Mold Litigation:  The Defense Perspective

 

Douglas G. Houser

Linda M. Bolduan

 

I.

Mold:  Not The Next Asbestos

Mold claims are a problem, but are more the product of media hysteria than the result of an actual health hazard.  There is still no scientific proof linking most mold health claims of “sick” people with “sick” buildings.  Mold claims are generally no more than water-damage claims in new clothes, packaged for greater jury appeal.  Most “mold” claims are, in reality, bad faith claims in disguise.  These claims are not a recent phenomenon. We have been handling them in the wet Pacific Northwest for some forty years.  In fact, concern with mold’s effects goes back at least as far as the Bible.[1]

Although Ballard[2] kick-started the current “mold rush” in 2001, there are mold cases dating back decades.  For example, in Thomas Roberts & Co. v. Calmar Steamship Corp.,[3] a case decided in 1945, the plaintiff sued the company that shipped cases of its canned beets from Baltimore to Seattle, alleging that the steamship company’s negligence resulted in moldy cases, rusty cans, and soiled labels.  The court found that the company’s bill of lading excepted it from liability for damage caused by mold, rust, and discoloration.  The court further held that the plaintiff could not recover under its marine insurance policy, which insured the canned beats for “loss or damage caused by sweat, fresh water, steam of hold, contact with oil and/or with other cargo.”[4]  This was true because the plaintiff could not establish the “essential cause” of the mold, rust, and stain, that is, “the excess moisture.”[5]

Since Ballard, however, homeowners have suddenly discovered mold everywhere, “lurking under sinks, behind wallpaper or under floorboards, and hearing from scientists that it can be a health hazard.”[6]  By January 2002, some 10,000 mold lawsuits were in the legal pipeline.[7]  Guy Carpenter & Co., a major re-insurance intermediary, has estimated that of those 10,000 suits, 5000 were brought against insurance companies for acting in bad faith; 2000 were brought against homeowner associations for improper maintenance; 1000 were brought against former owners of sold homes; and, 2000 were brought against builders for construction defects.[8]  The average mold-related construction defect claim is in the range of $10,000 to $20,000.  This sudden upsurge in the number of mold cases appears to be a uniquely American phenomenon.  Our understanding from reliable sources in Europe is that mold claims are not an issue on the Continent.

Given that mold “‘has been around forever, . . . is easily remediated, and its health threat . . . greatly exaggerated and virtually unproven by scientific fact,’” the number of mold cases indicates that the mold issue “is being blown out of proportion by public paranoia, media frenzy and plaintiffs’ attorneys.”[9]  According to R. Bryan Tilden, principal of Pittsboro, North Carolina, based Tilden & Associates, a training and consulting firm to the insurance industry, mold-related property damage allegations are no more than “‘water damage claims repackaged for jury appeal.’”[10]  Tilden believes that the asbestos model used by the plaintiffs’ bar will not work for mold because the potential for large verdicts “just isn’t there.”[11]  Tilden’s comment is borne out by data recently released by the Texas Department of Insurance (“TDI”).

On June 14, 2002, the TDI released data on mold claims for the two-year period from January 1, 2000, to December 31, 2001.  According to Department statistics, the average loss and allocated loss adjustment expenses per mold claim was $22,740, subject to certain qualifications,[12] a paltry amount, especially for a state that is arguably the birthplace of the “mold rush.”

One may reasonably wonder, then, why the plaintiffs’ bar has become enamored of mold cases.  It has been suggested that the answer lies in the opportunity for a plaintiff’s attorney to use a mold claim as a basis upon which to assert insurance company bad faith and to seek punitive damages.[13]  This notion is supported in part by the fact noted above that one-half of the approximately 10,000 mold lawsuits filed by January 2002 were brought against insurance companies for allegedly acting in bad faith.[14]  However, as will be discussed subsequently, appellate courts are reversing or reducing bad-faith punitive damages awards against insurance company defendants in mold cases.

            The bottom line is that courts are frequently finding in favor of defendant insurers in mold cases.  Plaintiff insureds have been unable to meet their burden of proof, failing to establish that 1) mold was the cause of their loss; 2) mold caused their personal injury; or 3) the insurance company’s conduct in handling the insured’s claim warranted an award of punitive damages.

 

II.

Causation Issues

A. First-Party Insurance

            Homeowners insurance is often an “all-risk” policy, which typically insures against direct physical loss to covered property caused by “perils” not excluded under the policy.  “Perils are active physical forces which cause the loss of or damage to the insured property.”[15]

One commonly excluded peril in “all-risk” policies is “mold.”  Such “mold” exclusions may contain an exception that provides coverage for any “ensuing” loss to covered property when such loss is not otherwise excluded by the policy.[16]  However, as will be discussed subsequently, for an ensuing loss to be covered, it must be a second, separate “loss.”[17]

                        1. Direct Physical Loss

            Under an “all-risk” policy, the insured must first prove that a direct physical loss occurred to covered property during the policy period.[18]  In Columbiaknit, Inc. v. Affiliated FM Insurance Co.,[19] the court, construing Oregon law, addressed when mold damage constitutes a “direct physical loss” to property under an “all-risk” policy.  In Columbiaknit, rainwater entered the plaintiff’s warehouse and saturated some of the fabric and garments stored there.  The plaintiff’s “all-risk” property insurance provided coverage for “direct physical loss of or damage to” covered property.  At issue was what constituted direct, physical loss to the garments.

            The plaintiff contended that the policy language “direct physical loss” was ambiguous in that it raised a question as to whether damages must be “direct” or “physical.”  Under that theory, if damages need be only direct and not physical, the plaintiff could recover for purely economic loss.  The court disagreed, finding the language unambiguous and, under Oregon law, not to cover consequential or intangible damages such as depreciation in value.

            The arguments regarding coverage for economic loss aside, the plaintiff also asserted that the property stored in the warehouse suffered direct physical loss or damage due to direct contact with water or prolonged exposure to high humidity and mold and mildew.  The plaintiff sought a “liberal” interpretation of the phrase “direct physical loss” with respect to mold and mildew damages.

            In Farmers Insurance Co. v. Trutanich[20] and Largent v. State Farm Fire & Casualty Co.,[21] the Oregon Court of Appeals held that odor from the “cooking” of methamphetamine that permeated the carpets, drapes, and walls of a house constituted  “direct physical loss” to property.  According to the Columbiaknit court, Trutanich and Largent suggested that “physical damage can occur at the molecular level and can be undetectable in a cursory inspection.”[22]  Although recognizing that physical damage can occur at the molecular level, the court in Columbiaknit nevertheless emphasized that “physical damage need be distinct and demonstrable.”[23]  In the case at bar, to obtain coverage the plaintiff had to establish “the presence of a pervasive, persistent or noxious odor, or mold or mildew” or show that the fabric or garments were “physically changed” in a way that would lead to mold or mildew damage in the future.”[24]  The court commented:

 

However, it is important to distinguish between the necessity of washing the garment because of its strong odor, and the decision by the retailer not to sell the garment as new, merely because it has been exposed to elevated levels of spore counts, for example, and may or may not develop mold or mildew in the future.  The decision not to sell the garment as new, in the absence of distinct and demonstrable physical change to the garment necessitating some remedial action that would preclude honestly marketing as first quality goods, is not a covered loss.  Furthermore, such damage that requires remedial action to some items is not sufficient to prove such damage to all items . . . .

            . . . Trutanich instructs that goods with heightened spore counts may be damaged if they will later develop odor or other effects so as to now require washing or such treatment that they may not be sold as first-quality goods.[25]

 

In Prudential Property & Casualty Insurance Co. v. Lillard-Roberts,[26] a magistrate, following Columbiaknit, held that a house with “visible mold” that might not be removable sustained “‘distinct and demonstrable’” damage sufficient to constitute a “direct” and “physical” loss under an “all-risk” policy.[27]  In this case, water leaked into the insured’s home, allegedly because of the prior owners’ knowing and negligent repair of the roof and flashing.  The insured’s plumbing system also failed, backed up into the bathroom on the main floor, and flooded the main floor with approximately one inch of sewer water.  Mold resulted from these leak problems, and the insured moved out of the house after being diagnosed with systemic fungal disease allegedly due to her living there.  The insured sought coverage under an “all-risk” policy for the mold damage.

            The court agreed with the insurer that the policy’s requirement of a “direct” and “physical” loss precluded the insured from recovering “‘indirect, nonphysical losses,’ including consequential or intangible damages such as loss in value.”[28]  Thus, the question before the court, which it answered in the affirmative, was whether the insured had a claim for loss due to physical damage to her house and other structures caused by the presence of mold.  It also noted two cases not involving mold that had deemed “the inability to inhabit a building as a ‘direct, physical loss’ covered by insurance.”[29]  The court could find “no analytical difference between these cases and the case here where a house has allegedly been rendered uninhabitable by mold.”[30]

                        2. Causation

            To determine whether a first-party insurance policy provides coverage for mold losses, read the policy; read the policy; and read the policy again.  Many first-party insurance policies now exclude mold losses or cap a mold loss at a reasonably low limit, such as $5000.

                                    a. Proximate Cause

In the context of first-party property insurance, issues of causation often arise.  The question is:  What event caused a particular loss?  In our common experience, we tend to simplify causative events: Event A causes Loss B, the fire caused the house to burn down.  However, multiple events are often implicated in losses to property and, for purposes of determining coverage under a particular policy, the insurer needs to know which event “caused” the loss and whether that event is a covered peril.

What has “caused” a loss in a case involving mold is a question that has led to extensive litigation.  The determination of causation in mold cases is extremely complicated when there are multiple events that have led to a particular loss -- was the loss caused by faulty workmanship that caused the leaky roof that led to the mold that caused the shower to turn green?

To determine causation where multiple events lead to a property loss, the majority of jurisdictions have adopted a “proximate cause” type analysis.[31]  Also sometimes called “efficient proximate cause,” “moving cause,” “predominant cause,” or combinations thereof,[32] the “proximate cause” of a loss is the “dominant, efficient one,”[33] the one that “sets in motion a chain of events that results in the loss without intervention of any new or independent source.”[34]  Thus, where there is an “unbroken connection” between the event and the injury, the act “causes” the injury, and an intervening event is not a proximate cause of the injury “unless it is efficient to break the causal connection.”[35]

As explained by the Supreme Court of West Virginia:

 

            [W]hen examining whether coverage exists for a loss under a first-party insurance policy when the loss is caused by a combination of covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss.  No coverage exists for a loss if the covered risk was only a remote cause of the loss, or conversely, if the excluded risk was the efficient proximate cause of the loss.  The efficient proximate cause is the risk that sets others in motion. It is not necessarily the last act in a chain of events, nor is it the triggering cause.  The efficient proximate cause doctrine looks to the quality of the links in the chain of causation. The efficient proximate cause is the predominating cause of the loss.[36]

 

However, the efficient proximate cause doctrine applies only when there are at least two distinct perils, which “could each, under some circumstances, have occurred independently of the other and caused damage.”[37]  Conversely, the efficient proximate cause doctrine does not apply when a loss is caused by a “single cause, albeit one susceptible to various characterizations.”[38]  Moreover, an insured may not avoid a policy exclusion “merely by affixing an additional label or separate characterization to the act or event causing the loss.”[39]  Although the efficient proximate cause doctrine may be difficult in application, it may be stated simply:

 

§        Where a covered peril is the efficient proximate cause of the loss, there is coverage.

§        But, where an excluded peril is the efficient proximate cause of the loss, coverage is denied.

 

b. “Ensuing Loss”

The proximate cause analysis tells us whether a covered peril has caused the loss at issue. Depending upon the policy terms, to the extent a covered peril causes the loss, the policy will provide coverage, subject to any applicable exclusions.  However, a property policy may contain an ensuing loss clause, which may act as an exception to the exclusion for some, but not all, of the damage.

There are several types of ensuing loss clauses.  One type broadly covers any loss occurring subsequent to an excluded loss, so long as that subsequent loss is not excluded by the policy.[40]  A second type more narrowly covers losses subsequent to an excluded loss arising from specified perils.[41]

Most courts appear to agree that the ensuing loss clause is clear and unambiguous.  For example, in McDonald v. State Farm Fire & Casualty Co.,[42] the Washington Supreme Court opined:

 

The ensuing loss clause may be confusing, but it is not ambiguous. Reasonably interpreted, the ensuing loss clause says that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered.  The uncovered event itself, however, is never covered.[43]

 

The purpose of the ensuing loss exception to an exclusion is to provide coverage only for certain losses that occur subsequent to an excluded loss, “not to enlarge the list of items covered under the policy.”[44]  Therefore, courts se