Property & Construction Law Update Winter 2003 Mold and Insurance - A Growing Conflict Recently, an article appeared with the title, "Toxic Mold is Good as Gold for Plaintiff's Lawyers." This may not be far from the truth some have coined these times the "mold rush." In Texas last year, a homeowner was awarded $32 million after his 11,500 square foot home became uninhabitable because it allegedly became overrun with toxic mold. Although one may not consider Minnesota a breeding ground for mold, in 1994 an energy code was passed that resulted in construction of tightly sealed homes. The code fails to provide for active ventilation; instead it assumes that building owners will ventilate their buildings by opening doors and windows. In a locale with sub-zero winter temperatures, this idea of "passive" ventilation is not practical. As a result, mold, and its associated claims, have become much more of a problem in Minnesota. It has not been definitively established that indoor mold causes personal injury, however, there are plenty of cases where individuals argue that they suffered significant personal injuries from exposure to mold. With the increase in personal injury claims, there has been a corresponding growth in disputes regarding insurance coverage for those claims. Insurance issues regarding mold coverage can arise in a number of circumstances including liability claims and claims for coverage under property policies. In the context of a liability claim it is important to note that even in those circumstances where the allegations of injury are meritless, it may take significant fees and costs to defend the claim. Defense of liability claims is typically covered under liability insurance such as commercial general liability or errors and omissions insurance. In this hard insurance market, be aware that insurers are carefully scrutinizing the allegations of these cases before agreeing to provide coverage. Insurers are taking a similar approach to claims that arise under property policies that may require them to pay property owners for mold damage. Because there have been a number of cases that resulted in significantly high verdicts against insurers because the insurer failed to properly clean up mold-related property damage, insurers tend to be fairly cautious when adjusting these types of claims. When facing a loss resulting from mold, whether it is property damage or a claim by a third party for personal injury, do not simply accept your insurance carrier's initial denial of a mold claim. Mold clean-up and defense of a mold claim can be enormously expensive. It is well worth engaging the assistance of insurance coverage counsel to analyze whether there is insurance coverage for a claim. It is important to prevent future coverage disputes by purchasing insurance that does not contain a mold exclusion, especially if you are in a business or a newer home where there is an increased risk of such claims. Mold exclusions are not always easy to find in an insurance policy. We recommend that you engage the assistance of counsel or your broker to make sure you are adequately protected. In response to increased claims and pay-outs, insurers are tightening policy wording and may require extra premiums for mold coverage. Laurie Kindel serves clients in the areas of insurance coverage disputes, insurance counseling, and products liability. She was most recently Senior Corporate Counsel at St. Paul Fire & Marine Insurance Company, providing coverage analysis and product development counsel to underwriters. André LaMere is a member of Maslon's litigation team. He is a 2002, magna cum laude graduate of the William Mitchell College of Law. Some helpful mold websites: Section 1031 Tax Deferred Like-kind Exchanges Deferred like-kind exchanges involving real estate continued to be one of the most popular tax deferral techniques available throughout 2002. Commonly referred to as "tax-free" exchanges, Section 1031 of the Internal Revenue Code (Section 1031) provides that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment." I.R.C. § 1031(a). The term "tax-free" exchange is really a misnomer, because an exchange under Section 1031 does not eliminate the gain, but only defers the recognition of the gain and the resulting income tax. However, it is important to note that Section 1031 provides there must be an "exchange." A simple sale followed by an immediate investment in like-kind property does not fall within the scope of Section 1031; the taxpayer must not receive directly or indirectly the proceeds from the disposition of the property. While an exchange can involve a two-party or three-party simultaneous exchange, the most typical scenario is a "deferred exchange," also sometimes referred to as a "Starker Exchange" (named after a 1979 Ninth Circuit case that permitted a non-simultaneous exchange). In a typical deferred exchange, the taxpayer uses a third party which holds the sales proceeds pending acquisition of the replacement property. Usually a financial institution or an affiliate of an established title insurance company, the third party is commonly known as the "qualified intermediary," and handles the exchange for the taxpayer. The taxpayer sells the "relinquished property" through the qualified intermediary and the proceeds of the sale are held by the qualified intermediary, which eliminates constructive receipt by the taxpayer of the sale proceeds. Because of administrative problems caused by the lapse of time allowed in the Starker case, Congress, in the Tax Reform Act of 1984, enacted Section 1031(a)(3) to restrict the time period in which a deferred exchange must be accomplished. The statute provides that the taxpayer must "identify" the "replacement property" within forty-five days following the sale of the relinquished property. Within the forty-five day period, a taxpayer may designate up to three replacement properties or any number of replacement properties, so long as their fair market value is no more than 200% of the value of the relinquished property or so long as 95% (based on value) of the designated properties are timely acquired. The taxpayer is then required to acquire one or more of the designated replacement properties through the qualified intermediary within the earlier of 180 days after the sale of the relinquished property, or the due date of the taxpayer's returns for the year in which the transfer of the relinquished property occurs. There is no specific holding requirement for either the relinquished property or the replacement property. The Internal Revenue Service takes the position that if the taxpayer's relinquished property was acquired immediately before the exchange, the taxpayer acquired the property primarily to dispose of it, rather than hold it for productive use in a trade or business or for investment. This finding will disqualify the "exchange" for deferral under Section 1031. In one private letter ruling, however, the Service did state that a minimum two-year holding period is a sufficient holding period for a qualified exchange. But time is only one factor to be considered in determining the taxpayer's intent regarding property exchanged or acquired in an exchange. The shorter the period of time during which either of the properties are held by the taxpayer, before or after the "qualified" exchange, the stronger other facts and circumstances must be to establish the proper statutory intent. In a deferred exchange, a partial gain is recognized to the extent that cash and other nonqualified property, known as "boot," is received. However, the amount of gain recognized is limited to the gain realized. No loss will be recognized in a qualified exchange. In addition, gain will be recognized if either the fair market value or the taxpayer's equity in the replacement property is less than the corresponding fair market value or equity in the relinquished property. It is also important to note that an exchange can be qualified under Section 1031 if it involves a related party, however, any gain recognized may be ordinary income under Section 1239. Further, special rules exist under Section 1031(f) for exchanges with related parties. With few exceptions, the statute requires that the deferred (and unrecognized) gain will be recognized when either the taxpayer or the related party disposes of the property received in the exchange within a two-year period. Based on our experience, every proposed Section 1031 transaction seems to have its own unique legal issues. Accordingly, when a Section 1031 deferred like-kind exchange is considered as an option, your accountants and your real estate attorney should be consulted. Charles Bans is a partner in the real estate area, where he handles the purchasing, financing, selling and leasing of commercial properties for developers and investors, as well as commercial real estate loans for both lenders and borrowers. He is certified as a Real Property Law Specialist by the Minnesota State Bar Association. Karen Bjorkman represents local developers and business owners in the leasing, acquisition, development and sale of real estate. She also represents local banks in their commercial lending transactions, including construction and development financing. Ms. Bjorkman is certified as a Real Property Law Specialist by the Minnesota State Bar Association. Expert Testimony Linking Exposure to Mold to Adverse Health Effects Held to Pass Frye Test The Nebraska Supreme Court reversed a trial court's Order excluding the testimony of a Clinical Ecologist who linked the plaintiffs' claimed personal injuries to her exposure to mold species that developed in a home as a result of water intrusion into the building envelope. The trial court refused the proffered testimony, reasoning that it failed to conform to the criteria required by Frye v. United States, 293 F.2d 1013 (D.C. Cir. 1923). The Nebraska Supreme Court ruled that the trial court abused its discretion in refusing the testimony, and remanded the case with instructions to consider the testimony as probative on the issues of causation and damages. The ruling is likely to fuel a continuing debate in the American medical community regarding whether diagnoses linking personal injury to exposures to mold constitutes a valid medical opinion. The American Medical Association and the majority of medical scientists who have considered the question believe such a link "junk science." Not so in Nebraska. Barbara Mondelli and her husband took possession of a new home, constructed by Kendel Homes Corp. Soon after substantial completion, the homeowners noticed water intrusion through the building envelope. While Kendel attempted to remediate the problem, its efforts apparently failed to arrest the water intrusion. During one of the remediation efforts, a section of interior wall was removed in the plaintiffs' presence, who observed dripping insulation, and wall studs that were stained with a substance that looked like mud "covered with tiny toadstools." They also detected an odor that theretofore they'd associated with a "new-house-smell." The Kendel employee who removed the wall segment informed the Mondellis that the substance was mold and suggested they hire an attorney. Barbara Mondelli did, and he retained a Clinical Ecologist named Adi Pour, PhD, who provided the link the plaintiff needed to demonstrate that her claimed personal injuries were causally linked to her exposure to mold species. The trial court excluded the testimony on the basis that (1) there is no recognized standard for sampling of the level of species and any related health effects; and (2) the testimony did not have general acceptance in the scientific community, under the standard set forth in Frye, supra. The Nebraska Supreme Court reversed, reasoning that the expert met the Frye standard of general acceptance in the community, based upon her own review, interpretation and understanding of applicable scientific literature. The supreme court ultimately determined that the trier of fact should hear Dr. Pour's testimony, and independently determine whether it coheres to present generally accepted scientific thought. The court's ruling turns the Frye test on its head, and allows non-members of the scientific community to decide what is imagined and what is real science. The American medical community has studied the writings and opinions of the Clinical Ecologists; what's more, it has rejected them. Medical scientists see no medical difference between their diagnoses of (1) multiple chemical sensitivity; (2) toxic encephalopathy; (3) fibromyalgia; (4) chronic fatigue syndrome; and (5) immunological disturbances: they are all the same thing. The scientific community is troubled by the fact that the description of the symptoms are derived subjectively, and are not objectively testable, and yet the list of such symptoms is virtually inexhaustible. The Clinical Ecologist's methods and conclusions fail to conform to traditional tests for foundation of medical opinion. Their medical methodology, diagnoses and described maladies are not accepted as "normal science." Why? Because there is no diagnostic testing methodology; no definition or diagnosis criteria, nor biological markers to identify the symptoms. Drummed out of the scientific community, the Clinical Ecologists have established their own organization, and their own journal; they support each others' writings, and rely upon them to support their own opinions though rejected by the larger scientific community. Who in the scientific community has rejected the basic assumptions, methods and opinions of the Clinical Ecologists? The AMA; California Medical Association; Health Ministry of Ontario; World Health Organization; American College of Physicians; General Medical Counsel of Britain; American College of Occupational and Environmental Medicine; and the International Society of Regulatory Toxicology and Pharmacology. Who, outside of the Clinical Ecologists themselves, has stepped forward to embrace the new science? The Nebraska Supreme Court. James Duffy O'Connor is the Chair of Maslon's Construction Law Department. He litigates mold claims, and advises contractors and others in connection with Mold Loss Prevention Programs.
April 30, 2003 is the deadline to appeal your real estate taxes payable in 2003. Accordingly, now is the time to review your property tax statements and decide whether you wish to file an appeal. Certain properties are particularly good candidates for a tax appeal, including: office properties in segments of the market where vacancy rates have been rising, older properties, special purpose properties, owner-occupied or single tenant properties, and recently purchased properties if purchased for a price that is less than the assessed value. If you would like to talk with us regarding the property taxes on your property, call Virginia Bell or Justin Perl. Do you have questions concerning commercial real estate or construction legal issues?
© Maslon Edelman Borman & Brand, LLP. "The Maslon Property & Construction Law Update" is published as an information service to clients and friends. Please recognize that the information is general in nature and must not be relied upon as legal advice. The attorneys listed above, or your Maslon attorney contact, would be happy to discuss in greater detail the information in this article and its application to your specific situation. We welcome your comments and suggestions. |
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