Canada: Keeping the Mould Away: Application of Mould-Based Policy Exclusions

In property damage claims involving water infiltration or water damage, associated mould issues are common. This is especially the case when the claim is only discovered after the water infiltration or damage has been going on for some time, which is hardly unusual in this type of claim.

Mould Exclusions

Several ground-breaking cases, especially in the US, several years ago made mould claims a prominent issue within the insurance industry. One reaction is that many policies now have exclusions specifically relating to mould. However, the application of this common policy exclusion is rarely clear-cut. In fact, an overview of some of the key decisions demonstrates the complexity when this exclusion is applied to actual claims.

It is established that mould can impact health to some extent, ranging from moulds with established toxic properties to the less certain issues caused by long-term exposure to common moulds. Where there is mould, there is potential for personal injury claims. Mould has a variety of effects on surfaces and structures, and in extreme situations gives rise to structural issues, most commonly with mould contributing to the rot of lumber-based structural elements. Even if not creating a structural risk, mould damage can require extensive repair or replacement of drywall, carpet, paper and wood.

Typically, a policy's mould exclusions are much broader than mould, covering organisms related to mould or similar in nature to mould, such as fungus, spores, bacteria, and more generally the end result: rot. It also covers issues created more generally, like extreme humidity and temperature. It excludes coverage for repair, replacement and investigation arising from the mould issue. However, given that water damage would typically be covered, the high degree of overlap with mould makes it difficult to apply the exclusion. Usually, this requires an analysis for whatever additional issues relate more primarily to the mould, as opposed to the more general water damage. This can become very complicated in practice.

How Policy Exclusions are Interpreted
There are several reported decisions that can aid lawyers and claims professionals dealing with claims where there is some uncertainty as to whether the exclusion will apply, particularly within the context of whether there is a duty to defend. Experienced lawyers and claims professionals familiar with this subject matter will have an advantage in handling these claims, especially since determining if an exclusion applies is often required at the outset of a claim.

It is well understood in Canadian law that insurance policies are to be construed broadly, and policy exclusions construed narrowly. Further, the doctrine of contra proferentem operates to favour uncertainties in interpretation against the party that created the contract, which for this issue is obviously the insurer attempting to rely on an exclusion. Finally, if an issue has multiple causes, some of which excluded and others not excluded, coverage applies unless the policy addresses this overlap specifically. In short, the burden is on the insurer to show that the exclusion applies and the loss is not covered, and this is particularly difficult for the mould exclusion since uncertainty about cause and impact is a common feature in mould-based claims.

...it was fatal to the insurer's case that the exclusion applied only to mould and fungus, and not bacteria.

Court Decisions on Mould Exclusions

In Appin Realty Corp. v. Economical Mutual Insurance Co., 2007 CarswellOnt 9329, an insurer relied on a mould exclusion with respect to a claim brought against its insured by a resident of the insured's building. The resident alleged health issues due to mould and bacteria arising from the building. The policy had a mould exclusion, applying to mould and other fungi. The exclusion applied "regardless of the cause of the loss or damage, other causes of the injury . . . or whether other causes acted concurrently or in any sequence". Based on the exclusion, the insurer took the position there was no duty to defend, and the Court was deciding an Application on this issue. The Court found there was a duty to defend. In this case, it was fatal to the insurer's case that the exclusion applied only to mould and fungus, and not bacteria. The plaintiff partly alleged that bacteria, combined with mould/fungus, caused the adverse health issues. Regardless of the merit of this allegation, it was sufficient to engage the duty to defend for the insurer. Accordingly, the decision may have been different if the mould exclusion included bacteria, which is actually included in many typical mould exclusions.

In Day v. Wood, 2008 92 O.R. (3d) 438, tenants of a building brought a claim against their landlord based on health issues arising from mould in their basement apartment. There was a dispute between the landlord and its insurer about whether the insurer had a duty to defend. Similar to the Appin Realty decision above, the actual mould exclusion did not have some features that are found in some mould claims, in this case, excessive moisture, prior flooding and yeast. As the claim by the tenants included allegations related to these other features, the Court found that the exclusion did not apply and the duty to defend was triggered.

The Manitoba Queen's Bench 2009 decision Minox Equities Ltd. v. Sovereign General Insurance Co., 2009 MBQB 203, involved a situation where the insurer was forced to provide coverage for the loss because they did not have a mould exclusion. In this case, a standard mould exclusion would likely have applied. Humidity and some minor mould issues were known shortly after the construction of the property in 1977, with occasional repairs. In 1993 the defendant insurer started providing coverage to the building, and by 2001 it was determined that the mould was, in fact, toxic in nature, giving rise to several claims. Here, the insurer unsuccessfully relied on a different exclusion, arguing that mould was a condition resulting from the normal use of the property and not a risk/peril as contemplated in the policy. The insurer attempted to use several other exclusions in the policy as well, including various exclusions for water damage and infiltration.

Courts in the US have dealt with the issue of absolute mould exclusions, including in De Brun v. Superior Court (2008) 158 Cal. App. 4th 1213. Most mould exclusions are not "absolute" exclusions, which exclude coverage for claims related to mould regardless of the interaction with other non-mould based aspects of a claim. An example of this is a claim for water damage that would otherwise be covered, such as a burst pipe, and mould damage directly related to this would also be covered despite the exclusion. However, an absolute exclusion specifically does not extend coverage to any mould related issue, regardless of overlap. In that decision, the exclusion was applied, but the US Court considered factors such as public policy. This suggests this type of exclusion would only be applied when the policy is completely clear, and even then whether the exclusion is even enforceable could be met with some judicial scrutiny.

How to Interpret Mould Exclusions

Claims arising from water damage and infiltration often overlap with mould-based claims. This ranges from property damage and structural issues to personal injury and health effects. In practice, determining how a mould exclusion applies in these situations is often complicated and depends on various factors. Insurers, claims professionals and their lawyers can respond best if they are well-informed and knowledgeable about the nature of mould exclusions, and how they have been interpreted by the courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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