Expert Commentary

Mold Excluded in Homeowner's Policy Is Not Covered as an Ensuing Loss of Leaking Water

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.


Environmental
January 2007

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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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