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Emerging Coverage Issues: Homeowners’ Mold Claims

By Charles S. LiMandri, Esq.

A controversy continues to surround coverage for homeowners' mold claims. The controversy centers around the interplay of so-called “ensuing loss” provisions with certain exclusions in standard homeowners’ policies. These provisions are often asserted as the basis for the denial of coverage by insurers. The relevant exclusions include continuous seepage or leakage of water, latent defects, mold, and construction defects.

The true magnitude of the problem is obvious — there has been a 300% increase in mold-related lawsuits during the past three years. According to the Insurance Information Institute, there are 10,000 such cases pending today nationwide (“Lawsuits, Insurance Claims Over Mold Damage on the Rise, USA Today, July 17, 2003.)

Judicial decisions have been inconsistent from jurisdiction to jurisdiction regarding coverage for mold claims. California and Washington courts, for example, tend to apply an efficient proximate cause analysis when interpreting policy language and resulting coverage. In contrast, jurisdictions such as Arizona and Texas do not. This difference explains some of the lack of consistency among judicial decisions in this developing area of the law.

Exclusions for Continuous Seepage and Latent Defects

Water damage claims are probably the most common claims made under homeowners’ policies. Since these are typically “all-risk” policies, any peril that is not specifically excluded is covered. While most homeowners’ policies specifically exclude certain types of “water damage” (such as flood and surface water), other types of water damage (such as sudden pipe leaks) are usually covered. The issue of coverage for leaks of long term duration has been a subject of major controversy.

The “continuous seepage” exclusion in standard homeowners' policies typically reads as follows:

We do not insure loss caused by: constant or repeated seepage or leakage of water or steam over a period of weeks, months or years, from within a plumbing, heating, air-conditioning or automatic fire protective sprinkler system or from within a household appliance.

The exclusion seems simple enough, inasmuch as any leak that exists 15 or more days apparently is not covered. But what about a hidden leak hidden inside a wall or under a floor, which the insured could not have known existed until more than 14 days had passed? There are no published cases in California on this issue. Insurance industry custom and practice, however, would seem to indicate that coverage should still exist in such circumstances.

For example, the Fire, Casualty, & Surety Bulletins (FC&S), published by National Underwriter Company, takes the position that hidden water damage from a leaking pipe is covered.1 This would be the case even if the leak continued for a lengthy period, so long as the damage was reported by the insured as soon as he or she became aware of it. As the FC&S indicates, the continuous seepage or leakage exclusion is only intended to apply to the situation where the insured has not fulfilled his or her duty of promptly reporting the loss as soon as he or she becomes aware of it. This is a reasonable approach, since it would be unfair to penalize an insured for not promptly reporting an otherwise covered water loss of which he or she had no knowledge.

Standard homeowners’ policies also typically exclude coverage for losses caused by “latent defects” such as faults, flaws and irregularities of construction as well as mere weakness of material. (Scott v. Continental Insurance Co. (1996) 44 Cal.App.4th 24, 35, 51 Cal.Rptr.2d 566, 573.)2 Such a broad definition for latent defects is important because, although the defect itself is excluded from coverage, any non-excluded water damage that results from it would still be covered under an ensuing loss provision.

Ensuing Loss Provision

Continuous seepage and latent defect exclusions are usually listed in the policy with other exclusions such as wear and tear, marring and deterioration. That list of exclusions is often followed by an “ensuing loss” clause, which typically reads:

If any of these cause water damage not otherwise excluded, from a plumbing, heating, air-conditioning or automatic fire protective sprinkler system or household appliance, we cover loss caused by the water, including the cost of tearing out and replacing any part of a building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which this water escaped.

Unless subsequent loss or damage is also excluded under the policy, the above wording should preserve coverage for the separate and distinct loss or damage caused by, or resulting from, the excluded water seepage/latent defect peril.

For the ensuing loss cause to apply, there has to be a resulting covered peril that is separate and independent from the excluded peril which caused it. For example, in Murray v. State Farm Fire & Casualty Co. (1990) (219 Cal.App.3d 58, 268 Cal.Rptr. 33), a copper pipe beneath a concrete slab ruptured as a result of corrosive acidic soil, which caused a crack in the slab. The initial peril was the corrosion of the pipe. This was excluded under the policy’s “deterioration” exclusion. The subsequent peril was the cracking of the slab. Nevertheless, this was not a covered “ensuing loss,” because the damage to the slab was also specifically excluded under the policy’s separate exclusion for “settling, cracking, shrinking” of foundations. (Id. at 65.) Some policies, however, contain a more limited “ensuing loss” clause that applies only if the water escapes “suddenly and accidentally” from a plumbing system.

There are no published cases in California applying the ensuing loss doctrine in the context of water damage and mold, and courts in other jurisdictions have gone both ways on the issue.

Mold: An Excluded Peril Or Covered Loss?

Many insurers have traditionally taken the position that while water damage that results from an inherent vice or a continuous water leak is covered, the mold that results from that water damage is still excluded. Within the last two years, however, some insurers have begun to endorse their policies to include coverage for water damage and mold subject to a specified sublimit, (e.g., $5,000). The insurers that provide the coverage may have reasoned that it is difficult, both analytically and practically, to separate water damage from mold damage because the presence of moisture is necessary for mold growth.

Part of the confusion over coverage for mold stems from the fact that some courts use the terms “peril” and “loss” interchangeably. For example, in one often-cited California case, the court stated: “We interpret the ensuing loss provision to apply to the situation where there is a‘peril,’ i.e., a hazard or an occurrence which causes a loss or injury, separate and independent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues.” (Acme Galvanizing Company, Inc. v. Fireman’s Fund Ins. Co., (1990) 221 Cal.App.3d at 179-80.)

The cases that have found coverage for mold as an “ensuing loss” view it as a form of loss or damage, rather than as a distinct excluded peril. This makes sense, because the insurance policies that exclude mold tend to do so in the context of mold as a “cause of loss,” rather than as the loss itself. A good illustration of this distinction can be found in the case of Liristis v. American Family Mutual Ins. Co. (Ariz.App. 2002) 61 P.3d 22.

In Liristis, mold resulted from water damage after a fire in the policyholder’s home, as well as from roof leaks which followed the fire. The insurer denied coverage based on the policy’s mold exclusion. The appellate court reversed the summary judgment in favor of the insurer because there were triable issues of fact regarding causation. The appellate court held that it would be up to the factfinder to determine whether the mold was caused by the covered peril of fire, in which case the cost of remediation of the mold would be covered as an ensuing loss. Alternatively, if the mold were not caused by fire, but rather than by an excluded peril, there would be no coverage. Also, if the mold was determined not to be an ensuing loss from a covered peril, but rather the cause of the loss itself, it would also fall within the exclusion, and coverage would be denied. (Id. at 27-28.)

Other cases have held that to interpret the ensuing loss provision in this manner would be to ignore the purpose of an express exclusion. For example, in one case, the insured argued that his losses were not subject to a “loss caused by rot” exclusion because those losses were not “caused by rot” but were rot itself. The court rejected that interpretation, arguing it would effectively “gut the listed exclusions.”

A number of unpublished cases discuss the effect of the ensuing loss clause on mold claims. These cases also fall on both sides of the issue. For the purpose of demonstrating how different judges tend to have vastly differing views on this issue, two Texas cases are worth noting.

In Fiess v. State Farm, 2003 WL 21659408 (S.D. Tex.), the court concluded that a mold exclusion operated to exclude mold damage completely, regardless of cause and notwithstanding that exclusion’s ensuing loss provision that provided coverage for losses resulting from water damage. In this case, the court held that the water damage had to “ensue” from the mold in order for any resulting losses to be covered. In contrast, and in another case, a different judge from the same federal court found that a virtually identical exclusion and ensuing loss provision covered mold damage which ensued from a loss otherwise covered under the policy.

To the extent the policy language is ambiguous, the goal of the court is to protect the objectively reasonable expectations of the insured. A reasonable insured would probably expect that if water damage resulting from an excluded peril (such as constant leakage) was covered as an ensuing loss, then the mold that results from that water damage would also be covered.

On the other hand, mold that simply takes the form of long term “deterioration” would be nonfortuitous, and therefore generally excluded as a cause of loss. Mold resulting from naturally occurring climatic conditions that cause a high moisture content in the atmosphere, thus would ordinarily not be covered. This is significant because most of the mold claims come from southern states like Texas and Florida, where there is high humidity and hurricanes, and coastal states like California and New York, which have damp coastal areas. As one might expect, other areas of the country, such as the Midwest, have far fewer mold claims.

Construction Defect Exclusion

Some construction defect exclusions contain their own ensuing loss clause. For example, one typical ensuing loss clause reads as follows:

We do not insure for loss to property caused by any of the following: faulty, inadequate or defective workmanship, repair, construction materials used in repair, construction, or maintenance However, any ensuing loss to property not excluded or excepted in this policy is covered.

In the face of a construction defect exclusion which contains such a clause, the ensuing loss analysis discussed above should apply. If the construction defect causes a loss that is not excluded by the policy (i.e., water damage), that loss should be covered. And if the construction defect exclusion does not contain an ensuing loss provision, it might conflict with the ensuing loss clause that usually applies to the latent defect/inherent vice exclusion discussed above. (This is because the exclusions for latent defects and construction defects can overlap, since the “latent defect” exclusion also includes “negligent construction.”) Therefore, if coverage is provided by an ensuing loss clause that applies to a latent defect exclusion, it makes no sense to take that coverage away pursuant to a separate construction defect exclusion.

Efficient Proximate Cause Doctrine

Even in the absence of an ensuing loss clause which attaches to a construction defect exclusion, one must apply the “efficient proximate cause” analysis in jurisdictions which recognize it. In those jurisdictions, first party property claims are covered if an insured peril is the efficient proximate cause of the loss, even if non-insured perils may also have contributed to the loss.

Various cases from around the country have applied the efficient proximate cause doctrine to find coverage in circumstances involving water damage and mold. For example, a Washington appellate court held that the marijuana cultivation by tenants, which created a hot and humid atmosphere in the basement of a rental house, was the efficient proximate cause of mold damage to the remainder of the house. Because the efficient proximate cause of the loss was covered vandalism by the marijuana-growing tenants, the landlord’s insurance policy covered the mold damage, despite the fact that the policy contained a mold exclusion.

Another Washington case involved a loss resulting from wind-driven rain and mold. Because wind-driven rain was not excluded from the plaintiff’s all-risk insurance policy, it was a covered peril. Fungus, on the other hand, was specifically excluded. Expert testimony identified rain as the cause of the fungus which resulted in damage to the building. Therefore, according to the court, the policy’s fungus exclusion did not necessarily bar recovery for fungus damage if the jury found the wind-driven rain to be the efficient proximate cause of that damage.

In Arizona, however, there is no efficient proximate cause rule. In that state, an insurer is permitted to limit its liability for concurrent causation. Accordingly, the court could determine that there is no coverage for losses caused by mold, even though a covered water event may have contributed to the loss.

Conclusion

Continuous water seepage, latent defect and mold exclusions are generally subject to an ensuing loss clause which serves as an exception to the exclusion. The exception should apply so that water damage and mold claims are covered to the extent that they result from a cause that is not otherwise excluded, such as a plumbing leak.

In those jurisdictions which apply an efficient proximate cause analysis, such as California and Washington, it is easier to find coverage for mold claims. That is not to say that coverage for mold can always be found. The exclusions for mold and deterioration may still bar coverage in the common situation of long-term exposure to natural conditions.

Mold coverage cases tend to be very fact specific. Since the efficient proximate cause of a loss is often a factual question, one must keep in mind that juries tend to be sympathetic to insureds in these cases. Finally, there is surprising variation in the standard forms being used to write property damage policies in states like California. Therefore, as always, close attention must be paid to the specific language of the policy, as well as the controlling law of the jurisdiction. 

Notes
1 The Fire, Casualty, & Surety Bulletins (FC&S) is used by insurance agents and brokers to interpret standard insurance policy provisions. (See Maryland Casualty Co. v. Reeder (1990) 221 Cal.App.3d 961, 972, 270 Cal.Rptr. 719, 725.) It is also used by insurance companies and adjusters. Most courts and commentators have recognized that the presence of standardized industry provisions and availability of such interpretive literature are of considerable assistance in determining coverage. (Montrose Chemical Corp. v. Admiral Insurance Co. (1995) 10 Cal.4th 645, 670, 42 Cal.Rptr.2d 324, 337.)
2 The same may be said of “inherent vice,” but this is an “arcane” term and its precise meaning is less clear. (See, e.g., Opsal v. United Servs. Auto. Ass'n. (1991) 2 Cal.App.4th 1197, 204, 10 Cal.Rptr.2d 352, 356). Therefore, most of the case law deals with the companion “latent defect” form of the exclusion.

ABOUT THE AUTHOR

Charles S. LiMandri, Esq. represents insurance companies and insureds in coverage and bad faith litigation involving complex toxic tort and environmental insurance coverage disputes. His firm is located in Rancho Santa Fe, California, and can be visited at www.limandri.com.

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November 2003