The Washington District Court finds that the "Efficient Proximate Cause" Doctrine does not Automatically Trump Mold Exclusions when Mold is not the Efficient Proximate Cause of the Loss

Posted on September 22, 2009 by Diane Polscer

In AXIS Surplus Ins. Co., et. al v. Intracorp Real Estate, LLC, et. al., the Washington District Court, Judge Coughenour, recently ruled in favor of the Insurers on the application of Mold Exclusions irrespective of the fact that efficient proximate cause was potentially a covered peril. This coverage dispute arises out of a claim made by the insured under two “all-risk” Builders Risk insurance policies for alleged moisture, mold, and related damages to a mixed-use condominium project that resulted primarily from faulty and defective construction. The Claimants argued that because the efficient proximate cause was a covered peril, the Mold Exclusions have no application under Washington’s “efficient proximate cause” doctrine. The Insurers argued that the Mold Exclusions should apply regardless of the rule.

 

On competing cross-motions for summary judgment on the application of the various Mold Exclusions, the Court expressly rejected the claimant’s argument that if the efficient proximate cause of the loss is a covered peril, then the efficient proximate cause doctrine per se requires coverage regardless of any other potentially applicable exclusions. The Court was “persuaded” by the Insurers argument that a properly worded Mold Exclusion can operate to exclude “mold damage” irrespective of the application of the “efficient proximate cause” doctrine, even if the efficient proximate cause is a covered peril. At the Insurers urging, the court adopted the holding from the California Court of Appeals decision in DeBruyn v. Super. Ct. , 70 Cal. Rptr. 3d 652, 658-659 (2008) that when a policy “‘plainly and precisely communicates an excluded risk to a reasonable insured’ * * * the efficient proximate cause doctrine [does] not operate to cover the loss. * * * [I]nsurers ‘may limit coverage to some, but not all, manifestations of a given peril, as long as a reasonable insured would readily understand from the policy language which perils are covered and which are not.’” In so holding, the District Court went on to note that the “efficient proximate cause” rule “merely brings about ‘a fair result’ within the reasonable expectations of the parties.”

 

With respect to the language at issue in this case, the District Court held, in relevant part, that the “[mold] however caused” language in one of the insurers Mold Exclusions “is clear. It communicates to a reasonable insured that mold damage is excluded, even if it was caused by a covered peril.” With respect to the other insurers Mold Exclusion, the Court agreed (ostensibly based upon the “anti-current causation” language), under the same rationale, that it applied irrespective of the “efficient proximate cause” doctrine as well, but found that the Exclusion’s “resulting loss” exception potentially had application, and that was “an issue not before the Court.” The Court’s holding with respect to the later Exclusion is not a model of clarity.

 

As we all know, the “efficient proximate cause” rule is a very insured friendly doctrine. Washington Courts have not been shy to apply the rule ad nauseam to find coverage regardless of the express policy language. Having the District Court put the brakes on its application and look to the particular language of an exclusion that has application later in the chain of causation is a step in the right direction, and an encouraging result for property insurers in Washington. That being said, it is hard to predict what Washington State Court’s or the Ninth Circuit might do with the decision.

 
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Texas Appellate Court Refuses to Recognize Claim for "Negligent Claims Handling"

Posted on February 4, 2008 by Chris Martin

Recently, the Houston Fourteenth Court of Appeals held State Farm did not breach a contract with its insured after it denied coverage for a mold claim. In Justice v. State Farm Lloyds Ins. Co., 2008 WL 123857 (Tex. App.—Houston [14th Dist.] January 15, 2008), the insureds made a claim under their State Farm homeowner’s insurance policy after a tree fell on their home. State Farm paid the claim. Later, the insureds discovered mold in the walls of their home and reported the claim to State Farm. After issuing a reservation of rights letter, State Farm contracted with a third-party vendor to remediate the home for $137,000. Thereafter, the insureds filed suit for additional mold damage. Both sides filed a motion for summary judgment. 

State Farm argued the breach of contract claim was barred by the mold exclusion in the policy. The insureds allege the mold exclusion is trumped by a provision of the State Farm Adjuster’s Guide, purportedly stating if the original claim is covered, such as the damage from the wind blown tree, then any loss that proximately results is therefore covered. The insureds, however, failed to provide any legal authority for their position and, as a result, waived any basis for relief on that contention.

The appellate court also summarily dealt with the insureds’ other issues such as extra-contractual claims and negligence on the basis the insureds provided no basis to contradict the trial court’s ruling. Importantly, the court reiterated the principle that Texas does not recognize a claim for negligent claims handling. Lastly, to the extent the third-party contractor was hired by State Farm to identify mold damage that could be covered under the policy, the court ruled the insureds response does not articulate a duty owed to them by the contractor or how its failure to identify the mold could have caused them damage if it was not covered under the policy.

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No Coverage For Mold

Posted on January 25, 2008 by Sara Thorpe

Although winter storms may bring another round of mold claims, California appellate courts again have upheld the right of insurers to exclude coverage for damage caused by mold. De Bruyn v. Superior Court (Fire Ins. Exchg.) (2007) 07 C.D.O.S. 5019. The efficient proximate doctrine, which in California (unlike many states) constrains insurers in how they communicate what they want to cover and not cover, did not prevent the insurer in this case from excluding mold, even where the insurer agreed to cover water damage from sudden and accidental discharge of water from plumbing and household appliances.

In De Bruyn, the California appellate court (Second Appellate District [Los Angeles]) ruled that a water damage exclusion that excepted out coverage for sudden and accidental release of water, did not cover the resulting mold. That is because the exclusion “plainly and precisely” indicated that: “We never, under any circumstances, cover rust, mold, fungus, or wet or dry rot, even if resulting from exceptions . . .” In addition, the policy had a specific exclusion for rust, mold, fungus, or wet or dry rot.

The court held that Fire Insurance Exchange’s exclusion of coverage for mold did not violate Insurance Code § 530 or the efficient proximate cause doctrine in California. The efficient cause doctrine provides that if there is both a covered and non-covered cause of the loss for which the insured seeks coverage, there is coverage for the claim. Calif. Ins. Code § 530; Garvey v. State Farm Fire & Cas. Co. (1989) 48 Cal.3d 395, 403. In California, insurers are not permitted to “contract around” this rule. See, e.g., Howell v. State Farm Fire & Cas. Co. (1990) 218 Cal.App.3d 1446. In other states, courts recognize that an insurer can, if it does so clearly and explicitly, contract that despite the fact that one cause of the loss may be covered, if the other cause is not covered, there is no coverage. See, e.g., Arizona: Millar v. State Farm Fire & Cas. Co., 804 P.2d 822 (Ariz. Ct. App. 1991), review denied, 811 P.2d 1081 (Ariz. 1991); Utah: Alf v. State Farmer Fire & Cas. Co., 850 P.2d 1272 (Utah 1993).) See, also, the De Bruyn court’s footnote 3.

In De Bruyn, the California appellate court again confirms that an insurance company is permitted to provide coverage for some but not all manifestations of a loss, as long as the company does so in manner that communicates the information and does not violate public policy. Accord, Julian v. Hartford Und. Ins. Co. (2005) 35 Cal.4th 747 (insurer can exclude coverage for certain perils, i.e., weather conditions and landslides, even if the policy provides that it will cover the results of other weather conditions; the policy clearly communicated that the insurer intended to exclude coverage for rain that induced a landslide).

In De Bruyn, the California appellate court (Second Appellate District [Los Angeles]) ruled that a water damage exclusion that excepted out coverage for sudden and accidental release of water, did not cover the resulting mold. That is because the exclusion “plainly and precisely” indicated that: “We never, under any circumstances, cover rust, mold, fungus, or wet or dry rot, even if resulting from exceptions . . .” In addition, the policy had a specific exclusion for rust, mold, fungus, or wet or dry rot.

The court held that Fire Insurance Exchange’s exclusion of coverage for mold did not violate Insurance Code § 530 or the efficient proximate cause doctrine in California. The efficient cause doctrine provides that if there is both a covered and non-covered cause of the loss for which the insured seeks coverage, there is coverage for the claim. Calif. Ins. Code § 530; Garvey v. State Farm Fire & Cas. Co. (1989) 48 Cal.3d 395, 403. In California, insurers are not permitted to “contract around” this rule. See, e.g., Howell v. State Farm Fire & Cas. Co. (1990) 218 Cal.App.3d 1446. In other states, courts recognize that an insurer can, if it does so clearly and explicitly, contract that despite the fact that one cause of the loss may be covered, if the other cause is not covered, there is no coverage. See, e.g., Arizona: Millar v. State Farm Fire & Cas. Co., 804 P.2d 822 (Ariz. Ct. App. 1991), review denied, 811 P.2d 1081 (Ariz. 1991); Utah: Alf v. State Farmer Fire & Cas. Co., 850 P.2d 1272 (Utah 1993).) See, also, the De Bruyn court’s footnote 3.

In De Bruyn, the California appellate court again confirms that an insurance company is permitted to provide coverage for some but not all manifestations of a loss, as long as the company does so in manner that communicates the information and does not violate public policy. Accord, Julian v. Hartford Und. Ins. Co. (2005) 35 Cal.4th 747 (insurer can exclude coverage for certain perils, i.e., weather conditions and landslides, even if the policy provides that it will cover the results of other weather conditions; the policy clearly communicated that the insurer intended to exclude coverage for rain that induced a landslide).
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