Disciplined in Sophisticated Defense and Insurance Litigation

April 05, 2007 | Publication| What the Heck is an Ensuing Loss?

William (Bill) R. Lewis

"What the Heck is an Ensuing Loss?"

William R. Lewis 
Butler Weihmueller Katz Craig LLP

I.     Introduction

The idea of "ensuing loss" sounds so simple. It is a loss that ensues from an earlier loss. In first party property insurance contracts, the "ensuing loss" concept comes into play when the initial loss is excluded, such as in the case of mold, water damage, or when a defective design causes the loss. When another loss ensues from the first excluded cause of loss, the intent of "ensuing loss" is to allow coverage for such ensuing damage. Up until now, conveniently, we have used the word ensuing to define "ensuing loss". Not exactly the model of clarity.

The dictionary teaches us that "ensuing" means "to take place afterward or as a result."[1] Yet, this very definition contains two parts that, in the context of first party property insurance, gives two very different results depending on whether one uses the first portion of the definition or the latter portion. If the first portion of the definition is how we must define an "ensuing loss," then all that is required is that the covered ensuing loss come later in time than the excluded loss. If the latter portion of the definition is used, however, the "ensuing loss" is covered only if happens as a direct result of the excluded loss.

Of course, the case law utilizes neither of these rather straightforward approaches. Instead, two different schools of thought have developed to grapple with this esoteric issue. In the first school of thought, an "ensuing loss" is a loss that results in damage to separate and distinct property from the initial excluded loss. The second school of thought holds that the "ensuing loss" must be caused by a separate covered cause of loss. In essence, the academic question is whether we look at the cause of the loss or the resulting property damage that ensues in order to determine the existence of coverage for the "ensuing loss." Fortunately for those less prone to such academic discussions, the Courts ignore the separate nature of the above schools of thought and apply both concepts interchangeably, often as a matter of convenience.

So what the heck is an ensuing loss? It is either a loss to separate property or a loss caused by a separate cause of loss. Much of the case law dealing with "ensuing loss" flows out of commercial policies. In recent years, a greater percentage of the "ensuing loss" jurisprudence has involved homeowner’s policies. In particular, much of the homeowner’s litigation to date has focused on mold damage.

Given the manner in which the "ensuing loss" concept evolved, this paper will discuss the "ensuing loss" concept in the historical commercial context and address how its is applied in homeowner’s insurance. While an "ensuing loss" could find its way into the typical homeowners insurance claim, it most often arises in mold and water damage claims. For this reason, this paper will focus on these two different exclusions. Specifically, this paper will discuss the current homeowner’s ISO form containing the "ensuing loss" provision as it relates to mold and water damage, explore the broad background of "ensuing loss" case law, and note the latest court decisions addressing these issues.

II.     The Terrible Causes of Loss: Mold and Water

As homeowner’s claims go, there are two causes of loss that cause a great deal of trouble. Mold and water claims are difficult to address because the damage supporting the claim is often hidden. The first recognition that a mold or water claim exists is often the secondary effects of the loss. In the case of water damage, the first discovery of the damage can be weeks or months after it began; long after the damage has spread throughout the property. In the case of mold, the damage is usually discovered when mold spores are smelled by the homeowner. Mold and water, though, are very different causes of loss with very distinct characteristics but very similar results - significant damages and coverage problems.

        a.     Mold Damage

Mold is everywhere. It is in the air, on our food, and in our homes. However, mold damage for purposes of insurance claims is the presence of biologically toxic material. While the presence of mold can physically weaken building materials over extremely long periods of time, the real damage of mold are the health problems caused by the presence of mold spores and toxins in the air.

        b.     Water Damage

In contrast to mold damage, water damage is much more tangible. Water damage does not have the same stygma that mold damage possesses predominantly because it does not make people physically ill. Instead, water damage is far more likely to cause physical damage to the building. Typical water damage can be anything from the saturation of drywall that causes it to crumble to the delamination of plywood floor decking.

Of course, some engineers do not differentiate between mold and water damage. Take, for instance, the following exchange that took place during an Examination Under Oath following a 2004 hurricane claim between an insured’s engineer and counsel for the insurance carrier:

Q:    How much of your estimate for the replacement and repair damage to the property is in connection with mold as opposed to water structural integrity damage?

A:    I didn’t do anything special for the mold. If there is mold, then remove it. It’s water damage in my estimate.

Q:     Does your estimate include the remediation of mold?

A:     No.

Q:     Is there mold damage?

A:     Only if there is water damage.

Q:     Does your estimate include the removal of mold?

A:     My estimate doesn’t include the removal of mold per se. It includes removal of water-damaged material on which mold may have grown.

Q:     Was there mold in place when you made the estimate to remove a particular object?

A:     I didn’t differentiate.

Q:     You don’t differentiate between mold and water damage? It’s all water damage as far as you are concerned?

A:     That’s fair as far as this estimate is concerned.

While some people maintain there is no difference between water and mold damage, water and mold are treated differently under the standard ISO form.

III.     Homeowner’s ISO Form Containing the "Ensuing Loss" Provision

One of the more difficult problems in synthesizing the rules of construction when it comes to "ensuing losses" in homeowner’s claims, is that the ensuing loss language changes from policy to policy. In the context of mold and water "ensuing losses," almost all of the case law contains policy language subtly (or in some cases, not so subtly) different from the ISO standard homeowner’s mold exclusion.

The ISO standard homeowner’s policy provides, in pertinent part:

SECTION I - PERILS INSURED AGAINST

A. Coverage A - Dwelling And Coverage B - Other Structures

1.    We insure against risk of direct physical loss to property described in Coverage A and B.

2.    We do not insure, however, for loss:

. . .

c.     Caused by:

. . .

(5) Mold, fungus or wet rot. However, we do insure for loss caused by mold, fungus or wet rot that is hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure if such loss results from the accidental discharge of overflow of water or steam from within:

a) A plumbing, heating, air conditioning or automatic fire protective sprinkler system, or a household appliance, on the "residence premises"; or

b) A storm drain, or water, steam or sewer pipes, off the "residence premises".

For purposes of this provision, a plumbing system or household appliance does not include a sump, sump pump or related equipment or a roof drain, gutter, downspout or similar fixtures or equipment.

. . .

Under 2.b. and c. above, any ensuing loss to property described in Coverages A and B not precluded by any other provision in this policy is covered. (Emphasis added.)

. . .

In addition to the ISO language, a common variation of the mold exclusion is as follows:

We cover accidental direct physical loss to property described in Coverages A and B except for losses excluded under Section I - Property Exclusions.

. . .

1.    We do not cover loss to any property resulting directly or indirectly from any of the following. Such a loss is excluded even if another cause or event contributed concurrently or in any sequence to cause the loss.

. . .

b) Water or damage caused by water-borne material. Water and water-borne material damage means:

(1) flood, surface water, waves, tidal waves, overflow of a body of water, spray from these, whether or not driven by wind.

(2) water or water-borne material which:

(a) backs up through sewers or drains from outside the dwelling’s plumbing system; or

(b) overflows a sump pump, sump pump well or other system designed to remove subsurface water or water-borne material from the foundation area.

However, we will pay up to a maximum of 5% of the Coverage A - Dwelling Limit of Liability for damage to covered property caused by Item b)(2) above. This is the most we will pay for all property under Coverage A - Dwelling, Coverage B - Other Structures and Coverage C - Personal Property.

(3) water or water-borne material below the surface of the ground, including water or water-borne material which exerts pressure on, seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool, or other structure.

Resulting direct loss by fire, explosion, or theft is covered.

. . .

3. We do not cover loss to property described in Coverages A and B resulting directly from any of the following:

. . .

e) continuous or repeated seepage or leakage of water or steam over a period of time from a heating, air conditioning or automatic fire protective sprinkler system; household appliance; or plumbing system that results in deterioration, rust, mold, or wet or dry rot. Seepage or leakage from, within, or around any shower stall, shower tub, tub installation or other plumbing fixture, including their walls, ceilings or floors, is also excluded.

If the loss caused by water or steam is not otherwise excluded, we will cover the cost of tearing out and replacing any part of the building necessary to repair or replace the system or appliance. We do not cover loss to the system or appliance from which the water or steam escaped.

                f)  (1) wear and tear, marring, deterioration;

    (2) inherent vice, latent defect, mechanical breakdown;

    (3) smog, rust, mold, wet or dry rot;

    (4) smoke from agricultural smudging or industrial operations;

    (5) release, discharge, or dispersal of contaminants or pollutants;

    (6) settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls, floors, roofs or ceiling; or

    (7) birds, vermin, rodents, insects or domestic animals. Resulting breakage of glass constituting a part of a covered building is covered.

If any of items f)(1) through (7) cause water to escape from a plumbing, heating, air conditioning or automatic fire protective sprinkler system or household appliance, we cover loss caused by the water not otherwise excluded. We also cover the cost of tearing out and replacing any part of a building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which the water escaped.

Under exclusions 3.a) through 3.f), any loss that follows is covered unless it is specifically excluded.

This typical language causes numerous problems, just like the ISO ensuing loss provision:

SECTION I - EXCLUSIONS

A. We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

. . .

3. Water Damage

    Water Damage means:

a. Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;

b. Water or water-borne material which backs up through sewers or drains or which overflows or is discharged from a sump, sump pump or related equipment; or

c. Water or water-borne material below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure;

caused by or resulting from human or animal forces or any act of nature.

Direct loss by fire, explosion or theft resulting from water damage is covered.

. . .

Under the above ISO language, certain types of water damage is excluded. Mold damage is also excluded with limited exceptions. However, any ensuing loss not precluded by any other exclusion is covered.

IV.     Development of "Ensuing Loss"

Courts around the country have adopted two different ways of defining an ensuing loss. One school of thought is that an ensuing loss is simply something which occurs as a consequence or follows an initial loss.[2] Under this definition, the courts do not draw a clear line between the original loss and the ensuing loss. In other words, the loss which follows does not have to be separate or distinct from the initial loss; it just has to follow as a result. The problem with this definition is that it becomes difficult to separate the initial loss from the loss which follows.

The second school of thought requires an ensuing loss to be separate and independent from the initial loss. An ensuing loss occurs "where there is a peril, (a hazard or occurrence which causes a loss or injury), separate and independent but resulting from the original excluded peril... "[3]

The relationship between exclusions and ensuing loss provisions is discussed at length in the Florida Supreme Court’s decision in Swire Pacific Holdings Inc. v. Zurich Insurance Co.[4] Swire contains perhaps the best analysis of an ensuing loss provision. In Swire the Court addressed three questions of Florida law that had been certified by the United States Court of Appeals for the Eleventh Circuit.[5] One of those questions was whether the policy's design defect exclusion clause barred coverage for the cost of repairing the structural deficiencies in the condominium building. The Court held that it did. Most importantly, the court held that the ensuing loss clause was not ambiguous.

In Swire, the developer altered the design and construction of a condominium project to address design defects. Had Swire continued with construction under the original design, the structure of the building would have been substantially and materially impaired. Swire spent approximately $4.5 million to correct the structural deficiencies. Zurich denied coverage on the ground that Swire's claim dealt with the cost of correcting a design defect and not any physical loss or damage resulting from the defect.

The design defect exclusion clause at issue in Swire contained an exception to the exclusion for resulting damage. The insured argued that the claimed costs went directly to repair a "physical loss or damage resulting from" the defect. The Florida Supreme Court rejected this argument, holding that the ensuing loss provision was clear and unambiguous. Applying the exclusion as written, there was no coverage for the cost of correcting construction or design defects.

In rejecting the insured’s interpretation of the ensuing loss provision, the Florida Supreme Court conducted a historical survey of cases that had addressed this issue. One of those cases was Schloss v. Cincinnati Insurance Co.[6] In Schloss, the insureds had an Exterior Insulation Finishing System ("EIFS") installed and a clay tile roof added to their home. While repairs were being done to the house, significant rot damage to the wooden stud structure was discovered. The rot had occurred from water allegedly resulting from faulty installation of the roof and EIFS system and/or faulty design. Consequently, the EIFS and roof were removed and replaced, and the rot damage repaired.

Schloss’ policy excluded "wear and tear, marring, deterioration, inherent vice, latent defect, mechanical breakdown, rust, mold, wet or dry rot..." The policy also stated that "any ensuing loss not excluded is covered." Schloss argued that the loss was not a loss caused by rot, but was itself the rot. He also noted that the policy did not exclude water damage and the "rot" was just a form of water damage.

In finding Schloss’ arguments to be unpersuasive, the court stated that the ensuing loss clause means that if a specified uncovered loss occurs then a separate loss which follows as a result of the specified, uncovered loss which would otherwise be covered remains covered. The removal and replacement of the roof and the EFIS systems, to repair rotted wood studs and prevent future rot, was not a covered "ensuing loss" because the policy excluded loss caused by rot. The court rejected the insured’s argument that the loss was not caused by rot, but was rot. The court also rejected the argument that the rot was just a form of water damage.[7]

Similarly, in Laquila Const., Inc. v. Traveler’s Indem. Co., the insured contracted to provide concrete of a certain minimum strength for construction of a new building.[8] During the project it was determined the concrete was below required strength, halting all further construction. Some of the work already completed had to be removed and later reinstalled in order to remove and replace the defective concrete slab.

The Laquila court analyzed the following builder’s risk policy exclusion:

        1.     PERILS EXCLUDED

. . .

(b) Cost of making good faulty or defective workmanship or material, but this exclusion shall not apply to physical damage resulting from such faulty or defective workmanship or material.

In Laquila, the insured made a claim for the cost of repairing the fifth floor slab and the costs of shoring the height of the building while the corrective work took place. The insurer denied coverage based upon the exclusion quoted above, and the insured sued. The insured argued that notwithstanding the faulty workmanship exclusion, the resulting loss provision extended coverage to pay for the removal and reinstallation of the other building materials. The insured argued that "‘the installation of concrete that proved defective ... physically damaged the insured property (the structural slab and/or the building as a whole) because it was physically incorporated into the larger entity and could only be removed at a cost.’"[9] The court disagreed, finding the mere removal of the defective concrete slab did not constitute physical loss or damage to covered property. Since the defective concrete had caused no damage to any other portion of the structure, other persons, or property, there was no ensuing loss for purposes of the exception to the exclusion. The court noted that had the concrete slab collapsed and damaged machinery, plumbing, and electrical fixtures, such losses, wholly separate from the defective materials themselves, would qualify as non-excluded ensuing losses under the policy. That, however, did not occur. Rather, the claim was nothing more than an attempt to improperly recover the excluded costs of making the insured’s faulty or defective workmanship sound, pursuant to the building contract.

In its decision ruling in favor of the insurer’s motion for summary judgment, the court advised:

[T]he exception to an exclusion should not be read so broadly that the rule -- the exclusion clause -- is swallowed by the exception -- here, the exception for ensuing loss.[10]

Another historically significant case addressing ensuing loss is Allianz Ins. Co. v. Impero.[11] The Allianz policy in Impero excluded:

Cost of making good faulty or defective workmanship, material, construction or design, but this exclusion shall not apply to the damage resulting from such faulty or defective workmanship, material, construction or design...[12]

In the Impero case, the insured sought to recover the costs it incurred to make repairs after a subcontractor failed to follow specifications in pouring the concrete for concrete walls which resulted in voids in the walls. The defective concrete in the walls did not cause any damage to any other part of the structure or property. The court declared:

Had the wall, as a result of the deficiencies in the concrete, collapsed and caused damage to some other portion of the work, or to equipment of a subcontractor or some similar thing, we would have a different case. However, when a contractor assumes the obligation of completing a structure in accordance with plans and specifications and fails to perform properly, he cannot recover under the all-risk policy for the cost of making good his faulty work. Clearly, such a result is not contemplated by the policy and is clearly within the exclusion referred to above. I do not believe any reasonable person could read it otherwise.[13]

Similarly, the case of Vermont Elec. Power Co. v. Hartford Steam Boiler Inspection and Ins. Co. involved damage to the insured’s transformers from a faulty design.[14] The subject policy had an exception for faulty design. As such, the insured attempted to state the design defect was the loss itself, and that the actual damage to the transformers was an ensuing loss. The court rejected this argument explaining as follows:

This case presents precisely the type of situation in which the loss is directly related to the original excluded risk. Characterizing the damage to the transformers as an ensuing loss would supercede Continental’s exception for losses caused by design defect. As Continental’s policy unambiguously excludes coverage for such losses, Continental’s motion for summary judgment is granted.[15]

Continuing the examination of significant ensuing loss cases, the case of Alton Ochsner Medical Foundation v. Allendale Mut. Ins. Co. involved an all-risk policy of property insurance whereby the insured filed a declaratory judgment action against its insurer for indemnification of costs arising out of the need to repair cracks in the foundation of a building under construction.[16] The building was planned to be fifteen stories tall, but the initial construction involved only five stories. Prior to the completion of the first phase, the insured’s general contractor advised the insured that the caps on three of the pre-cast concrete piles were cracking. Investigation disclosed nine of the caps were cracking, but the damage did not present any major structural problems. The cracks were repaired with epoxy and the first five floors were completed. Two years later, the insured discovered additional cracking and hired another engineering firm to investigate. It also notified its insurer, Allendale, for the first time. The expert report stated the cracking was more severe than previously observed and the ability of the pile caps to hold the weight of the rest of the structure was compromised.

The insurer investigated the claim and reviewed the expert reports and denied coverage based on the exclusions for faulty workmanship and cracking. The insured sought a declaratory judgment and indemnification. The engineering firm subsequently returned to the structure and observed new cracks in ten previously uncracked pile caps and widening of the cracks in the original cracked caps. It concluded the construction of the remaining floors of the building would present significant risks.

The insurer filed a motion for summary judgment on the grounds that, among others, the exclusion for "faulty workmanship, material, construction, or design from any cause, unless physical damage not excluded by this policy results..." applied. The insured argued the damage should be covered because that portion of the exclusion which stated "‘unless physical damage not excluded by the Policy results,’" was an exception to the exclusion and the engineers’ finding that the more extensive cracking constituted "‘resulting physical damage’" which would be excluded. In response, the insurer interpreted the "unless" clause to require the damage be "‘distinct and separable’" from the excluded damage. The court agreed with Allendale’s interpretation and ruled in its favor, concluding the impairment of the building’s structural integrity was not the result of faulty workmanship or cracking, but the cracking itself constituted the impairment.

The insured also argued the "major" cracking was "resulting damage" from the "minor" cracking and therefore covered. The Court held, however:

To fall back within coverage as "resulting physical damage," the policy contemplates damage that is different in kind, not merely different in degree. ...[W]e conclude that direct harm from cracking or faulty design or construction is excluded (no matter how severe it is) "unless physical damage not excluded by this Policy results," that is, unless damage of a different kind – a kind that is not excluded – results. (Emphasis in original.)

Another one of the frequently cited cases concerning ensuing loss is Acme Galvanizing Co. v. Fireman’s Fund Ins. Co.[17] In that case, an ensuing loss provision in an all-risk policy was interpreted "to apply to the situation where there is ‘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." (emphasis in original). In Acme, a steel kettle at Acme’s plant ruptured, allowing several tons of molten zinc to spill onto the surrounding equipment, destroying it. The insurer denied coverage on the grounds the loss was not caused by an external cause, but rather a latent defect or inherent vice and was, thus, excluded from coverage.

Through inspection it was determined that the kettle failure was due to poor welding techniques. Acme argued that even if the damage to the kettle was not covered, the discharge of molten zinc damaging the surrounding equipment was an "ensuing loss" not excluded from coverage. The court rejected Acme’s argument, stating:

Here, there was no peril separate from and in addition to the initial excluded peril of welding failure and kettle rupture. The spillage of molten zinc was part of the loss directly caused by such peril, not a new hazard or phenomenon. If the molten zinc had ignited a fire or caused an explosion which destroyed the plant, then the fire or explosion would have been a new covered peril with the ensuing loss covered. That did not occur.

Also, in the case of Holden v. Connex-Metalna, the court permitted the ensuing loss exception to an exclusion for machinery breakdown and faulty workmanship to afford coverage, and denied the carrier’s motion for summary judgment.[18] The facts underlying the claim indicate the insured’s crane toppled into the Mississippi River during overload testing. The insured sought to recover under its property policy for the cost of purchasing a replacement crane, repairing damage to its dock, leasing a temporary replacement crane, purchasing accessories for the replacement crane, removing debris from the river and dock, etc. The insurers denied coverage, and both sides sought summary judgment in connection with the litigation that ensued. The exclusions at issue both included an exception which stated: "unless loss not otherwise excluded hereunder ensues and then only for loss or damage caused by the ensuing loss."[19]

In granting summary judgment in favor of the insured, the court, relying on Lake Charles, supra, set forth the following analysis:

The exclusions at issue here are designed to ensure that the property insurers do not become warrantors of the crane’s quality. As such, the property policies do not cover worn or broken parts, pay for repairs when a mechanical system or process breaks down, or fix a design problem. In this case, to the extent that there was a flaw or defect in the quality of the crane it would have been that the boom and trolley were significantly heavier than intended in the design of the unloader. Thus had it remained standing, any of the exclusions if applicable, would have barred from coverage any costs to rebalance or redesign the crane. However, in this case, the unbalance triggered a series of ensuing events that lead to the complete destruction of the crane and other property. . . . All damages caused by the falling crane, including the total loss of the crane itself are excepted under the "ensuing loss" proviso.[20]

The Holden court’s discussion of ensuing loss decisions in the Fifth Circuit is instructive. It stated:

Thus, in attempting to glean the meaning of "ensuing loss" in this Circuit, the Court uses the following precepts. First, the damage that falls under the exclusion and the ensuing damage must be separable events in that the damage and the ensuing loss must be different in kind, not just degree. Second, the mere fact that an excluded act or event is the "but for" cause of the ensuing loss does not necessarily preclude coverage for the ensuing loss. Third, catastrophic damages to a machine caused by its own mechanical breakdown may be considered "ensuing loss". Finally, courts distinguish between damages arising from faulty workmanship during the construction process itself, and damages primarily caused by events extraneous to the construction process. [21]

With this historical background, we now turn and look at specific homeowner "ensuing loss" cases.

V.     Latest Judicial Decisions on the Homeowner’s "Ensuing Loss" Provision

A number of courts around the country have considered whether mold is covered under the typical property policy, with different results. One difficulty in analyzing case law which has addressed coverage for mold is that many of the reported decisions have not been released for publication. While not binding in most situations, they are instructive of how courts have approached the issue.

        1.     Cases Finding No Coverage

Some courts have applied the mold exclusion to bar coverage even if the mold were caused by a covered cause of loss. For example, in Cooper v . American Family Mut. Ins. Co., the Plaintiff made a claim for damage to dry wall and flooring in the master bedroom and hall closet that resulted from a plumbing leak.[22] The Insurer paid the Plaintiff for repairs to the drywall and flooring, but denied coverage for damage caused by mold. The Plaintiff filed suit claiming that the Insurer’s failure to pay for mold remediation was a breach of the contract as the leak also caused mold damage in her residence. The policy provided:

We do not cover loss to the property described in Coverage A--Dwelling and Dwelling Extension resulting directly or indirectly from or caused by one or more of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.

. . .

6. Other Causes of Loss:

. . .

c. smog, rust, corrosion, frost, condensation, mold, wet or dry rot ...

However, we do cover any resulting loss to property described in Coverage A-- Dwelling and Dwelling Extension from items 2 through 8 above, not excluded or excepted in this Policy. (emphasis added)

The Plaintiff claimed that because water damage was a covered loss, under the "efficient proximate cause" rule, the resulting mold from the introduction of water is also covered. As such, Plaintiff contended the insurer was liable for the mold remediation as well as the damage to personal property due to the mold growth and additional living expenses incurred during the mold remediation period. The insurer argued the Plaintiff's alleged damages were caused by mold, and because the policy excludes coverage for mold regardless of the cause, Plaintiff's claim was properly denied.

The Court rejected Plaintiff’s claim and rested its decision on the anti-concurrent causation language preceding the mold exclusion. Under that language, a loss caused by mold, wet or dry rot was excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. The Plaintiff then argued that the costs of mold remediation were covered because they were required to prevent the damage caused by the release of mycotoxins, biological contaminants released by mold. The Plaintiff asserted these were a separate and independent loss resulting from mold, an ensuing loss which was not excluded or excepted in the policy. In rejecting this claim, the Court found that the toxins were produced and released by the mold. Under the circumstances, removal of the mold would also remove the mycotoxins. As such, the mycotoxins did not constitute a separate and independent loss resulting from mold.

The decision in Cooper is based on the fact the mold exclusion contained anti-concurrent causation language which barred coverage for mold whether such damage resulted directly or indirectly or whether any other cause or event contributed concurrently or in any sequence to the loss. Therefore, there was no coverage for loss caused by mold regardless of what caused it. Likewise, in Dahlke v. Home Owners Insurance Company, the court relied on the anti-concurrent causation language to exclude coverage for mold even though the mold was caused by a covered peril.[23]

In Dahlke, melting ice and snow on the insureds’ roof leaked into the house causing the ceiling to collapse and water damage to the walls. The leakage also caused mold growth throughout the house. The insurer paid for repairs to the collapsed roof and damaged walls, as well as some mold remediation efforts involving the application of a mildicide. The insured denied coverage for any additional mold remediation work. The court upheld the denial of coverage for the mold contamination citing to the anti-concurrent causation language which stated that mold was excluded as a cause of loss whether or not any other cause contributes in any way to the loss. Because of this language, the mold was excluded regardless of the fact that covered water damage contributed to the growth of the mold.

A similar result was reached by the U.S. District Court in Fiess, et al. v. The Insurer Lloyds.[24] In Fiess, Plaintiffs’ home sustained flooding and other damage as the result of Tropical Storm Allison. The Plaintiffs made a claim under their flood policy, but then discovered black mold growing throughout the residence. The Plaintiffs then filed a claim under their homeowners policy. The plaintiffs argued that at least some of the mold resulted from water leaks unrelated to the flood damage.

The Insurer argued that regardless of the cause of the mold (flood waters which is an excluded cause of loss or leaks unrelated to the flood which may be a covered cause of loss), the Plaintiffs' claim for mold damage was expressly excluded from coverage under the policy. The Plaintiffs, responded that the mold damage was covered as an "ensuing loss" under the policy and, therefore, the policy’s mold exclusion was not operative. The policy provided:

f. We [The Insurer] do not cover loss caused by:

(1) wear and tear, deterioration or loss caused by any quality in property that causes it to damage or destroy itself.

(2) rust, rot, mold or other fungi.

(3) dampness of atmosphere, extremes of temperature.

(4) contamination.

(5) rats, mice, termites, moths or other insects.

We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under the Policy.

. . .

i. We do not cover loss caused by or resulting from flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of these whether or not driven by wind.

The District Court rejected the claim that the ensuing loss provision extended coverage for mold. The Court held that for coverage to be restored via the ensuing loss clause, an otherwise covered loss must result or ensue from the excluded loss. Here, even if the Plaintiffs could have established that the water loss was caused by covered leakage rather than excluded flood, the damage that followed the water loss was mold, an excluded cause of loss.

Other cases which have found a lack of coverage for mold have based their decisions on the fact the mold did not result from a covered cause of loss. For example, in Myers v. State Farm, the insureds discovered mold several months after they remodeled their kitchen.[25] Eventually, it was discovered that the mold was caused by defective plumbing and a defectively built crawl space. The court upheld State Farm’s denial of coverage noting that the policy expressly excluded damages caused by the continuous or repeated leakage or seepage of water from a plumbing system, as well as damages caused by mold, fungus or wet or dry rot. Additionally, the policy also excluded damages caused by defective construction. The insureds then argued that the ensuing loss exception "resurrected" coverage. The court also rejected this argument because the ensuing loss was not otherwise covered under the policy.

A more typical homeowner’s claim for mold can be found in Garza v. Allstate Texas Lloyds.[26] In Garza, the insured claimed mold damage resulting from long term water infiltration through a decaying roof. Ostensibly, the Garza policy did not contain a mold exclusion, but it did contain a wear and tear exclusion applicable to the loss:

        f.     We do not cover loss caused by:

(1)     wear and tear, deterioration or loss caused by any quality in property that causes it to damage or destroy itself

. . .

(3) dampness of atmosphere, extremes of temperature.

Under this policy language, the Garza court found that "mold damage resulting from water leaks resulting from gradual roof deterioration is not a loss ensuing fra covered event." In order to support its decision, the Garza court cites to yet another Texas federal court decision with similar facts entitled Hood v. State Farm Lloyds:[27]

[The plaintiff] cannot argue that the deteriorated roof caused the leaks, and the leaks are "water damage" that caused the mold. Mold almost always develops from some kind of water problem, but water problems are not always water damage. Traditional water damage is caused by severe storms, a bursting pipe, or broken glass that lets water inside the house. Mold is not an ensuing loss from water damage just because it is caused by water. In this case, a bad roof -not water damage- caused the mold.

In Factory Mutual v. Estate of James Campbell, the court found no coverage for resulting mold because the mold was not caused by a covered cause of loss.[28] In that case, construction defects allowed water to periodically enter the building over a period of several years. The court observed that California follows the efficient proximate cause doctrine which provides that when two independent perils interact to cause a loss, insurance coverage is determined by looking to see if the proximate cause of the loss is covered. In Campbell, however, the construction defects were the efficient proximate cause of the loss. Because the construction defects were not covered, the resulting mold damage was also not covered.

        2.     Cases Finding Coverage

Most cases finding coverage for mold contamination involve situations where the mold was caused by a covered cause of loss. Nevertheless, there is some language in at least one case which seems to support the distinction between loss caused by mold and loss consisting of mold.[29] That distinction, however, is not the basis of the Liristis court’s coverage decision because the court still questions whether the mold was caused by a covered cause of loss.

In Liristis, the Plaintiffs suffered a house fire resulting in damage including water damage from the water used to put out the fire. The insurer paid for necessary repairs. Within a month or two after the file, the Plaintiffs claimed they noticed mold growth in the home. The Plaintiffs reported allergic reactions and respiratory and other unexplained illnesses.

The source of the mold was either the water used to put out the fire, or continuing roof leaks which the Plaintiffs were unable to fix despite repeated attempts. Two years after the fire, the Plaintiffs submitted a mold claim. The Plaintiffs claimed the mold was the result of the water used to extinguish the fire. The Insurer contended that mold damage was excluded under the losses-not-covered provisions of the policy, regardless of its cause. The Plaintiffs countered that there was a distinction between mold which is the loss or damage as opposed to loss which is caused by mold. Stated another way, similar to the argument advanced by the Church, the Plaintiffs argued that the loss to the property was not caused by mold; rather, it was mold, and thus the losses-not-covered provisions did not apply. The trial court entered summary judgment in favor of the insurer. On appeal, the Court reversed.

The policy provided:

We do not cover loss to the property ... resulting directly or indirectly from or caused by one or more of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.

. . .

6. Other Causes of Loss:

. . .

c. smog, rust, corrosion, frost, condensation, mold, wet or dry rot;

On the face of the opinion, the Court accepted the Plaintiffs’ distinction between loss caused by mold and loss consisting of mold. Specifically, the Court stated as follows:

We agree that mold may be either damage or a cause of loss, depending on the circumstances...On the other hand, losses caused by mold may be excluded.

Notably, the court also stated the following between the two sentences quoted above:

For the reasons that follow, we hold that mold damage caused by a covered event is covered under the American Family policy in this case.

(Emphasis supplied). Clearly, the court found the possibility of coverage for mold because it resulted from a covered cause of loss, not because the mold did not cause the loss. Because the mold may have resulted from the fire, then the cost of removing it was not a loss separate from or caused by the mold itself, but was simply the implementation of coverage for mold damage caused by a covered event. Therefore, the exclusion for loss caused by mold would not apply. Because there was a factual issue as to the cause of the mold, the summary judgment was reversed and the case was remanded for further proceedings.

In Kelly v. Farmers Ins. Co., Inc., the court rejected the distinction between mold as the "loss" and mold as the "cause of loss," but also found that the mold contamination was covered because the efficient proximate cause of the loss was a covered peril.[30] In Kelly, the homeowners made a claim for damaged resulting from a water pipe which burst because of freezing. The insurer paid for repairs, including several mold remediation-related tasks, the completion of which were deemed necessary to adequately repair the water damage and prevent the spread of the mold. Soon afterward the homeowners complained of health problems and subsequent testing revealed that the home was infested with mold. The Insurer denied the claim for mold-remediation coverage pursuant to the mold-exclusion provision in the policy.

The policy language excluded "loss either consisting of, or caused directly or indirectly by: ... mold." The insurer argued that the language operated to completely eliminate all potential liability for mold-related loss, regardless of what caused the mold. The Plaintiffs asserted that the efficient proximate cause doctrine still applied and that the relevant inquiry was whether the property loss was proximately caused by a covered peril. The Court held that Oklahoma had adopted the efficient proximate cause doctrine which it defined as follows:

The efficient proximate cause doctrine applies only when two or more identifiable causes, at least one of which is covered under the policy and at least one of which is excluded, contribute to a single property loss.

Under this doctrine, if the proximate cause of the loss is covered, the resulting mold is covered. The court rejected the insurer’s contention that its "anti-concurrent" causation language effectively eliminated the efficient proximate cause doctrine. The insurer then tried to draw a distinction between an excluded cause of loss and an excluded loss, arguing that the efficient proximate cause doctrine only applies where there are two causes of loss. In other words, the insurer argued that mold was not an excluded cause of loss, but merely an excluded loss, so the efficient proximate cause doctrine should not apply. The court rejected this argument as well noting that the insurer’s argument was premised on a mis-characterization of mold as a "loss" as opposed to a "cause." The Court found that the words "consisting of" within the exclusion appear to imply that mold could constitute a loss in and of itself. The words "caused directly or indirectly by" clearly reflected a contractual designation of mold as an independent cause. In addition, the policy explicitly identified mold as a "peril." The Court then defined the word "loss" as "[t]he amount of financial detriment caused by ... an insured property's damage, for which the Insurer becomes liable."[31] The Court held that "both common sense and the dictionary definition of the word "loss" dictate that there must be some financial detriment in order for a loss to exist. To that extent, then, mold is always a "cause" of a loss, even if the corresponding financial detriment consists solely of mold-related property damage." Nevertheless, even though the court found that the mold was a "cause" of loss, the mold was covered because it was caused by a covered peril.

A covered water loss is not always the cause of mold contamination. In Bowers v. Farmers Insurance Exchange, the court found coverage from mold contamination caused by a tenant’s vandalism.[32] In that case, the tenant converted a portion of the insured’s basement into an marijuana growing operation. This caused elevated levels of moisture causing mold damage throughout the house. Farmers denied coverage based on the mold exclusion. The appellate court held there was coverage because the tenant’s conduct in creating a sauna like environment in the basement amounted to an act of vandalism, a covered loss under the policy. Therefore, the efficient proximate cause of the damage was vandalism, so the resulting mold damage was also covered.

VI.     Conclusion

Although there is significant interplay with efficient proximate cause argument the ensuing loss provision is distinct. There are two trains of thought as to how it applies. One theory treats the loss as a separate and independent peril, and the other treats it as requiring loss to other properties. In any event these issues will be litigated for some time.

ENDNOTES

1Merriam Webster Online Dictionary, Merriam-Webster, http://www.m-w.com/dictionary/ensuing (March 1, 2006).

2See generally, Employers Casualty Company v. Holm, 393 SW 2d 363 (Tx. Ct. App. 1965); and (an unpublished Texas decision).

3 Acme Galvanizing Co., Inc., v. Fireman’s Fund Ins. Co., 221 Cal.App.3d 170 (1990).

4 845 So.2d 161, (Fla. 2003).

5 Swire Pacific Holdings Inc. v. Zurich Insurance Co., 284 F.3d 1228, (11th Cir.(Fla.) 2002).

6 54 F.Supp.2d 1090 (M.D.Ala.1999).

7 There a number of cases which have ruled contrary to Schloss and characterized rot as "water damage" or otherwise found that simple "water damage" was not excluded as a construction defect. For example, Phillips v. USAA, 2004 WL 578604 (Tenn.Ct.App. Mar 24, 2004)(rot and mold that formed under defectively installed EFIS was covered as water damage); Blaine Const. Corp. v. Insurance Co. of North America, 171 F.3d 343, (6th Cir. Tenn. 1999)(damage caused defectively installed vapor barrier which resulted in water accumulation with the ceiling of the structure was covered). Employers Casualty Company v. Holm, 393 SW 2d 363 (Tx. Ct. App. 1965), (rot damage from leaking shower pan covered as water damage notwithstanding exclusions for deterioration, rot and inherent vice). Likewise, there are cases which have followed the reasoning in Schloss and drawn a distinction between water damage and rot. For example, Aetna Casualty & Surety Co. v. Yates, 344 F.2d 939 (5th Cir.1965)(inadequate venting caused joists, sills and sub-flooring to rot away, but not covered as "water damage" because all rot begins as water damage; such an interpretation would render the rot exclusion practically meaningless); Ames Privilege Associates Ltd. Partnership v. Utica Mut. Ins. Co., 742 F.Supp. 704 (D.Mass. May 24, 1990)(rejected a claim that rot damage to an apartment building was an ensuing water loss).

8 66 F. Supp. 2d 543 (S.D. N.Y. 1999).

9 Id. at 545 (emphasis in original).

10 Id. at 545 (citation omitted).

11 654 F. Supp. 16 (E.D. Wash. 1986).

12 Id. at 17.

13 Id. at 18.

14 72 F. Supp. 2d 441 (D. Vt. 1999).

15 Id. at 445.

16 219 F.3d 501 (5th Cir. 2000).

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Key Points