Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Reasonably interpreted, the ensuing loss clause provides that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered. The uncovered event itself, however, is never covered.

In Fiess v. State Farm Lloyds, the Texas Supreme Court resolved a long-running dispute within the state by concluding that the ensuing loss language did not restore coverage for mold loss:

To “ensue” means “to follow as a consequence or in chronological succession; to result, as an ensuing conclusion or effect.” An “ensuing loss,” then, is a loss which follows as a consequence of some preceding event or circumstance…. If we give to the language of the exception its ordinary meaning, we must conclude that an ensuing loss caused by water damage is a loss caused by water damage where the water damage itself is the result of a preceding cause.

Other courts have reached a different conclusion. In Reynolds v. Travelers Indemnity Company of America, a Kentucky court held such an exclusion pertains to “loss caused by mold, rather than loss in the form of mold.” The insureds made a claim under their policy for the theft of their refrigerator, but ensuing water damage caused mold damage that was excluded under the policy. The dispute centered on the cost to remediate the mold. The court agreed with the insureds and found coverage, “[s]ince there is no genuine issue of material fact with respect to the cause of the mold, we are satisfied that the costs associated with the removal of the mold are covered by the policy.”

In determining whether or not mold damage is excluded under an ensuing loss provision, courts often look to see if mold is the cause of damage or the result. Whether damage is covered as an ensuing loss is a fact specific question that generally must be analyzed according to the law in the jurisdiction where the claim arose.

In Fisher v. Certain Interested Underwriters at Lloyds, 930 So. 2d 756, (Fla. 4th DCA 2006), the Fishers had dwelling coverage that was “all-risk” and personal property coverage, under the same policy, that was “named peril” coverage. The insuring language of the personal property coverage provided that the homeowners were insured for “direct physical loss” to their personal property caused by various listed perils, including accidental discharge or overflow of water or steam from within a plumbing system.

After returning home from a month-long vacation, the Fishers found that a water pipe had leaked under the foundation of their home, leading to mold damage to their personal property. The insurance company denied coverage, claiming that the personal property did not have direct contact with the discharged water, so it was not a “direct physical loss.”

While the parties argued about whether or not the “all-risk” provisions carried over to the personal property coverage, the Court recognized that,

The specific provision requires that the damage be a “direct physical loss” caused by a “named peril.” In this case, the mold damage resulted from the discharge of water – a named peril. The real question we must answer is whether this damage is a “direct physical loss” or merely a consequence of the named peril.

In concluding that the damaged personal property was covered under the policy, the Court stated,

The discharge of water set into motion a sequence of events proximately resulting in mold damage to the homeowner’s personal property….We live in a day and age where mold is a damage commonly resulting from the discharge of water. It makes little sense to construe the policy so narrowly that the consequential mold damage from the discharge of water is not covered. To do so would require us to turn a blind eye to what common sense dictates.

Fortunately for the homeowners, common sense prevailed and thwarted the insurance company’s attempt to assert a mold exclusion where one didn’t exist. This case goes to show that mold, even if not specifically covered in “named peril” policies, may still be covered in some circumstances.

As always, keep in mind that this case applied Florida law, and the law varies in different jurisdictions.

In Bowers v. Farmers Insurance Exchange, 991 P. 2d 734 (Wash. Ct. App. 2000), Ms. Bowers rented her property to new tenants. Prior to the new tenants, the house was well-maintained and in good shape. A few months into the lease, the Ms. Bowers became suspicious of the activities taking place in her rental home and called the police. A marijuana grow operation had been set up in the basement. The extreme heat in the basement allowed for the rapid growth of mold throughout the house. Ms. Bowers filed a claim with her insurer. The insurance company denied the claim, reling on policy language which stated,

We do not cover direct or indirect loss from…wear and tear, marring, deterioration, inherent vice, latent defect, mechanical breakdown, rust, mold, wet or dry rot…

The policy did, however, provide coverage for vandalism, which was not defined. Using a definition from Webster’s Dictionary, the court ruled that the marijuana grow operation was vandalism to the house which caused the mold damage.  The court held:

When the insured can identify an insured peril as the proximate cause, there is coverage even if subsequent events in the causal chain are specifically excluded from coverage….Here, there can be no reasonable difference of opinion regarding the cause of Ms. Bowers’ loss. It was the tenants’ acts, which in an unbroken sequence produced the result for which recovery is sought. We conclude that the tenants’ acts are the efficient proximate cause of the owner’s loss.

This case highlights the importance of determining the proximate cause of mold damage to determine whether or not you have a valid claim. If a covered peril causes the mold to grow, you may be able to collect payments to repair the mold damage.

Keep in mind that the above case used Washington law, and laws vary in different states. Be sure to check in next week for another look at the all-risk policy. 

Mold exclusions often contain language like:

This policy does not apply to any loss or damage caused by or resulting from the actual or threatened existence, growth, release, transmission, migration, dispersal or exposure to mold, spores or fungus.

As phrased, this exclusion may lead one to believe that any and all damage stemming from mold would be excluded. While many times mold damage will be excluded, there may be other avenues for recovery under the policy. Before looking at those other avenues, I want to first begin with a case in which coverage was denied.

In Merrimack Mutual Fire Insurance Company v. McCaffree, 486 S.W. 2d 616 (Tex. App. 1972), the insureds faced a mold problem in their shower stall. The shower stall lacked a shower pan and consequently, the water from the shower leaked onto the wood underneath the shower stall. Of course, the water caused the wood to rot and the growth of fungus and mold. The insurance policy contained an exclusion that read:

This insurance does not cover…loss caused by inherent vice, wear and tear, deterioration, rust, rot, mold or other fungi, dampness of atmosphere, extremes of temperature, contamination, vermin, termites, moths or other insects…

The court ruled that denial of coverage was appropriate, reasoning that “since the damage or deterioration to the property was admittedly directly caused by fungi, and to some extent by termites, such would bring it clearly within the exclusion of the contract.”

The court based its decision largely on the fact that mold – along with termites – was the direct, or proximate, cause of damage. Keep in mind, though, that this case applied Texas law and that the laws are different in every state.

Mold exclusions are relatively straightforward, but many of you may be wondering what happens when mold damage is the result of some other damage. Great question. The answer is: It depends – if the “other damage” is a covered peril, then the policyholder may be in luck. Next week I will write about a case that found mold damage was covered even though the policy at issue contained a mold exclusion.

The sinkhole issue was noted as follows:

The idea of creating a state sinkhole "facility" was floated Thursday at an Office of Insurance Regulation symposium in Orlando on the state’s property insurance crisis.

Insurance Commissioner Kevin McCarty said the event, featuring mostly insurance industry officials, will help his office draft recommendations for state leaders on improving the affordability and availability of property insurance.

McCarty and insurance company executives said premiums aren’t keeping pace with expenses for many insurers because of backup coverage costs and a dramatic increase in claims costs, including expenses for sinkhole claims. Citizens collected $19.6 million in premiums specifically for sinkhole coverage in 2009 but paid out $97 million in sinkhole claims and expenses. Most of the sinkhole claims were for minor cracks in walls and driveways, according to the state-backed insurer.

John Auer, president of American Strategic Insurance in St. Petersburg, said a government program covering sinkholes is “by far the best way to go.”

“I know a lot of other companies feel similarly,” Auer said, adding that sinkholes are hard for insurers to cover because of the disagreement among architects and engineers about what is a sinkhole or not.

Auer also said that sinkhole costs are so high that they “could take some companies down before the rate can catch up with it."

This sounds an awful lot like the debate regarding coverage of mold related losses which took place nearly a decade ago. First party coverage for mold related losses is extremely limited or excluded under most property insurance policies. As Jason McCaul noted in
Plain Meaning or Fuzzy Interpretation? The Future of First-Party Property Coverage for Mold:

[B]etween 2001 and 2005, insurance companies quietly amended homeowner’s policies by adding endorsements that exclude coverage for mold damage. According to David Dybdahl, a noted expert in the field of insurance and risk management, insurance companies “blasted through more policies than anything in history -- faster than terrorism, asbestos or pollution. They quietly excluded [mold damage coverage] from everyone's policies, and they got away with it.

McCaul provided some background into the financial reasons mold losses are now often not covered:

The new millennium ushered in many unanticipated events: high speed Internet access, a Boston Red Sox World Series Championship, and an unprecedented rise in mold litigation. The statistics are staggering: in 1998, only 129 mold-related insurance claims were filed nationally. By 2001, this number had skyrocketed to 9,563. Despite this rapid surge in mold claims, the financial impact on insurers was minimal at first. In 2000, Texas insurers were settling most mold claims for a few thousand dollars. However, as attention to what some were calling “the next asbestos” grew, the potential dangers of mold spread across headlines and into the national consciousness. “Lurking, Choking, Toxic Mold” was the cover story in the August 2001 edition of the New York Times magazine. And for readers of the Washington Post, the attitude toward mold was no less threatening: the attention-grabbing headline “Exorcizing a Mold Monster” surely had homeowners thinking about whether their property or health was at risk.

As concern over mold swept across the nation, the eye of the inevitable legal storm that would pit homeowners against insurers over coverage for mold damage was forming in the most appropriate of places – Dripping Springs, Texas. There, homeowner Melinda Ballard had sued Farmers Insurance Group (“Farmers Insurance”) for failing to adequately reimburse her for the extensive mold damage to her eleven thousand square-foot home. Ballard accused Farmers Insurance of intentionally delaying its investigation of her claim in an effort to avoid payment. While Farmers Insurance stalled, toxic mold multiplied in Ballard’s home to the point where virtually nothing in the house was salvageable and the house itself was no longer habitable. Although Ballard was partially a dispute over coverage, the central issue was whether Farmers Insurance acted in bad faith in its handling of the claim. The jury’s verdict in June 2001 not only found that Ballard had been covered, it also heavily penalized Farmers Insurance for bad faith: Ballard was awarded $6.2 million for her property damage claims, $17 million for her bad faith claim, and $8.9 million in legal fees. While a Texas appellate court later reduced the
$32 million award considerably, the jury’s decision sent property insurers scrambling to look for ways to lawfully deny coverage for future mold claims. Thus, from the ashes of Ballard, the mold exclusion was born. (emphasis added and citations deleted)

Regardless of other reasons, severe and frequently encountered perils will not be covered unless the rates accurately reflect the risks of loss.  Sinkhole losses are expensive to properly repair. The frequency is primarily concentrated in a very small geographic area. I predict that, similar to mold coverage, only those willing to pay significant premiums with high deductibles or those with very large financial interests in property will have sinkhole coverage in the future. Just like mold, the insurance industry seems bent on either leaving markets with mandatory sinkhole coverage in areas where they often occur or simply not covering the risk.

This scenario is often repeated just after destructive hurricane seasons as insurers try to increase premiums to make up for the catastrophe losses. As I noted several years ago in, Do we build or flee in the face of catastrophic frequency and severity?:

Frequency and severity of loss have everything to do with our current insurance situation. The catastrophic frequency and severity of hurricanes from 2004 to 2006 was off the charts. And, the severity of loss (the average amount paid per claim) was extraordinary as well. Combined, these lead to historic losses in a relatively small catastrophe prone area. Like bookies looking for the sure bet, insurance companies are simply looking to place bets where fewer losses occur. As these private insurers flee the coasts, state insurers of last resort are left to fill the void, in some instances with less than satisfactory results. The long term answer is not easy and will not be cheap. People are determined to continue living close to beaches and water. Recognizing and accepting this fact, we must start to deal with the upfront cost of building more structurally sound and "hurricane resistant" structures.

Unlike hurricanes, sinkholes losses, similar to mold losses, occur on a fairly regular basis. Many trades and businesses depend on sinkhole claims because the losses are so prolific. Similar to mold coverage, those in the business will probably be blamed as the entities killing the goose with the golden sinkhole egg. The insurance industry seems to have made up its mind. From what I have read about the methodology regulators are using in their investigation on this issue, you don't need to be a weatherman to know which way the wind is blowing.

In Malley, the homeowner had a standard Texas Dwelling Policy Form—3, insuring the house he owned in Beaumont, Texas. The house was damaged by plumbing leaks in the foundation during a 1999 freeze. Allstate denied Plaintiff’s subsequent mold claim, asserting that the policy contained an exclusion for mold damage. Plaintiff asserted that there was coverage under the “ensuing loss” provision, because it resulted from a covered event.

The policy stated:

We do not cover loss caused by:
.....
(2) rust, rot, mold or other fungi.
.....
We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of 349*349 glass which is part of the building if the loss would otherwise be covered under this policy.

The District Court noted that the Texas Supreme Court had not the construed “ensuing loss” provision in a policy like the one in this case, so it had to make an educated guess as to how the Texas Supreme Court would rule. However, the District Court pointed out that Texas state intermediate courts have interpreted “to ensue” as meaning “to follow as a consequence in chronological succession; to result, as an ensuing conclusion or effect.” Citing another Texas case, the Court stated that:

Ensuing loss caused by water damage refers to water damage which is the result, rather than the cause, of settling, cracking, bulging, shrinkage, or expansion of foundations, walls floors, [and] ceiling.

Applying this analysis, the Court concluded that mold damage resulting from earlier water damage, as claimed by the Plaintiff, would not be covered. “The ‘ensuing loss’ caused by water damage would refer to water damage which is the result, not the cause, of mold damage.”

The Court decided that if it were to interpret the “ensuing loss” provision so as to allow mold coverage under the circumstances in this case, it would “very nearly destroy the exclusions.” And an interpretation rendering the exclusionary clause inoperative makes “no sense.”

In short, according to the U.S. District Court for the Eastern District of Texas, if you have a mold exclusion in your insurance policy, an “ensuing loss” provision will not negate that exclusion.

Ms. Page’s all-risk policy included a general exclusion for mold, but the personal property damage section specifically noted that losses resulting from plumbing leaks were covered. State Farm argued that because the Court had previously held that an “ensuing loss” provision in the standard policy does not provide coverage for mold contamination caused by water damage that is otherwise covered under the policy, the Court should rule in its favor. Fiess v. State Farm Lloyd’s, 202 S.W.3d 744 (Tex. 2006).

However, the Court disagreed with State Farm’s interpretation of Fiess. The Court stated that even though the ruling in Fiess was broad, it could not conclude that the Fiess decision prohibited coverage for all mold damage no matter the cause, as State Farm claimed. The Court pointed out that it specifically mentioned that the Fiesses failed to preserve a claim for mold caused by plumbing and air conditioning leaks.

The Texas Supreme Court stated that although the mold exclusion did not apply to the personal property provisions of the policy--because loss caused plumbing leaks was specifically included--it did apply to coverage for damage to the dwelling because that was specifically excluded.

This case just goes to show you that interesting rulings that may seem counterintuitive at first brush are usually backed by persuasive logic and reasoning. We may not always agree with a court’s decisions, but at least we get the opportunity to review why the court ruled the way it did.