Appraisers and toxic mold: Legal and valuation issues

Journal of Real Estate Practice and Education, 2003 by Aalberts, Bob, Hoyt, Richard W

This article is the winner of the Real Estate Valuation manuscript prize (sponsored by the Appraisal Institute), presented at the 2002 American Real Estate Society Annual Meeting.

Abstract: New construction techniques designed to improve insulation have created conditions ripe for the proliferation of toxic mold. These developments have spawned numerous and costly lawsuits. Appraisers could be sued for negligent appraisals if they do not follow professional standards of care. Since mold has only recently become a serious issue, appraisers and other real estate professionals must devise policies and procedures to handle this potentially explosive problem. For appraisers, the amount of required expertise is dictated by the Uniform Standards of Professional Appraisal Practice, specifically in the Competency and Ethical Rules. Appraiser guidance is also contained in The Appraisal Foundation's Advisory Opinion 9 (AO-9) and the Appraisal Institute Guide Notes 6 and 8.

Introduction

A growing number of commentators suggest that the legal consequences of toxic mold will become as serious and extensive as the crushing wave of asbestos litigation that occurred over the past several decades. (Hsieh, 2000; Van Voris, 2001; Carlton, 2002; and Cross, 2002). Indeed, in the last few years plaintiffs have won an increasing number of precedent-setting, multi-million dollar judgments and settlements due to toxic mold problems. A notable example of this occurred in May 2001. Two women in Delaware, suffering from asthma attacks and other health problems, were awarded $ 1.04 million from their landlord who had failed to correct mold problems (Haverford Partnerships v. Stroot, 2001). In November 2001, a family living in a California apartment complex was awarded $2.7 million for health-related problems allegedly caused by mold. In addition, in December 2001, tenants in an apartment complex in New York settled for a figure reported to be as much as $1.8 million for alleged mold exposure that caused health problems (Smith, 2002). Concurrently, there have been several successful bad faith lawsuits against insurers that refused to indemnify those they insure for losses due to mold. In one California insurance case, the jury awarded the homeowner $18 million, although it should be noted that the judge later reduced it to $3 million, while a similar case in Texas resulted in a $1.5 million settlement (Van Voris, 2001). Possibly the largest award to date occurred in a Florida case against an architect and general contractors for mold problems in a new court house that caused fifteen workers to become ill (Centex-Rooney Construction Co. v. Martin County, 1997). The $11.5 million award, along with attorneys' fees, actually exceeded the building's value (Van Voris, 2001).

With this impending exposure to costly lawsuits, the pressures on potentially responsible parties are becoming intense. Insurers claim homeowners' premiums will rise by at least 10% due to toxic mold claims (Insurance Day, 2001). Contractors, particularly in fast-growing Sunbelt states are building less, freezing their activities and even going out of business due to the rising premiums caused by construction defect litigation, including those suits involving mold. Not surprisingly, there are also indications that fewer companies are now willing to insure these risks. The Wall Street Journal reports that mold exclusions are allowed in commercial and homeowner insurance policies in more than thirty-five states. If insurance is not available for mold coverage then ". . . , apartment landlords will either have to spend more to beef up their mold-mitigation programs, pay out a lot in litigation expenses-and possibly settlements-or all of the above," (Smith, 2002). Some builders are turning to secondary or relatively unregulated insurers that typically charge more, but provide less coverage. All of this has caused housing shortages and increased the price of homes in some parts of the United States. (Gavin, 2002).

Still, owners of residential and commercial buildings argue their claims are far from frivolous. Indeed the effects of toxic mold on people and property can be devastating. Some toxic molds, most notably the infamous Stachybotrys or "killer fungus" produce a potent mycotoxin that has been linked to hundreds of illnesses and even to the alleged deaths of several infants in Cleveland from pulmonary hemosiderosis (Cross, 1998). Another mold, Poria incrassata, also called the "house-eating fungus" attacks buildings and can cause extensive damage to flooring and walls (Miller, 2002). So while such debates grow as to the causal nature of specific molds and illnesses, the lawsuits still appear to keep coming.

This article discusses why toxic mold is causing significant legal and economic problems for property owners. It also discusses the potential role of appraisers in managing this risk as well as competently addressing the issue of mold in the appraisal process. To this end, various standards that appraisers should consider in order to comply with the Uniform Standards of Professional Appraisal Practice (USPAP) are presented.