Academic journal article Defense Counsel Journal

Mold Claims under First-Party Policies: It's a Burgeoning Field of Litigation; Coverage Language, Mold Exclusion, Pollution Exclusion, and the Ensuing Loss Doctrine Must Be Studied and Analyzed by Defense Counsel

Academic journal article Defense Counsel Journal

Mold Claims under First-Party Policies: It's a Burgeoning Field of Litigation; Coverage Language, Mold Exclusion, Pollution Exclusion, and the Ensuing Loss Doctrine Must Be Studied and Analyzed by Defense Counsel

Article excerpt

ALTHOUGH mold may not be the "next asbestos," litigation arising from claims for coverage of mold-related damage under first-party insurance policies has resulted in a number of significant verdicts. In January 2001, a federal court jury awarded almost $500,000 in compensatory damages and $18 million in punitive damages to a homeowner against Allstate Insurance Co. for its alleged bad faith failure to pay a mold claim. (1) Later that year in a widely publicized case, a Texas jury awarded more than $33 million in damages to a homeowner for a mold-related claim, finding that the insurer had engaged in fraud and unfair or deceptive acts. (2) Although on appeal this award was greatly reduced, including $17 million punitive and mental anguish damages, (3) cases such as these help to heighten public awareness of mold issues.

Concern over mold has risen; litigation has blossomed. A rundown of recent (2002-04 to date) cases appears below in this article.

COVERAGE AND EXCLUSIONS

A. Coverage

Mold claims raise a number of questions regarding coverage, several of which are represented in the recent cases noted below. For example, typical insurance policy language requires "direct physical loss" to property to trigger coverage. When mold has actually begun to grow on building materials or personal property, this requirement is relatively simple for the insured to establish. Situations involving the fear of mold growth, the potential for mold growth in the future, or a pre-existing defect that results from an error by the builder create more difficult issues.

B. Exclusions

In addition, coverage issues often arise under policy exclusions. For instance, an insurer may allege that coverage for mold damage is barred by a policy's "mold exclusion." In order to determine whether that exclusion bars coverage in a particular case, consideration must be given to the language of the exclusion at issue and the law of the controlling jurisdiction.

A typical mold exclusion in a property policy provides:

   We do not pay for loss caused by contamination
   or deterioration, including corrosion,
   decay, fungus, mildew, mold, rot, rust or
   any quality, fault, or weakness in covered
   property that causes it to damage or destroy
   itself. We do cover any resulting loss caused
   by a "specified peril" or breakage of building
   glass.

Although this exclusion may appear to express a clear intent that mold losses will not be insured, the coverage determination is often not that simple. Instead, an analysis of what caused the mold, and thus what were the other causes of the damage, is generally necessary to determine whether there is coverage. This type of concurrent causation analysis--the "efficient proximate cause" test--applies in many states, and it provides that a loss is covered if the efficient proximate cause--the cause that set the others in motion--is covered.

Moreover, many policy exclusions, while barring coverage for mold, provide that ensuing losses may be insured. An "ensuing loss" is a separate loss that follows an initial loss. Generally, when an exclusion provides that ensuing losses will be covered, it applies only where the ensuing loss is not also excluded. This is because ensuing loss provisions are not intended to expand the causes of loss that a policy covers. Thus, in evaluating whether damage that follows from mold is covered, it must be determined whether the ensuing loss is covered or excluded. If it is covered, only that ensuing damage will be insured.

An insured also may attempt to avoid the application of the mold exclusion based on the rule of insurance contract construction known as "ejusdem generis," meaning that where descriptive terms are grouped together, they should be interpreted to show some common design or intent. Within the above exclusion, the term "mold" is surrounded by types of loss that occur naturally over a period of time. …

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