TABLE OF CONTENTS

I. NEW ISSUES IN MOLD LITIGATION 1

A. Proving causation of adverse medical impact - the weak link in

plaintiffs' cases 1

B. Toxic mold legislation 3

C. Trends in Mold Nationwide 6

D. Recent Cases on Mold 8

E. Response of insurers to the increase in mold cases and recent .

legislation regarding mold 13

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I. NEW ISSUES IN MOLD LITIGATION

A. PROVING CAUSATION OF ADVERSE MEDICAL IMPACT - THE WEAK LINK IN PLAINTIFFS' CASES

• One of largest problems facing plaintiffs counsel in toxic mold cases is causation.

• At the pre-trial stage, vigorous lawyering by the defense can eliminate much of the bodily injury component.

• Plaintiffs seeking to prove a toxic mold case must establish both general and specific causation.

• General causation is the demonstration that a given toxic substance, in the particular location and for a particular duration, can cause the type of illness or injuries alleged.

• Specific causation requires proof that the toxic chemical actually did cause the alleged injuries.

• Establishing either type of causation requires expert testimony, which is subject to exclusion or limitation under Daubert (Daubert v. Merrell Dow Pham1aceuticals, Inc., 509 U.S. 579, 580 (1993) case, and comparable rules in state courts that still follow the Frye line of cases (Frye v, U.S., 293 F.2d 102 (1923)).

• Daubert test - judge has discretion to determine whether expert's testimony is relevant and based on a reliable foundation. The judge may consider

• whether the theory or technique in question can be tested;

• whether it has been subjected to peer review and publication;

• its known or potential error rate (statistical validity); and

• whether it has attracted widespread acceptance within the relevant scientific

community

• Specific Causation - Source of Toxic Mold

• Substantial moisture levels are necessary for the growth of toxic mold and since a

variety of circumstances can cause such condition, others may be partially or wholly responsible for the resulting loss.

•

Specific causation can be broken down as follows:

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• Identify type of mold alleged to result in injuries;

• Specifics relating to exposure, proximity, duration and alleged exposure pathway; and

• Medical issues, such as onset of symptoms relative to specific exposure alleged.

• Respond with presentation of all the more .common and likely reasons why

plaintiff is symptomatic.

• There are currently no reliable epidemiological studies that demonstrate, by a

preponderance of the evidence, a causal connection between environmental mold and the illnesses typically involved in mold litigation, and

• No relevant significant peer reviewed articles establishing such a connection.

• Bradford - Hill factors - these factors are commonly used to determine

causation of a disease - they are often rejected by plaintiffs experts even though broadly accepted in the scientific community.

• factors are: 1) temporal relationship; 2) strength of association; 3) dose-

response relationship; 4) replication of findings; 5) biological plausibility;

6) consideration of alternative explanations; 7) cessation of exposure;

8) specificity of association; and 9) consistency with other knowledge.

• Dose-Response Relationship-

• Definition: as exposure increases, the given health effect should

also increase.

• OFTEN WEAKEST AREA OF PLAINTIFF'S CASE- exposes the

subjective nature of plaintiff's claims in the face of remote exposures and alleged harm.

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B. TOXIC MOLD LEGISLATION

Toxic Mold Act of2001: §26100 of Health & Safety Code

• MOLD DEFINED as "any form of multi-cellular fungi that live on plant or animal matter and in indoor environments. Types of mold include, but are not limited to, c1adosporiuim, penicillium, alternaria, aspergillus, fuarim, trichodenna, mernnoniella, mucor, and stachybotrys chartarum, often found in water-damaged building materials."

• General Provisions

• Department of Health must convene task force to advise on adopting and adopt (if

feasible) permissible exposure limits ("PEL's") for mold in indoor environments;

• May develop alternative permissible exposure limits for targeted populations such

as hospitals and childcare facilities;

• Must notify public of permissible exposure limits.

• Report to legislature by July 1,2003;

• Any limits set must be reviewed and amended once every 5 years;

• Adopt practical standards to assess the health threat posed by the presence of mold.

• Guidelines for Identification of Molds

• Adopt mold identification guidelines for recognition of mold, water damage, or

microbial volatile organic compounds in indoor environments.

• Commercial, industrial, or residential landlords or a public entity that rents or

leases a unit or building - are not required to conduct tests to determine whether mold exceeds limits.

• Guidelines for Remediation

• The Department of Health must develop and disseminate remediation guidelines

for mold in indoor environments.

• These guidelines are to provide practical guidance for removal or cleaning of

contaminated materials. But cannot require a landlord, owner, seller or transferor of real property to be specially trained and certified or to utilize the services of a specially qualified professional.

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• Disclosures

• Affirmative Disclosure Obligation

• Sellers or transferors of commercial or industrial real property must disclose

presence of mold.

• Residential landlords - must disclose in writing, when know of presence of mold

and it either exceeds exposure limits or poses a health threat. Standard is if the landlord· knows OR has reasonable cause to believe there is mold that exceeds the limits. Landlords must also distribute consumer oriented booklet from DHS regarding the potential adverse health risks associated with mold.

• If mold is remediated according to guidelines, sellers, transferors/landlords of

commercial/industrial property and residential landlord can be EXEMPTED from disclosure requirements.

• Duties of Tenants

• Of commercial/industrial property,

• Must provide written notice to landlord ifhave knowledge or notice that mold

present or chronic water intrusion exists, and must make property available for assessment of remedial action.

• Affirmative Duties of Landlords (Commercial or Industrial Property):

• With knowledge that mold is present or there is a condition of chronic water intrusion, must assess presence of mold or the condition and conduct any necessary remedial action within reasonable time;

• Unless Tenant is contractually responsible for maintenance of property;

• Then Tenant must inform Landlord in writing that mold present and correct

condition in compliance with the terms of contract with the Landlord.

Companion Mold Bill §26200 of Health and Safety Code (Ch. 19)

•

Requires California Research Bureau, in consultation with Depart of Health Services, to perform a study, publish findings and organize meetings regarding fungal contamination in indoor environments.

•

CRB must submit to Legislature and Department of Health Services published findings by July 1, 2003.

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S.B. 1763, Insurance for Mold Damage

• Introduced by California State Senator Deborah Ortiz on February 21,2002. It proposes to add sections 790.0 and 2071.2 to the Insurance Code.

• The Bill would require the California Insurance Department, in consultation with the Department of Consumer Affairs, to conduct a study about mold and its effect on residential and commercial property owners and insurance companies in the state.

• The Bill would also require the department to report its findings and recommendations to the Legislature by July 1, 2003.

• The Bill would provide "that insurers could exclude mold as a non-covered peril if the insurer states the exclusion in clear, explicit and understandable terms. The bill would require an insurer or its representative, agent, claims handler, expert or adjustor to disclose immediately all relevant information to an insured if mold is implicated, likely is present, or results from a claim, and to inform an insured when mold is reasonably believed to have ensued from a covered loss."

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C. TRENDS IN MOLD NATIONWIDE

• There is mold legislation currently enacted or pending in 11 states.

• Federal mold legislation is expected to be introduced before the end of the current

session.

• Last year, legislation to regulate general indoor air quality in schools was proposed in Congress as well as in seven states (Connecticut, Maine, Maryland, New Hampshire, New Jersey, Pennsylvania, and West Virginia).

• Only 2 states - Maine and New Hampshire - have enacted the legislation so far.

• Non-school related IAQ legislation is pending in New York and Minnesota.

• Trends in Cases

• Mold claims involving schools, especially involving modular housing used in

overcrowded schools, which often contains materials ripe for mold infestation.

• Mold claims involving apartments. Reasons for this include:

• Apartments may be built with cheaper materials;

• The level of maintenance, by both landlord and tenant, varies;

• Some claims are brought by tenants seeking to evade eviction or rent

obligations.

• Mold claims involving groupings of single family homes:

• In general, claims have moved away from condominiums to groupings of

single family homes which are prosecuted together.

· • Mold claims involving government buildings.

• On March 27th, 2000, California Superior Court Judge Elisabeth Krant

filed a lawsuit against Tulare County, alleging medical problems stemming from mold contamination in her chambers in the County Courthouse.

• Mold claims involving commercial buildings.

• Damages involve not only personal injury, but also potentialloss of use

and business interruption.

• Measures adopted during the energy crisis to make buildings more energy

efficient have actually made buildings unable to breathe. This can result in

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structures that trap moisture and mold growth within the building envelope and mold spores circulating throughout the HV AC system.

• New products, such as synthetic stucco and exterior insulation and finish

systems (EIFS) trap moisture within the building envelope and provide an environment for mold growth.

• Mold claims involving Health Care Facilities.

• Often the least publicized cases, but the most dangerous and expensive to

remediate because of the presence of immune-compromised people.

• 2nd and 3rd Generation Suits.

• In arena of prior construction defect cases, growing trend of plaintiffs

bringing claims for improper investigation, identification or remediation of the original mold condition.

• Filed against board members, experts and lawyers for failing to recognize

the scope and gravity of mold conditions, repair protocols and costs.

• Driven by fact that remediation is expensive.

• High verdicts show seriousness of claims.

• Single family Home - $32.2 Million verdict against Farmers Ins. Group

by a Texas jury in 2001.

• Apartment - $1.04 million award upheld by Delaware Supreme Court to

two women whose landlord failed to address leaks and mold problems in their apartments.

• Single Family Home - $18 million award by California jury in 2001, all but $500,000 in punitive damages, to a homeowner against a first party insurer who declined coverage for mold damage.

• Single Family Home - Undisclosed settlement amount believed to be

between $10-12 million for a Beverly Hills house infested with toxic mold.

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D. RECENT CASES ON MOLD

• Ballard, et al. v. Fire Insurance Exchange, No. 99-05252, Tex. Dist. Ct., Oct. 30, 2001.

• In October of2002, Texas Jury awarded $32 million against Fanners Insurance in

a mold coverage dispute.

• Michael Baldwin et al. v. County of Monterey, No. M55757, California Superior Court, Monterey County.

• Judge overruled a demurrer in a mold personal injury case, allowing a fraudulent

concealment claim to stand against the County.

• Workers in Old Monterey County jail allegedly injured by exposure to toxic

mold.

• Darren Mazz, et al. v. Raymond Schurtz, et al., No. 00A504795, California Superior Court, Sacramento County.

• California judge on January 7th, 2002 denied requests to order a new trial or issue

a judgment notwithstanding the verdict in a case in which apartment residents were awarded $2.7 million for injuries allegedly caused by mold exposure.

• Darren Mazza, his wife and son were repeatedly hospitalized for injuries caused

by mold after moving into their apartment.

• California Capital Insurance Company v. President Asset Group LLC, No. BS 071300, California Superior Court, Los Angeles County.

• California apartment owner agrees to reimburse carrier $1.7 million for firstparty claims.

• Mold found in apartment building, CGL carrier agreed to mitigate damages and remediate the mold subject to reservation of rights.

• Policy did not include mold coverage or water damage caused by construction defects.

• Did agree to cover third-party claims, including $350,000 already paid.

• Re: Board of Directors of Bay Point Condo Assn. Inc., et al. v. RML Corp., et al., No. CL 99-475 Virginia Circuit, Norfolk County.

• EIFS maker ordered to pay $2.5 million for construction defects and mold at

condo complex.

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• First verdict against maker of Exterior Insulation Finish System, also known as synthetic stucco.

• Court found that condo association entitled to direct damages based upon implied contractual indemnity from breach of the implied warranties of merchantability and fitness.

• Found EIFS itself defective, not installation.

• Jesse Barajas et al. v. County of Monterey, No. 56477, California Superior Court, Monterey County.

• County Employees suing over mold, lead exposure.

• Asserted fraudulent concealment, negligence and continuing nuisance.

• Companion case to Michael Baldwin, et al.

• Shirley Cooper v. Am. Fam. Mutual Ins. Co. et al., No. CV-00-I097 PXX-JAT, Arizona District Ct.

• Federal judge found no coverage for mold remediation under a homeowner

policy, rejecting the insured's arguments on efficient proximate cause and resulting loss cause.

• Argued that because water damage was a covered loss, any resulting mold would be covered under the efficient proximate cause rule. Court agreed with insurer that mold damage was excluded.

• Joy Craft v. Western Mutual Ins. Co., No. EO 30318, Calif. App., 4th Dist., 2002 Cal.App. Lexis 1713.

• California court affirmed dismissal of mold bad faith case.

• Trial court granted summary adjudication on causes of action for breach of the '

implied covenant of good faith and fair dealing and for intentional infliction of emotional distress. At end of plaintiffs case, trial court granted a non-suit on her claims for damages to personal property and for structural damages.

• At end of defendant's case, the court granted a directed verdict on plaintiffs

remaining claims for additional living expenses and fair rental value.

•

Vacaville Quail Run v. Gable Plastics, Inc., No. AO 92651, Calif. App., 1st Dist. (2002).

• Appeals Court affirms verdict finding mold property damage due to construction

defects, but remanded on allocation of award issue.

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• RCDI Const. Inc. et aI. v. Spaceplan Architecture, et aI., NO.1, OOCVI77, 4th Circuit (2002).

• Federal appeals court affirmed that an architectural firm owed no duty to a construction company and cannot be held liable for negligence in the rendering of a professional opinion regarding mold remediation.

• Michael Gutierrez, et aI. v. Centex Homes, et aI., No. 01-1-98432, California Superior Court, Tulare County; (companion case) Braun et aI. v. Centex Homes et al., No. 01- 196661, California Superior Court, Tulare County.

• California homeowners filed complaint accusing Centex Homes of defectively designing houses that later became contaminated with mold.

• Suing for negligence, breach of warranty, strict liability, fraud and unlawful business practices.

• George Allison et ai. v. West bel Arno Pacific Condo Assoc., et aI., No. YCO 40331, California Superior Court, Los Angeles County.

• Jury found condo association not liable for claims that a unit contaminated with mold eventually led to personal injuries.

• Judge, in tentative ruling, denied plaintiffs request for declaratory relief on common unit repairs.

• Settlement reached May 23.

• Lisanne Laranita, et al. v. Edward L. Deemer, et aI., No. SC 068 519, California Superior Court, Los Angeles County.

• Court grants demurrer in mold injury case to all claims except negligence.

• Factory Mutual Ins. Co., as successor in interest to Arkwright Mutual Ins. Co. v. the Estate of Jane Campbell and Clinton R. Churchill et ai. v. Factory Mut. Ins. Co., as successor in interest to Arkwright Mutual Ins. Co., No. 01-7518, C.O. California (2002).

• California federal judge granted summary judgment motion filed by an insurance

carrier that argued that mold property damage claims manifested before coverage incepted.

• Scottsdale Ins. Co. v. Essex Ins. Co., No. 0038635, Calif. App. 4th Dist. (2002) (now published).

• The court reversed the trial court, finding that an insurer is not required to

reimburse another carrier for a common insured contractor because the insured failed to

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comply with a condition set forth in the policy to require subcontractors to be insured and that he be named an additional insured in their policies.

• Ed McMahan v. American Equity Ins. Co., No. BC 271423, California Superior Court, Los Angeles County.

• Ed McMahon sued his homeowner's carrier, insurance agent and other companies

hired to remediate mold and water problems, seeking more than $80 million in damages for injuries allegedly caused.

• FSR Brokerage, Inc., et aI. v. The Superior Court of Los Angeles Co., et aI., No.

B156982, Calif. App. 2nd Dist (2002).

• The California Court of Appeal ruled that testing of an alternate living space

should have been allowed because evidence from that apartment could help determine if the alleged injuries were caused by mold.

• Deloris J. Farner v. Stone Water Terrace Homeowners Association, No. BC238549, California Superior Court, Los Angeles County.

• California homeowners association maintains that personal injury and property

damage claims allegedly caused by mold are time barred.

• The Association stated that the "HOA did not breach a duty to plaintiff because

the foundation and yards are not areas which the HOA is responsible to maintain. Furthermore, the water intrusion was solely caused by and originated in areas that the plaintiff had the exclusive responsibility to maintain - i.e. her back and side yard, and the inside of her unit including the upstairs bathroom and kitchen sink."

• Ghadir Ayaz, et al. v. Fullmer Const., et aI., No. 00CC06647, California Superior Court, .' Orange County.

• Although a California jury found that a bank and a condominium association were

not negligent, the jury found the construction company negligent and awarded a family more than $200,000 in a mold contamination case.

• Darren Mazza, et al. v. Raymond Schurtz, et aI., No. 00AS04795, California Superior Court, Sacramento County.

• After a $2.7 million jury award for injuries allegedly caused by mold exposure,

apartment residents reached a confidential settlement agreement with Defendants.

• Joseph Glaviano, et aI. v. Allstate Insurance Co., No. 00-56754, 9th Circuit, 2002 U.S.

App. Lexis 9324.

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• Federal Appeals Court held in an unpublished opinion that exclusions in a homeowners policy created ambiguity on whether there was coverage for property damage cause by fungus.

• The Court found that the dry rot exclusion and collapse exception, when read

together, created an ambiguity over whether collapse resulting from dry rot was covered.

• However, the Court rejected the homeowner's bad faith claim.

• Daniel Thompson, et al. v. Fireman's Furid Ins. Co., et al., No. B 149380, Cal. App. 2nd Dist.

• California Court of Appeal heard oral arguments on whether a trial court properly

dismissed claims that a homeowner's carrier acted in bad faith by refusing to pay for destructive testing to assess water and mold damage to interior walls .

• California Capital Ins. Co. v. Sacramento Partridge Pointe, et al., No. 00AS0996, California Superior Court, Sacramento County.

• Underlying personal injuries caused by mold are covered by a commercial general

liability policy because "fungus" was not included in the definition of "pollutant" in absolute pollution exclusion.

• Duke G. Warner, et al.v. Todd Drawbaugh, No. SCVSS087976, California Superior Court, San Bernardino County.

• Apartment renter Warner and his family alleged that a plumbing leak behind the

dishwasher resulted in mold growth that contaminated their unit and caused personal injuries. Warner maintained that the defective conditions were not caused by wrongful use of the property and that notice was given to the unit's owner.

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E. RESPONSE OF INSURERS TO THE INCREASE IN MOLD CASES AND RECENT LEGISLATION REGARDING MOLD

• Insurers have begun to include mold exclusions in their CGL policies.

• Below is a typical exclusion:

Fungus, Mildew and Mold Exclusion

This insurance does not apply to:

1. "Bodily injury", "property damage", medical payments, "personal and

advertising injury" arising out of, resulting from, caused by, contributed to, or in any way related to the existence, inhalation or exposure to any "fungus/fungi" and or spore(s)"; or

2. Any cost or expenses associated in any way, or arising out of the

abatement, mitigation, remediation, containment, detoxification, neutralization, monitoring, removal, disposal, or any obligation to investigate or assess the presence or effects of any "fungus/fungi" or "spore(s)"; or

3. Any obligation to share with or repay any person, organization or entity,

related in any way to items 1. and 2. above,

Regardless of any other cause, event, material, product and/or building component that contributed concurrently or in any sequence to the injury or damage. .

For purposes of this endorsement, the following definitions apply:

"Fungus/fungi" includes, but is not limited to, any form or type of mold, mildew, mushroom, yeast, or biocontaminant.

"Spore(s)" includes, but is not limited to, any substance produced by, emanating from, or arising out of any "fungus/fungi".

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