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TOXIC
MOLD: ENGINEERS, BUILDERS, CONTRACTORS AND LANDLORDS BEWARE
By Linda Alderman
Over the past few years allegations of damage arising
from the presence of toxic mold in buildings have resulted in the
filing of hundreds of law suits for property damage and/or personal
injury. Plaintiffs, many of whom are seriously ill, are suing building
owners, property managers, architects, contractors and commercial and
personal lines insurers for millions of dollars -- and winning.
What Is Toxic Mold?
Molds are fungi that grow when damp conditions are present. Some mold
spores are relatively benign, while others are believed to cause health
problems for humans. Mold spores that cause an adverse health reaction
are referred to as "toxic." The effect on humans will depend on the
type of mold, the metabolic byproduct of the mold, the extent of the
contact and length of exposure, as well as the individual
susceptibility of the person exposed.
The overwhelming majority of molds are harmless, but
exposure to several types of mold has been associated with the
potential for adverse health effects. When a mold produces mycotoxins
(a poisonous substance produced by a fungus) it becomes dangerous to
those who are exposed to it through ingestion (eating or inhalation) or
through skin contact. The causal relationship between exposure to mold
and human health is being actively studied in the medical community at
this time, however, research does exist that suggests that toxigenic
molds can cause problems with the vascular, digestive, nervous, urinary
and reproductive systems of the human body. Symptoms include headaches,
rashes, lung disease, and cognitive memory loss.
As of this writing there are no federal or state
regulations that establish standards for exposure to "toxic" mold, nor
are there federal or state standards for mold abatement.
Toxic Mold Litigation
The increase of toxic mold cases may be related to the manner in which
buildings have been constructed. For newer buildings, the same
insulation that prevents drafts also may prevent airborne chemicals and
moisture from venting. This increased moisture buildup can create a
breeding ground for mold and other bacteria. In older buildings
deterioration of building materials may allow moisture to accumulate in
places where mold spores and other bacteria can grow.
Litigation related to toxic mold has resulted in a
number of large damage awards. In two separate cases, courthouses in
Florida were evacuated as a result of toxic mold. The damage award for
the remediation and costs for the Polk County Courthouse was
approximately $100 million dollars. In the case involving Martin
County, the county was awarded $11.5 million in damages plus $2.9
million in interest. In Texas the builders of a private home
contaminated with toxic mold were ordered to pay damages of $32.1
million in June 2001. The $32.1 million award represents $6.2 million
for replacement of the home and contents, $5 million for mental
anguish, $12 million in punitive damages and $8.9 million for legal
fees. In 1999, a Delaware jury found the owner of an apartment complex
liable for $1 million in damages to three tenants for medical expenses,
permanent impairment and pain and suffering associated with exposure to
various mycotoxins, bacteria, fungi and other toxins while living in
that apartment complex. A homeowners group in California sued builders
and contractors alleging property damage and bodily injury due to mold
contamination and the matter settled for $1.3 million.
Implications to the Insurance Industry
The insurance industry is bracing itself. Some courts have held that
the pollution exclusion does not apply to mold claims because it is not
the traditional type of "pollutant" for which the exclusion was drafted
to cover. In one case the insurer argued that the pollution exclusion
was broad enough to include a home environment contaminated with mold.
In rejecting that argument the court stated that because the injuries
were caused by exposure to mold that grew from water vapor trapped in
the walls, that "no contaminants were released, but rather formed over
time as a result of environmental conditions." One court held that even
where there was a mold exclusion in a homeowner's policy that it was
inapplicable because the mold growth occurred as a result of a leaking
roof. Some courts, however, have analogized mold contamination to lead
paint flaking in holding that it falls within the plain language of the
pollution exclusion since it disperses into the air, like lead flakes
from paint. Other courts have stated that a pollution exclusion should
not apply to substances that are commonly found in the
environment.
Personal injury and property damage claims related to
mold exposure are increasing at lightening speed. Engineers,
developers, landlords, contractors, subcontractors, architects,
property owners and managers, insurers and others need to quickly
evaluate how they can proactively manage the risk associated with
potential future claims of mold infestation.
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CASES OF
INTEREST
* Power company with exclusive easement for transmission of electric
current and telephone wires could assign portion of that easement to
third party for wireless telephone tower. Zhang v. Omnipoint
Communications Enterprises, Inc.
* Parent's use of UGMA funds to pay child support
payments violated fiduciary duty. Mangiante v. Mangiante Neimiec.
* Franchisor's right to inspect does not, in and of
itself, grant franchisor control over, or responsibility for, premises.
Ward v. McDonald's Restaurant of Connecticut.
* Debtor's equity of redemption under strict foreclosure
statute constitutes a contingent interest that is property of the
estate. In re Canney.
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LIMITED
LIABILITY COMPANIES--THE BEST OF ALL WORLDS?
A limited liability company (LLC) is a business structure that combines
some of the best features of sole proprietorships, partnerships and
corporations. LLC owners, like their counterparts for partnerships or
sole proprietorships, report profits or losses on their personal income
tax returns. Like a corporation, however, the owners of an LLC have
"limited liability," that is, they are shielded from personal liability
for debts and claims arising from the business.
Limited Liability
The limited liability for LLC owners is not absolute. Owners still can
be held liable if they (1) personally and directly injure someone; (2)
personally guarantee a loan or business debt on which the LLC defaults;
(3) fail to deposit taxes withheld from employees' wages; (4)
intentionally commit a fraudulent or illegal act that harms the company
or someone else; or (5) treat the LLC as an extension of their personal
affairs rather than as a separate legal entity. The last exception to
limited liability is the most significant. It carries the potential for
complete removal of the protections for individual owners. If the line
between LLC business and personal business becomes too blurred, a court
could find that a true LLC does not exist, leaving the owners
personally liable for their actions.
Ownership
Most states allow a single individual to be the sole owner of an LLC.
An LLC makes the most sense in circumstances where there is a concern
about personal exposure to lawsuits stemming from operation of the
business. Most laws prohibit establishment of an LLC in the banking,
trust, and insurance fields.
Unlike corporations, LLCs can carry on their business
without holding regular ownership or management meetings. Of course,
formal meetings backed up by written minutes still may be advisable to
document important decisions, such as a change in membership or a major
expenditure.
Formation
Setting up an LLC is relatively simple. Articles of organization must
be filed with the appropriate state office, usually the Secretary of
State. The articles of organization include the name and principal
office for the LLC, the names and addresses of its owners, and the name
and address of the person or company that agrees to accept legal papers
on behalf of the LLC.
Even if it is not legally required, the owners should
prepare an operating agreement that spells out the owners' rights and
responsibilities. The absence of an operating agreement will mean that
state statutes will govern the operation of the LLC by default. An
operating agreement acts as a guide for resolving common issues that an
LLC will face, and thereby helps to avert misunderstandings between the
owners. It also underscores the authenticity of the LLC itself, which
can be helpful when a judge is deciding whether the owners are
protected from personal liability.
A standard operating agreement includes the members'
percentage interests in the business; the members' rights and
responsibilities; the members' voting power; allocation of profits and
losses; how the LLC will be managed; rules for holding meetings and
taking votes; and "buy-sell" provisions that control what happens when
a member wants to sell his interest, becomes disabled, or dies.
Although it is frequently overlooked when an LLC is created, a buy-sell
agreement is important as a sort of "premarital agreement" among the
owners. The buy-sell provisions can clarify and ease the transition
when the inevitable changes come to the members of the LLC.
Taxes
Since an LLC is not considered separate from its owners for tax
purposes, the LLC pays no income taxes itself. Like a partnership or
sole proprietorship, an LLC is a "pass-through entity." Each owner pays
taxes on a share of profits, or deducts a share of losses, on a
personal tax return. The IRS regards each member as a self-employed
business owner, not an employee of the LLC. There is no tax
withholding, and owners must estimate taxes owed for the year, then
make quarterly payments to the IRS.
Conversion
By converting to the LLC business structure, sole proprietors and
partnerships can gain the protection afforded to LLC owners without
changing the way their business income is taxed. Conversion usually can
be accomplished either by filling out a simple form or filing regular
articles of organization. Federal and state employer identification
numbers will have to be transferred to the name of the new LLC, as will
such items as sales tax permits, business licenses, and professional
licenses or permits.
The process for creating an LLC is streamlined and free
of highly technical considerations. However, there is an important
place for professional advice concerning such matters as choosing an
LLC over other business structures, preparing or reviewing the
operating agreement, and setting up accounting systems.
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NO
PRIVACY FOR HOME COMPUTER
An insurance services company bought two computers for use by Robert,
one of its employees. One computer was used at the office, and one was
used exclusively at home. Robert signed a policy statement in which he
agreed that he would use the computers for business purposes only and
not for various inappropriate purposes, including accessing obscene
material. He also consented to having his computer use monitored "as
needed" by employer personnel and agreed that his communications by
computer were not private.
When Robert's employer determined that he had used the
home computer to view sexually explicit material, it fired him, despite
Robert's protests that he had not intentionally accessed the
pornographic sites. Robert sued for wrongful discharge, contending that
the real reason he was let go was the fact that three days after the
termination some of his stock options were going to vest. Since the
company contended that the home computer was likely to contain evidence
that Robert was deliberately accessing pornography, it demanded that
the computer be produced, with nothing deleted from the hard drive.
Robert refused, arguing that he had an expectation of privacy when
using a computer at home, even a computer supplied by his
employer.
The court ordered Robert to turn over the computer under
the terms required by his employer. It rejected the argument that the
home computer was a "perk" for senior executives that could be used for
personal purposes. In Robert's case, the home computer was, in fact,
primarily used by him and his family for personal matters. Information
on the computer included his family's financial information and
personal correspondence. Robert and his family had been treating the
home computer as a personal computer at their own risk.
Robert lacked a reasonable expectation of privacy in the
home computer, in part because he had notice of and had consented to
his employer's policy allowing only business use of the computer.
Another factor weighing against his position, however, was "accepted
community norms." He could not argue forcefully that there had been an
invasion of privacy given that, according to the court, over
three-quarters of major firms in the country monitor, record, and
review employee communications and activities on the job.
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