Expert Commentary

Whether Mold Cleanup Costs Are Covered Depends on Causation

An insurer on a homeowners policy denied coverage for mold damages. It was held by an appellate court that if the homeowner proved the mold resulted from a covered peril, then the cost of removing the mold would be covered by the policy so long as it was not a loss separate from or caused by the covered peril or loss.


Environmental
April 2005

In Simonetti v Selective Insurance, 372 NJ Super 421, 859 A2d 694 (2004), a trial court found that there was no coverage under a homeowners policy for mold and other damages allegedly caused by water intrusion following a severe rainstorm in June 2001. The pertinent language of the policy contained an exclusion for "loss caused by … mold" and for damages resulting from "faulty design … workmanship … [and] maintenance."

The Facts

It was about 2 months following the rainstorm that the homeowner discovered the mold and notified the insurer, Selective Insurance Company. The environmental claims unit of the insurer initially determined that the mold contamination and other water damages would be covered under the policy. Subsequently, however, the claims adjuster changed his mind upon learning that there had been water damage to the house several years earlier during 1997.

It appears that following the rainstorm damages, the homeowner initially made a claim against its homebuilder who tendered the claim to Royal Specialty Underwriting, its general liability insurer. Royal had a professional engineer inspect the house, and he wrote a report detailing his findings in September 2001. The report concluded that the water damage occurred from a time in 1997 when the homeowner had first noticed water intrusion around windows and had the builder caulk and otherwise repair the windows. The report further concluded that the leakage was due to a combination of design defects and waterproofing workmanship defects.

The homeowner had his own expert engineer also examine the house and write a report, dated October 1, 2001. That report also determined that the water intrusion resulted from poor workmanship during original construction of the house, and that, "The method of stucco and flashing application resulted in gaping holes in the wall permitting water entry into the wall cavity."

Based on the information from these two expert reports, the homeowners insurer in November 2001, issued a denial of coverage on the basis that the damage "resulted from wear and tear, deterioration, latent defect, inherent vice, corrosion, mold, wet or dry rot, settling including resultant cracking of walls; neglect, faulty, inadequate, or defective specifications, workmanship, construction, repair, materials used in repair, construction or maintenance." The homeowner responded by filing suit against the insurer for breach of contract and bad faith.

The Decision and Appeal

The trial court granted summary judgment for the insurer against the homeowner. This was reversed by the appellate court which concluded that mold damage caused by a covered event is covered under the Selective policy even though losses caused by mold may be excluded. The difference is whether the damages are caused directly from the covered event or from the mold itself. As stated by the court, "Mold can be both a loss and a cause of loss."

The court explained its reasoning as follows:

This distinction between mold damage and loss caused by mold is supported by the very language of Selective's policy [which provides]: "we do not insure, however, for loss caused by … mold…." This language clearly focuses on "cause" of the loss. But mold which is the loss is not mentioned. If Selective had intended to exclude not only losses caused by mold, but also mold itself, it could have easily expressed that intention.

Conclusion

As the court reverses and remands this case back to trial, it states that if the homeowner proves that the mold resulted from a covered peril, then the cost of removing the mold is not a different loss separate from or caused by the mold but rather is within the coverage for the basic loss. "In other words," says the court, "When a covered event causes mold, the mold damage includes the cost of removal."

It will be necessary for the trial (jury) to decide whether the mold and other damage claimed by the homeowner was caused by a covered peril or covered cause of loss. It is possible, explains the court, that two or more identifiable causes may contribute to a single property loss—with one of the causes being covered by the policy and one not being covered. This would not necessarily bar coverage since the policy did not contain an anti-concurrent or anti-sequential clause in its exclusions dealing with faulty design, workmanship, and maintenance. For these reasons, the appellate court remanded the case back to trial for a decision as to the actual cause of the damage (which will determine whether or not there is coverage).


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