Practical Tips for Minimizing Exposure to Mold-Related Liability

Serious mold problems can occur in any home or building from seemingly minor design, repair or maintenance issues and can create millions of dollars of liability for a broad range of people. However, with the significant increase in mold-related cases since 1999 and nearly five years of mold-related case law in place, a number of simple, practical steps to avoid or minimize exposure to mold-related liability are becoming apparent.

Landlords, Tenants and Hotel Owners may incur major losses and potential liability. In fact, a large hotel in Hawaii was closed because of mold that required a multi-million dollar cleanup resulting in numerous lawsuits against contractors asserting various theories, including negligence, breach of warranty and breach of contract.

Practical Tips:

• Review your leases and operating agreements with a view to minimizing the risk of liability arising out of mold contamination, and allocating that risk among landlord, tenant and manager.

• Make sure maintenance and repair responsibilities are clearly set forth so that if contamination results from a building not being properly maintained or repaired, it is clear which party is responsible.

• Insist on appropriate waiver and indemnification provisions to protect the parties, and watch for boilerplate provisions in leases, such as the covenant of quiet enjoyment, that may result in unintended liability.

Sellers, Contractors and Developers can face lawsuits alleging defects in design and construction that results in mold contamination. For example, Erin Brockovich, claiming faulty construction that caused mold in her home, sued not only the contractor that built the home, but also the prior owner that sold it to her. Repairs cost more than $600,000. In Ohio nearly 200 homeowners recently settled a class action against the developer of their homes for $3,000,000.

Practical Tips:

If you are selling property:

• Ensure that required disclosures are made as to any known mold issues.

• Make sure that any new construction warranties are clear as to the scope and duration of liability for construction defects that may result in mold damage.

If you are buying property:

• Request representations and warranties as to past mold and water damage issues, and ask your property inspector to pay particular attention to any evidence of mold or past water damage. Consider more thorough invasive inspections if there is reason for concern.

• If you believe that there was past water damage, consider including a contingency in the purchase contract so that you do not lose your earnest money if you are unable to close the acquisition because the building is found to be uninsurable. This is a real risk since some insurers refuse to insure properties with a history of water damage in view of the potential for future mold claims.

• If a contingency is not feasible, check with your insurer before signing the contract to make sure the building will be insurable at a reasonable cost.

Property Owners may face substantial costs to rectify mold problems that are not insured and may have problems selling their property if they file a claim to cover mold related damage.

Practical Tips:

• Have your insurance professional review your coverages to determine the scope of protection. Some insurers will provide special mold coverage for an additional premium based upon the underwriting risks involved.

• If you incur water damage to your property, carefully consider whether you should file an insurance claim. You may decide not to proceed with a claim since it will likely be reported to the Comprehensive Loss Underwriting Exchange, a national registry of the insurance industry that, once a claim is reported, will provide a "CLUE" report to future insurers of your property disclosing the water damage. A CLUE report showing past claims for water damage may affect the ability to sell your property, or the price you receive, since the buyer may be unable to obtain insurance (or incur substantially higher premiums), due to the reluctance of insurers to take the risk of future mold claims in view of the earlier water damage.

Building Managers and Condominium Associations that fail to repair and protect properties from moisture that may result in mold damage could face contractual liability for not adhering to the standard of care provided for in the operative legal documents, and also potential liability claims for health problems asserted by residents.

Practical Tip:

• If you are a manager, employee, board member or officer of a management company or condominium association, make sure management agreements and condominium declarations protect you against claims that may be asserted by building occupants for property or health claims arising out of mold contamination. You should be fully indemnified, including for legal fees incurred in defense of claims, provided you act in good faith in performing repairs and inspections as part of your management responsibilities.

Architects and Engineers who specify the use of materials that permit water infiltration, or who design a building without providing for adequate drainage or ventilation, risk liability for possible breach of contractual and duty of care obligations.

Practical Tips:

• Take special care to focus on design issues that may result in future mold problems. For example, the use of synthetic stucco (EIFS system) has resulted in significant litigation alleging that the product may permit moisture penetration leading to potential mold problems.

• Review your insurance and professional service agreements for provisions that affect your liability.