June 2, 2004 New York Times
COMMERCIAL REAL ESTATE
High-Rise Alert: There's a Fungus Among Us
By TERRY PRISTIN
Only a year after it opened in 2001, the 25-story, 453-room
Kalia Tower at the Hilton Hawaiian Village in Waikiki was shut because of a
persistent mold problem. The hotel tower cost $95 million to build, and the
Hilton Hotels Corporation spent $55 million on the mold cleanup, which lasted
13 months. Hilton has sued two dozen companies and individuals, including
architects, construction companies and engineers, saying they were
responsible for construction defects that allowed the gray fungus to
like Hilton's have captured the attention of the commercial real estate
industry. Lenders are trying to develop new approaches and policies for
guarding against mold, microscopic organisms that have been known to cause
allergic reactions in some people and that can seriously reduce a building's
value. Fitch Ratings has warned lenders in large transactions to make sure
that inspectors test for mold because of the potential risk for
recent years, insured losses for mold damage have risen so sharply - from
$700 million in 2000 to $3 billion in 2002 for property damage alone,
according to Robert J. Hartwig, the chief economist for the Insurance
Industry Institute, a trade association - that insurance companies, fearing
mold could be the new asbestos in terms of litigation, no longer cover mold
damage in conventional policies.
Commercial property owners can still get some coverage but only as an
addition to an expensive pollution liability policy. David J. Dybdahl, a
senior consultant for American Risk Management Resources Network, a
consulting company in Middleton, Wis., estimates that fewer than one-tenth
of 1 percent of property owners are covered.
premiums are costly, with high deductibles, and only property owners who can
demonstrate that they have already taken action to prevent, identify and
control mold can qualify, Mr. Dybdahl said.
Mr. Dybdahl said mold insurance might become cheaper and easier to get as a
result of a report issued last week by the Institute of Medicine, an arm of
the National Academy of Sciences that advises the federal government on
health issues. A panel of experts found that mold does not appear to pose a
serious threat to most people. But Mr. Dybdahl said there was "no chance
that it will eliminate mold exclusions in standard policies."
J. Madden, the managing director of the real estate practice for
Aon, the global insurance brokerage company, said the owner of a
25-story building in Texas would pay about $75,000 a year for pollution
coverage with a cap of $5 million (with a $100,000 deductible), on top of
its property and liability premium of $75,000 to $100,000. Mold coverage, if
allowed, would cost an additional $50,000. (Covering an entire portfolio of
properties costs substantially less per building, as does paying for a
three-year term, Mr. Madden said.) The average commercial loss for a single
incident is $200,000, according to Mr. Dybdahl.
Madden said: "There is no economical insurance available, especially for the
small buyer. The larger owners, if they're not buying it already, they are
giving more consideration to it." But he said that even when coverage was
available for injury to tenants, it might not be possible for the landlord
to recover for property damage.
Zurich Insurance began offering mold coverage a year ago as an add-on to an
environmental policy, but it will not sell the insurance for properties like
hospitals, where patients with compromised immune systems may be more
susceptible to infection arising from mold exposure, nor to hotels, which
have more bathrooms than other buildings and therefore may be more
vulnerable to moisture damage.
consider them to be high risk," said David J. Jung, a vice president of
Zurich Insurance, referring to hospitals and hotels. "We're not comfortable
Zurich requires borrowers who seek mold coverage to fill out detailed
questionnaires about the maintenance history of the building and potential
problems that could lead to mold growth. Sometimes an engineer is sent to
inspect the building, he said. The additional coverage can increase the
pollution coverage premium by as much as 30 percent, he said.
Lenders say they are only now beginning to grapple with mold risks. Katie
Schwarting, director of commercial real estate financing for the Mortgage
Bankers Association, a trade group in Washington, said lenders were not
requiring borrowers to buy mold coverage because they believed that the
insurers' caps on potential claims were too low.
Ms. Schwarting said lenders were requiring borrowers to submit plans
specifying the action they would take in the event of a mold problem "so
there is a meeting of the minds about what will happen."
Schwarting said some lenders responding to a recent survey conducted by her
organization reported that they had turned down requests for loans because
of extensive mold damage, but she said most would not reject a borrower
solely because some mold was observed or suspected. "If we stopped lending
because of mold - there's mold in every shower stall across the nation," she
lender, Richard M. Sullivan, a vice president at Legacy Real Estate Finance,
a division of Legacy Banks of Pittsfield, Mass., said he had not come across
reports of mold when reviewing loan applications. If he did, he said, "more
than likely we would pass on it." He added, "You just don't want to take the
Despite all the fuss about mold, said Mary E. O'Rourke, a senior director at
Fitch Ratings, investors are better protected today than they were a few
years ago. Investment bankers avoid including mold-infested buildings in
portfolios that are to be sold to investors in the form of commercial
mortgage-backed securities because such problems are likely to result in
lower ratings, she said.
insurance industry and lawyers who represent property owners maintain that
the risks associated with mold have been hugely exaggerated by plaintiffs'
lawyers in states like California and Texas, where several
multimillion-dollar verdicts have been handed down. In one Texas case that
attracted national attention, Melinda Ballard won a $32 million jury verdict
against Farmers Insurance (later reduced to $4 million plus interest and
lawyers' fees) after her 22-room house in the Austin suburb of Dripping
Springs was invaded by mold.
however, mold litigation is entering a new phase, with the target no longer
a homeowner's insurance company but rather developers, contractors and
subcontractors on commercial projects, as illustrated by the Hilton case,
Mr. Dybdahl said. In another commercial case, LaeRoc Partners, a California
company that owns the former Waikiki Parkside, a hotel across the street
from the Hilton, has sued the former owners, accusing them of withholding
information about mold problems that led to the hotel's closing.
or five years ago we saw very few cases," Mr. Hartwig of the Insurance
Industry Institute said. "Today, they are exploding."
real estate specialists say mold has become more of a problem in recent
years in part because buildings tend to be more tightly sealed to make them
more energy efficient; this means that moisture is trapped inside. Mold does
not proliferate just in areas with high humidity but can also be a result of
shoddy construction, sometimes because the contractor cut corners and, say,
did not install the roof properly, so that moisture seeps in.
"Contractors," said Christopher C. Gunther, the manager of industrial
hygiene services for EMG, a company in Hunt Valley, Md., that performs
environmental assessments for lenders, "are always rushed, always under a
deadline. The pressure put on the construction industry to get buildings
completed is enormous."
Charles L. Perry Jr., a principal of the Environmental Assurance Group, a
consulting company in West Hartford, said that since mold was created when
spores came in contact with moisture, heat and paper, using materials
containing fiberglass or gypsum instead of paper would eliminate the
essential food source. "I'd rather not deal with mother nature," Mr. Perry
Mr. Madden at Aon said there was always the danger that new materials could
create new issues. "Asbestos was once a state-of-the-art product," he noted.
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