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The Supreme Court Answers “No” to the Fifth Circuit’s Question Regarding Coverage for Mold

September 1, 2006

On August 31, 2006, the Texas Supreme Court answered the certified question of the 5th Circuit in Fiess v. State Farm Lloyd’s in favor of the carriers. The majority focused on well settled rules of contract interpretation and addressed the issue of whether the “ensuing loss provision contained in Section I-Exclusions, part 1(f) of the Homeowner’s Form B (HO-B) 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.” Finding the policy language clear and unequivocal, Justice Brister, speaking for the majority held, “In this case, it is hard to find any ambiguity in the ordinary meaning of ‘We do not cover loss caused by mold.’”

The court relied upon Lambros v. Standard Fire Ins., 530 S.W.2d 138 (Tex. Civ. App. – San Antonio 1975, writ ref’d) in construing the “ensuing loss” provision in the policy. Noting that although the policy had changed, the court found the “ensuing loss” language in Lambros was indistinguishable from the language in the policy at issue. The court noted that not every instance of mold would give rise to coverage as it would convert the homeowner’s insurance policy into a maintenance policy and effectively obliterate twenty-two exclusions.

The court further noted that mold itself is not water damage as that term is used in the policy. The court adopted Justice’s Friendly’s reasoning in Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939, 941 (5th Cir. 1965) as to what the phrase “caused by water damage” would mean. “We do not think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage; it would not be easy to find a case of rot or dampness of atmosphere not equally subject to that label and the exclusion would become practically meaningless. In our case the rot may have ensued from water but not from water damage, and the damage ensuing from rot was not the damage from the direct intrusion of water conveyed by the phrase water damage.” Aetna, at 941. The court noted, without deciding the extent of the phrase, that “water damage” must refer to something more than every tiny water leak or seep.

The court’s ruling appears to eliminate mold coverage from the HO-B policy. The Court emphasized that the rules for interpreting an insurance policy do not change simply because potentially harsh circumstances may exist. The court was not persuaded by the Texas Department of Insurance’s interpretation of the policy. Rather, “if potential branches of the Texas government decide that mold should be covered in the Texas Insurance policies, they have tools at their disposal to do so; Texas courts must stick to what those policies say and cannot adopt a different rule when a ‘crisis’ arises.” What impact this case has on insurance policies in Texas in the future remains to be seen, but for those few remaining mold claims and lawsuits, it is clear, the end is near.