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Mold Exclusion Held Ineffective

By Olga Sekulic

In Kelly v. Farmers Insurance Company, a United States District Court applied the efficient proximate cause doctrine under Oklahoma law to determine whether the mold exclusion provision contained in a homeowners insurance policy barred coverage as a matter of law. Kelly v. Farmers Insurance Company, 281 F. Supp. 2d 1290 (W.D. OK 2003). Denying the insurer’s motion for summary judgment on claims for bad faith and fraudulent non-disclosure, the Court held that policy language excluding loss caused directly or indirectly by mold did not bar coverage where the mold may have resulted from water damage, a covered cause of loss.

Background

The Kelly family first noticed their mold problem when Ms. Kelly opened the closet in an unused bedroom and found mold on the wall, above damp carpeting. The Kellys submitted a claim for coverage to Farmers, and after an inspection, Farmers authorized coverage for their claim. The Kellys soon found out that their mold problem extended far beyond one closet—it was in multiple walls and sections of floor. Farmers authorized coverage for additional repairs after a second inspection, and the Kellys had all visible mold damage removed and repaired. The second inspection revealed that the mold resulted from water damage caused when pipes froze and burst during the previous winter.

Unfortunately, the repair efforts had failed to remove the mold from the Kelly home. Mr. Kelly’s doctor suspected continued mold contamination of their home when he found that Mr. Kelly had dangerous levels of mold in his system, a fact that he felt explained his respiratory problems and fatigue. After the Kellys moved out of their home at the doctor’s suggestion, Farmers performed a third inspection, and this time denied the Kellys’ claim on the basis of a mold exclusion provision in the policy.

In their motion for summary judgment, Farmers pointed to the clear language of the mold exclusion provision, which stated that the policy excluded loss caused directly or indirectly by mold. The Kellys responded by arguing that the loss, although resulting from mold, was nonetheless caused by water damage, a cause of loss covered under the policy. In Oklahoma, mold exclusion provisions are enforceable, in contrast to some states. Yet in Oklahoma, as in many other states, an insured can avoid the effect of an exclusion by showing that the proximate cause of the loss was a covered event, even if the immediate cause of the loss was excluded, under the doctrine of efficient proximate cause.

The doctrine of efficient proximate cause

As the court explained, the efficient proximate cause doctrine may apply where two or more identifiable causes, at least one of which is covered under the policy and at least one of which is excluded, contribute to a single loss. For a loss to be covered under the doctrine, the covered cause must set in motion an unbroken sequence of events that leads to the loss. If this can be shown, the loss is covered even if the policy contains an exclusion for the last step in the causation chain. In the Kelly case, the court applied the doctrine of efficient proximate cause to allow the plaintiffs to argue that water damage was the proximate cause of their loss. Stated differently, the doctrine enabled plaintiffs to argue that mold was merely the manner in which water leakage caused damage to their house.

A possible solution for insurers: contract around the doctrine of efficient proximate cause

The decision in Kelly is notable for its discussion of how insurers may be able to contract around the efficient proximate cause doctrine. The court observed that Oklahoma, like most states, allows insurers to avoid the application of the efficient proximate cause doctrine. After a survey of cases around the country, the court explained that an exclusion for loss due, directly or indirectly, to a particular cause is not sufficient to circumvent the doctrine. Instead, it may be desirable to include a separate anti-concurrent causation provision, which explicitly and specifically disclaims coverage for losses that arise from a combination of excluded and covered causes, regardless of the sequence in which the various causes occurred.

Certain courts have found that the anti-concurrent causation provision effectively excludes coverage for losses directly or indirectly caused by mold, as a noncovered cause, even where the mold itself resulted from a covered event. See, e.g., Dahlke v. Home Owners Ins. Co., 2003 WL 23018291 *3 (Mich. App. Dec. 23, 2003).

ABOUT THE AUTHOR

Olga Sekulic 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
October 2005