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The concern for the property damage and third party liability associated with mold or fungus has been the focus of new insurance policy exclusions in recent years. Damage related to Exterior Insulation and Finish Systems (EIFS) i.e. synthetic stucco is a standard exclusion in all liability policies today.The deterioration of this building product has resulted in structural damage from moisture infiltration and growth of mold. In addition to this restriction most liability policies will also have a separate mold and fungus exclusion.

First party property policies are all being issued with similar mold and fungus exclusions. It would appear that everywhere you turn the insurance industry is finding another way to restrict coverage for this loss exposure.

 We often find the first generation of these type of "absolute exclusions" take away things that were never intended. Consider when the pollution exclusion in the general liability policy was introduced in the 1980's. The original version excluded injury as result of smoke from a hostile fire. A tenant in an apartment fire dies as result of smoke inhalation. The apartment owner has no insurance for the wrongful death lawsuit. This is a far cry from the underground tank leaking for several years, one of the primary causes for this exclusion. Now there is an exception for hostile fire, smoke, as well as the failure of heating, ventilating and cooling equipment.

We are finding that the same is true with the issue of mold. Let's assume you are a restaurant and patrons get ill alleging that food you served was spoiled. If you have the commonly used mold exclusion you will have no coverage for this type of an incident. Liability for the customer's illness is not covered by the general liability policy since it was the result of bacteria.  There is a version of this exclusion put out by ISO form CG 21 67 which has an exception for products that contain fungi or bacteria  intended for bodily  consumption. Like the good customer discount you have to ask for it and it is available.

 Now on to property. Let's assume your building sustains a fire and in the process of extinguishing it water infiltrates into the walls that you are unaware of at the time. You then learn weeks later that mold has grown in the walls and need to be remediated. A  policy with the typical biological agents exclusion would provide no coverage for cleanup with my example. It is only logical if an insurer covers a loss due to an insured peril they should also cover all  the resulting damage. Some property insurers are willing to extend coverage for mold damage that results from a covered peril often with a sublimit. Some coverage for mold is better than none at all.

Now one would think that if you purchased a separate pollution liability policy you would automatically have coverage for mold damage. This is not the case since most insurers attach a mold exclusion in their standard policy. Usually, a mold coverage extension can be negotiated with the insurer which will usually have a separate sublimit and deductible. Here again some coverage is better than none.

The message here is watch for mold limitations in your insurance policies. There are circumstances where coverage carve backs are available.

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In Directors and Officers insurance it is well accepted that the “final adjudication” standard for so-called conduct exclusions trumps the “in fact” standard every time. Given a recent court decision, that dogma may no longer carry the same weight but it is still, with some modification, the preferred policy language.

Conduct exclusions are typically of two types, criminal or fraudulent acts and personal profit, remuneration or advantage (and not always confined to financial advantage) to which the Insured is not entitled.

Most standard policies make an exception to these exclusions to the extent that such conduct is determined “in fact” to have occurred or that a “final adjudication” has determined that such conduct has taken place.  Other policies will split the standard, applying “in fact” to personal profit and “final adjudication” to criminal acts. Still other policies (constructed in multiple sections covering Directors and Officers, Employment Practices and Fiduciary Liability) apply different standards to different coverage parts. It is important then to determine what’s what and where.

Dispensing with the quotations around these terms, the in fact standard was generally assumed to mean that the insurance company would evaluate the available evidence and make the determination of whether the conduct alleged in fact had taken place. If so, and at that point, all coverage (primarily but not exclusively defense) would be withdrawn. This made sense to the insurance company as they were then able to control the provision of coverage without relying on the more costly and time consuming process of a court's final adjudication on the merits of the underlying case.

In Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, Case No. 10-20069, decided on March 15, 2010, the Fifth Circuit declared that “absent language unambiguously pointing to the (insurance company) as the decision-maker, the policy language“ determined….”in fact” necessitates a “judicial act” before the insurance company can rely on the exclusion.

 Although the case cited involved money-laundering allegations and either a public or private company D&O policy form, the same conduct exclusion language appears in not-for-profit D&O forms as well.

Of note is the fact that the Pendergest-Holt court did not conclude that this judicial determination would occur in the underlying (non coverage) action but in a separate contemporaneous coverage litigation.

All of that said, the policy language recommendation for conduct exclusions remains that the “in fact” standard is less useful (and more legally contentious) than the “final adjudication” standard. We would now add, as others have, that the final adjudication take place in the underlying action and that the adjudication be not merely final but final and non-appealable. This language should modify the conduct exclusions in separate D&O, EPL and Fiduciary polices or in all coverage parts of a management liability policy.

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A February 14, 2011 article in Business Insurance discussed favorable changes in the market for public company Directors and Officers (“D&O”) liability insurance. What is even more pronounced, however, though less chronicled by main stream insurance publications, is availability of significant coverage enhancements for purchasers of Not-for-Profit (“NFP”) D&O insurance.

Because of the sheer number of such coverage enhancements, this is the first in a series of blog posts that will discuss what I consider to be the enhancements most useful to the typical buyer of NFP D&O. Along the way we will look at not only new coverages but also improvements to both existing coverages and other policy provisions. In the latter category, consider the so-called “hammer clause”.

Found typically in a Defense Costs, Settlements, Judgments (AIG) or Defense of Claims and Settlements (Starr) section of the policy, the hammer clause encourages the insured to agree to a settlement proposed by the insurer and acceptable to the claimant. In policy forms still being used, should the insured not agree to the settlement , the insured becomes responsible for 100% of all settlement amounts (often to include incremental defense costs) excess of the proposed settlement rejected by the insured.

Insurers, when challenged, lighten the hammer by agreeing to a 60/40 split; the insured assuming responsibility for only 40% of the amount excess of the proposed and rejected settlement. When still challenged, the hammer becomes just a bit lighter at 70/30 and, most prevalently, with 80/20 splits. All of these potential changes are, of course, subject to what an insurer is filed to offer in any jurisdiction.

Sometime around 18 months ago or so, insurers began removing the hammer clause altogether, although in policies with separate coverage parts for Employment Practices Liability (“EPL”) and Fiduciary Liability (“FL”), diligence is encouraged to ensure that the hammer does not apply to any  coverage parts and not just the D&O.

For the buyer of Not-for-Profit D&O/EPL/FL policies, first determine if the current policy contains a hammer clause of some weight (chances are it does) and if it does, call your agent or broker and ask why.

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