The Current State of the Ensuing Loss Provision in the Context of Mold Claims
April, 2005
All risk insurance policies often contain “ensuing loss” provisions. A typical ensuing loss provision provides coverage for loss or damage that is not otherwise excluded, and results or ensues from an excluded cause of loss. For example, insurance policies are often written to exclude coverage for loss or damage caused by faulty workmanship, but provide coverage for loss or damage that ensues from that faulty workmanship. See, e.g., Prudential Property & Casualty Co. v. Lillard-Roberts, No. CV-01-1362-ST, 2002 U.S.Dist. LEXIS 20384 (D.Ore. June 14, 2002).
Often regarded as the seminal decision on ensuing loss, Acme Galvanizing Co., Inc. v. Fireman's Fund Insurance Co., offered the following analysis:
We interpret the ensuing loss provision to apply to the situation where there is a ‘peril,’ i.e., a hazard or occurrence which causes a loss or injury, separate and independent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues. 221 Cal.App.3d 170, 179, 270 Cal.Rptr. 405 (1990)(emphasis not added).
In the United States, litigation resulting from alleged toxic mold contamination in homes, schools, and commercial buildings, has significantly increased over the past four years. First party coverage litigation involving mold contamination often centers on the interpretation of an insurance policy’s ensuing loss clause. The decisions regarding the ensuing loss clause have not been uniform. The following highlights the disparity in some of the decisions in the United States.
Insurance Coverage Denied:
Sapiro v. Encompass Insurance, 221 F.R.D. 513 (N.D.Cal. April 30, 2004)
In Sapiro, the United States District Court for the Northern District of California held that the exclusion for “faulty workmanship” which contained an ensuing loss clause did not serve to provide coverage for the insureds' claimed mold damage which was caused by faulty workmanship. The court stated that “California’s courts have long defined an ‘ensuing loss’ as a loss ‘separate’ and ‘independent’ from [an] original peril.” As a result, the court in Sapiro held that the insureds’ claimed losses were “neither; they are, rather, abstrusely phrased reformations of the same …[faulty workmanship] losses -- losses plaintiffs [the insureds] concede are excluded by [the] ‘faulty workmanship’ clause.”
Prudential Property & Casualty Insurance Co. v. Lillard-Roberts, 2002 U.S.Dist.LEXIS 20384 (D.Ore. June 14, 2002)
In Lillard-Roberts, the United States District Court for the District of Oregon held that coverage for the insured's claimed water and mold damage was not covered under the homeowner's policy at issue. The court stated that “[t]he ensuing loss clause ‘does not reinsert coverage for excluded losses, but reaffirms coverage for secondary losses ultimately caused by excluded perils.’… In other words, ‘an ensuing loss provision does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property itself.… When water intrudes into a residence, mold … is not a surprise, particularly in the damp northwestern United States. Because mold is a natural foreseeable result of water damage, it cannot be an ensuing loss.”
Insurance Coverage Granted:
In Home Insurance Co. v. McClain, a Texas appellate court held that water and mold damage that resulted from numerous construction defects was covered under the policy's ensuing loss clause. No. 05-97-01479-CV, 2000 WL 144115 (Tex.App.-Dallas, Feb. 10, 2000). The insurer, however, argued that the damage was excluded under the policy exclusion for wear and tear, deterioration, mold, rust, rot, etc., and that the ensuing loss clause had no application. The court found coverage to exist:
Thus, the application of the mold and fungi exclusion is dependent on the application of the ensuing loss provision.... To be an ensuing loss caused by water damage, the mold and fungi would necessarily have to follow or come afterward as a consequence of the water damage. ... a set of facts could produce the conclusion that an ensuing loss of an excluded damage was caused by water damage resulting in coverage.... Here, the water from the leaking roof pooling in the crawl spaces caused the mold and fungi.... Consequently, the loss that followed the water damage was caused by water damage. Therefore, under the facts of this case, the exclusion for fungi and mold damage does not apply. Id. at *3-*4, citing to and relying in part on Merrimack Mutual Fire Insurance Co. v. McCaffree, 486 S.W.2d 616 (Tex.App. 1972).
In Blaine Construction Corp. v. Insurance Co. of North America, the court summarized its opinion as follows:
Faulty workmanship exclusion in builder’s all-risk property damage insurance policy, with an exception for loss or damage that ensues from an insured peril, did not preclude coverage, under Tennessee law, for cost incurred by insured construction contractor in replacing ceiling insulation that became water-soaked because of subcontractor's failure to install the vapor barrier properly, where the ensuing damage was otherwise insured in that water, except for groundwater and, under limited circumstances, rainwater, was an insured peril; the ensuing loss, to be covered, did not have to be the result of a new, separate and independent peril that was excluded, rather than a loss that followed naturally and ordinarily from the excluded peril. 171 F.3d 343 (6th Cir. 1999).
Learning Point:
When interpreting ensuing loss clauses in the context of faulty workmanship exclusions and mold claims, the court's decisions have not been uniform. A court may deem an ensuing loss to be one that is separate and independent from the original excluded peril. Another court may find that an ensuing loss is one that follows naturally as a consequence of the original excluded peril. Each fact pattern must be considered in light of the policy terms and applicable case law. •
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