(FORTUNE Magazine) – Deutsche Bank recently discovered a nasty problem at its 40-story skyscraper near Ground Zero. No, not structural damage. And not asbestos in the air either. It was something far more unexpected: mold. Spores invaded the building after it was vacated on Sept. 11; now there's speculation that the still-empty tower is no longer habitable. Deutsche Bank is yet another casualty of mold, which is being blamed not just for building damage but also for health problems such as hay-fever-like allergies, nosebleeds, and possibly nerve damage. Almost overnight the same repulsive stuff that has been sprouting in dank places since before the dinosaurs has become the bete noir of homeowners, landlords, builders, and contractors across the country.

How bad is the problem? Jerry Carnahan, head of homeowner policies at Farmers Insurance, says the number of mold-related claims against his firm in Texas rose from 400 in all of 2000 to 2,500 in January 2002 alone. Says Carnahan: "In my 23 years in this business, I've never seen anything ramp up like mold." In past years, he adds, insuring against it would be akin to "insuring against dust." Now Robert Hartwig, an insurance industry economist, estimates that Texas mold could cost carriers half a billion dollars and says mold claims have been filed in virtually every state.

Mold began to grab headlines about ten years ago as scientists tried to ascertain why new commercial buildings often caused respiratory and flu-like symptoms. The usual suspects--lead paint, carbon monoxide, and adhesive solvents circulating in tightly sealed buildings--were ruled out. Then gobs of mold were found in a museum basement in New York and a Florida courthouse. Spores flourish, it turns out, when the cardboard backing on Sheetrock, which has been widely used since the 1960s for interior walls, gets soaked. Wet ceiling tiles and wood sprout mold too.

One of the first mold lawsuits was brought in 1995 by an actor living in Malibu who found it hard to breathe when he closed the windows of his new ocean-view mansion. It turned out the builder had pumped shredded newspaper behind the walls to serve as insulation, which was soon saturated by a leaky roof. "We opened the walls, and there was this black Jell-O oozing out," says the actor's attorney, Alex Robertson. Robertson won a $1.5 million settlement from the builder and has since handled 1,000 other mold cases.

But it was a 2001 Texas case that created the biggest stir. Melinda Ballard alleged that Farmers Insurance didn't move quickly enough to stop a fast-spreading mold, which was so toxic that a guest went deaf in one ear after spending half an hour in her house. A jury awarded Ballard an unheard-of $32 million. Farmers Insurance announced a month later that it would no longer cover extensive mold claims when policies came up for renewal. That spawned the "mold chasers": lawyers, insurance adjusters, and contractors--sometimes working in cahoots--who offered to root out mold at extravagant prices and sue insurance companies that refused to pay.

Lawyers say that while personal-injury mold cases will be hard to prove, class-action suits against the corporations that make building materials are likely. Although only one--involving Behr Paint's antimildew deck stain--has been filed so far, the prospect of getting hauled into court has developers rushing to rewrite warranties and repair mold-spawning defects.

So will mold turn out to be another asbestos? Probably not. While asbestos litigation is predicted to cost insurers and manufacturers $60 billion to $70 billion, the tally for mold is likely to be far lower. And, unlike toxic asbestos, barely half a dozen of the thousands of mold varieties are believed to cause health problems. Still, Congressman John Conyers Jr. (D-Mich.) is expected to introduce a bill shortly that would protect consumers from toxic mold, and if a panel of scientists convened recently by the U.S. government clearly links mold to serious illnesses, expect the mold story to keep on spreading.

REPORTER ASSOCIATE Jonathan Sprague