercial and industrial buildings, and those to whom they may look for indemnity. Once the development begins, DHS is to post notice of that fact, seeking public comment, on its website.

The task force is, by statute, to include a wide range of experts as well as economic and political constituencies. Experts in public health, mold remediation, environmental health, medicine and building code enforcement are to participate, along with representatives of consumers and affected industries, including building proprietors, developers, realtors and insurers. The make-up of this task force will be crucial to the ultimate impact of this legislation. As anyone who has dealt with mold issues has learned to their sorrow, the same mold-infested building can be examined by two comparably qualified professionals who will reach antipodal conclusions about whether it presents a health hazard and whether and how the mold should be remediated.

Commercial and industrial building owners and tenants appear to face obligations as of the effective date the Act, January 1, 2002. Under new California Health & Safety Code Sections 26142 through 26145, any landlord of such a building who knows of either the presence of mold or a water intrusion condition is obligated to conduct "any necessary remedial action" within a reasonable time, unless the tenant, under the terms of the lease, is responsible for building maintenance. Commercial and industrial tenants are responsible for notifying their landlords of any mold or water intrusion conditions. If tenants are responsible for maintenance, they must perform necessary remedial actions to correct the mold or water intrusion condition. This aspect of the legislation will foster many disputes, since most commercial and industrial leases divide the maintenance obligations between landlord and tenant, as opposed to allocating the responsibility solely to one or the other.

The seeming immediacy of this obligation will also foster confusion and disputes. Without the contemplated standards for permissible mold exposure levels, and appropriate mold remediation, both landlord and tenant face a vague obligation to effect an uncertain cure of an unspecified problem.

All disclosure requirements which the statute creates go into effect no sooner than six months after the DHS establishes guidelines. Once guidelines are in effect, any seller or transferor of commercial or industrial real property who knows of the presence of mold, either at a level in excess of the guidelines, or which poses a health threat according to the guidelines, must make written disclosure to prospective buyers, prospective tenants, or existing tenants, as soon as practicable.

Residential landlords who know or have reasonable cause to believe a building or unit contains mold either in excess of the exposure guidelines, or pose a health threat, must also disclose the fact in writing to existing and prospective tenants. Residential landlords are subject to a further requirement that they distribute to prospective tenants a DHS-prepared booklet on the health risks of mold.

Of course, statutory and common law in California already impose an obligation on sellers to disclose material facts regarding the property. The Act arguably makes the presence of mold or water intrusion material matters. Real estate brokers and agents would be well advised to take this into account as well. The Act expressly leaves untouched existing rights, defenses and other duties under common law or other statutes. Specific mention is made of the statutory obligations of real estate agents to inspect properties and make disclosure and the obligations of sellers to disclose known defects to prospective buyers.

The statute specifically provides that it does not require any landlord or seller or transferor of real estate to conduct air or surface tests to determine whether mold levels in their buildings exceed the levels permitted under the guidelines. Thus, in theory, a "head in the sand" approach could benefit a landlord or building owner. However, once a landlord has notice of a problem or "reason to believe" one may exist and has an obligation to remediate it, prudence seems to dictate testing to determine whether a problem exists and how extensive it may be.

These institutions, and the companies which build, remodel, maintain and own them, may experience major effects from the Act. The Act authorizes the DHS to develop alternate mold exposure limits for facilities whose primary business is to serve vulnerable populations. Hospitals and nursing homes are specifically identified. The result may be more stringent standards for these institutions, which may serve both to expose them to prohibitive remediation costs and to increased liability if they fail to meet the standards.

Underwriters should take advantage of the deferred nature of the obligations the Act creates to examine property risks in light of these impending standards. For companies developing new forms to limit exposure to first- and third-party mold losses, those should ideally be in effect, particularly for residential rental risks, before the new standards take effect.

Companies which waived mold exclusions to accommodate large commercial property risks would be wise to evaluate their waivers, or their pricing, since this legislation may spur remediation of mold or water intrusion conditions which may previously had been ignored.

Third-party risks may prove more difficult to manage. Loss control efforts with builders and developers designed to minimize mold losses may prove a good investment. In addition, once the requirement that residential landlords warn prospective tenants about the health risks of mold takes effect, prudent underwriters may want to ask for proof of fulfillment of that obligation as a condition of issuing or renewing liability coverage.

One potential advantage to this Act may be eventual clarity about what types and levels of mold are hazardous, and what methods of remediation are acceptable. For those mold losses which are in fact covered — and many are not — the guidelines, if they are reasonable, could preempt many disputes where the need for remediation, or the appropriate type of remediation, is in dispute. Of course, if the guidelines are unreasonably stringent, resisting a demand that remediation of a covered loss comply with the guidelines is likely to be futile.

On the liability side, this Act may well expand existing liabilities or create new exposures for landlords, employers, sellers of real property and real estate agents. The precise contours and value, if any, of those exposures remains to be seen. These guidelines could potentially limit the use of "junk science" in these cases, which could prove a real benefit. On the other hand, casualty professionals need to be attuned to the novelty of these issues in evaluating cases presenting mold exposures.

The Act permits enforcement, once guidelines are created, by local officials, including public health officers, building code enforcement officers and city attorneys. The statute is silent on whether this enforcement is the exclusive remedy, or is in addition to private litigation.

The Act ends with a truly Delphic pronouncement: It is to be "implemented" only to the extent that the DHS determines funds are available to implement it. Presumably this applies to the development of the guidelines themselves, and the multiple duties which will follow the adoption of the guidelines.. For commercial and industrial building owners and tenants, the obligations appear to go into effect when the Act becomes effective, on January 1, 2002.