The Pennsylvania Supreme Court held that the insureds' negligence claim survived because it was not based upon breach of a duty created by the policy, but upon the alleged breach of a duty imposed by tort law. Bruno v. Erie Ins. Co,, 2014 Pa. LEXIS 3319 (Dec. 15, 2014).
After purchasing their home, the insureds obtained a homeowner's policy from Erie. A separate endorsement covered loss to the property caused by "fungi," which was included as any form of mold. The endorsement obligated Erie to pay up to $5,000 for loss caused by mold. The policy required Erie to pay the cost of testing the air to confirm the absence or presence of mold. If mold was present, Erie was to pay for the cost of removal, including the cost of tearing out any part of the property needed to gain access to the mold.
While renovating the basement, the insureds discovered two areas of black mold in close proximity to leaking water pipes. Erie was notified and sent an adjuster to view the mold. The adjuster took no action, but returned a couple of days later with an engineer. The adjuster and engineer informed the insureds that the mold was harmless and that health problems associated with mold were a media frenzy and overblown.
Based on these assurances, the insureds continued to live in the house and renovate. Additional areas of mold were found in the basement. The engineer returned and inspected the newly-discovered areas of mold and performed testing. He did not disclose the results to the insureds. Nor did the adjuster apprise the insureds of the true hazard to human health imposed by the mold, or indicate that it should be removed or remediated.
Thereafter, each member of the insureds' family began to suffer respiratory ailments which worsened over the succeeding months. The insureds had the mold tested, at their own expense, which revealed that the mold was toxic in nature and hazardous to human health.
The insureds demanded the full $5,000 payment for eradicating the mold. Erie informed the insureds that the matter was still being investigated. Finally, Erie made the $5,000 payment. The insured wife was subsequently diagnosed with cancer of the throat and esophagus, which her doctors attributed to her exposure to the toxic mold. Fearing for their safety, the insureds moved out of the house which was eventually demolished because the mold could not be eradicated.
The insureds sued, claiming, among other things, that Erie had been negligent in failing to recognize the severity of the mold problem and had misled the insureds about the mold problem in general and as it related to their health. Erie filed a demurrer claiming that the negligence claim was barred by the "gist of the action" doctrine. This doctrine provided that an alleged tort claim against a party to a contract, based on the party's actions undertaken in the course of carrying out the contract, is barred when the gist of the cause of action, although sounding in tort, is, in actuality, a claim against the party for breach of its contractual obligations. (The "gist of the action" doctrine appears to be similar to the economic loss doctrine utilized by Hawaii courts. See, e.g. Kawamata Farms v. United Agri. Prods, 86 Haw. 214, 948 P.2d 1055 (1997)).The trial court agreed and dismissed the negligence claim against Erie.
On an interlocutory appeal, the Superior Court affirmed.
The Supreme Court reversed. The insureds' negligence claim was not based on Erie's violation of any contractual commitments. The insureds did not allege that Erie failed to pay the $5,000 it was obliged to pay for the costs of testing and remediation of damage, and, in fact, Erie did eventually pay the $5,000. Instead, the claim was predicated on the allegedly negligent actions taken by Erie's agents on its behalf while they were performing Erie's contractual obligations to investigate the claim made by the insureds. While performing these obligations, Erie, through its agents, acted negligently by making false assurances regarding the toxicity of the mold and recommending to the insureds that they continue their renovation efforts, which caused them to suffer physical harm because of the reasonable reliance on those assurances.
Consequently, the negligence allegations concerned Erie's alleged breach of a general social duty, not a breach of any duty created by the policy itself. The order of the Superior Court was therefore reversed.