COSTLY Mold suit seeking $2 billion alleges that apartments costing $3,000 per sq ft are worthless.

It is a "mold new world" out there and construction industry firms think that it stinks because of increasing liability for things that they feel they cannot control. But like it or not, they are going to have to change the way they do business and build projects as mold litigation hysteria sweeps through the nation.

There definitely is something to fear and for which to prepare. In June 2001, a Travis County, Texas, trial court set match to tinder when it awarded a homeowner more that $32 million for mold contamination from her insurer, Fire Insurance Exchange.

The case began innocuously enough. In 1998, Mary Melinda Ballard filed a claim for water damage to a hardwood floor due to a plumbing leak in her house, a 7,400-sq-ft structure in Dripping Springs, Texas, that she bought in 1990 for $275,000 at a foreclosure sale. By the time the District Court of Travis County heard the case, multiple water leaks from frozen pipes, a refrigerator ice maker, toilets and roof had spread stachybotrys mold, making the house uninhabitable. At the time, Ballard's expert witness estimated remediation would cost $1 million.

Ballard sued the insurer for breach of contract, deceptive trade practices, breach of the duty of good faith and fair dealing in the claims process, and negligence. On May 31, 2001, a jury awarded Ballard $2.5 million to replace the home, $1.2 million for remediation, $2 million to replace the contents, $350,000 for living expenses, $176,000 for appraisal costs, $5 million for mental anguish, $12 million in punitive damages and $8.9 million in attorneys' fees. It reduced the actual damages by the $2 million that FIE already had paid on the claims.

Insurers, construction industry firms, and almost everyone else associated with buildings went into shock. And the very aggressive plaintiffs' bar perked up. Last year, insurers paid out about $2.5 billion in mold-related claims, double what they did in 2001, according to the Insurance Information Institute, New York City.

The Ballard case "acted as a wake-up call and fueled the fire," says Daniel R. Lavoie, an environmental lawyer and senior vice president and environmental practice leader in New York City for Marsh, a major insurance broker. "Insurance carriers, when faced with an issue like this, cut it off at the knees," he says.

And so they did, by dropping mold coverage as policies expired, capping coverage or raising rates tremendously, even though the Ballard judgment was reduced substantially on appeal. On Dec. 19, 2002, the Texas Court of Appeals said that there was insufficient evidence to support the jury's finding that Farmers acted unconscionably or fraudulently or that it knowingly breached its duty of fair dealing, which was necessary to support the punitive damages. As a result, Judge John K. Dietz affirmed $4 million in actual damages, plus interest, and remanded for a recalculation of attorneys' fees.

Part of the problem is that mold is everywhere and can grow on just about anything in a variety of forms (ENR 5/3/99 p. 32). "Mold has been growing in damp, dark places since before there were people," says Diane Bowdoin, senior microbial investigator for Engineering and Fire Investigations, Kingwood, Texas, which writes specifications for cleanups. "The temperature we like inside also is the temperature they like, just add water" from any source, such as plumbing leaks, HVAC systems and pipe condensation, she says. Mold thrives on organic materials such as the paper on drywall, wall paper adhesive and ceiling tile, but organic dust in carpets and even fiberglass insulation also can support mold when wet, says Bowdoin.

The law is evolving along with the science, says Leah A. Rochwarg, partner in Boston-based law firm Gadsby Hannah LLP. Rochwarg says confusion began in the personal injury area after a 1994 Centers for Disease Control study established a link between infant deaths in Ohio to mold exposure. It was later withdrawn, but the damage was done. Subsequently, CDC said that exposure to high levels of mold spores causes illness in susceptible people, such as those with compromised immune systems, lung disease or allergies.

But that has caused some flux in the courts where establishing the connection between symptoms and exposure has been allowed in some and refused in others. "It's that uncertainty that drives potential liability concerns," says Rochwarg.

JUST ADD WATER Mold can grow on almost anything. (Photo courtesy of Covino Environmental Associates Inc.)

Over half of mold litigation involves single family homes, but it is moving into larger residential and commercial projects and that has the industry and insurers nervous. Even very high-end structures are not immune. Mold and water intrusion is at the heart of major lawsuits filed in December in New York Supreme Court by the management board and a condominium owner in what had been billed as the most expensive residential building in the world–515 Park Ave., New York City. The 39 condominium units in the 43-story building were selling for $3,000 per sq ft when the building was completed in 2000, and ranged from $2 million to $15 million.

"From the time the building opened its doors in early 2000, it has failed to provide its residents consistently with even the most basic services, including heat, hot water and air conditioning," says the complaint by Richard L. Kramer, filed Dec. 31, 2002, against 28 defendants, which include all parties that designed, built, sponsored or managed the project and building. Kramer alleges, among other things, that water infiltration and the passage of time "have rendered apartments in the building uninhabitable and put the health of the building's residents seriously at risk" because the building is contaminated with fungus molds, including stachybotrys. "That mold infestation has resulted from massive leaks and other water problems throughout the building, which defendants knew about for well over a year, but concealed from apartment owners and failed to remedy."

According to this complaint and a separate one by the board of managers, water is entering through voids in the foundations, around windows and parapets and from pipe condensation and frozen pipes that burst. Missing insulation in walls and on pipes apparently is a big factor. According to one source close to the case, missing pipe insulation caused the sprinkler system to freeze and burst last winter on the 20th floor, which "destroyed" that apartment, "substantially destroyed" the one on the 19th floor and caused water damage down to the 14th floor.

To complicate matters, the suit alleges that 3-year-old Alana Kramer "has developed severe and disabling respiratory and other illnesses attributable to toxic mold exposure as well as Mrs. Kramer, who has developed severe allergic reactions to this toxic mold." The Kramers also had millions of dollars of museum-quality antiques, art and other valuables that they claim were damaged. They have vacated their apartment and claim that it now is "worthless." The lawsuit seeks more than $2 billion in compensatory and punitive damages and recision of the sale contract. An attorney for local developer Zeckendorf Realty L.P. and several other defendants says a motion to dismiss has been filed. The construction manager, Jones GMO, New York City, was not available for comment.

"You have to take this stuff seriously," says Lavoie. "When you have a claim out there, don't blow it off. It is very emotional."

"We were seeing these huge judgments around the country [and] a lot of it could have been prevented," says J. William Ernstrom, a construction attorney with Ernstrom & Dreste, Rochester, N.Y. It has less to do with sloppiness and more to do with scheduling and design issues, he says. But speed in handling the issue is paramount, say many industry sources. "If you have a problem, it has to be handled immediately–in days, not weeks," says Ernstrom, a member of the mold litigation task force of the Associated General Contractors, Alexandria, Va.

After a year of work, the task force March 20 unveiled a new document, Managing the Risk of Mold in the Construction of Buildings, at AGC's annual convention in Honolulu. Significantly, the document does not just try to "shift risk away from contractors," but rather talks about how contractors can work with owners and designers to avoid mold problems in the first place, says Stephen E. Sandherr, AGC's CEO.

SHUT DOWN Poppe (above) talking about mold at Hilton's Kalia Tower (below).

The 20-person task force included contractors, attorneys and insurers. The document offers an overview of what mold is, how it grows and how designers, contractors and owners can work together to minimize problems. "Our goal was to elevate the level of knowledge in the industry," says committee chairman Rick Poppe, president of the Weitz Co., Denver. "There was a reticence in the committee to produce something that could be used as a standard of care [in litigation], but the majority wanted to be action oriented, to give members a tool to help solve this problem."

Ironically, mold sessions at the convention were held in the lower floors of Hilton Hotels Corp.'s Kalia Tower, a 25-story hotel with 453 guest rooms that opened in May 2001 at a cost of $95 million and shut in June 2002. It is undergoing mold remediation that Hilton expects to cost $35 million.

"No one party in the construction process can solve the mold problem, but if there is litigation, everyone will be involved," says AGC General Counsel Michael E. Kennedy. "We have a lot of construction to perform as everyone sorts out the questions associated with mold....We are trying to forge a consensus even if it is on a fairly broad level [because] no one party has hands on all of the levers."

"Contractors need to do a much better job of managing and documenting things that happen in construction so they are not held responsible for post-occupancy things that they have no control over," says J. David Odom, vice president of CH2M Hill Cos.' Building Services Group in Orlando. "Contractors will be held responsible because they are the biggest gorillas on the block and have deep pockets." His firm and Disney Development Co. produced a landmark book almost a decade ago, Preventing Moisture and Mold Problems in Hot, Humid Climates: Design and Construction Guidelines. Odom adds: "It has moved from the back of the bookshelf to the front."