Pandora’s Box: Texas Passes Mold Legislation

By ANDREW L. FONO and B. SHAWN COX

Much of the recent controversy in Texas over mold and mold remediation began in 1999 just south of Austin, Texas, in the unassuming town of Dripping Springs when Melinda Ballard and her husband, Ronald Allison, sued Fire Insurance Exchange (“FIE”), an affiliate of Farmers Insurance Group. Ballard alleged Farmers committed fraud and bad faith in handling mold claims in connection with water damage in her 12,000 square foot home. Ballard further claimed that the resulting mold infestation in her home caused her family to become severely ill (as well as damaging most if not all of her home). In June of 2001, a jury awarded Ballard $32 million in damages.1 Although the damages were subsequently reduced to $4 million on appeal,2 the suit garnered national attention and is credited by many with spawning widespread worries (some might argue hysteria) about mold.3
These worries were further aggravated by a huge onslaught of media attention and hype. To make matters worse, during the summer of 2001, Houston experienced one of the largest urban floods in U.S. history when Tropical Storm Allison struck, leaving literally thousands of homes, apartment units, commercial and governmental buildings under water. As a result, many mold-related issues have surfaced regarding insurance coverage, remediation/assessment contractors, property appraisals and disclosures, to name just a few. In response, the Texas Legislature passed legislation designed to address these and other problems associated with the public’s concern over mold.
On July 11, 2003, the Governor signed into law House Bill 329 (the “Act”), the first specifically mold-related law in Texas. The Act’s goal is to “protect the public from the adverse health effects of mold.” The Act establishes, among other things, a regulatory system for mold assessments and remediations (for qualifying companies in this business), civil liability for violations, requirements for continuing education, and guidelines for insurance coverage of mold claims. The Act requires the Texas Department of Health (“TDH”) to adopt the rules and regulations to carry out the Act, develop mold safety standards and minimum performance standards and work practices for conducting assessments and remediations, establish rules to conduct inspections to ensure compliance, investigate complaints and establish a code of ethics.
The Act requires the TDH to develop and by April 1, 2004, to adopt rules implementing the Act. None of the requirements of the Act, including licensing requirements or accreditations, are effective until the rules are adopted. After months of work and numerous drafts, the proposed rules were finally approved at a January 15, 2004 Board of Health (“Board”) meeting.
The proposed rules were published in the Texas Register on January 30, 2004.4 This publication date in the Texas Register begins a 30 day formal public comment period. There also was a public hearing conducted by the Indoor Air Quality Program on February 13, 2004. After public comment and incorporation of any changes, the rules will be sent back to the Board for consideration.

Mold Assessors and Mold Remediators
One concern that supporters of the Act addressed related to a growing trend of fraud that has emerged in the mold remediation and assessment industry. In addition to the mold “hysteria,” supporters contemplated that the Act and implementing regulations would help control some of the unethical business practices within the mold remediation and assessment industry. The Act came in the wake of former Texas Attorney General John Cornyn’s suit to freeze the assets of a mold remediation company due to alleged fraud. The defendants in that case pled guilty last October to various charges of insurance fraud.
Under the Act, only licensed companies are legally authorized to perform mold assessments and remediations, and a license holder may not perform both mold assessments and mold remediations on the same project (otherwise referred to as “one-shopping”). Also, a person may not own an interest in an entity that performs assessment services and an entity that performs remediation services on the same project (the Act requires disclosure of the ownership of each entity). Further, the Act requires that certain records be kept by mold remediators, including photographs of the remediation scene, written contracts, and all invoices regarding the remediation. Once a mold remediation is complete, the remediator is required to provide property owners with a certificate that the mold remediation was properly completed. Mold assessors and remediators will now be subject to a licensing board possessing disciplinary power over them.
David Fetveit, president of the Indoor Environmental Standards Organization and a member of the Mold Task Force established by the TDH, commented, “This [legislation] is truly a step in the right direction for the Indoor Air Quality Industry. Texas is leading the way toward bringing balance to an unregulated industry.”5 According to some sources, giving the Board the ability to control the quality of consultants and service providers who address mold should have the most impact of the Act’s provisions.6 If the program works as anticipated, there should be an opportunity for some parity in the ranks of consultants and remediators statewide, which “can only help commercial owners and managers get a true grip on the issue without needlessly blowing their annual budget every time mold is found.”7
The Act exempts property owners and property managers from the same requirements if they engage in mold remediation and assessments on their own (and are not themselves in the business of mold remediation and assessment). But this exemption has limitations. For example, it does not apply if the mold contamination affects a total surface area of 25 contiguous square feet or more, or if the property has 10 or more dwelling units. What is the immediate impact of these provisions? It is anticipated that licensing and other requirements will only result in increasing assessment and remediation costs to the ultimate consumer. The more extensive and arduous the licensing requirements, the more costly mold remediation and assessment may become. Minimizing the impact of errors and omissions by establishing liability requirements could also result in increased costs which would ultimately be passed on to the consumers. These additional costs are, of course, balanced against the goal of creating a level of parity and accountability between mold evaluations and remediation.

Insurance
The Act contains an important prohibition of certain insurance underwriting decisions based on previous mold damage or previous mold claims. An insurance company may not make an underwriting decision to deny coverage regarding a residential property insurance policy based on previous mold damage or a previous mold damage claim if the applicant has property otherwise eligible for coverage, the property has had mold damage, mold remediation was performed and the property was remediated as evidenced by a remediation certificate, or the property has been inspected by an independent assessor or adjuster who determines that the property does not contain evidence of mold damage. Early in the Act’s history, the insurance industry voiced its concerns over this particular provision. The TDH director of claims, Dirk Handoen, noted, “While supporters of this legislation argue that licensing remediators will minimize fraud and incompetent work by remediators, the [Insurance] Alliance opposes licensing on the grounds that licensing criteria are limited by deficiencies in the science which inhibits a clear understanding of remediation.”8 Supporters of the Act voiced, “Every jughead and his brother are holding themselves out as mold remediation contractors or consultants; we’ve got to have some sort of licensure.”9 Stephen Pape, legislative chairman for the Texas state chapter of the Air Conditioning Contractors of America, observed in hearings that mold has resulted in some huge damage claims and scams. According to Pape, “Insurance companies have been complaining that they’ve had to pay some pretty large sums, and a lot of it has to do with the companies that have come in” to do the mold work.10 The Act also attempts to block insurance companies’ efforts to protect themselves from high-risk properties. Typically, insurance companies keep extensive records of claims made. This Act challenges the ability of an insurer to protect itself from a potential insured that has been the subject of prior water loss or mold claims.11 Recently, one author called no fewer than ten different insurance companies attempting to purchase insurance for a residence that had been the subject of two water loss claims in the last three years. Although the two claims were made by prior owners of the property, no reasonably priced coverage was available. In this instance, the stigma related to mold from the seller’s two water loss claims was clear. The policies offered were not available or offered at prices in excess of three times that of a residence with no water loss claims. As a last resort, the author attempted to obtain coverage under the Texas Fair Plan,12 but coverage for any future water loss of any kind was expressly excluded.

Property Owners
Under the Act property owners gain numerous advantages by obtaining a mold remediation certificate from the company that performed the remediation. Property owners who obtain a certificate cannot be held liable for damages “related to mold remediation on a property” if they can prove that the damages existed prior to the issuance of the certificate. In addition, a property owner cannot be liable for damages related to a decision to allow occupancy of a property after mold remediation if he has a certificate of mold remediation and the property is owned or occupied by a governmental entity.
The Act may create some intriguing potential sources of litigation. Many mold suits allege diminution in property value and claim that a mold stigma is attached to the property even after remediation is completed. The legislation prohibits these types of damages, but only if the specific requirements of the legislation are followed. For example, a property owner is not liable for damages related to mold remediation on a property if (1) a certificate of mold remediation has been issued, and (2) the damages accrued on or before the date of the issuance of the certificate. In spite of the civil liability protection, the stigma of mold quite likely remains with the property, which creates a host of concerns. For example, stigma is one of the more prevalent factors affecting real estate deals and often results from required or requested disclosures.13 Stigma may be a critical factor in influencing a diminution in real estate market value, and may ultimately determine whether a person is willing to engage in the purchase. With respect to the sale of properties, disclosures and warranties could become potential areas of litigation related to the Act. Improper documentation, failure to adequately disclose latent defects with respect to past remediation, and the risk of recurring mold all present potential areas of litigation

Shortcomings of the Act
The Act fails to address one of the primary concerns of mold-related regulation and litigation, namely the health-based effects of mold contamination. The legislation makes the unproven assumption that there is a significant health issue related to mold contamination or exposure. But there is continued widespread debate within the medical community about just what the health risks are regarding human exposure to mold. In response to widespread public concern over mold, and as a result of a split in the medical community over the real (verses perceived) health effects of mold exposure, many other states have proposed (and even passed in some cases) legislation to address such concerns. This past year alone, Arizona, Idaho, Illinois, Louisiana, Nevada, Oklahoma and Tennessee have all enacted some type of legislation creating task forces to examine and determine remediation and licensing standards, licensing requirements for remediators, or developing uniform guidelines for remediators

Conclusion
Mold is one of the oldest forms of life, and no form of legislation will ever eliminate mold, or the inevitable ensuing litigation, from the planet. The Act creates a framework to establish a somewhat level playing field among mold evaluation standards and remediation personnel and creates certain protections for consumers where insurance coverage and real estate transactions are concerned. Only time will tell if the people of Texas will benefit from this new Act.

Endotes
1. The damages awarded were broken down as follows: $2,547,350 (replacement of home); $1,154,175 (remediation costs); $2,000,000 (replacement of contents of home); $350,000 (past and future additional living expenses); $5,000,000 (mental anguish); $12,000,000 (punitive damages); and $8,891,000 (attorneys’ fees); see Allison v. Fire Insurance Exchange, 98 S.W.3d 227 (Tex. App. – Austin 2002, pet. withdrawn). 2. Id. at 264 (Court of Appeals affirmed the actual damages award in part, in the amount of $4,006,320.72). 3. See “Perry Signs Mold Bill,” Austin Business Journal, June 12, 2003 (In the Ballard case, the fact that the claims handling concerns were primary to the determination of Ballard’s outcome has not diminished the impact of the mold litigation onslaught). 4. See 29 Tex. Reg. 876 (2004). 5. “Texas Mold Task Force Established,” Mold Reporter, Vol. 2, No. 6 (Winter 2003). 6. “The Texas Mold Bill, How Will the Pending Legislation Impact Commercial Managers?” Indoor Air Currents, Vol. 3, Issue 8 (May 2003). 7. Id. 8. “Alliance Opposes Texas Mold Remediation Bill,” Insurance Journal, Jan. 23, 2003. 9. Jim Norland, “States Consider Mold Legislation,” IAQ News, Air Condition, Heating & Refrigeration News, Monday, May 19, 2003, Vol. 219, Issue 3, p.2 (quoting Senator Michael S. Benne of Florida). 10. See id. 11. This is very similar to legislation challenging insurer practices related to calculating the premiums of insured individuals according to their credit scores. 12. The Texas Fair Plan is an insurance of last resort for “uninsurable” properties. 13. See Andrew L. Fono and Rudy R. Robinson, How Mold Impacts Real Property Values and Real Property Decisions, Columns Mold, (Harris Martin, March 2002).


Andrew L. Fono is a partner with Haynes and Boone, L.L.P. His practice focuses on all environmental aspects of commercial and residential real estate matters, CERCLA litigation, contamination and related administrative cleanup matters, and mold litigation. Fono is a Judge Advocate and Major in the United States Marine Corps Reserves, and serves as one of the Chief Environmental Counsels to the Marine Corps in that capacity.

B. Shawn Cox is an associate with Martin, Disiere, Jefferson & Wisdom. He has eight years of legal experience in civil litigation and transactional matters involving residential and commercial construction, real estate, land development, environmental, general business and telecommunications. He is a former in-house counsel with one of the nation’s largest homebuilders.

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