Floods, hurricanes, flash floods and other water-related events can have a major impact on small businesses. Such events can severely damage buildings and personal property. They can also lead to a second problem, namely mold.

What is Mold?

Mold is a type of fungi, organisms that have characteristics of both plants and animals. There are thousands of different types of molds. Most are harmless but a few can cause illness, particularly in people that have mold sensitivities.

Mold has some characteristics that make it particularly destructive to property.  For one thing, it can grow on virtually any building material, including wood, drywall, carpet and paper. Secondly, when mold grows, it breaks down the material on which it is growing for use as food. This process may destroy the material. Thirdly, mold is often insidious, growing in places that aren't visible. For instance, mold often grows behind walls, under floors, in ducts, in carpet pads and behind ceiling tiles. By the time you discover the mold, it has caused severe property damage.

How Mold Grows

Molds reproduce through spores that they release into the air. These spores are distributed by wind and air currents. Spores may begin to grow if they land in an area that is warm and humid. Besides  heat and moisture, spores require oxygen and food to grow.

Molds generally become a problem only when property has been infiltrated by water. Moisture may enter a building through an opening in the structure's exterior, such as a window or a leaky roof.

Water may also enter a building from an interior source, such as a leaky pipe or broken water heater. You can prevent mold from growing by eliminating excess moisture. You should also ensure that buildings have adequate ventilation. Check for leaks often. If you find a leak, repair it immediately. Mold will continue to grow as long as it has access to water.

Fungus Exclusion in Commercial Property Policies

Commercial property insurers began adding mold exclusions to their policies in the 1990s in response to lawsuits by policyholders. Many of these exclusions refer to fungus rather than mold. An example is the exclusion found in the standard ISO commercial property policy. The ISO policy excludes loss or damage caused by the presence, growth, proliferation or spread of fungus, wet or dry rot or bacteria. Fungus includes mold or mildew. It includes toxins, spores, scents or by-products produced or released by fungi.

Like many property policies, the ISO policy provides limited coverage for mold losses via exceptions to the fungus exclusion. The fungus exclusion in the ISO policy contains three exceptions. The exclusion does not apply to:

• Fungus, mold, dry rot etc. that results from fire or lightning. While it's conceivable that mold could result from fire or lightning, this doesn't seem very likely.
• A specified cause of loss that results from fungus. Specified causes of loss is a defined term in the policy. It includes perils like windstorm or hail, smoke, riot or civil commotion, vandalism, and sinkhole collapse. These perils are unlikely to result in fungus.
• Fungus that results from a specified cause of loss other than fire or lightning. The coverage provided by this exception is called Limited Fungus Coverage

Limited Fungus Coverage

Under Limited Fungus Coverage, the ISO policy covers fungus damage, cleanup and repair. It covers loss or damage by fungus, wet or dry rot or bacteria if the fungus, dry rot etc. results from a specified cause of loss other than fire or lightning. Fungus caused by flood is also covered but only if the policy includes flood coverage via an endorsement.

There are only two perils included in the definition of specified causes of loss that are likely to result in fungus. One is water damage. The other is leakage from fire-extinguishing equipment. For example, suppose that the fire suppression system in your building develops a small leak. The leak has continued for several months by the time you notice it. In the meantime, mold has appeared under acoustical tile in the ceiling of the building.

The ISO property policy covers the following:

• Direct physical loss or damage to Covered Property caused by fungus, including the cost of removing the fungus. This coverage would include the cost of removing the damaged ceiling tiles and replacing them with new ones.
• The cost to tear out and replace any part of the building or other property as needed to gain access to the fungus. For example, if a portion of the ceiling needed to be removed to gain access to the damaged tiles, the policy would cover the cost of tearing out and replacing that portion of the ceiling.
• The cost of testing performed after removal, repair, replacement or restoration of the
  damaged property is completed. If testing was needed to ensure that the mold was gone after the ceiling tiles were repaired, the policy would cover the cost of such testing.

The coverage described above is available only if you used all reasonable means to save and preserve the property from further damage both before and after the occurrence takes place. For example, suppose that you just discovered the leak in your fire sprinkler system. You'll need to take immediate action to stop the leak and to dry the affected area until repairs can be performed.

The most your insurer will pay for all of the expenses described above that result from any one occurrence is $15,000. This limit is also an annual aggregate. That is, your insurer will not pay more than $15,000 under Limited Fungus Coverage in any one policy year.