RISKVUE ARCHIVE | INDUSTRY WATCH > ENVIRONMENTAL

Mold Strikes Again

By Gretchen Henninger

In Hayley v. Allstate Insurance Company, 262 Mich. App. 571 (2004), the Michigan Court of Appeals held that a mold exclusion in a non-standard homeowners policy applied to bar coverage for mold caused by interior water damage. In addition, the court held that failure to pay an insurance claim does not create a cause of action for the tort of intentional infliction of emotional distress.

Background

In 1999 the insureds’ home sustained water damage to the carpeting of a bedroom and family room as a result of ice damming on their roof. The insureds submitted a claim to their homeowners’ insurer, Allstate Insurance Company, which was paid. The next year the insureds discovered a toxic mold in the suspended ceiling tiles of their utility room. The mold was growing in approximately one-quarter of the unfinished drywall ceiling above the suspended tiles. The insureds alleged that they experienced physical symptoms and ailments related to the mold and were forced to move out of their home in 2001.

Upon discovery of the mold, the insureds requested that Allstate reopen their 1999 water damage claim to cover the cost of removing the mold. Allstate denied coverage for any claim associated with mold and the insureds brought an action against Allstate for breach of contract, violation of the Unfair Trade Practices Act (UTPA), intentional infliction of emotional distress, gross negligence, and breach of a duty of good faith.

Analysis

a. Mold Exclusion

For purposes of summary judgment and appeal, Allstate conceded that the mold discovered in 2000 was caused by the 1999 water damage. Nevertheless, Allstate contended, mold was expressly excluded from coverage under the policy issued to the insureds, regardless of the cause.

The policy in question contained this exclusion from coverage:

We do not cover loss to the property described in Coverage A—Dwelling Protection or Coverage B—Other Structures Protection consisting of or caused by:

15.a) . . .

* * *

In addition, we do not cover loss consisting of or caused by any of the following:

* * *

d) rust or other corrosion, mold, wet or dry rot; . . .

* * *

23. We do not cover loss to covered property described in Coverage A—Dwelling Protection or Coverage B—Other Structures Protection when:

* * *

a) there are two or more causes of loss to the covered property; and b) the predominant cause(s) of loss is (are) excluded under Losses We Do Not Cover, items 1 though 22 above.

In construing the policy, the court noted that “exclusionary clauses in insurance policies are strictly construed in favor of the insured.” Nevertheless “clear and specific exclusions must be given effect because an insurance company cannot be liable for a risk it did not assume.”

In this case, the court held that the policy in question “clearly exclude[d] losses caused by mold and losses consisting of mold damage.” Id. at 575-76. Further, the court held that paragraph 23 did not extend coverage for the excluded mold damage. The court noted that paragraph 23 applied where “there are two or more causes of loss.” In this case, the court said there was only one cause of loss, the water damage, and losses resulting from the water damage were covered to the extent they were not excluded from coverage. The mold, which developed after the water damage was corrected, however, was excluded from coverage.

b. Intentional Infliction of Emotional Distress

In addition to their claim for breach of contract, the insureds brought causes of action against Allstate for violation of the UTPA, intentional infliction of emotional distress, gross negligence, and breach of a duty of good faith. Inasmuch as the court determined that Allstate properly rejected the insureds’ claim, the court dismissed the insureds’ UTPA cause of action. In addition, the insureds conceded that Allstate was entitled to summary judgment on their gross negligence and breach of a duty of good faith claims.

With respect to the insureds’ claim for intentional infliction of emotional distress, the court said that “to establish a claim of intentional infliction of emotional distress, a plaintiff must prove . . (1) extreme and outrageous conduct, (2) intent or recklessness, (3) causation, and (4) severe emotional distress.” Further, “the conduct complained of must be ‘so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious and utterly intolerable in a civilized community.’” citing Graham v. Ford, 237 Mich. App. 670, 674 (1999).

In dismissing the insureds’ claim for intentional infliction of emotional distress, the court held that “the failure to pay a contractual obligation or insurance benefits does not amount to outrageous conduct, even if it is done in bad faith or willfully.” A tort claim for intentional infliction of emotional distress must be based on a breach of a duty distinct from the contract. Thus, where an insurer does nothing more than refuse to pay an insured’s claim, a cause of action for intentional infliction of emotional distress will not arise.

Dissent

In dissent, Judge Cooper concluded that the plain language of the policy “provided coverage for an otherwise excluded loss if the predominant source of the loss was a covered event.” Where it was admitted that the mold was caused by the covered water damage, the predominant source of the mold damage was a covered event, and therefore the mold damage was covered by the policy. In addition, given the conclusion that the policy covers mold loss incidental to a primary covered loss, Judge Cooper said that there was a genuine question of material fact as to whether the insureds’ claim was reasonably in dispute, and therefore whether the insureds were entitled to twelve percent penalty interest under the UTPA.

ABOUT THE AUTHOR

Gretchen Henninger is an Associate at Mound Cotton Wollan & Greengrass.

This article originally appeared in the Fall 2005 issue of the Mound Cotton Wollan & Greengrass Newsletter. Used with permission.

riskVue | The webzine for risk management professionals
November 2005