Homeowner's Insurance Policy Provides Coverage for Mold and Water Damage at Insureds' Home That is Also Used as a Bed and Breakfast
April, 2003
A Washington appeals court recently held that a homeowner’s policy provided coverage for mold and water damage at the insureds’ home which doubled as a bed and breakfast. DePhelps v. Safeco Insurance Co. of America, 65 P.3d 1234 (Wash. App.). Through a reading of the “whole policy,” the court determined that “it covers the insureds’ use of [the] … residence as a bed and breakfast.” The policy’s coverage provision was clear in that it insured the home when used “primarily as a private residence.” But the court noted that the policy “also refers to and covers various aspects of room rentals.”
Facts
The insureds owned a residence in Ronald, Washington. The property was zoned for general commercial use. The insureds used part of their home as a bed and breakfast. They also rented out the home’s great hall for weddings and similar events. The insureds purchased a homeowner’s insurance policy for coverage at this property. In March of 1997, the insureds’ home experienced roof damage which the insureds repaired themselves. At the end of that year, they determined that the damage was considerably more extensive than what they had originally thought. The insureds then submitted a claim with a contractor’s estimate for $40,000 to repair the roof. The insurer provided coverage for the initial roof damage, and then made an additional payment for damage that was later discovered by the insureds. As of August, 1999, the insurer had provided payment to the insureds totaling approximately $80,000. However, the insureds’ roof continued to leak.
In December, 1999, the insureds’ “home and its contents were found to be contaminated by toxic mold caused by water leaks resulting from the defective repairs. In January 2000, the … [insureds] moved out of the house and submitted more claims for mold damage and loss of use.” The insureds hoped to commence repairs soon thereafter. However, the county in which the insureds lived required a permit to proceed with the repairs. Furthermore, the county classified the property as a hotel which meant all repairs had to conform with the 1997 commercial building code, and the Americans with Disabilities Act.
The insureds submitted a claim for $1.8 million to their insurer. The insurer provided payment for about $540,000. The insureds thereafter sued for breach of contract, bad faith, and violations of the Consumer Protection Act.
Analysis
The court held that the homeowner’s policy provided coverage for the insureds’ claimed damages: “[t]he overarching issue here is whether this policy covered the rental parts of this building. And we conclude that it did.” However, nowhere in the policy was there a specific coverage provision for the residence when used for commercial purposes. Indeed, the policy only referred to commercial uses within the definition of bodily injury, within the limits of liability specific to covered property, and the provision specific to fair rental value.
Under the “overarching issue,” the court addressed three discrete coverage issues: the insurer’s liability for the code upgrades, the insurer’s liability for loss of use/lost income from a decrease in room rentals, and whether coverage should be provided based on a replacement cost or actual cash value basis.
Code Upgrades
The insureds claimed that their insurer was required to provide coverage for code upgrades required by the county in accordance with the policy’s plain language. The insurer, however, argued that “because this policy is intended to cover residential loss only, the coverage is implicitly restricted to residential code upgrades.” The court held that the policy provided coverage for the code upgrades in accordance with the policy’s “Building Ordinance or Law Coverage” provision. Furthermore, the court noted that an “insured can reasonably expect replacements to comply with current building laws.”
Loss of Use/Lost Income
The insurer also contended, specific to the loss of use coverage issues “that the rental rooms here are not covered.”
The kind it [the insurer] contends was contemplated by this policy is a sort of ‘private’ renting or holding out for rent, as compared to a ‘commercial’ renting or holding out for rent. [The insurer] contends that the policy contains a general grant of coverage which controls the entire policy--coverage for a residential premises. And it argues that [the insureds] converted the residential structure into a commercial structure by renting rooms as a bed and breakfast.
The court once again disagreed, noting that the structural damage was covered by the policy, as well as the “loss of rental income …”
Actual Cash Value or Replacement Cost
The court determined that a question of fact remained on the issue of valuation. “When the loss is total, the policy defines actual cash value as ‘the market value of property in a used condition equal to that of the destroyed property, if reasonably available on the used market.’”
Like loss of use, actual cash value clauses provide indemnity only. … The replacement cost considerations -- such as building code upgrades -- do not, therefore, apply. Replacement value applies only if actual replacement is undertaken. … If the [insureds] elect to take cash value, to the extent the subject property was functional as a bed and breakfast -- i.e., code compliant -- at the time of loss, the cash value of the building as a bed and breakfast with commercial zoning is recoverable. If the [insureds] elect to repair and replace the structure, the building code upgrades are recoverable as necessary to restore the structure to its former use.
Learning Point:
DePhelps did not address coverage issues specific to the insureds’ claimed mold damage. It is therefore safe to assume that the homeowner’s policy did not contain a mold or water damage exclusion, otherwise the court would have likely analyzed the applicability of the exclusion. DePhelps is primarily concerned with whether a homeowner’s policy provided coverage for a residence that is also used as a bed and breakfast. In this case, the court interpreted the policy to provide coverage for the rental aspects of the residence despite the absence of a clear coverage provision specific for commercial use.
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