Court Holds That Mold as a "Loss" is Distinct from Mold as a "Cause of Loss"
December, 2004
The Superior Court of New Jersey, Appellate Division, recently held that a policy containing an exclusion for “loss caused by mold,” provides coverage for the repair and remediation of mold damage caused by a separate covered peril. Simonetti v. Selective Ins. Co., 859 A.2d 694, 372 N.J.Super. 421 (App.Div. 2004). The court held that “mold can be both a loss and a cause of loss,” and that, in this case, mold was the loss rather than the cause. Id. at 699.
The insured, a married couple, bought a newly constructed house in 1995. Within a few years they detected leaks from a window, usually following rainfall. Early on, the contractor who built the house returned to caulk the window on a few occasions. However, by 2001, the contractor claimed that the leaks were the result of normal wear and tear, and instructed the insured to caulk the windows themselves. In June, 2001, the insured experienced a substantial water leak following a severe rainstorm, resulting in damage throughout the house. The insured reported the damage to their insurer, but did not inform the insurer about the prior water damage.
Two months after the June rainstorm, the insured discovered mold growth and notified the insurer. After initially agreeing to provide coverage, the insurer obtained documents from the contractor’s insurer indicating that the house experienced significant water damage when the insured first discovered their water leakage problem in 1997. The documents further indicated that the water leakage resulted from design defects and waterproofing workmanship defects. The insured also obtained a report by an expert engineer who determined that the water intrusion was a direct result of faulty workmanship during construction.
Shortly after receiving the claim for the mold damage, the insurer denied coverage on the basis that the damage was caused by policy exclusions, including wear and tear, deterioration, latent defect, mold, and faulty workmanship. The insured commenced a litigation against the insurer, alleging breach of contract, bad faith, and violation of the New Jersey Consumer Fraud Act. The insurer moved for summary judgment on the issue of coverage. The trial court granted summary judgment in favor of the insurer.
The insured appealed, arguing that the mold was a direct physical loss to the house caused by water intrusion from the 2001 rainstorm, and that the rainstorm was a covered cause of loss. Further, the insured claimed that the mold itself is a covered loss, rather than a cause of loss otherwise exempted from coverage.
The insurer countered that the loss resulted from one or more policy exclusions. Specifically, the policy stated, “[w]e do not insure, however, for loss . . . caused by . . . any of the following: wear and tear, marring, deterioration; inherent vice, latent defect, mechanical breakdown; smog, rust or other corrosion, mold, wet or dry rot….” In addition, the policy excluded loss to property caused by “faulty design, specifications, workmanship, repair, [or] construction….” The New Jersey Superior Court, Appellate Division, determined that, according to New Jersey rules of insurance policy interpretation, mold damage caused by a covered event is covered under the policy. Id. However, property loss caused by mold is excluded. Id.
Thus, even though the insured’s claim was comprised of the cost to repair and remediate mold damage, to the extent that mold damage was caused by a covered peril (i.e., a rainstorm), rather than an excluded peril (i.e., faulty workmanship), the policy would cover the cost of such repair and remediation. Id. The case was then remanded to the trial court to determine whether some or all of the mold damage was caused by the 2001 rainstorm, as opposed to the prior water leaks caused by faulty workmanship. Id. at 699-700.
In making this determination, the court rejected the insurer’s argument that policy exclusions for faulty design, workmanship, and maintenance barred recovery, even if covered perils contributed to the damage. The court noted that both a covered and excluded event may contribute to a single property loss without necessarily barring coverage. Id. at 700. The court stressed that the policy did not contain an “anti-concurrent” or “anti-sequential” clause in the exclusion dealing with faulty design, workmanship, and maintenance, which would operate to preclude coverage even in the event a covered peril contributed to the loss. Id. Absent such language, “where included and excluded causes occur concurrently, it is for the fact finder to determine which part of the damage was due to the included cause of loss and for which the insured can recover…. And with regard to sequential causes of loss, our courts have determined that an insured deserves coverage where the included cause of loss is either the first or last step in the chain of causation which leads to loss.” Id. (citing Franklin Packaging Co. v. Cal. Union Ins. Co., 171 N.J.Super. 391, 408 A.2d 448 (App.Div.1979)).
Learning Point:
Before writing policies in New Jersey, underwriters should pay special attention to ensure that the perils which they seek to exclude are expressed in no uncertain terms. Since mold damage is usually attributable to another cause, policies excluding mold, wear and tear, and other damage that is gradual in nature, should use language such as “this policy does not insure for loss caused by, or the repair or remediation of, mold, wear and tear, etc.” •
Back to New York CM Report of Recent Decisions (2004v4) 2004 Volume 4 Table of Contents
