Real Estate Law
Mold Issues in the Colorado Real Estate Industry
by Gregory A. Goodman
Real Estate Law articles are sponsored by the CBA Real Estate Law Section.
**Louise Staab, Denver, Holme Roberts & Owen LLP—(303) 861-7000, email@example.com
**About the Author:
This month’s article was written by Gregory A. Goodman, an associate with Otten, Johnson, Robinson, Neff + Ragonetti, P.C., where he specializes in commercial leasing and sales transactions, resort development, and mixed-use development—(303) 575-7553, firstname.lastname@example.org. This article in no way represents the views of Otten, Johnson, Robinson, Neff + Ragonetti, P.C., and is written independent of the author’s association with the firm.
**This article discusses the current state of affairs in mold litigation and its impact on the real estate industry in Colorado, and concludes that in Colorado and across the country, the toxic mold phenomenon already is beginning a general decline.
**Several years ago, the rising spate of toxic mold litigation across the country, including property damage and personal injury claims, was widely touted as the "next asbestos," in terms of the volume of lawsuits and the corresponding crippling effect on many businesses in the real estate and insurance industries.1 Although the hotspots for mold claims tend to be states that are both warmer and wetter than Colorado, such as Texas and Florida, scores of Coloradans filed mold-related lawsuits in the late 1990s and early 2000s. The University of Colorado made news in October 2006 when it closed a small building on the Boulder campus because employees were complaining of flu-like symptoms blamed on toxic mold.2 Organizations across the state, including the Home Builders Association of Metro Denver, began to seriously address the issue.3
It now appears, however, that the toxic mold phenomenon has begun to fade as a result of concerted efforts in the medical community (to accurately determine the potential health risks of mold exposure); the real estate development and construction industries (to address the underlying causes of mold proliferation in homes and buildings); and the insurance industry (to exclude mold claims from standard coverage and vigorously contest the flood of lawsuits).4
This is not to say that builders and developers in Colorado should stop taking design, construction, and legal precautions to protect themselves. However, the uncertainty that has plagued the real estate industry for the past decade regarding the potential ill effects of mold on persons and property, as well as the legal liability builders, developers, architects, and other real estate professionals face, has begun to abate. Toxic mold now appears to be a risk not unlike any other common potential construction or development pitfall, such as radon gas or swelling soils, that can be effectively managed and mitigated.
This article discusses the current state of toxic mold litigation. First, general facts about mold are explored, including the history of toxic mold as a cause of action and medical and scientific evidence relating to mold. Next, potential causes of action relating to toxic mold exposure and growth are discussed. Finally, the article provides recommendations for avoiding liability for mold.
**What is Toxic Mold?
**Molds are simple microscopic organisms found almost everywhere, indoors and outdoors. Mold generally is not dangerous to humans; most varieties of mold will do nothing more than aggravate hay fever, asthma, or other allergies.5
Mold requires three elements for growth: warm air, a viable food source, and moisture.6 Warm air is present in most homes and buildings. Any number of organic materials found in homes and buildings, such as cotton, leather, drywall, insulation, synthetic carpets and sidings, and even wood and dirt, provide a viable food source for mold.7 The most critical ingredient, and the ingredient easiest to control, is moisture; it is easier to eliminate moisture than warm air or organic food sources inside buildings and homes.8 Moisture can appear as a result of flooding, a plumbing leak, condensation from air conditioning units, or simply as a result of high humidity combined with building materials that retain moisture.
"Toxic" mold is not a scientific term, but loosely refers to the limited group of molds that may potentially pose human health risks.9 Toxic molds produce mycotoxins, which are fungal metabolites that may aggravate a variety of respiratory problems.10 Any toxic effects stem from exposure to these mycotoxins found on the surface of mold spores, not from mold actually entering the body.11 Toxic mold spores may be found in soils and enter buildings after floods or other sudden water entry, or latch onto building materials coated with dust. Toxic mold can grow on papers, carpet, and any other organic debris in general, and may be present without being seen.12
**Toxic Mold as a Cause of Action
**The first appellate court in any jurisdiction to uphold the admission of scientific testimony regarding the health impacts of toxic mold was in Florida in 1997.13 Shortly thereafter, in 2001, a Texas jury awarded a family $33 million after finding that their insurance carrier acted in bad faith in evaluating a slew of mold claims for personal injury and property damage.14 Several other high-profile toxic mold claims, including multimillion dollar lawsuits filed by celebrities such as Ed McMahon and Erin Brockovich, combined with the large jury award in the Texas case, were widely credited as being the impetus for thousands of toxic mold lawsuits in the following several years.15
Far-reaching federal legislation was proposed in 2002, in the form of the Toxic Mold Safety and Protection Act (Act). In addition to establishing uniform inspection and construction requirements, the Act would create a national toxic mold insurance program administered by the Federal Emergency Management Authority that is similar to the national flood insurance program.16 This bill has yet to make it out of committee for a full vote, but it has been reintroduced in subsequent years, most recently in 2005.17
*Toxic Mold Case Law
*Most early mold cases involved individual home or building owners bringing suit against insurance companies for failing to cover various personal injury and property damage claims.18 Mold is now excluded in virtually every homeowner’s policy issued in Colorado and across the country.19 Furthermore, there is nothing to indicate that courts are refusing to enforce mold exclusions on public policy or any other grounds. In a hotly contested case, the U.S. Court of Appeals for the Fifth Circuit recently certified a question to the Texas Supreme Court, asking whether a plain language mold exclusion was valid.20 After considering arguments from ten agencies and law firms, the Texas Supreme Court answered in August 2006 that it was valid, noting that "whether insurers should provide mold coverage in Texas [is] a public policy question beyond our jurisdiction as a court . . . and we cannot create ambiguities from previous policies, an agency’s interpretation, or a ‘mold crisis.’"21 The Texas Department of Insurance had urged the Court to rule against the insurer on grounds that the policy was both ambiguous and contrary to public policy.
Although this case was not brought against a builder, developer, or designer, it nonetheless is highly informative and relevant, because Texas courts have been at the vanguard of toxic mold litigation. Thus, this is the clearest indication to date that courts are rejecting the notion of a "mold crisis."
**Although it appears that builders, developers, and insurers will not face the prospect of crippling litigation for personal injuries attributable to toxic mold, the threat of economic harm and property damage from mold still exists. This is partly attributable to the old adage that perception is reality. Many real estate players, from lenders to builders to landlords to sellers, probably do not know or even care about the actual evidence regarding exposure to mold and its adverse health effects. However, because concepts such as "toxic mold" and "sick building syndrome" have become part of the public vernacular, builders, developers, and sellers of real estate have no choice but to address mold.22
**Medical and Scientific Evidence
**The decline in the volume of mold litigation and public hysteria surrounding toxic mold also is due in part to recent medical and scientific studies that have found no clear link between exposure to mold inside modern homes and buildings and any lasting health effects on humans. Accordingly, more courts have excluded expert testimony to the contrary.
At the beginning of this decade, there was more uncertainty about the actual health hazards from toxic mold, although scientists did not dispute that high levels of toxic mold likely were harmful to humans.23 Interestingly, in the 2002 Texas case, *Allison v. Fire Ins. Exchange, which is widely credited with opening the floodgates of toxic mold litigation, the plaintiffs’ personal injury claims had actually been dismissed prior to trial, because the court refused to admit the proffered expert testimony.24 The appellate court subsequently upheld the trial judge’s ruling that the underlying data informing the expert testimony offered on the effects of toxic mold on human health did not meet Texas evidentiary requirements.25 Instead of strengthening the causal link, nearly every ensuing study to date—or at least those that have been generally accepted or endorsed by the scientific and medical establishments—has concluded that there is insufficient evidence to causally link indoor mold growth to adverse effects on human health.26
This trend is evident in the results of perhaps the most landmark study to date, a two-year study and report on toxic mold by the Institute of Medicine (one of the National Academies), commissioned by the Centers for Disease Control and Prevention. The study concluded that the only health effects that clearly can be linked to any variety of toxic mold are conditions associated with asthma symptoms in asthmatics or sufferers of hypersensitivity pneumonitis.27 Additionally, the study found that the aggravated symptoms from mold exposure in an individual with pre-existing respiratory conditions often disappear when he or she is removed from the high-mold environment.28 Studies also have noted that these same persons may experience similar symptoms with other common irritants, such as dust and mites.29 Given the absence of a large body of scientific literature on the health impacts of mold, it is unclear at this time what evidence will be admitted by courts in actions seeking compensation for alleged mold-related personal injuries.
Accordingly, more trial courts are concluding that expert testimony offered by plaintiffs is insufficient to establish that toxic mold is the proximate cause of claimed ailments or injuries.30 In a closely watched case in 2006, Achin v. Shea Homes, L.P.,31 a mold claim against Shea Homes was tried to a California jury. The trial court excluded much of the plaintiff’s proffered expert testimony and the jury apparently discounted or rejected the remainder of the expert testimony and found for the defendant on all claims.32 Nonetheless, many builders and developers still are facing large lawsuits where mold is at least one claim, and many of those defendants are still choosing to settle cases rather than incur large litigation costs.33
*Mold claims for property damage include issues related to fraud and disclosure laws, warranty issues, proximate cause issues, and potential consumer protection violations. One question arising in some insurance cases where mold is specifically excluded in the policy is whether mold is the proximate cause of harm to the property.34 Technically, mold can be either the cause of property damage or the result of some other cause that itself is a covered harm, such as burst water pipes or a foundation leak.35 This very question, whether mold is itself the cause of property damage or rather the result of other property damage, is the subject of a pending lawsuit in the U.S. District Court for the District of Colorado.36
A somewhat related issue arises in some claims against builders or their subcontractors where a series of causes ultimately result in mold forming in a structure, such as a defective roof allowing water to seep into a wall, where mold subsequently could form. Many commentators have suggested that the economic loss rule should prohibit tort claims for mold in such a case, because the only harm suffered would be monetary damage to property.37 In Colorado, plaintiffs cannot sue in tort for purely economic damages resulting from the breach of an express or implied contractual duty, such as an express warranty or the implied warranty of habitability.38 Furthermore, builders and developers can include specific damage limitations in their contracts that limit their liability to replacing or repairing the defective product, such as the roof or window, and exclude liability for consequential losses, such as the resulting mold formation.
**Consumer Protection Laws
**Some plaintiffs in mold cases have alleged a breach of the Colorado Consumer Protection Act.39 Even though there are no published decisions on this point, it appears from the available trial materials that this type of claim will be difficult to establish.40 A plaintiff would have to establish that the claimed deceptive practice or act has the requisite public impact.41 Therefore, although plaintiffs in construction defect cases in general have successfully alleged violations of the Consumer Protection Act, it would be more difficult to find a factual situation where some type of construction defect led to widespread mold damage affecting a sizeable enough group of persons.
The Construction Defect Action Reform Act of 2003 restricts the availability of treble damages against construction professionals to claims that, among other requirements, successfully allege a violation of the Consumer Protection Act.42 One of the easiest ways to establish a mold claim under the Consumer Protection Act against a builder or other construction professional is to show fraud or misrepresentation, because claims under the Consumer Protection Act generally require that the party acted knowingly.43 It should be easy for builders, developers, and sellers of property to avoid fraud, misrepresentation, or non-disclosure in the context of mold.
**Fraud and Misrepresentation
**The only published mold cases with fraud or misrepresentation theories also have involved defendants that acted knowingly (or at least were alleged to have acted knowingly).44 For example, in a case involving the sale of a home by a bank, where the bank knew that there had been a significant water leak in the basement but did not disclose this fact to the buyer, the court refused to absolve the defendant on the basis of either an "as is" clause or a mold waiver clause in the purchase contract.45 Some jurisdictions have recognized a common law suspension of the statute of limitations in cases where the possible mold presence was concealed.46
To avoid future liability, builders and developers may wish to expressly disclaim any liability for future mold damage, and refrain from performing any formal mold testing, such as an inspection by an industrial hygienist. Although this may seem counterintuitive, the best protection that a builder or developer can afford themselves is to make sure that there are no known sources of water leakage or design defects likely to lead to mold growth, and then encourage buyers to conduct their own independent examinations for mold. Any representation by the builder or developer that can be interpreted as a statement that there is no mold in the building leaves the door open for a potential claim of misrepresentation. This is why it is not advisable to perform any mold testing and then make an express or implied claim based on the results of such testing or, conversely, to withhold the results of such testing if the results might put a buyer on notice that mold was present. Although there is no legal duty to provide a mold warning, it is good form to advise all buyers that there may be potential health risks associated with mold and that the buyers should conduct their own inspection for mold.47
If a builder, developer, or seller has actual knowledge of a past water leak or similar defect that reasonably could be expected to lead to mold formation, it should be disclosed upfront and in writing, no matter how minor. Then, the buyer can elect to conduct an inspection for mold, evaluate any report issued by the mold inspector, and decide how to proceed. Similarly, if a buyer’s broker sees visual evidence of water stains or foundation cracks, the broker may violate his or her fiduciary duty if he or she merely accepts a seller’s representations that there is no mold present and fails to advise the buyer to investigate further.48 Indeed, many brokerages now require buyers to sign an in-house mold disclaimer to protect brokers from any such claims. Again, the likelihood of a builder, developer, or seller being successfully sued in a personal injury claim stemming from toxic mold has become small, and there is no reason a party should risk a claim based on non-disclosure or misrepresentation instead of fully disclosing possible sources of mold growth.
**Statute of Limitations
**Architects, contractors, builders, engineers, and developers should be familiar with the statute of limitations for construction defect claims.49 All claims against a builder or contractor relating to construction of improvements must be brought no later than two years after the claimant "discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury."50 In addition, no such action may be brought more than six years after substantial completion of the improvement, unless the claim arises in the fifth or sixth year, in which case the two-year limitation applies from the time the defect manifests itself.51 Thus, if a defect does not manifest itself for many years, as mold infestation often does not, a claim may be barred. Colorado’s statute of limitations generally is much more protective of builders and contractors than the laws of other states, particularly in that it may be triggered without the potential plaintiff even realizing it is running, because it does not contemplate actual knowledge of the defect.52
This does not imply that a builder should try to conceal latent defects that may not ordinarily manifest themselves for six years or more, which seemingly could be the case with a poor foundation or roof design destined to allow water intrusion and subsequent mold growth. Rather, Colorado’s favorable statute of limitations is just another reason toxic mold should not account for any more than *de minimis *transaction costs in the development, construction, and buying and selling of real estate in Colorado.
**As many builders and contractors may know, there are numerous steps that can be taken to greatly reduce the chances of mold infestation in new developments. For instance, gypsum wallboard has been found to be particularly susceptible to mold growth.53 Heating, ventilation, air conditioning, and other mechanical systems can be configured to eliminate all or most water pooling that provides a base for mold growth. Good construction practices already dictate that roofing systems, flashings, windows, doorjambs, and other building envelope features be properly sealed; the threat of mold infestation should only heighten the attention to critical seal points in a building.54 In addition, particular care also should be taken to avoid exposing materials with organic components, such as wood or insulation, to excessive rain or moisture prior to their installation.
**Although mold and toxic mold still present issues of concern to the real estate industry, it appears that the "mold crisis" is subsiding. As the scientific evidence has caught up with the volume of litigation, there are fewer mold cases being litigated. At the same time, builders, developers, and other real estate professionals and insurers have acted swiftly to confront the challenges posed by mold. With proper diligence and sound construction practices, mold claims in Colorado should continue to decline and not pose an ongoing threat to the real estate industry.
**1. *See, e.g., Moll and Reed, Jr., "A Plague on Many Houses: Proliferation of Mold" Nat’l L.J. (Sept. 16, 2002) at B10; Bradshaw, "Toxic Mold Litigation Is in the Air," N.J. L.J. *10 (July 8, 2002).
2. *See Anas, "Mold Spores Close Building on CU Campus," Daily Camera (Oct. 12, 2006) at A-1.
3. See Johansen, "Mold Becomes a Growing Problem," Denver Bus. J. (July 5, 2002) at 6.
4. See, e.g.,Golden, "Three Years Later, Industry Puts Toxic Mold Into Perspective," 70 Ins. J. 20 (Feb. 9, 2004).
5. Etzel, "Toxic Effects of Indoor Molds," 101 Pediatrics 712, 713 (1998).
6. Lathrop, Insurance Coverage for Environmental Claims, § 12.02 (New York, NY: Matthew Bender & Co., 1992).
7. See Goodman, "Insurance Triggers as Judicial Gatekeepers in Toxic Mold Litigation," 57* Vand. L.Rev. 241, 247–49 and accompanying notes (2004).
*10. *See Etzel, supra *note 5.
*13. *Centex-Rooney Constr. Co. v. Martin County, 706 So.2d 20 (Fla.App. 1997).
14. Allison v. Fire Ins. Exch., 98 S.W.3d 227, 237 (Tex.App. 2002). Ironically, as discussed later herein, the court actually excluded the expert testimony regarding the personal injury claims, although that appears to have been overlooked in the ensuing litigation frenzy. The award was reduced on appeal, however, by $17 million, because the court found that the insurer did not act knowingly and thus there was no basis for the $17 million portion of the punitive and mental anguish damages. Id. at 256–58. The remaining judgment included more than $4 million in mold damages and nearly $9 million for attorney fees. Id. at 263–65. However, the award of attorney fees was remanded for a determination of reasonableness, given the court’s reduction of damages on appeal.
15. See Goodman, supra *note 7 at n.9.
16. U.S. Toxic Mold Safety and Protection Act of 2002 (Melina Bill), H.R. 5040, 107th Cong. (2002).
17. U.S. Toxic Mold Safety and Protection Act of 2005, H.R. 1269, 109th Cong. (2005).
18. *See, e.g., Goodman, supra *note 7 at 251–58 and accompanying notes.
19. *Id. at 255–56.
20. Fiess v. State Farm Lloyds, 49 Tex. Sup. Ct. J. 996 (2006).
21. Id. at 997 (emphasis added).
22. See Goodman, supra *note 7 at 253–54 and accompanying notes.
23. *Allison, supra *note 14 at 240.
24. *Id. at 240–41.
25. See, e.g., Montanaro and Bardana, "Inhalational Mold Toxicity: Fact or Fiction? A Clinical Review of 50 Cases," Ann. Allergy, Asthma, Immunology (Vol. 95, No. 32005) at 239.
26. Institute of Medicine, Board on Health Promotion and Disease Prevention, Damp Indoor Spaces and Health (Washington, DC: The National Academies Press, 2004).
*28. *See *Montanaro and Bardana, *supra note 25 at 240.
29. See, e.g., Roche v. Lincoln Prop. Co., 278 F.Supp.2d 744 (E.D.Va. 2003), aff’d, 2006 U.S. App. LEXIS 8588 (4th Cir. 2006). The dates of this case highlight another issue worth noting—the initial spike in toxic mold litigation, and the accompanying public awareness of toxic mold as a potential health hazard, occurred from approximately 1999 to 2002; in 2006, there is more published case law from appellate courts. That said, beyond those practitioners and industry professionals actively involved in toxic mold litigation, the general public still may be largely unaware of the substantial legal and scientific blows that have been dealt to toxic mold litigation as a cottage industry.
30. Achin v. Shea Homes, L.P., No. PC030022 (Cal.Sup.Ct. 2006).
*32. In 2005, several prominent homebuilders settled a host of claims with a homeowners association in Boulder County, where mold infestation was at least a secondary claim, *see *03-CV-209 (Colo.Dist.Ct. 2003), and an arbiter awarded the another homeowners association, also in Boulder County, more than $2.6 million against a large developer in a case that contained allegations of mold contamination of a condominium development, *see *02-CV-253 (Colo.Dist.Ct. 2002).
33. *See generally Jarman-Felstiner, "Mold Is Gold: But, Will It Be the Next Asbestos?" 30 Pepp. L.Rev. 529 (2003). As other examples, an organization called "Homeowners Against Deficient Dwellings" (HADD), which has a Colorado chapter, has a recommended reading list that includes titles such as What Every Homeowner Needs to Know About Mold and Handling Construction Defect Claims: Western States. See http://www.hadd.com/reading.php. Another group called the "Mold Help Organization" has an online database of hundreds of articles regarding ailments associated with mold and tales of "mold survivors." See http://www.mold-help.org/index.php.
34. See Kelly v. Farmers Ins. Co., 281 F.Supp. 2d 1290 (W.D.Okla. 2003).
*36. *Regency Hotel Mgmt. Co. v. Evanston Ins. Co., Nos. 04-CV-181 RPM and 04-CV-182 RPM (D.Colo. 2004).
37. See Perrone et al., "The ‘Economic Loss Doctrine’ as a Defense to Mold Claims," Mealey’s Litig. Rep.: Mold (Dec. 2001).
38. Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1259 (Colo. 2000). For a review of the economic loss doctrine in Colorado, see *Witt, "The Spearin Doctrine and the Economic Loss Rule in Residential Construction," 35 *The Colorado Lawyer 49 (July 2006).
39. CRS §§ 6-1-101 to -1120.
40. See Brayton v. Front Range Roofing System, 2003WL24192596, Order in No. 02-CV-1344 (Colo.Dist.Ct. 2003).
41. See, e.g., Rhino Linings USA, Inc. v. Rocky Mountain Rhino Linings, Inc., 62 P.3d 142, 150 (Colo. 2003).
42. See *CRS § 13-20-806.
43. CRS § 6-1-105.
44. *See, e.g., Larson v. Safeguard Properties, Inc., 379 F.Supp.2d 1149 (D.Kan. 2005).
*46. *See Booker v. Real Homes, Inc., 103 S.W. 3d 487 (Tex.App. 2003).
47. See Kelly, supra *note 34 at 1301.
48. *See Sodal v. French, 531 P.2d 972 (Colo. App. 1974). See also CRS § 12-61-805.
49. CRS § 13-80-104.
50. CRS § 13-80-104(1)(a) and (b).
51. CRS § 13-80-104(2).
52. CRS § 13-80-104.
53. See, e.g., Wright and Irby, "The Transactional Challenges Posed by Mold: Risk Management and Allocation Issues," 56* Ark. L.Rev. *295, 339 (2004) (noting the gypsum industry’s efforts to produce mold-resistant products in response to mold’s attraction to gypsum materials).
54. *See id. *at 338–39.