Mold Excluded in Homeowner's Policy Is Not Covered as an Ensuing Loss of
Leaking Water
January 2007
Summary judgment was correctly awarded against
a homeowner that claimed it was entitled to coverage under its homeowner policy
for damages arising out of mold growth that occurred as a result of construction
defects that caused serious water leakage through the roof and moisture seepage
through the foundation.
by J.
Kent Holland Jr.
ConstructionRisk.com
LLC
An exclusion in the policy expressly stated that there was no coverage for
rust, rot, mold, or other fungi. An exception to the exclusions allowing coverage
for ensuing loss caused by water damage was held not to apply in this case.
The ensuing loss exception is intended, says the court, to allow coverage for
an otherwise covered type loss (water damage) that follows from an excluded
loss (mold) but will not create coverage for an excluded category of loss (mold)
that follows from a covered loss (water damage).
In the case of Lundstrom v. United Services Automobile
Association, 192 S.W.3d 78 (Tex. App. 2006), homeowners were denied coverage
under their homeowner's policy for mold damages to their home. After moving
into their new home, the Lundstroms found water in a stairwell following a rainstorm.
They complained to the builder about leakage. He came to the house on repeated
occasions in an attempt to correct the problem.
On two occasions, the builder cut a hole in the roof in an effort to try
to determine the source of the problem. On both occasions the builder left the
hole open and unprotected from the elements and, on both occasions, severe rainstorms
caused large amounts of water to pour into the house. (See my secondary comment
below about this not-so-clever contractor.)
As a result of the various sources of water, mold developed. The homeowners
made a claim to their insurer for coverage for the water and property damage,
and for the mold. The insurer granted limited property damage coverage pursuant
to a binding appraisal that was provided pursuant to the policy to resolve disputes
concerning the value of a loss. The insurer denied coverage for mold, however,
based on exclusion (f. 1 & 2) of the policy which states:
- We do not cover loss caused by … (1) wear and tear, deterioration or
loss caused by any quality in property that causes it to damage or destroy
itself [and] (2) rust, rot, mold or other fungi.
The policy further provided at the conclusion of section (f), however that:
- We do cover ensuing loss caused by collapse of building or any part
of the building, water damage or breakage of glass which is part of the
building if the loss would otherwise be covered under this policy.
In their argument against summary judgment, the homeowners acknowledged the
applicability of the exclusions but asserted that the "ensuing loss" provision
was to "cover ensuing loss caused by … water damage." The question for the court,
therefore, was whether the alleged mold damage would be covered under the ensuing
loss exception to the mold exclusion.
In analyzing the policy language and the intent of the ensuing loss exception,
the court relied on precedent established by the case of Lambros v. Standard Fire Insurance, 530 S.W.2d
138 (Tex. Civ. App. 1975). That decision, quoting from Webster's Dictionary, explained that:
- 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.
The Lambros decision considered facts quite
similar to those in the present case, including the same exclusions and the
same ensuing loss provisions. The way that decision interpreted the ensuing
loss exception was that the language of the exception:
- compels the conclusion that the water damage must be a consequence,
i.e., follow from or be the result of the types of damage enumerated in
exception k.
Thus, says that court:
- 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, ceilings….
Since in Lambros the water damage was the
cause rather than the consequence of settling, the exclusion applied, and the
ensuing loss exception to the exclusion was of no help to the homeowner.
In the current case, the court explains that what Lambros means is that the ensuing loss is to be understood as a loss
that results or follows from the listed excluded risks (wear and tear, deterioration,
inherent vice, rust, rot, mold, etc.)
Consistent with Lambros, for the ensuing loss
exception to override the exclusion for mold in the present case, the mold must
have caused or preceded the water damage, not vice versa.
Since that is not the case here, the court found that the mold damages are
excluded from coverage under the policy.
Comment
The court in this decision stated:
- Regardless of whether we agree with Lambros,
it is on point, and as an intermediate court of appeals, this court is bound
to follow established precedent from the Texas Supreme Court.
This suggests that the court did not, in fact, agree with the logic of Lambros. The court quoted several other unreported
and unpublished decisions of Texas courts that interpret the ensuing loss exception
quite differently—and in a manner that would have found coverage.
The point of the decision is that in Texas, the way that the ensuing loss
exception is interpreted is that the exception does not mean that the policy
will not cover an excluded loss that results from an otherwise covered loss.
Instead, it means the policy will permit coverage for an otherwise covered loss
that results from a loss that is excluded under the policy. Thus, mold being
plainly stated to be excluded does not become covered just because it results
from water damage which is covered.
Another way to look at this is to consider what coverage there might be under
a builder's general liability policy for property damage to automobiles that
are destroyed when a partially constructed wall being built by the builder falls
down. The policy would not cover the damage to the builder's own work on the
wall since that is excluded under the "your work" exclusion, but there could
be coverage for the property of others that is damaged as a result of the defective
work. Thus, the cause is excluded from coverage but the resulting property damage
is covered. This parallels the reasoning of the Lambros court as applied to a homeowners policy. From the discussion in the current
case, it does not appear that such comparisons to other policies were made or
considered.
Secondary Comment
It was only discovered much later that the source of the water problem was
a soda can caught inside the scupper and downspout blocking the drainage and
causing water to pool on the flat roof. It seems surprising that a contractor
would try to find out why water was getting inside the house by cutting a hole
in the roof instead of first checking to see if water was exiting the drain
pipe, either by looking at the drain where it entered the ground or looking
at it on the roof top during a rainstorm or even after using a garden hose to
cover the roof with water. A little common sense could have saved a lot of trouble.
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