Mold claims under first-party policies: it's a burgeoning field of litigation; coverage language, mold exclusion, pollution exclusion, and the ensuing loss doctrine must be studied and analyzed by defense counsel.

AuthorBrennan, Robert J.

ALTHOUGH mold may not be the "next asbestos," litigation arising from claims for coverage of mold-related damage under first-party insurance policies has resulted in a number of significant verdicts. In January 2001, a federal court jury awarded almost $500,000 in compensatory damages and $18 million in punitive damages to a homeowner against Allstate Insurance Co. for its alleged bad faith failure to pay a mold claim. (1) Later that year in a widely publicized case, a Texas jury awarded more than $33 million in damages to a homeowner for a mold-related claim, finding that the insurer had engaged in fraud and unfair or deceptive acts. (2) Although on appeal this award was greatly reduced, including $17 million punitive and mental anguish damages, (3) cases such as these help to heighten public awareness of mold issues.

Concern over mold has risen; litigation has blossomed. A rundown of recent (2002-04 to date) cases appears below in this article.

COVERAGE AND EXCLUSIONS

  1. Coverage

    Mold claims raise a number of questions regarding coverage, several of which are represented in the recent cases noted below. For example, typical insurance policy language requires "direct physical loss" to property to trigger coverage. When mold has actually begun to grow on building materials or personal property, this requirement is relatively simple for the insured to establish. Situations involving the fear of mold growth, the potential for mold growth in the future, or a pre-existing defect that results from an error by the builder create more difficult issues.

  2. Exclusions

    In addition, coverage issues often arise under policy exclusions. For instance, an insurer may allege that coverage for mold damage is barred by a policy's "mold exclusion." In order to determine whether that exclusion bars coverage in a particular case, consideration must be given to the language of the exclusion at issue and the law of the controlling jurisdiction.

    A typical mold exclusion in a property policy provides:

    We do not pay for loss caused by contamination or deterioration, including corrosion, decay, fungus, mildew, mold, rot, rust or any quality, fault, or weakness in covered property that causes it to damage or destroy itself. We do cover any resulting loss caused by a "specified peril" or breakage of building glass. Although this exclusion may appear to express a clear intent that mold losses will not be insured, the coverage determination is often not that simple. Instead, an analysis of what caused the mold, and thus what were the other causes of the damage, is generally necessary to determine whether there is coverage. This type of concurrent causation analysis--the "efficient proximate cause" test--applies in many states, and it provides that a loss is covered if the efficient proximate cause--the cause that set the others in motion--is covered.

    Moreover, many policy exclusions, while barring coverage for mold, provide that ensuing losses may be insured. An "ensuing loss" is a separate loss that follows an initial loss. Generally, when an exclusion provides that ensuing losses will be covered, it applies only where the ensuing loss is not also excluded. This is because ensuing loss provisions are not intended to expand the causes of loss that a policy covers. Thus, in evaluating whether damage that follows from mold is covered, it must be determined whether the ensuing loss is covered or excluded. If it is covered, only that ensuing damage will be insured.

    An insured also may attempt to avoid the application of the mold exclusion based on the rule of insurance contract construction known as "ejusdem generis," meaning that where descriptive terms are grouped together, they should be interpreted to show some common design or intent. Within the above exclusion, the term "mold" is surrounded by types of loss that occur naturally over a period of time. As a result, insureds may argue that the intent of the mold exclusion is to bar coverage for mold that occurs gradually and is not associated with a fortuitous event, such as water damage.

    The other exclusion frequently implicated in the cases is the pollution exclusion. Since the advent of "mold litigation," commentators have been analyzing the pollution exclusion and debating whether it might bar coverage of mold claims. The issue remains unresolved. Although many states restrict the application of this exclusion to industrial, environmental pollution, some states do not. The issues of whether "mold" constitutes a "pollutant" and whether the pollution exclusion has applicability to mold claims generally arise when this exclusion is invoked.

    It is also worth noting that the "competing duties" of homeowner and insurer are often at issue in these cases. If insureds know that the circumstances for mold growth have been created, it is their responsibility to cure the problem or risk forfeiting any insurance coverage that might cover the future loss. Policies typically exclude loss caused by insureds' failure to use all reasonable means to save and preserve property at and after the time of a loss. If a loss occurs which, for example, allows water to enter a building, it is the policyholder's obligation to take all reasonable steps to prevent mold growth.

    Similarly, the insurer has a duty to investigate claims properly. Delegating the work will not relieve the insurer of responsibility for the results. This was one of the factors behind the $33 million verdict in the Texas case mentioned above. The jury found that the insurer failed to appoint a competent, independent investigator.

  3. Legislative and Administrative Actions

    Apart from the cases, defense counsel also should be familiar with the legislative and administrative initiatives of their particular jurisdiction. The Texas Department of Insurance, for example, has enacted regulations allowing insurers to phase out coverage for mold for all new homeowner policies, while permitting them to offer enhanced water coverage. In contrast, California's Toxic Mold Act of 2001 mandates that insurers offer mold coverage and that selling homeowners disclose previous water or mold problems.

    Administrative initiatives may change as quickly as commissioners, as in Maryland, where in mid-2003 the new insurance commissioner rescinded his predecessor's ban on mold exclusions, instead implementing a permissible coverage cap of $50,000. Other noteworthy developments include initiatives in Texas and Florida to regulate mold remediators, the creation in New York state of an advisory task force to develop exposure limits for indoor environments, and legislative efforts in a number of jurisdictions, by committee and otherwise, to study and consider the effects of mold contamination.

    On the federal level, the United States Toxic Mold Safety and Protection Act (H.R. 1268) was introduced in the House of Representatives in 2003. The first federal legislation to address indoor mold contamination, it

    * empowers the Centers for Disease Control and the Environmental Protection Agency to conduct research to determine the health effects of mold;

    * directs the Department of Housing and Urban Development and the EPA to develop guidelines related to mold investigation and remediation, including the certification of inspectors;

    * authorizes tax credits for the inspection and remediation of mold hazards;

    * authorizes grants for the removal of mold in public buildings;

    * mandates mold inspections for multi-unit residential property; and

    * seeks to require local jurisdictions to modify building codes to help to minimize mold hazards in new construction.

    As of mid-March 2004, the bill was in committee.

    RECENT (2002-04) DECISIONS

  4. Tellez v. Encompass Insurance Co.

    The plaintiffs suffered damage to their property in December 2000 after an ice storm. They notified their insurer and received payment for the reported losses. In June 2002, they notified their insurer that their home also had sustained mold damage as a result of the storm. The insurer denied coverage based on late notice and its mold exclusion, and the plaintiffs sued the insurer in federal court for breach of contract and misrepresentation, including violations of the Texas Insurance Code and the Texas Deceptive Trade Practices Act.

    On summary judgment, the insurer argued that the plaintiffs testified that the only misrepresentation of which they were aware arose from the insurer's alleged failure to pay for mold damage. The court held that misrepresentation of a contract's terms does not give rise to a claim under the Deceptive Trade Practices Act; rather, a misrepresentation must be material and proof of causation is necessary for recovery under the act. The court held that the plaintiffs failed to meet this standard, noting that, when questioned at deposition about their misrepresentation claim, they merely described a dispute concerning insurance coverage.

    The insurer also argued that the plaintiffs' claim was untimely. Considering the plaintiffs' testimony that they did not learn of mold damage or water leaks in their home until early 2002, and noting that plaintiffs offered no evidence that the policy was renewed or in any other way extended past the coverage expiration date of July 16, 2001, the court held that the claim was untimely because the loss manifested itself outside of the policy period. The court reasoned that because the policy defined property damage to include incidents within the policy period, there was no property damage in this case. Thus, the court held that the plaintiffs were unable to establish that there was a breach of the insurance contract. (4)

  5. Ramirez v. State Farm Lloyds

    In 2001, the insured reported water damage resulting from various household appliance leaks and rain to State Farm, seeking coverage under his standard homeowners policy. The insured's policy limits were $90,800 for the dwelling and $54,480 for its contents.

    After its investigation, State Farm identified...

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