Texas Supreme Court Holds That Exclusion For "Loss Caused By Mold" Does Not Provide Coverage For Mold Stemming From Small Roof And Window Leaks
October, 2006
In Fiess v. State Farm Lloyds, the Texas Supreme Court addressed the Fifth Circuit’s certified question asking whether “the ensuing loss provision contained in Section 1-Exclusions, part 1(f) of the Homeowners Form B (HO-B) insurance policy, … when read in conjunction with the remainder of the policy, provides coverage for mold contamination caused by water damage that is otherwise covered by the policy …” 2006 WL 2505995 (Tex.). The Court answered this question in the negative stating: “…[W]e cannot hold that mold damage is covered when the policy expressly says it is not.”
Facts
In 2001, the insureds’ home suffered flood damage as a result of Tropical Storm Allison. When the insureds removed drywall that had been damaged by the flood, they discovered black mold growing throughout their house. The insureds sent samples of the mold to a laboratory for analysis. The laboratory’s examiner determined that the mold samples consisted of stachybotrys mold. Upon further examination, the examiner concluded that Tropical Storm Allison had caused some of the mold contamination, but that a “significant percentage” of the mold had actually been caused by roof leaks, plumbing leaks, heating, air conditioning and ventilation leaks, exterior door leaks, and window leaks that existed prior to Tropical Storm Allison.
The insureds submitted a claim to their insurer, State Farm Lloyds (“State Farm”). State Farm issued payment in the amount of $34,425 under a reservation of rights, and the insureds, believing this payment to be inadequate, filed suit in state court. State Farm removed the case, and obtained summary judgment in the United States District Court for the Southern District of Texas. The insureds appealed. The Fifth Circuit reversed in part, and certified the insurance coverage question to the Texas Supreme Court.
Analysis
The policy provision at issue in Fiess states that State Farm does “not cover loss caused by: … mold or other fungi. … We do cover ensuing loss caused by collapse of the 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.” The Texas Supreme Court divided this provision into four discrete sections and then analyzed each.
First, the court considered the language, “We do not cover loss caused by mold.” Relying on standard contract interpretation principles, the court stated that it is “hard to find any ambiguity” in this provision: “[w]hile the ensuing loss clause that follows may be difficult to parse … few ordinary people would imagine that it changes the meaning of the … sentence to read ‘We do too cover loss caused by mold.’” (emphasis in original) The court also rejected the interpretation advanced by the Texas Department of Insurance (“TDI”) because the TDI’s interpretation created an ambiguity where none is actually present: “neglecting what this policy says in favor of what the Department says it intended would raise a host of … problems.”
Second, the court analyzed the language, “We do cover ensuing loss caused by water damage.” The court specifically declined the opportunity to overrule Lambros v. Standard Fire Ins. Co., 530 S.W.2d 138 (Tex.Civ.App.-San Antonio 1975), writ ref’d, instead applying Lambros to the ensuing loss clause and stating: “[t]he part of the ensuing loss clause at issue in Lambros is indistinguishable from the part at issue here. … If Lambros is still the law, then this [ensuing loss] clause too applies only to losses caused by an intervening cause (like water damage) that in turn follow from an exclusion listed in paragraph 1(f).” (emphasis added)
Third, the court evaluated the language “caused by water damage.” Noting that the policy’s ensuing loss provision only provides coverage for those losses which ensue from water damage, the court held that the term “water damage” “must refer to something more substantial than every tiny water leak or seep. … [A] policy exclusion for ‘mold’ cannot be disregarded by simply deeming all mold to be ‘water damage.’”
Finally, the court considered the meaning of “if the loss would otherwise be covered under this policy.” The insureds argued that this provision canceled the policy’s mold exclusion. The Supreme Court of Texas, however, disagreed, holding that if this provision canceled the mold exclusion, it would also effectively cancel the policy’s other twenty-two exclusions. The court refused to rewrite the policy: “[b]ut those exclusions are part of the policy; a policy without exclusions for rust, rot, mold, wear and tear, and termites is simply a different policy. This would be policy ‘construction’ in the architectural rather than the legal sense.”
Learning Point:
In sum, the Texas Supreme Court in Fiess was admittedly faced with a “crisis” regarding Texas citizens’ insurance claims related to the presence of mold. The court, however, avoided the opportunity to find an ambiguity in a standard insurance policy, and instead relied on established rules of contract interpretation to uphold enforcement of the mold exclusion as written, stating: “[f]or more than a century this court has held that in construing insurance policies ‘where the language is plain and unambiguous, courts must enforce the contract as made by the parties, and cannot make a new contract for them, nor change that which they have made under the guise of construction.’”
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