As many of us know, mold can develop following a water loss. In California, water losses are one of the most common property damage claims we see. So how do insurers address mold in relation to water damage claims?
Most insurers issue exclusions or limitations pertaining to mold. Representative exclusions state that the policy does not cover “fungus,” and some carriers issue specific sublimits for damage related to mold in the ballpark of $5,000-$10,000.
Consequently, when the loss triggering event (water damage) is covered, but mold is excluded or limited, insureds in California often discover that carriers attempt to deny all or part of their claim based on the mold provision appearing in the policy.
California cases have mostly enforced mold exclusions and limitations. The California Court of Appeal has held that an insurance company is “permitted to limit coverage for some . . . manifestations of water damage.”1 This decision, seems to be at odds with California’s efficient proximate cause doctrine, which holds that if a covered peril (accidental water damage) is the “predominant cause” of the loss—even if an excluded peril (e.g., mold) may have contributed to the damage—the insurer is obligated to cover the loss and damage.2
There may be times that water damage (covered) and mold damage (not covered or limited) may be difficult to differentiate in the context of a water loss. An example might be as follows: Due to water damage (covered claim) mold (not covered) forms in and around drywall and flooring. Even if no mold had formed however, the water damage must be remediated and the drywall and flooring might need to be torn out. In such a situation, because the water damage is covered and is undoubtedly the predominant cause of the loss, insurers should not be able to limit or preclude an insureds ability to obtain coverage for remediating and/or repairing the property damaged by water simply because mold also formed.
Public adjusters and policyholder advocates should push back if insurers seek to use mold exclusions or mold limitations to limit the benefits policyholders are entitled. I have discussed this very issue and the apparent problem with the De Bruyn decision with Dan Wade of United Policyholders. We are both hopeful that the California Supreme Court will revisit the efficient proximate cause doctrine and the insurance industry’s attempts to contract around it (as the carrier in the De Bruyn case did).
The current state of the law in California does not bar or otherwise limit the recovery of damages associated with mold in all cases. As an example, actions against insurers for breach of the implied covenant of good faith and fair dealing will permit an insured to recover any damages (including mold) which are the proximate result of the insurer’s bad faith conduct. If mold damages are caused by an insurer’s unreasonable claims handling after a water loss, even if the insurance policy contains a mold exclusion, mold related damage can be recovered as tort damages in connection with a bad faith claim against the insurer.
In fact, mold damage arising in water claims can be often be tailor-made for bad faith actions. Insurance companies cause delays after water losses all the time. Consequently, insureds can often argue that the insurer’s delay was unreasonable, and caused or exacerbated the mold problem. In this context, while mold damages may not technically be covered under a given insurance policy, mold related damage may nonetheless be recoverable as a form of consequential damage from the insurance company’s bad faith delay in handling the covered water claim.