Insurance Law Hawaii

SIR Relieving Insurer of Obligations After Insured's Bankruptcy Violates Public Policy

   A self-insured retention provision that excused the insurer from providing excess coverage if the insured was bankrupt and unable to meet the SIR violated public policy in Rhode Island. Rosciti v. The Ins. Co. of the State of Pennsylvania, 2011 U.S. App. LEXIS 20400 (1st Cir. Oct. 7, 2011).

   The Roscitis purchased a mobile home manufactured by Monaco. The mobile home was defective and suffered from water leakage. This led to toxic mold, which rendered the home uninhabitable.

   The Roscitis sued Monaco for negligence, breach of warranty, and strict products liability. Monaco filed for bankruptcy. The Roscitis then amended their complaint to add Monaco's insurers, including The Insurance Company of the State of Pennsylvania (ICSOP), as defendants under Rhode Island's direct action statute. This statute allowed a direct action against the alleged tortfeasor's insurer when the tortfeasor filed for bankruptcy.

   Monaco's policy with ICSOP provided coverage for claims above $500,000. Monaco was self-insured for liability up to a retained limit of $500,000. The policy's Retained Limit Provision stated ICSOP's duty to indemnify arose only after "a complete expenditure of the insured's retained limit by means of payments for judgments, settlements, or defense costs." The Bankruptcy Provision of the policy provided the insured's bankruptcy would not relieve ICSOP from payment of any claim covered by the policy. The provision further stated,

But under no circumstanaces shall such bankruptcy, insolvency, or inability to pay require [ICSOP] to drop down or in any way replace [Monaco's] retained limit or assume any obligation associated with [Monaco's] retained limit.

  The District Court granted summary judgment to ICSOP because Monaco had not exhausted the retained limit, thereby triggering excess coverage.

   The First Circuit initially held there was no inherent conflict or ambiguity between the Retained Limit Provision and the Bankruptcy Provision. Rather, the Bankruptcy Provision was subject to the limitations in the Retained Limit Provision. ICSOP was liable above the retained limit if Monaco was bankrupt, but only after Monaco exhausted the retained limit.

   However, the court determined the Retained Limit Provision violated public policy because it nullified rights under the direct action statute. Rhode Island's public policy was to prevent insurance companies from avoiding their obligations when an insolvent insured was unable to make payment to discharge its liability. If the Retained Limit Provision was enforced, it would allow ICSOP to avoid its obligations thanks to Monaco's bankruptcy, a result contrary to public policy.

Exclusion Precludes Argument under Efficient Proximate Cause Doctrine

   The court determined there was no coverage for water intrusion based upon a comprehensive Exterior Insulation and Finish Systems (EIFS) Exclusion. Nat'l Am. Ins. Co. v. Gerlicher Co., LLC, 2011 Okla. Civ. App. LEXIS 79 (Okla. Ct. App. Aug. 29, 2011).

   Gerlicher purchased a commercial building constructed by general contractor Pinion Construction, Inc. Gerlicher then leased the building to the United States Fish & Wildlife Service. Subsequently, the Fish and Wildlife Service noted water intrusion, high humidity, and mold in the building.

   An expert report suggested three sources. First, water was trapped between two vinyl wall barriers, preventing evaporation. Second, a brick row ledge sloped towards the wall instead of away from the wall system. Third, the EIFS system at the windows had deteriorated caulking and holes along the wall system, allowing moisture to enter.

   Gerlicher sued Pinion for breach of implied warranty and negligence. National American agreed to defend Pinion under a reservation of rights and then sued Gerlicher for a declaratory judgment. The trial court granted National American's motion for summary judgment.

   The appellate court found the EIFS exclusion was determinative. It clearly excluded "coverage for damages that arise out of any work that you do . . . related to an EIFS system . . . . This includes any damage to a building or structure caused by the intrusion of water or moisture through an EIFS system . . . ." Consequently, the damages alleged by Gerlicher were excluded under this provision.

   Nevertheless, Gerlicher argued the "efficient proximate cause" doctrine prevented summary judgment. The doctrine applied when at least two identifiable caused combined to form a single property loss, and one was covered under the policy while the other one was excluded under the policy. If the cause which was determined to have set the chain of events in motion, the efficient proximate cause, was covered under the policy, the loss would likewise be covered.

   Here, however, the exclusion barred application of the efficient proximate cause doctrine. The only reasonable construction of the exclusion was that when more than one cause was involved in a loss that included EIFS, whether directly or indirectly, there was no coverage regardless of whether the causes acted concurrently or in any combination with EIFS.

Texas Law Bars Coverge Under Homeowner's Policy for Mold Damage

   Although the insurer paid for some of the mold damage at the insured's home, the Fifth Circuit eventually determined the homeowner's policy did not cover such damage. Rooters v. State Farm Lloyds, 2011 U.S. App. LEXIS 12306 (5th Cir. June 15, 2011).

   The policy excluded loss caused by hail to personal property unless the direct force of wind or hail made an opening in the roof allowing rain to enter. Further, the policy excluded loss caused by mold or other fungi.

   In 1999, hail and rain caused water damage to the roof and interior of the residence. State Farm paid $19,000 to repair the roof. Another $1,800 was paid for repairs to the interior of the building. In 2002, the insured noticed black mold. State Farm issued an additional check for $4,402 for mold abatement.

   In 2003, the insured had an environmental assessment performed. More black mold, as well as other types of mold, were discovered. State Farm again made payments. In sum, State Farm paid a total of $93,000 for mold and other damage.

   The insured eventually filed suit, claiming breach of contract and seeking coverage for additional loss caused by mold. The trial court granted summary judgment to State Farm.

   On appeal, the insured argued the mold exclusion did not bar coverage. The mold was allegedly instigated by the water damage and water damage was covered by the policy. Therefore, the mold contamination should also be covered.

   The court noted a similar argument was made in Fiess v. State Farm Lloyds, 202 S.W. 3d 744 (Tex. 2006). There, the Texas Supreme Court held that the policy did not cover mold damage. Because mold-related losses were explicitly barred by the mold exclusion, the "ensuing loss" for the water damage clause could not create coverage for mold stemming from roof and window leaks even though the mold damage arose in part because of water damage.

   Therefore, the insured here could not argue the mold contamination was caused by water damage, a covered claim, thereby making the mold contamination a covered claim as well.

Mold Damage to Personal Property Covered

   Although the insurer contended the Texas Supreme Court had previously decided that mold was never covered under a homeowner's policy, the Court found coverage for mold damage to personal property in State Farm Lloyds v. Page, 2010 Tex. LEXIS 415 (Tex. June 22, 2010).

   The insured discovered mold and water damage to her home and to some of her personal property.  She filed a claim with State Farm pursuant to her homeowner's policy.  Leaks were found in the plumbing system and sanitary sewer lines.  Although State Farm covered the costs of some repair and remediation, a dispute arose over amounts needed to fully repair the home and its contents.  The insured eventually sued.

   The policy covered the dwelling from all risks of physical loss described in the policy unless excluded.  Similarly, physical loss to personal property was covered if caused by a listed peril and not excluded.  Accidental discharge or leaking of water from a plumbing system was a listed peril for both the dwelling and personal property sections of the policy.  But loss caused by mold was excluded from coverage of the dwelling.  On the other hand, the mold exclusion did not apply to the personal property section of the policy.

   State Farm argued that Fiess v. State Farm Lloyds, 202 S.W. 3d 744 (Tex. 2006) was controlling, and the trial court agreed.  In Fiess, Tropical Storm Allison caused flood damage to the home.  The flooding caused some mold contamination, but most of the mold was caused by leaks from the roof, plumbing and air conditioning.  The Texas Supreme Court determined the ensuing loss provision reinstated coverage only as to losses caused by an intervening cause (like water damage) that in turn followed from an exclusion.  Therefore, the ensuing loss provision did not reinstate coverage for otherwise excluded mold damage.  But the court also noted that the insureds in Fiess did not appeal whether personal property was covered for mold damage resulting from plumbing leaks.  

   Here, as in Fiess, the policy clearly clearly excluded mold coverage for the dwelling.  The mold exclusion, however, was expressly removed and not applicable to the personal property section of the policy that covered plumbing leaks.  Therefore, the insured's claims for mold damage to her personal property resulting from plumbing leaks was covered under the homeowner's policy.

Mold Remediation Excluded Based on Anti-Concurrent Causation Clause

   In Builders' Mutual Ins. Co. v. Glascarr Prop., Inc., No. COA09-486, 2010 N.C. App. LEXIS 186, (N.C. Ct. App. Feb. 2, 2010), the court found no coverage for loss caused by mold because of the anti-concurrent causation clause.  Whether reliance on the anti-concurrent causation clause was correct is difficult to determine from the facts set forth in the decision.

   The insured purchased a builders' risk policy.  After completing construction of a house, vandals broke in and left water taps running, causing extensive damage.  After a claim for $102,161.44 was submitted for losses arising from the vandalism, the insurer paid $101,661.44.

   The insured later discovered mold in the house, caused by the water damage.  An additional claim for $39,000 for mold remediation was submitted.  This claim was denied based on the exclusion for losses caused by mold.

   The parties agreed the policy covered losses from water damage caused by vandalism.  The parties disagreed, however, on whether the policy covered reimbursement for the cost of mold remediation.  The insured sued, but the trial court found no coverage. 

   On appeal, the court considered the policy's the anti-concurrent causation clause:

We will not pay for a "loss" caused directly or indirectly by any of the following.  Such "loss" is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the "loss".

.  .  .

  f.  The presence, growth, proliferation, spread, or any activity of "Fungi", wet or dry rot or "microbes."

   The court determined this clause unequivocally excluded payment for losses "caused directly in indirectly by" mold, and the exclusion applied "regardless of any other cause or event that contributed concurrently or in any sequence to the 'loss.'"  Therefore, payment of a claim for the cost of mold remediation was excluded. 

   Should the anti-concurrent causation clause have been applied?  The opinion notes that, "the water damage led to the formation of the mold."  Further, "vandalism caused water damage, which in turn, caused the formation of the mold."  Finally, the mold was discovered "later."

   Typically, the anti-concurrent causation clause involves two different forces contributing to the exact same damage.  If two or more forces cause different, distinct, and divisible damage, only single causation exits and the anti-concurrent causation clause does not come into play.  If water damage "led to" formation of the mold and the mold damage was discovered "later," it does not seem likely the damage was exactly the same.

   Some cases have held that mold loss following water damage is covered despite the exclusion for mold.  See The Home Ins. Co. v. McClain, 2000 Tex. App. LEXIS 969 (Tex. Ct. App. Feb. 10, 2000)(mold loss that follows water damage is caused by water damage, not mold damage, so policy's exclusion for mold does not apply); Flores v. Allstate Texas Lloyd's Co., 278 F. Supp. 2d 810, 815 (S.D. Tex. 2003)(when mold damage ensues form water damage which is covered under the policy, the mold damage is covered despite the exclusion).  Neither of these cases, however, discuss whether the policies included an anti-concurrent causation clause.

 

Dollar Limitation for Mold Coverage Upheld

     A property policy's limitation on mold coverage was challenged in MMI Reality Serv., Inc. v. Westchester Surplus Lines Ins. Co.,Civ . No. 07-00466, 2008 U.S. Dist. LEXIS 93653 (D. Haw.  Nov. 17, 2008).

     Kahala Mall in Honolulu suffered flood damage after the severe rains of March 2006.  The Mall was insured by Westchester for "direct physical loss or damage to" the Mall.  The policy had limited coverage for mold when it was "the result of flood that occurs during the policy period" and "only if all reasonable means were used to save and preserve the property from further damage at the time of  and after that occurrence."  Under such conditions, Westchester would pay up to $15,000 for loss or damage by mold.

     After the 2006 Flood, the Mall submitted a claim totaling more that $2.97 million.  Westchester challenged much of the claim, but eventually paid $1.23 million.  The Mall then sued, seeking additional coverage for, among other things, mold damage.   

     Westchester moved for partial summary judgment as to mold coverage.  The federal district court found the mold provision to be clear on its face.  The $15,000 limitation existed where (1) the mold results from flood and (2) "all reasonable means were used to save and preserved the property from further damage."  Westchester's motion was granted to the extent it sought an order declaring that coverage for loss or damage caused by mold is limited to $15,000.  Pursuant to the policy, this covered the cost to tear out and replace part of the building if needed to gain access to mold, the cost of testing performed after restoration of the property if there is reason to believe mold is present, and any increase in loss caused by mold.