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
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
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
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
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
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
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