If your career path is in insurance or real estate litigation, you may become immersed in moldy law. Not moldy as in old, like those wonderful ancient law school real property topics of the Rule in Shelley’s Case and the Rule against Perpetuities, but claims involving black mold and other fungi and spores. Just don’t expect to be the highlight of cocktail parties if this is your specialty.

 

Mold remediation in houses goes as far back as the Old Testament. In Leviticus 14:37, Moses and Aaron are instructed on how a house should be cleaned by a priest if there is a plague of ingrained greenish or reddish streaks deep in the walls. Legal issues surrounding mold in buildings began to appear in significant numbers only after the energy crisis of the late 1970’s. In an effort to reduce heating and air conditioning costs, we began to construct buildings so that little ventilation with the outdoor air existed. The consequence of this reduced ventilation was that new buildings became better habitats for mold growth.

 

In the 1990’s insurers found that many insureds were making mold remediation claims under their homeowner’s policies. Since such claims were unpredictable and thus difficult to calculate for insurance rates, insurers countered with exclusions that attempted to limit or totally deny coverage for mold claims, even when mold was the resulting damage from a covered claim.

 

In some states, insurers have been successful in either limiting the amount of mold damage they are required to pay or totally excluding payment for all claims involving mold. In other states, insurance departments and the courts have reacted negatively to such policy exclusions and have taken a more pro-insured approach to mold claims. Two recent cases with similar fact patterns by state courts in California and Texas show how courts are reaching divergent results when interpreting mold exclusions.

 

In De Bruyn v. Superior Court, 158 Cal. App. 4th 1213 (Cal. App. 2d Dist. 2008), the insurer denied coverage under an all-risk homeowners insurance policy for mold contamination. The insured returned from a vacation and discovered that an upstairs toilet had overflowed. A few days later he further found that his dishwasher had leaked. The insurer paid for the water damage caused by the toilet and the dishwasher, but refused to pay for the remediation of the mold that was caused by the overflowing and leaking water.

 

The policy in question covered losses for specified perils including “Sudden and accidental discharge or overflow of water from within a plumbing, heating or air conditioning system, or from within a household appliance.” The policy also contained this state approved exclusion – “We never, under any circumstances, cover rust, mold, fungus, or wet or dry rot….” The insureds argued that the mold exclusion violated California’s efficient proximate cause doctrine, which provided that if a loss was caused by a combination of a covered and a specifically excluded risk, the loss was covered if the covered risk was the efficient proximate, or dominant, cause of the loss, and that the loss would not be covered if the covered risk was only a remote cause of the loss. Clearly the efficient proximate cause of the insured’s loss was the water peril that was covered in the policy, but the Court of Appeal of California held that the exclusion was enforceable, ruling that “Because the policy at issue in this case “plainly and precisely communicate[d]” (ibid.) that mold damage is not covered even when it results from a covered sudden and accidental discharge of water, we hold the insurer's denial of coverage does not violate section 530 or the efficient proximate cause doctrine.”

 

Six months after the De Bruyn decision, the Court of Appeals of Texas issued a very different holding in Page v. State Farm Lloyds, 259 S.W.3d 257 (Tex. App. Waco 2008). In the Texas case, the insured discovered mold and water damage in her home, and a plumber hired by the insurer found that the plumbing system had several leaks in the sanitary sewer lines. The insurer paid for some remediation of the home, but refused to pay for the mold remediation that the insured sought.

 

Similar to the policy in De Bruyn, the policy in Page provided coverage for specified perils, including “Accidental Discharge, Leakage or Overflow of Water or Steam from within a plumbing, heating or air conditioning system or household appliance.” Similarly the policy in Page also contained this exclusion – “We do not cover loss caused by:…. rust, rot, mold or other fungi.” But the Texas policy included an “exclusion repeal provision” which stated that certain exclusions, including the mold exclusion, did not apply to a loss caused by the peril of an “Accidental Discharge, Leakage or Overflow of Water or Steam”, which the appellate court referred to as a “plumbing leak.” The “exclusion repeal provision” was required in all homeowner policies by the Texas Commissioner of Insurance and its predecessor, the Texas Board of Insurance

 

The Court of Appeals of Texas held in favor of the insured, ruling that the mold exclusion did not apply to a plumbing leak. The appellate court pointed out that named peril in the litigation was the plumbing leak and not the resultant loss that was caused by the mold. Thus, if the insured could establish that the mold damage to her personal property in her home was caused by a plumbing leak, the loss was covered under the policy, subject to the policy limits.

 

Clearly, the State of Texas required language in homeowner policies that was favorable to insureds faced with mold claims, while the State of California permitted insurers to utilize a very strong exclusion against mold claims by homeowners. In both cases, though, strong arguments were made on both sides, and the California court sided with the insurer, possibly reflecting the public policy of the state, while the Texas court sided with the insured, again possibly reflecting the public policy of the state. We can expect this tug of war to continue throughout the country as insurers on one hand, and insureds and consumer groups on the other hand, try to gain a moldy upper hand.

 

To keep abreast of developments in insurance law, see Mealey's Litigation Report: Insurance.