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A casualty does not include normal wear and tear or progressive deterioration from age or termite damage. The damage must be caused by a sudden, unexpected, or unusual event (e.g., car accident, fire, earthquake, flood, vandalism).
Loss of property due to progressive deterioration is not deductible as a casualty loss.
According to the IRS publication 547 - http://www.irs.gov/pub/irs-pdf/p547.pdf - damage from mold is generally considered as progressive deterioration and as such may not be deductible as a casualty loss.
Settlements in a mold lawsuit filed by Ed McMahon is for failing to adequately handle remediation of mold in their Los Angeles home - see some details here - http://www.imakenews.com/pureaircontrols/e_article000154071.cfm - that settlement has nothing to do with tax treatment. Settlement amount
Some additional information....
According to IRS Private Letter RulingNNN-NN-NNNN- http://www.irs.gov/pub/irs-wd/0607003.pdf - the tax treatment of the cost that increases the useful life of a building, add value to it or adapt it to a different use must be capitalized and depreciated over the applicable period prescribed by the Internal Revenue Code.
In PLRNNN-NN-NNNN the IRS determined that the cost of mold removal did none of these things; it merely kept the building serviceable - so the IRS permitted the cost to be deducted in the year incurred by the taxpayer. The ruling did state that it was presumed that none of the mold had been present at the time the taxpayer purchased the property - assuming otherwise - the mold remediation may have been treated as a part of the purchase cost.
Please be aware that
you may be able to treat the cost of mold removal for personal use property as causality loss - but that issue is not addressed in this PLR
While the mold itself is not a casual event - the cause of the mold - such as the damage of the pipe may be considered as a casual event - if so - all resulted damage may be treated as the casual loss and may be deducted as such.
A key factor to consider is whether the mold damage occurred as a direct result of a causal event - and there is a direct connection between the casualty event and the loss claimed.
If your property has to be torn down or rebuilt because of the mold damage - that is not a casual event, but
if your property has to be torn down or rebuilt because of broken pipe (that was a sudden, unexpected, or unusual event) - you may have a casualty loss deduction to the extent of expenses you paid for that were not reimbursed by insurance.
To determine the casual loss you will need before and after full appraisals by qualified experts to back the deduction.
If the large amount of money involved - you may consider to request a PLR from the IRS to back your deduction.