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Inside This Issue:

  • Preventing Mold-Related Nondisclosure Claims
  • Court Rejects Employees’ Claim against Employer for Fraudulent Concealment of Mold
  • Incident Reports are Held to be privileged

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Risk Management Workshop – New York – October 16

Workshop will be presented in New York by Kent Holland (Arch Insurance) and Catha Pavloff (Marsh).  We will cover (1) design professional insurance in the current market; (2) contract terms and conditions, (3) communication and documentation management (particularly electronic), (4) site safety; and (5) presenting, mitigating and defending contractor claims and claims against the design professional.

The course is registered with the AIA for three (3) AIA continuing education learning units, including HSW.  A charge of $79.95 will cover course materials and continental breakfast.  It will be held in a conference room and attendance will be limited to a small number and will include much discussion.  For additional information, including comments by attendees of earlier workshops, plus location address, and TO REGISTER,  go to: http://www.constructionrisk.com/workshops.htm

Previous attendees have described the workshop this way: “Good practical overview of risk management issue pertaining to construction.   Discussions were interesting, thought provoking and informative.  Enough food for several weeks of thought!  Anyone involved in the construction industry owes it to their company to familiarize themselves with the risk management issues, and Kent did a great job of giving a primer on just about every pertinent topic touching on construction risk management.”  Dion Cominos, Esq., Gordon & Rees, LLP.
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ARTICLE # 1
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Preventing Mold-Related Nondisclosure Claims

By:  Gordon Rees, L.L.P. (Each of the three articles in this issue were written by attorneys with the law firm of Gordon Rees.  Contact information may be found at the conclusion of the third article).

Property owners and managers are increasingly faced with claims due to actual and potential indoor mold problems, raising the dilemma of what needs to be disclosed when leasing and selling properties.  Although California’s Toxic Mold Protection Act, signed into law on October 1, 2001, includes mold disclosure requirements for building owners, the requirements do not go into effect unless and until a California Department of Health Services taskforce first determines objective “permissible exposure levels,” which has not yet been done.

The Department of Health Services cites a lack of funding to explain its inability to convene the taskforce and address the threshold question of whether permissible exposure levels for indoor molds are feasible.  Despite the lack of regulations mandating mold-related disclosures, the California Association of Realtors recently added a specific question to its standard CAR disclosure form to inquire about the presence of mold.  Moreover, given the media attention and substantial jury awards, the number of real estate non-disclosure actions involving mold has increased substantially.

Under California law, buyers and tenants of commercial property are traditionally deemed to be sophisticated and able to freely negotiate contracts with owners.  As long as there are no material or fraudulent misrepresentations, commercial owners generally only need to be concerned with disclosing any “known material facts” that affect the value or desirability of the property, and there is no obligation to repair defective conditions.

Residential sellers and landlords generally need to be more wary of rendering complete written disclosures because even if they have no actual knowledge, residential owners are also required to disclose any condition that they “should have known.”  [See, California Civil Code §§ 1102, et seq. for more information.]  Therefore, when in doubt, disclose, disclose, disclose!

For example, Owner X wants to sell his single family residence and is not aware of having any mold problems during the ten years he occupied the home.  However, five years earlier, a pipe had burst; the kitchen had flooded; and water had leaked into the crawl space and other parts of the home.  Professional contractors repaired the damage, and Owner X had no further problems.  Now that Owner X is selling his home, should he disclose the prior flood?  Yes.  Should he disclose the repairs and subsequent inspections that were done?  Yes.  Should he disclose any reports he obtained?  Yes.  Should he even disclose the minor flooring defect he discovered when repairing the flood damage?  Yes.  And in the mold context, these same answers would also generally apply to a commercial property transaction.

The tricky question is whether to disclose the “potential” for mold due to the extensive water intrusion into the crawl space, wall cavities, etc.  Although the parties in a commercial setting typically would be deemed to be equally aware that water intrusion can lead to mold growth, buyers and tenants may nonetheless claim ignorance and pursue a claim for non-disclosure.  In the residential context, plaintiffs often claim ignorance as to the connection between water intrusion and indoor mold growth.  Such plaintiffs may sue based on the lack of disclosure of water intrusion and/or mold and seek damages such as remediation and repair of personal and real property, bodily injuries, fraudulent concealment and misrepresentation claims, “stigma” and resultant “diminution of the home’s value and/or breach of contract.  These cases can be quite expensive to defend, and owners and/or realtors may not have applicable or adequate insurance to cover the costs of defense or judgments.  Therefore, it is typically advisable to err on the side of disclosing all past water intrusion and mold-related events as well as the investigation and repairs made, if any, when selling either commercial or residential property.

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ARTICLE 2
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Court Rejects Employees’ Claim against Employer
for Fraudulent Concealment of Mold

The California Appellate Court (2nd Dist.) recently affirmed the trial court’s summary adjudication of an employee’s tort action brought against her employer. Jensen v. Amgen, Inc. (2003) 105 Cal. App. 4th 1322.  An employee injured during the course of employment is generally limited to remedies available under the Worker’s Compensation Act.  However, there is a narrow exception to this exclusivity rule where the employee’s injury is aggravated by the employer’s fraudulent concealment of the existence of the injury and its connection with the employment.

The narrow exception was first articulated in the asbestos context.  The employee alleged that his employer learned that he had an asbestos-related disease through routine screening and fraudulently concealed this condition from him, thereby preventing him from receiving treatment for the disease and inducing him to continue working under hazardous conditions.  John Mansville Products Corp v. Sup. Ct. (1980) 27 Cal.3d 465.

Here, plaintiff complained to a company nurse of having sinus headaches, skin rashes and fatigue.  At the time, plaintiff attributed her symptoms to allergies to the laboratory animals present and was transferred.  A few months later, a mushroom was discovered in the building.  Subsequent air testing revealed the presence of “toxic mold” but in concentrations that were lower indoors than outdoors.  The employer informed building occupants of the mold and removed and repaired the water intrusion and mold.  Plaintiff subsequently learned that mold had also been discovered and cleaned five years prior in the air delivery system of the building.

Plaintiff took a medical leave of absence and filed a lawsuit for fraudulent concealment against her employer alleging that her injuries were mold- related and her employer knew of the presence of the “toxic mold” in the building, knew that plaintiff’s symptoms were related to the “toxic mold” and concealed this information from her.

The court rejected plaintiff’s arguments and confirmed the extremely narrow exception to the worker’s compensation exclusivity rule.  The court held that the threshold issue was whether the employer knew of plaintiff’s symptoms before she knew of her own symptoms.  The court noted that the exceptions to the worker’s compensation exclusion are intended to be extremely limited.  The court also noted that plaintiff was the first person to associate her symptoms with mold in the building.  There was no evidence that the employer was aware of any such connection.  Rather, the employee had told the employer that her symptoms were caused by animal allergies.  Moreover, the employer relocated plaintiff after learning of her allegedly building-related symptoms.  Therefore, plaintiff failed to establish the elements of fraudulent concealment and the court affirmed the summary judgment in favor of the employer.
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ARTICLE 3
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Incident Reports are Held to be privileged

A California Court of Appeals held earlier this month that incident reports are protected by the attorney-client privilege when certain criteria are met.  Scripps Health v. Superior Court (Reynolds), 2003 D.A.R. 6059 (filed June 6, 2003)   This case is particularly instructive to companies, such as property owners and managers, which regularly confront mold claims and have established protocols requiring the completion of report forms when water intrusion complaints are received.  This case sets forth criteria for maintaining the privileged nature of this material.

In this wrongful death case against a hospital, plaintiffs filed a motion compelling production of internal incident reports.  In opposition to the motion to compel, the hospital submitted evidence that (1) the reports were marked confidential, (2) the reports were used by the hospital’s attorneys to assess internal risks and create a claims profile and (3) access to the reports was limited to risk managers, in-house or outside counsel and third party claims administrators. To the extent that information from the reports was needed by other departments at the hospital, it was extracted from the documents and then circulated in another format.

The trial court granted plaintiffs’ motion to compel, but the Court of Appeals reversed, holding that the reports were protected by the attorney-client privilege.  The court reasoned that the existence of the privilege depends more upon the intended and actual use of the document than its contents.  The court emphasized the significance of forwarding the reports to the Legal Department, risk managers or outside counsel. If copies are kept only by the initiating department, there is a stronger argument that the primary purpose of the reports is not communication with attorneys, but customer service or other administrative purposes.

Significantly, the court did not limit its holding to hospital settings, but rather on application of the attorney-client privilege to the corporate setting in general.  Accordingly, any company that creates confidential records involving incidents which may result in litigation may be able to classify the documents under attorney-client privilege if the above-listed criteria is followed.

About these Articles: These three articles were originally published the law firm of Gordon & Rees L.L.P. in the July/August 2003 issue (Vol.3, No. 3) of their newsletter entitled, Mold… Matters!” The attorneys contributing to the articles include Mike Pietrykowski, Linda Moin, Traci Lagasse and Molly McKay.  The San Francisco office address is Gordon & Rees, 275 Battery St., Suite 2000, San Francisco, CA 94111; (415) 986-5900.  The firm also has offices in San Diego , Los Angeles , Sacramento , Orange County , Portland , OR , and Las Vegas , NV .  For more information on the article you may also contact the authors by e-mail at: mpietrykowski@gordonrees.com.  The firms website has additional information and articles.  See http://www.gordonrees.com.

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ON-LINE RISK MANAGEMENT COURSES by KENT HOLLAND

Currently available risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include the following: Risk Management for the Design Professional; Contract Guide for the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for environmental and design professional liability.  The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law.  Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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Copyright 2003, ConstructionRisk.com, LLC

Publisher & Editor: J. Kent Holland, Jr., Esq.

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