RISKVUE ARCHIVE | FEATURE STORIES

Getting Rid Of Mold, Fungus, And Rot

By Hilary M. Henkind, Esq.

Many property insurance policies contain an exclusion for rot, mold or fungus. The law is unsettled, however, as to whether such an exclusion will apply to preclude coverage for mold or fungus damage. Mold does not spontaneously appear; rather, it can only grow in the presence of water. Inasmuch as water is a necessary catalyst of mold growth, many insureds characterize mold damage as a covered water loss, rather than as excluded mold damage. Depending on the policy language and the jurisdiction, a mold exclusion may not exclude mold damage. It is apparent, however, that the courts that find coverage for mold damage even in the presence of a mold exclusion have ignored or stretched the policy language to obtain the result desired by the court and by the insured. Generally, the court’s ultimate conclusion rests on whether the loss is caused by “water damage” and/or the court’s characterization of the efficient proximate cause of the loss

The Texas courts have issued conflicting opinions regarding the mold exclusions. The Texas decisions seem to rely on whether the mold was the result of “water” or “water damage.” For instance, in Merrimack Mut. Fire Ins. Co. v. McCaffree, 486 S.W.2d 616 (Tex. 1972), the insured’s dwelling sustained mold damage. Apparently, the shower stall in the home was constructed without a shower pan, which allowed water to pass under the shower floor, around the drainpipe, and onto the wood under the shower stall. The leaking water, inadequate ventilation and absence of light led to mold growth. The policy excluded, among other things, loss caused by “mould or other fungi.” The court held that, because the damage to the property was “admittedly directly caused by fungi,” the mold/fungi exclusion would apply to preclude coverage. Importantly, the court noted that the mold exclusion specifically stated that the exclusion would not apply to “ensuing loss caused by...water damage.” The court did not believe that the presence of water constituted “water damage.” The court stated:

The water which ran from the shower could very well have created an atmosphere or environment which could have, and possibly did, contribute to the growth of fungi which, in turn, caused the rot and deterioration of the structure. Under these circumstances it cannot be legally said that the “ensuing damage” was caused by “water damage.”

In other words, the court construed the ensuing loss provision to mean that if mold growth ensued after water damage, the mold exclusion would not apply. In McCaffree, the court’s ultimate holding was based on the fact that the court did not believe that the presence of water under the shower stall constituted “water damage.”

Similarly, in Aetna Cas. & Surety Co. v. Yates, 344 F.2d 939 (5th Cir. 1965), the court held that the proximate cause of the damage to the insured’s home was rot and mold—excluded causes under the policy—rather than water damage, which was a covered peril. In Yates, the insured discovered that the joists, sills, and subflooring of their home were almost completely rotted away by fungi that grew in a damp, dark atmosphere in the crawl space under the house. The policy excluded loss caused by “rot, mould, or other fungi,” but also stated that the exclusion did not apply to “ensuing loss caused by...water damage ....” The court held that, although the rot may have ensued from the presence of water, the rot did not ensue from “water damage.”

A more recent unreported Texas decision construing a similar mold exclusion and ensuing loss provision came to a different conclusion. In Home v. McClain, 2000 WL 144115 (Tex. App.), rainwater entered the insureds’ residence through leaks in a new roof. The insured later discovered that the leaking water had collected and soaked stud areas behind the interior walls, allowing mold and bacteria to grow. The homeowner’s policy excluded loss caused by “rust, rot, mold or other fungi,” but also stated that the policy covered “ensuing loss caused by...water damage.” The insurer contended that the ensuing loss exception applied only to water damage that followed mold or fungus damage, but that the policy did not cover mold and fungus damage even if caused by water damage.

The court disagreed, noting that to “be an ensuing loss caused by water damage,” the mold and fungi would necessarily have to follow or come afterwards as a consequence of the water damage. Contrary to the holding in McCaffree and Yates, the McClain court held that the mold and fungi did indeed follow “water damage,” and thus, the fungi and mold exclusion was inapplicable. It is difficult to discern, however, why the leaking shower stall in McCaffree or the condensation of air conditioners in Yates was not “water damage,” while water leaking from a roof in McClain did, indeed, constitute “water damage.”

Other courts have had different conclusions with respect to whether mold damage is covered under a property policy depending on the court’s characterization of the proximate cause of the loss. For instance, in Fireman’s Fund Ins. Co. v. Oregon Cold Storage, LLC, 11 Fed. Appx. 969, 2001 WL 669779 (9th Cir. 2001), after the insured purchased a building, it discovered that the support beams and posts under the floors had sustained extensive rotting. Experts concluded that the rotting of the floor was the result of a long-term process of moisture condensation, freezing, heaving, and deterioration, which led to fungal growth in the wood. The experts further noted that the insulation system was defectively designed and that the poor design of the floor also led to the rotting problem. The property policy excluded coverage for gradual deterioration, mold, and wet or dry rot. While the insured argued that the cause of the loss was “moisture and condensation,” which are covered causes of loss, the court stated that, “although moisture and condensation may have been causes of the rotting, this does not eliminate rotting as a cause of the damage.” Accordingly, because mold and rotting was the cause of the damage, the mold and rot exclusion applied to preclude coverage.

Similarly, in Sather v. State Farm Fire Cas. Ins. Co., 2002 WL 378111 (Minn. App.), the insureds discovered a significant mold problem in their home that allegedly resulted from a rain storm that occurred two years earlier. The homeowner’s policy provided that the Company did not insure for “loss to the property...which consists of, or is directly and immediately caused by [mold, fungus or wet or dry rot], regardless of whether the loss occurs suddenly or gradually, involves isolated or widespread damages, arises from natural or external forces, or occurs as a result of any combination of these.” The court held that the “plain language of the policy provision supports the district court’s interpretation that the policy excludes coverage for mold-related damage.” Apparently, the court did not believe that the rainstorm was the proximate cause of the loss.

On the other hand, the Washington Court of Appeals recently held, in Bowers v. Farmers Ins. Exchange, 99 Wash. App. 41, 991 P.2d 734 (2000), that the proximate cause of mold growth in the insured’s basement was vandalism, rather than mold. In that case, a tenant of the insured had converted the insured’s home into a marijuana-growth operation, which infested the house with mold as a result of the damp, dark environment. The court held that the tenants’ actions constituted vandalism, a covered peril under the policy. The court further concluded that the efficient proximate cause of the loss was not the mold, but the tenants’ vandalism, and therefore the loss was covered.

In light of the proliferation of mold claims in the past two years, we are likely to see many decisions in the future discussing the application of the mold exclusion. If insurers desire to exclude coverage for mold damage regardless of the efficient proximate cause of the loss, they can do so by including anti-concurrent causation language in the lead-in language of the mold/fungus exclusion. For instance, in Cooper v. American Family Mut. Ins. Co., 184 F. Supp. 2d 960 (D. Ariz. 2002), the insurance policy stated that the Company did not insure mold “regardless of any other cause or event contributing concurrently or in any sequence to the loss.” The court held that, based on this language, the mold exclusion applied regardless of whether a covered water event also may have contributed to the loss. Thus, while mold exclusions without anti-concurrent causation language may, indeed, preclude coverage for mold claims, insurers may desire to take the extra precaution of using the anti-concurrent lead-in language in connection with the mold exclusion.

ABOUT THE AUTHOR

Hilary Henkind is a partner at Mound, Cotton, Wollan & Greengrass. The views expressed in this article do not reflect the opinions of Mound, Cotton, Wollan & Greengrass.

riskVue | The webzine for risk management professionals
February 2004