Mold May Attack E&O

June 7, 2002

Litigation Attorney Warns Brokers Could Be Lawsuit Targets

By Bridget McCrea
Inman News Features

The mold mania spreading through homes, offices and schools across the nation is putting the real estate industry on guard against potential lawsuits.

And those on guard should include real estate brokers and agents who play pivotal roles in the sale of those mold-infected homes and other properties, according to Robert J. Shulkin, senior litigator with Coldwell Banker Residential Brokerage Co. in Los Angeles.

An expert on toxic mold litigation, Shulkin calls such actions a "potentially grave threat" to the real estate brokerage industry. He said some experts already are speculating that mold litigation could result in the insolvency of some builders and brokers.

One of the first areas to be hit could be the errors-and-omissions and liability insurance brokers carry to protect themselves and their agents.

"Insurance coverage for toxic mold lawsuits against real estate brokers is scarce and will soon be nonexistent," Shulkin predicted. "Traditional errors-and-omissions policies exclude coverage for property damage and bodily injury and the standard commercial general liability policy excludes coverage for professional services."

Shulkin said insurance companies are well aware of the potential risks of insuring people who are involved in property sales and have been adding specific mold exclusions to their policies.

"The insurance industry does not intend to absorb losses or liabilities resulting from toxic mold," he said. "Those losses will ultimately have to be absorbed exclusively by the defendants who are held liable by juries."

Brokers in California are particularly vulnerable, in Shulkin?s view, because the state holds them to special standards of care in disclosure not only to their own clients, but also to all parties in the real estate transaction. Brokers are required under California law to conduct a visual inspection of every home and disclose all observed defects to all parties to the transaction. The result, Shulkin said, is that real estate practitioners in the state frequently are sued for negligence in failing to discover or disclose such potentially mold-triggering conditions as leaky roofs and defective plumbing.

Shulkin said brokers are "natural defendants in toxic mold cases" because of their assets and the "unreasonably high expectations jurors have concerning the expertise of brokers in discerning construction defects."

He estimates 20 new mold lawsuits are being filed in California every week, many of them directed at brokers.

Mold problems aren?t exclusive to California. Brokers and agents across the country are holding their breath to see how the new nemesis affects the industry.

Debbie Morris, a sales associate with F.C. Tucker in Indianapolis, didn?t think her company?s E&O or liability insurance rates or coverage have been affected, even though she?s already seen home sales fall through because of mold.

"I?m working on a deal right now where the buyers want the home?s siding removed for an inspection prior to the sale, even though they?re getting an allowance for the new siding," said Morris. "They want to be able to inspect the home before the new siding goes up."

Kaye Environmental VP John Butler called mold the "new asbestos for the insurance world." Kaye is a New York-based insurance broker that counts real estate company owners and managers among its clients.

Brokers and agents in the residential property field are especially prone to E&O and liability insurance problems in the future, in his view.

"The feeling is that brokers and agents can be liable for injuries and the property value if they fail to disclose the condition on a private home," he said.

And Butler suspects it will only be a matter of time before E&O and liability insurance premiums rise and coverage decreases mainly through exclusions for mold-related liabilities.

"Any insurance that transfers that risk from the real estate professional to the insurance company will always rise (in price) to compensate (the insurer)," said Butler.

National Association of Realtors General Counsel Laurie Janik said the group is unaware of any claims brought against Realtors for failure to disclose a mold condition.

However, Janik said, NAR is "in the process of obtaining information from the insurance companies that provide errors-and-omissions insurance to real estate professionals about the current coverage for mold related claims and any plans for future changes (exclusions or premium increases) due to mold."

Copyright: Inman News Service

Contact ALTA at 202-296-3671 or [email protected].