United States: Toxic Mold: Do Insurers Have A Duty to Warn?

Originally published in FDCC Quarterly, Fall 2001

From Parade Magazine to the Center for Disease Control Website, the level of publicity and concern about health risks associated with molds in homes, apartments and public buildings is on the rise. As is often the case, insurers find themselves at the forefront of these difficult problems, educating their claims professionals in all the particulars of identifying and addressing mold infestations. For property insurers, these infestations present special challenges. Apart from the significant coverage questions and debate relating to appropriate remediation that mold and "sick building" claims present, responsible property insurers must also ask themselves what information, if any, they should disclose to the occupants of the buildings they insure about mold-associated health risks.

The health consequences of exposure to these molds are the subject of considerable debate in the scientific community. However, studies associated with various responsible governmental entities have suggested that certain molds can pose serious health risks for infants and individuals with compromised immune systems. Insurers, as they deal with scores of mold losses, often develop superior institutional knowledge both about the health risks and the mycotoxins involved. Under these circumstances, what obligations to disclose possible health risks does a property or casualty insurer have, upon learning of a toxic mold infestation at an insured property?

Building materials which become moist or water damaged, whether from water intrusion, condensation, or plumbing leaks can provide a hospitable environment for stachybotrys and other moisture-loving molds. The New York City Department of Health outlines a balanced and thoughtful assessment of the known health risks:

One significant focus of insurer concern and scientific debate arose out of a study in Cleveland which suggested a possible relationship between a rare form of pulmonary hemorrhage in infants and fungal infestations, particularly stachybotrys chatartarum. The Center for Disease Control concluded that, because of problems with data collection and reporting, the association between stachybotrys chatartarum and pulmonary hemorrhage is not established. The CDC, however, insisted that its reassessment of the studies performed in Cleveland does not "change the recognition that there are health affects from exposure to mold." While scientific debate about whether these potent mycotoxins can be fatal to infants rages on, how should a responsible insurer, investigating claims today, navigate the issues of warning policy holders or third parties working or living in a building where a significant infestation of toxic mold is found? This article will explore these issues and suggest a balanced resolution of the insurer's dilemma.

Only a few courts have allowed third parties injured by an insured or on an insured's property to assert that the insurer owed them a duty either to warn them of specific risks, or to refuse to insure a specific customer unless a hazardous condition on the property was corrected.

Typical situations involve the issuance of insurance to a dangerous driver or an unqualified pilot, whose negligence later causes injury to the third party. In these situations the typical finding is one of no duty to warn a third party or to refuse to insure a potentially dangerous policyholder. See, e.g., Nipper v. CAARP, 19 Cal. 3d 35 (1977) [no duty on the part of an assigned risk program to "weed out" poor risks]; Fireman's Fund v. Superior Court, 75 Cal. App. 3d 627 (1987) [no obligation to investigate the qualifications of a pilot purchasing flight insurance]; Galanais v. Mercury International Insurance Underwriters, 247 Cal. App. 2d at 690 (1967) [No duty to screen, interview, or investigate the financial condition of, someone who purchased life insurance at airport, even though he was in financial straits, despondent, and subsequently caused a plane crash].

Outside of the initial purchase context, injured third parties have contended that an insurers' knowledge of dangers to them gave rise to an obligation to warn them. Cases evaluating these contentions have consistently held that there was no duty towards third parties, not even to disclose known dangers. For instance, in In re A.H. Robbins Company Incorporated, 880 F.2d, 709, 751 (4th Cir. 1989), Plaintiffs alleged that Aetna, the insurer of A.H. Robins Company, (which manufactured the Dalkon Shield intrauterine device) was aware of deficiencies in the Dalkon Shield but failed to disclose them to patients who subsequently suffered injuries from the device. The court held these facts did not give rise to any duty to disclose dangers known to the insurance company. See, also, Matthias v. United Pacific Insurance Company, 260 Cal. App. 2d 752, 755 (1968) [insurance company's knowledge of defects in the stairs at the insured's premises did not give rise to any duty to warn third parties of the defect, or to require the insured to repair the defects]. Kent v. Jomac Products Inc., 542 So. 2d 99 (1989) [Worker's Compensation carrier which inspected a plant, knew or should have known of defects in the industrial equipment at that plant. The insurer failed to warn either the employer whom it insured or the employee who was injured by the defective equipment. This case holds the insurer had no legal or contractual duty to conduct safety inspections, and therefore no duty to warn. It should be noted that the policy in this case specifically stated that the inspections were not safety inspections, but related only to the insurability of the workplace and the premiums to be charged.] In another case, a Plaintiff alleged a hospital's insurer was responsible for a shooting in the Hospital's parking lot. Isaacs v. Huntington Memorial Hospital, 38 Cal. 3d 112, 134-135 (1985). Again, the insurer had no liability to a third party for a dangerous condition on property it did not own or control.

One exception to this general rule is found in Seay v. Travelers Indemnity, 737 S.W. 2d 774 (1987), which holds that an insurer's voluntary inspection of industrial machinery (in this case boilers) gave rise to a duty. The insurer certified the boilers to the State Department of Labor, made recommendations to the owner for their care, and the owner relied upon those recommendations. Under those circumstances, the insurer had a duty of care toward the owners' employees, requiring that the inspections be performed with due care.

In summary, it does not appear likely that courts will hold insurers responsible for warning third parties (such as tenants or employees) about health risks associated with exposure to stachybotrys or other toxic molds present on insured premises.

There is very little case law addressing any obligation on the part of an insurance company to warn a policyholder about possible dangers associated with a reported loss. Most of the cases involve contentions that life insurance companies were negligent in issuing life policies, changing beneficiaries or raising policy limits where the beneficiary of the policy had a motive to murder (and sometimes did murder) the insured. Most find some form of duty toward the insured.

For instance, in Bacon v. Federal Kemper Life Assurance Company, 400 Mass. 850 (1987), the widow of an insured who was murdered by one of his business partners sued Kemper, claiming it had acted negligently in accepting and recording a change of beneficiary on a life insurance policy. The insured's business partner had sent the company a change-of-beneficiary form bearing the forged signature of the insured. The business partner later murdered the insured in an effort to collect the policy proceeds. The Court concluded that the company did have a duty of care towards the insured. However, the duty was limited to acting with due care in effectuating a change of beneficiary. The Bacon court went on to hold that the company had not breached that duty, because there was no evidence that Kemper either knew or should have known that its approval of the change of beneficiary request exposed its insured to an unreasonable risk of harm.

The element of knowledge is also emphasized in the peculiar case of Life Insurance Company of Georgia v. Lopez, 443 So. 2d 947 (Supreme Court of Florida 1983). In that action, the insured, Mr. Lopez, survived an attempt on his life by his wife and her brother. Shortly before they attempted to murder Lopez, the wife obtained insurance on Lopez's life with an annual premium equal to the family's annual income. After overhearing his wife and her brother plotting to kill him, Lopez allegedly called his insurance agent and informed him of the conspiracy. The company made no inquiry into the situation.

Lopez survived the attempt on his life. He sued the company, alleging it had been negligent in failing to discover the disproportionate relationship between the premiums and his income, and in failing to investigate the conspiracy to murder him after receiving actual notice. Given that there was actual notice of the beneficiary's murderous intent, the court concluded that the company had a duty to "eliminate any motive for effecting the insured's death, if not by withdrawing the coverage as void for reasons of public policy, then at least by warning the beneficiary that no proceeds would be payable if she murdered the insured."

The Alabama Supreme Court came to a similar conclusion, again in the context of life insurance in Liberty National Life Insurance Company v. Weldon, 267 Ala. 171 (1957). The company had issued a policy on the life of a two-year-old child, at the request of the child's aunt by marriage, with the aunt as beneficiary. The aunt then poisoned the child, presumably to collect the insurance. The Alabama Supreme Court held that an insurance company had a duty to use reasonable care not to issue a policy of life insurance in favor of a beneficiary who had no interest in the continuation of the life of the insured. The court concluded that this duty existed because an insured was placed in a position of extreme danger by the act of issuing such a policy.

While these life insurance cases shed little direct light on the duty to warn about health risks caused by molds, their emphasis on the companies' knowledge of the insured's jeopardy is significant. The insurer's property claims representatives, particularly if they are aided by an environmental consultant, will, in all likelihood, know a great deal more about the general health risks involved with mycotoxins than the average insured. Does this superior knowledge create a duty to warn, and, if it does, what are the contours of that duty?

A person who has not created a peril is ordinarily not liable for failure to take affirmative action to protect another, no matter how great the danger in which the other is placed, unless there is some relationship between them which gives rise to a duty to act. Matthias v. United Pacific Ins. Co. 260 Cal. App. 2d 252, 755 (1968) See, also, Barras v. Monsanto Co., 831 S.W. 2d 859, 865 ["Mere knowledge of a dangerous situation imposes only a moral duty to warn or render aid, not a legal duty"] Such relationships ordinarily do not include those of insurer and policyholder. Rather, they typically involve landowners and those on the premises, or suppliers of goods and those who purchase them. The cases often refer to these as "special relationships."

One argument the companies will doubtless confront is that the policyholder/insurer relationship is a special relationship giving rise to a duty to warn policyholders about significant risks to their health caused by toxic mold. There are two theories courts could use to find a duty.

First, insurance cases discussing the covenant of good faith and fair dealing often describe the relationship between policyholder and carrier as a "special relationship". See, e.g. Tamez v. Certain Underwriters at Lloyds, 999 S.W. 2d 12, 21 (1998); Egan v. Mutual of Omaha 24 Cal. 3d 809, 820 (1979). These cases, however, impose extra-contractual liability on insurers, not any duties to warn or to act to protect the insured from health risks that the company did nothing to create. Nevertheless, given the identical language used to describe the relationship in duty-to-warn cases and extra-contractual cases, a court could be persuaded that the insurer-policyholder relationship, in and of itself, gives rise to a duty to take affirmative action when a policyholder is in a dangerous situation.

The second approach flows from the fact that a contractual relationship exists between the insurer and the policyholder. A duty of care can arise because of a contract; however, that duty simply is one to perform the services contracted for in a competent and reasonable manner. See, e.g., North American Chemical Company v. Superior Court, 59 Cal. App. 4th 764, 774-75 (1997) [a contract to transport chemicals includes an implied term that the chemicals will be properly packaged and shipped; thus a negligence cause of action can be pursued when the services contracted for have not been competently performed.]

Here, insurers contractual obligation is to pay indemnity for covered losses. This obligation probably includes a duty to determine coverage, to scope a loss accurately, to estimate the cost of repairs in a reasonable fashion, and to issue an accurate payment. These contractual obligations, however, are quite removed from the act of warning or advising about health hazards posed by damage to an insured dwelling. Thus, while there may be judges who will find this argument appealing, a Plaintiff asserting it would be making new law.

The alternate, and greater, risk of a finding of duty flows simply from the courts' dissatisfaction with the traditional rule that people and institutions have no obligation to come to the aid of others. The rule is regularly criticized in published opinions, See, e.g., Solon v. O'Daniels, 141 Cal. App. 3d 443, 447 (1983) and often subverted by expanding the list of "special relationships."

"Duty" is the shorthand term courts generally use to describe the public policies that give rise to liability. Such "policy determinations" by definition, can be extremely result-oriented.

California jurisprudence on the existence of a duty provider is a useful touchstone to evaluate how a liberal jurisdiction may assess this issue. California looks to eight distinct factors to make this public policy determination: (1) the foreseeability of harm to the Plaintiffs; (2) the degree of certainty the Plaintiff has been injured; (3) the closeness of the connection between Defendant's conduct and the injuries suffered; (4) the moral blame attached to Defendant's conduct; (5) the policy of preventing future harm; (6) the extent of the burden on Defendant; (7) the consequences to the community of imposing liability upon the Defendants; and (8) the prevalence of insurance for the risks in question. Rowland v. Christian, 69 Cal. 2d 108, 113 (1968).

Based on the scientific information available, there appear to be specific classes of insureds or occupants of insured property who may be particularly vulnerable, so harm is arguably foreseeable: Infants, those with respiratory or immune problems, and perhaps others, depending upon the medical information developed. The degree of certainty that a particular plaintiff has been injured obviously will vary from case to case, depending on the claimed medical condition and its relationship to exposure to mold. Similarly, the connection between the Company's conduct in not warning an occupant about particular health hazards and the injuries suffered will vary from case to case, depending on how long the house has been infested with mold, the particular injuries the Plaintiff suffered, and the policyholder's willingness to vacate the home.

The moral blame attached to any decision not to warn also depends on the facts. In a "worst case scenario" -- where an infant with uneducated parents and respiratory difficulties is living in a property filled with stachybotrys -- many people would attach substantial moral blame to any decision not to warn the parents of the risk to their child. In less extreme situations, the "moral blame" factor may be significantly diminished.

Two factors which militate against a duty to warn are the burden on the insurer and the consequences to the community of imposing liability, both of which could both be substantial. Property insurers are in the business of underwriting insurance and paying covered losses, not giving medical advice, or educating employees or policyholders about mycotoxic hazards. Developing medical information about who is at risk and microbiological information about which molds are hazardous to whom are both substantial burdens. Educating claims staff in these two technical areas is highly burdensome as well, and not particularly pertinent to most loss adjustments or coverage determinations. Indeed, imposing liability on insurance companies for health problems people suffer as a result of mold in their homes will inevitably result in higher insurance prices for the community at large.

There is some risk in the first party context, that a Court will in fact impose a duty to warn policyholders about the health hazards these molds create. The arguments against the imposition of such a duty are strong and, in many fact situations, are better founded than the arguments favoring imposition of a duty.

Nevertheless, it is easy to imagine a "hard case making bad law" where a duty would be imposed. If a claims representative said nothing about a known toxic stachybotrys infestation to an uneducated policyholder whose infant later died of lung hemorrhage, many courts would be deeply averse to finding there was no duty to say something to the policyholder. Such a clear-cut situation would present compelling arguments for a finding of duty.

The multitude of less clear-cut factual situations which claims professionals will undoubtedly encounter have the potential to plunge insurers into a morass of line drawing and distinction making on complex medical and microbiological issues which are beyond an insurers' expertise. Moreover, the science in this area is still developing, so medical facts about who is at risk for what harm from what molds will undoubtedly change.

Under the circumstances, there is no course of action open to an insurer which entirely eliminates risk of liability for real or imagined physical injury to policyholders and their families. If a company takes the position that it owes no duty to warn anyone, including the hypothetical policyholder with an infant discussed above, a bad set of facts could result in a finding of duty and breach. Moreover, it would be naïve to assume that such a situation would not involve exposure to damages in excess of those ordinarily associated with the death of an infant, to say nothing of significant bad publicity.

A decision to warn only policyholders who are, or may be, particularly vulnerable entails intrusion into the customers' privacy (e.g., claims representatives inquiring whether anyone in the household is pregnant, HIV positive, etc.) and will require claims representatives to develop substantial expertise about vulnerable populations and toxic molds. In addition to requiring that expertise, asking claims professionals to make judgment calls about which people require warning about what risk from which mold carries with it significant risks of mistakes, confusion, and disparate treatment of claimants.

A third alternative is to give simple, basic information, (such as that found in the New York City Department of Health Guidelines) to everyone whose house is found to contain any toxic mold. That, together with the results of any sampling, gives the policyholder basic information to enable him or her to make an informed decision about seeking medical advice for evacuating their home.

Undoubtedly there will be policyholders who do not belong to any vulnerable group who nevertheless overreact to this information, or who consult with physicians whose ideas are far out of the mainstream. Nevertheless, this approach lessens the risk of liability although it may increase the likelihood of unjustified claims for alternate living expense, business interrupting or other benefits.

Simple, straight-forward information, coupled with disclosure of any environmental testing results, should fully inform the policyholder without plunging the claims staff into decisions about what health issues in a policyholder's household, coupled with which mold, warrant what type of warning. Thus, this appears to be the simplest, safest route for an insurer to follow.

Even that path, however, is not entirely free from risk. For example, the Restatement 2d of Torts § 324A imposes a duty of care on a person or institution that "undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of a third person or his things . . ." Liability for this "Good Samaritan" act attaches if the actor (1) fails to exercise reasonable care which increases the risk of harm; or (2) undertakes to perform a duty owed by some third person; or if (3) the Plaintiff suffers harm because of reliance on the actor's conduct.

The Texas case of Seay v. Travelers Indemnity Co., 737 S.W. 2d 774 (1987) illustrates the principle in the insurance context. In Seay, the Travelers voluntarily inspected boilers at the premises of its insured. Texas law required that the boilers be periodically inspected by certified inspectors, and that their condition be certified to the Department of Labor Standards. The Department certified employees of Travelers to inspect the boilers; If the certified Inspector approved a boiler, the Department would certify it for continued operation.

Over the years, employees of Travelers inspected its insureds' boilers and gave reports on their condition to the Department of Labor, as well as to the insured. As a result, the certificates of operation were issued, and the insured continued to use the boilers. A malfunction in one boiler resulted in an employee of the insured being scalded to death. The widow sued Travelers for wrongful death.

The Seay court found that Travelers' inspections were an undertaking under §324A of the Restatement which gave rise to a duty of care in inspecting and certifying them. The Court reasoned that the purpose of the inspections, as required by the Department of Labor, was to determine whether the boilers were safe to operate. The employer presented evidence that it relied upon Travelers' inspections both to determine the boiler's condition, and for advice concerning problems and any needed changes or modifications. The upshot for Travelers was liability for a death caused by negligent inspection.

Although Travelers had no obligation to inspect the boilers at all, its extensive involvement in certifying the boilers and recommending changes to the insured gave rise to liability. Thus, an insurer's decision to give advice or give warnings concerning health hazards from molds could impose a duty of care to give accurate information to insureds. Given that insureds may well rely on what their carriers tells them, this is not a surprising outcome.

Unfortunately, providing accurate advice requires analyzing toxicology and medical issues that are far from simple, involving more than a dozen potentially toxic molds and varying health risks depending on an individuals pre-existing condition and exposure. Thus, giving specific information to policyholders about health risks would require a massive effort and close monitoring to ensure accurate and up-to-date information.

If an insurer decides to provide basic information about mold hazards, not specific to any individual, it may also be wise to advise policyholders to check with their own doctors to see whether there is any cause for concern. This puts the responsibility for knowledge of the policyholders' medical situation and of up-to-date toxicology where it belongs: with the policyholder's physician. It also minimizes any chance of aggravating any danger to policyholders or of policyholders' relying on claims people for what is essentially medical advice.

The toxic nature of some mold infestations, and the health risks they pose, has been a fast-breaking issue for the insurance industry. As with many fast-breaking issues, it poses a host of new, and as yet unanswered, legal and practical questions. This dilemma will persist for insurers adjusting this type of loss until public awareness and knowledge catch up with the education many carriers have rapidly acquired on this topic. Striking the balance among the competing considerations of avoiding liability, avoiding undue alarm to policyholders and their families or tenants, and the practical realities of property claim adjustment, can undoubtedly be accomplished in a number of reasonable, responsible ways. The balance suggested in this article should minimize the risks on all three fronts.