Vol. 77, No. 9, September 2004

The Stigma Enigma:
Damages Based on Public Perception of Taint

Sidebars:

• State Bar Updates the Law of Damages in Wisconsin

by Thomas Hofbauer & Clare Ryan

Consider these scenarios:

Scenario 1. You represent a group of homeowners from a new subdivision. All complain that their houses are plagued with cracks in the walls, damage to foundations, and water seepage into basements. You learn that the subdivision was built on unsuitable soil. News about the suit you file against the developer and builder for property damage makes its way into the local paper. Your clients worry that even if they prevail and their homes are repaired, public awareness of the problem has irreparably devalued their homes. Can your clients expect to recover for this "stigma"?

Scenario 2. You decide to sell your own home. Aside from the usual fix-up here and fresh paint there, your house has been well kept, and the sale should yield a nice profit. Then you learn from a home inspector that the plumbing contractor you hired some time ago evidently did not fully repair a pesky water leak. You also learn new words, like stachybotrys chartarum, and - worse - that this mold is growing in your walls. Thousands of dollars later, your certified mold remediation expert assures you that the contamination has been abated, but the expert cannot guarantee that the mold will not return. You put your house on the market and forthrightly disclose the mold history. At the mention of the mold, however, potential buyers' interest wanes. You are forced to sell at a lower price than similar houses would command. If you sue the plumbing contractor, can you expect to recover damages for the "stigma" that you are convinced reduced the value of your home?

Nationwide, plaintiffs increasingly are seeking redress for "stigma damages." Stigma damages are those tort damages awarded for diminution in value of specific property due to a negative public perception, rational or not, and are in addition to any recovery obtained for physical injury to the property.¹ Stigma represents a loss in value apart from the cost of curing the contamination itself.² Plaintiffs seek stigma damages when they believe the traditional remedy for their injury will not make them whole.

Stigma damages are not new. Historically, they have been pursued in several kinds of circumstances, most as a result of a home's sale. Some of the more exotic examples include a property alleged to be haunted or that was the site of a gruesome event, such as a suicide, murder, or notorious criminal activity. More often, however, stigma damages arise in a more mundane context, such as in situations involving prior environmental contamination or construction defects. Is public perception - founded, some say, only on conjecture and speculation,³ and which may not even be reasonable⁴ - too unreliable a basis for an award of damages?

This article focuses on stigma damages in situations involving construction defects and environmental contamination, particularly mold because of its recent prominence in the media.⁵ It discusses the factors that go into evaluating the existence and extent of stigma, and the use of experts to prove stigma damages. Finally, the article examines how some courts in other states have addressed stigma damages and how stigma damages fit within the framework of Wisconsin law.

Causes of Stigma

In common parlance, a stigma is a mark against one's reputation. Similarly, in the context of this article, a stigma is a mark against the reputation of one's property. Recovery for stigma presents a special challenge, and courts understandably approach these cases gingerly. For one thing, stigma damages represent a modification to the traditional rule of damages, because repair of the defect and diminished property value generally are considered to be mutually exclusive remedies.⁶ For another, they can be based on changeable, imprecise, or even inaccurate public perceptions about the contamination's effects on health or the environment. One survey demonstrated that even among well-educated people, perceptions of risk may differ significantly from actual risk.⁷ Asked to state the most risky of certain activities or technologies (nuclear power, smoking, handguns, motor vehicles, and aviation), those surveyed selected nuclear power when, in fact, it is the least risky.⁸

Or consider mold. According to the Wisconsin Division of Public Health, molds are everywhere, exist naturally outdoors, and have existed for millions of years.⁹ To date, no clear scientific link between mold exposure and adverse health effects has been established,¹⁰ except for persons whose health already is compromised by, for example, HIV/AIDS or chemotherapy.¹¹ In fact, in a rare move, in 2000 the Centers for Disease Control retracted its earlier endorsement of studies finding an association between exposure to stachybotrys (pronounced "stack-ee-BOT-ris") mold and certain lung problems in infants.¹² Yet even absent medical or scientific proof of causation, or even if it is discovered that the danger from mold exposure is more perceived than real, the perception of causation or danger becomes reality if the perception causes property values to fall.

Claims of construction defects often allege structural problems due to water damage (which may lead to mold growth), cracking and shifting of floors and walls, and foundation problems. Any construction defect can diminish the value of a house. Usually repair of the defect fully addresses the problem. In stigma cases, however, plaintiffs are asserting that remediation of the defect addresses only part of their damages - that the physical repairs do not compensate them for the loss in value that results from the lingering public impression that the property is "damaged goods." As a result, property damage claims arising out of mold infestation, for example, are brought by building owners against contractors, architects, and engineers and their insurers for constructing or designing a building that allowed mold to grow. Although health concerns also may be an issue, the primary goal is to recover remediation, reconstruction, and stigma damages, rather than to prove that mold exposure caused the occupants' medical conditions.

Environmental contamination of a property may include current or historical exposure to radon, asbestos, toxic wastes, lead, or mold. Environmental stigma may come about in one of several ways. It may occur because a property's contamination has not yet been, or is unable to be, abated. Or it may occur because the property, although uncontaminated itself, is situated near tainted property. Finally, a negative perception may persist even after abatement has been accomplished, due to a fear, perhaps unfounded, that the contamination may be dormant, and may reappear.

Experts

Proving stigma entails proving both its existence and its extent - that is, determining whether stigma exists and then placing a dollar value on it. Using mold litigation as an example, named defendants may include owners and managers of commercial buildings, home inspectors, real estate sellers, brokers, manufacturers of building products, architects, engineers, contractors, and subcontractors, including roofers, plumbers, and landscapers. In addition to the typical expert testimony needed in construction defect cases, also required will be expert testimony regarding whether exposure to airborne indoor mold causes serious bodily injury. At this time in Wisconsin, such testimony does not have to clear the Daubert reliability hurdle, but need only be relevant and helpful to the jury.¹³

Once the existence of stigma is established, its extent still must be proved. A few courts may permit stigma damages to be supported by nonexpert testimony. In one case, for instance, the plaintiff landowners offered testimony that media reports of contamination led to sudden decreases in the value of their property.¹⁴ This testimony also included evidence of decreased values and offers and completed sales at these decreased values.¹⁵

Generally, however, expert testimony is required. Such testimony may come from appraisers or economists, who will use a variety of methods to establish the decreased value, including sales comparison (comparables), income stream (also called "capitalization" or "cash flow," used for commercial property), and replacement value.¹⁶ Experts may even knock on doors and conduct surveys of prospective purchasers, local real estate agents, or lenders in an effort to establish the level of stigma attaching to a particular site.¹⁷

Market value may be affected by several factors. Experts should consider the following:

• Prospective buyers' fear of health effects from exposure to contaminants;
• Whether responsible parties acknowledge their responsibility for the cleanup;
• Whether responsible parties have the financial resources to fund a cleanup;
• Potential buyer liability for future cleanup;
• Concern about a regulatory agency's administrative order or cleanup and abatement order;
• Concern that the standards for cleanup will change in the future or that a regulatory agency might reclassify previously damaged properties as "remediated";
• Uncertainty as to when the cleanup will begin or be completed;
• Uncertainty as to the nature of the cleanup and the effect it will have on the property's appearance or quality of life on the property;
• Fear of recurrence of a problem due to quality, thoroughness, and permanence of repairs;
• Uncertainty over future financing or refinancing related to possible unwillingness of banks to make conventional loans on the property; and
• Increased future maintenance.¹⁸

Logically, the property owner's cost to remediate, plus residual stigma losses, should equal the diminution in market value. One commentator has stated the "formula" this way:

Cost effects (remediation and related costs) + Use effects (effects on site usability) + Risk effects (environmental risk/stigma) = Property value diminution¹⁹

Despite the apparent patness of a formula, estimating stigma is not an exact science, in part because each piece of real estate is unique. In addition, evaluation entails quantifying the reduction in value on that particular parcel due to market subjectivity, the permanence of the stigma, and any change in the stigma that may occur over time. Common appraisal methods may not work equally well, therefore, for estimation of remediation costs and estimation of stigma.

Other Perspectives

The concept of stigma recognizes that some residual damage may survive remediation. In other words, when the cost of repair does not fully compensate the plaintiffs, they should be compensated for their remaining loss or they will be permanently deprived of significant value.²⁰ Courts have attempted to fit stigma damages into the traditional framework with divergent results. Some courts accept that remediation may not fully restore market value. For example, the Third Circuit Court of Appeals, applying Pennsylvania law, has recognized a claim for diminution of value to property allegedly contaminated with PCBs (polychlorinated biphenyls).²¹ Moreover, the court ruled that a showing of permanent physical damage to the property is not necessary when three conditions are met: 1) defendants have caused physical damage to plaintiffs' property; 2) plaintiffs have demonstrated that repair of this damage will not restore the value of the property; and 3) plaintiffs have shown that there is ongoing risk to their land.²²

Similarly, the Louisiana Supreme Court recently upheld an award for stigma on property that was cleared of asbestos contamination. In Bonnette, defendant Conoco arranged for the demolition of abandoned houses on property it owned. Conoco did not notify the proper authorities that a predemolition inspection revealed asbestos tiles on some of the houses. After demolition, a contractor Conoco had hired to haul away the soil from the site sold it to area residents who spread it on their lawns. After they discovered that the soil contained a small amount of asbestos, 143 residents sued. Conoco offered to remediate the asbestos-containing lawns, and trial was held for four families whose lawns had been remediated. The plaintiffs, none of whom had sustained an immediate physical injury, sought recovery for increased risk of contracting asbestos-related diseases, fear of contracting such diseases, stigma damages for their allegedly devalued, although remediated, properties, and punitive damages. The court of appeals affirmed the trial court's award of damages in all categories. On review, the supreme court reversed all awards except that for stigma damages. The supreme court affirmed the 10 percent property devaluation on the basis of the testimony of the plaintiffs' real estate appraisal expert that, even though the properties had been fully remediated, a "stigma effect" remained, such that potential buyers still would be concerned because "the word 'asbestos' is frightening to people."²³

Some courts have allowed plaintiffs to recover stigma damages simply for proximity to contamination.²⁴ Some courts have not, relying on the economic loss doctrine, and holding that alleged diminution in property value based on unfounded third-party fears relating to contamination on a neighboring property does not give rise to a claim for private nuisance.²⁵ Other courts have ruled that plaintiffs may not recover for stigma damages unless contamination actually has spread to their property.²⁶

Still others have done an about-face. In 1991 an Ohio jury awarded $6.7 million to 1,713 owners of uncontaminated land based solely on the land's proximity to a hazardous waste site.²⁷ In 2003 the Ohio Court of Appeals clarified that, absent a showing of "actual harm," Ohio does not recognize as compensable "pure environmental stigma, defined as when the value of real property decreases due solely to public perception or fear of contamination from a neighboring property."²⁸

In the construction defect context, the California Supreme Court has refused to allow stigma damages, instead limiting recovery through the economic loss doctrine.²⁹ Interestingly, while other courts seem to use the terms interchangeably, the California Supreme Court draws a distinction between "stigma damages" and "diminution in value." "In contrast [to stigma damages], diminished value is simply one of the standard alternative measures of damage for injury to property. The successful plaintiff in such cases ordinarily recovers either the diminution in market value attributable to the injury or the cost of repairs, whichever is less."³⁰

Wisconsin's Approach

Hofbauer Ryan Thomas C. Hofbauer, Loyola Univ.-Chicago 1987, is a partner at McCoy & Hofbauer S.C., Waukesha. A considerable amount of his practice is focused on construction defect litigation. He is admitted to practice in Wisconsin and Illinois. Clare T. Ryan, U.W. 1989, is an attorney in private practice in Pewaukee.

In Wisconsin, the question remains open as to how courts would rule on a claim for stigma. Statutory causes of action do not provide for compensation for the public's negative perception of the property. Nor have Wisconsin courts squarely taken on the issue of whether an owner can recover damages for residual stigma.

The general principle regarding the measure of damages for defects and omissions in the performance of a building contract is simply this: that a party is entitled to have what he or she contracts for, or its equivalent.³¹ Thus, the measure of damages for injury to property has been either the cost to repair the property or the property's loss in value. In suits arising from construction contracts, an award for defects and omissions traditionally has been the lesser of the cost of repairing the defect or supplying the omission or the diminution in value of a property that cannot be remediated.³² Perhaps significantly, the Jacob court recognized that it may be necessary to apply both rules to accomplish full compensation. The court said that property, even once repaired, still may suffer a diminution in value, and such damages also are recoverable:

"The proper rule for measuring the recoverable difference between substantial and complete performance of a building contract is not necessarily the costs of tearing down the defective work and rebuilding it so as to conform to the contract. It is the reasonable cost of remedying defects, so far as that can be done practicably, and the diminished value of the building so completed because of defects not so remediable."³³

Since Jacobs, the Wisconsin court has reaffirmed its position that a damages award in a construction defect context need not be a choice of the two rules.³⁴ In Magestro, a business owner sued the building contractor for breach of contract and negligence after the pole building he constructed cracked and sagged. The court held that in addition to the cost of repair, lost profits are allowable consequential damages, as specifically shown by Wisconsin JI-Civil 3710.³⁵

Conclusion

At first blush, recognizing stigma as a part of a plaintiff's recovery makes sense. Since repairs such as mold, radon, or asbestos remediation must be disclosed and such disclosure may lead to a negative perception of the site, any resultant diminution in value, it can be argued, necessarily calls for compensation for the stigma to satisfy the fundamental concept that an injured party must be made whole.

On the other hand, stigma brings with it another set of problems, most notably, inherent uncertainty and unreliability. A perception of harm may be all that is needed to support an award of stigma damages.³⁶ The public perception underlying the stigma may be unsubstantiated, unreasonable, and formed in reaction to publicity given to certain events.³⁷ Furthermore, the publicity may be skewed by unobjective reporting or a single sensational incident. As a result, public perception may be rooted in fear, not fact. Also, the stigma may be transient: as media attention dies down, property values often rise. And especially in the context of yet-to-be-remediated environmental contamination, projecting a post-cleanup stigma value may be highly speculative.³⁸ Accordingly, stigma may be an unreliable measure of damages. Furthermore, permitting recovery of damages both for a full repair and for stigma could result in a windfall to a plaintiff, a result not countenanced by Wisconsin courts.³⁹ It might be said that if the perception of a stigma is what causes the stigma, this truly is a case of the tail wagging the dog.

Endnotes

¹ Walker Drug Co. v. LaSal Oil Co., 972 P.2d 1238, 1246 (Utah 1998).

² E. Jean Johnson, Environmental Stigma Damages: Speculative Damages in Environmental Tort Cases, 15 UCLA J. Envtl. L. & Pol'y 185, 185 (1996-97).

³ Id.

⁴ Criscuola v. Power Authority of State of New York, 621 N.E.2d 1195, 1196-97 (N.Y. 1993).

⁵See, e.g., John Mitby & Kevin Trost, Out of the Dark: The Emergence of Toxic Mold Litigation, 75 Wis. Law. 14 (March 2002).

⁶ Gail L. Wurtzler, Environmental Contamination: Making a Claim for Property Damages.

⁷ See Johnson, supra note 2, at 195.

⁸ See id.

⁹ <http://dhfs.wisconsin.gov/eh/HlthHaz/fs/moldinfo.htm>.

¹⁰Id.; see also <http://www.cdc.gov/nceh/airpollution/mold/stachy.htm>.

¹¹Raymund C. King & Richard Barrett-Cuetara, Moldy Misperceptions and Plummeting Property Values, Prob. & Prop., Jan./Feb. 2004, at 33.

¹²See Centers for Disease Control Update: Pulmonary Hemorrhagic Hemosiderosis Among Infants - Cleveland, Ohio, 1993-1996 (Mar. 10, 2000), <http://www.cdc.gov/epo/mmwr/preview/mmwrhtml/mm4909a3.htm>.

¹³State v. Peters, 192 Wis. 2d 674, 687-88, 534 N.W.2d 867 (Ct. App. 1995); State v. Walstad, 119 Wis. 2d 483, 516, 351 N.W.2d 469 (1984).

¹⁴Allen v. Uni-First Corp., 558 A.2d 961 (Vt. 1988).

¹⁵Id. at 964-65.

¹⁶Beers, infra note 18, at n.25.

¹⁷Stuart Lieberman, Stigma Damages: What To Do When Nobody Wants Your Home, Realty Times, Feb. 19, 2004.

¹⁸Roger Beers, Stigma Damages in Property Contamination Cases; John A. Kilpatrick, Construction Defects and Stigma, Mealy's Construction Defects, July 2003, 3-4.

¹⁹Thomas O. Jackson, Methods and Techniques for Contaminated Property Valuation, Appraisal J., Oct. 2003, at 311, 314.

²⁰In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 797-98 (3d Cir. 1994).

²¹Id. at 796-98.

²²Id.

²³Bonnette v. Conoco Inc., 837 So. 2d 1219, 1239.

²⁴See, e.g., Lewis v. General Elec. Co., 254 F. Supp. 2d 205, 218 (D.C. Mass 2003).

²⁵See, e.g., Adkins v. Thomas Solvent Co., 487 N.W.2d 715, 724-27 (Mich. 1992).

²⁶Adams v. Star Enter., 51 F.3d 417 (4th Cir. 1995) (interpreting Virginia law); Berry v. Armstrong Rubber Co., 989 F.2d 822 (5th Cir.), cert. denied, 1141 S. Ct. 1067 (1993).

²⁷DeSario v. Industrial Excess Landfill Inc., 587 N.E.2d 454 (Ohio Ct. App. 1991).

²⁸Ramirez v. AKZO Nobel Coatings, 791 N.E.2d 1031, 1034 (Ohio Ct. App. 2003) (court held that any precedential value of DeSario was superseded by Ohio Supreme Court's subsequent decision in Chance v. BP Chemicals Inc., 670 N.E.2d 985 (Ohio 1996)).

²⁹Aas v. Superior Court of San Diego County, 12 P.3d 1125 (Cal. 2000).

³⁰Id. at 1141.

³¹Jacob v. West Bend Mut. Ins. Co., 203 Wis. 2d 524, 541, 553 N.W.2d 800 (Ct. App. 1996).

³²Id.

³³Id. (quoting W.G. Slugg Seed & Fertilizer v. Paulsen Lumber, 62 Wis. 2d 220, 226, 214 N.W.2d 413 (1974)).

³⁴Magestro v. North Star Envntl. Const., 2002 WI App 182, 256 Wis. 2d 744, 649 N.W.2d 722.

³⁵Id. ¶ 11.

³⁶Paoli, 35 F.3d 717.

³⁷See Johnson, supra note 2, at 193.

³⁸Id. at 208-09.

³⁹Jacob, 203 Wis. 2d at 542 ("An owner is entitled to recover for an actual amount, but not a greater amount"); see also Nischke v. Farmers & Merchants Bank, 187 Wis. 2d 96, 118, 522 N.W.2d 542 (Ct. App. 1994) (court noted that rationale for general rule that property owner's damages are the lesser of cost of repair or property's diminished value is to ensure that owner recovers only actual loss and does not realize windfall).

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