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Mold Not Covered: Fiess v. State Farm Lloyds
07.01.03

In a Memorandum Opinion and Order, a United States Magistrate has refused to find coverage for mold, concluding that the ensuing loss provision in a homeowners policy does not create coverage for mold which ensues from water damage.

The claim arose from flooding and other damage resulting from tropical storm Allison. Ultimately, the homeowners also discovered black mold throughout their residence. An expert retained by the homeowners determined that water intrusion had resulted from flood waters, roof leaks, plumbing leaks, heating and air conditioning leaks, exterior door leaks and window leaks.

The expert concluded that a significant percentage of the mold was not related to flooding, but that the flooding had created mold in virtually every wall, stud and baseboard. State Farm contested coverage but tendered payment for mold remediation where there was evidence of leaks. There was a dispute, however, as to the adequacy of payment.

The Magistrate first noted that the policy exclusions in the homeowners policy specifically provide that the insurer does not cover loss caused by "rust, rot, mold or other fungi." In addition, the policy specifically excluded loss caused by flood.

Nevertheless, the policyholders contended that the "ensuing loss" provision created coverage. This provision provided, in part, that "we do cover ensuing loss caused by ... water damage ... if the loss would otherwise be covered under the policy." Thus, State Farm contended that mold was excluded, regardless of cause, while the policyholders contended that mold was covered where it ensued from water damage.

The Magistrate acknowledged the split in Texas case law, and reviewed all of the existing cases construing similar ensuing loss provisions. Ultimately, the Magistrate followed the reasoning in Lambros v. Standard Fire Ins. Co., 530 S.W.2d 138 (Tex. Civ. App.--San Antonio 1975, writ ref'd), concluding that ensuing loss caused by water damage must be water damage which is the result, rather than the cause, of the excluded damage -- mold in this instance. Because there was no evidence that the mold caused the water damage, there was no coverage afforded under the ensuing loss provision.

In the alternative, the Magistrate also noted that there was insufficient evidence for the policyholders to determine which portion of the mold allegedly came from non-flood related causes, as opposed to the excluded flood damage.

The Magistrate also found that there was no statutory or common law bad faith, as there was a bona fide dispute as to coverage. The Magistrate did not discuss the effect of the Texas Supreme Court's opinion in Safeco Ins. Co. v. Balandran, 972 S.W.2d 738 (Tex. 1998).

In Balandran, the court concluded there was an ambiguity in the policy, created by a repeal provision in the personal property coverage. Because Coverage B, which applies to personal property, excludes "accidental discharge, leakage or overflow of water or steam from or within a plumbing, heating or air conditioning system or household appliance" and because Coverage B also provides that "exclusions 1(a) through 1(h) under Section I - Exclusions do not apply to loss caused by this peril," the court concluded there is an ambiguity, and the "repeal provision" for damages resulting from accidental discharge, leakage or overflow of water should apply to both personal property coverage and dwelling coverage. Accordingly, exclusion 1(f), which encompasses mold, would be inapplicable to accidental leaks.

Arguably, the Balandran exception is irrelevant, because of the Magistrate's alternative finding that the policyholders could not allocate losses between those caused by the flood, and those caused by other sources of water intrusion, including leaks. In any event, the Fiess opinion is yet one more voice weighing in on the debate over the "ensuing loss" provision.