Mold: The Hysteria Among Us (Continued)

EXPOSURE TO MOLD CAUSES BAD FAITH CLAIMS

If the average mold claim in Texas for the 2-year period from January 1, 2000 to December 31, 2001 was $22,740, inclusive of allocated loss adjustment expenses (but could be more or less, on account of shortcomings in the data collection techniques), then why are some lawyers so anxious to get their hands on mold insurance claims? Easy - because mold insurance claims make ideal bad faith cases.

As discussed above, the Ballard case, despite its status as the Marbury v. Madison of mold litigation, was really a bad faith insurance claim. Even Melinda Ballard would likely say so. Testifying on July 18, 2002 before the Congressional Subcommittees on Housing and Community Opportunity and Oversight and Investigations, she stated, "[B]y early February of this year, there were more than 16,000 homeowners with insurance claims that began as relatively inexpensive water damage claims and because of wrongful denials or disputes over proper repairs, the claims turned into expensive claims requiring remediation of toxic mold." Shortly thereafter, in an August 5, 2002 open letter to the insurance industry, posted on her Policyholders of America website, Ms. Ballard put it a little more bluntly. Describing the nearly 19,000 American families that are members of her organization, she stated, in part, as follows:

All of our members are homeowners who have been victimized by wrongful delays, denials and disputes over coverage. In every situation, the actions of the insurance company involved turned simple water damage into massive toxic mold infestations. None of us wanted to get into a pissing match with our insurance company. We were content with our lives and are not litigious people. But, none of us are going to lay down and let someone or something run all over the top of us, destroy our property and health and then blame us for the problem. Our goal is not to cause financial turmoil. We want insurance companies to be healthy and strong. Otherwise, you could not pay claims. However, we are adamantly against bad faith and fraud, regardless of who commits it. Unfortunately, our group sees far too many instances where the insurance company did not honor its policy and the result was the destruction of property and health.36

Melinda Ballard's message is simple - water damage, left unabated, is likely to cause mold. Therefore, water damage claims must be handled by insurers expeditiously. Moreover, Texas Insurance Commissioner Jos Montemayor has sent the same message to insurers. In a September 18, 2001 statement to residential property insurers addressing mold, Commissioner Montemayor offered the following advice:

Insurers can help reduce mold exposures by improving your response time in water damage cases. Testimony by experts at my public hearings indicated that mold can be stopped from forming if the moisture source is eliminated within 48 hours. Testimony from some homeowners indicated that it sometimes takes a week or more for a company's insurance adjuster to answer the policyholder's call. In some cases, the policyholders were told to do nothing until the adjuster arrived. This type of slow reaction and bad advice must stop. Company staff must be trained to react quickly to water damage claims and to tell policyholders to proceed quickly to stop the flow and begin the drying process before the adjuster arrives.37

While it is easy to say that if the moisture source is eliminated within 48 hours, mold will not form, coverage determinations in actual water damage claims are likely to be far more complex and far less cut and dry. As a threshold matter, mold caused by water damage may not be covered under the policy. Without getting into a full-blown analysis of homeowners' and other first-party property coverage, it is generally recognized that mold is not covered under such policies, unless it is the result of a covered peril, such as a burst pipe. Mold that is not the result of a covered peril is considered to be a home maintenance issue, which is not covered by insurance.38

However, even this seemingly straightforward "covered" or "not covered" inquiry can sometimes be anything but. In Shirley Cooper v. American Family Mutual Insurance Company, 184 F. Supp. 2d 960 (D. Ariz. 2002), the court examined coverage for what appears to have been a garden-variety mold homeowners' claim. A plumbing leak damaged dry wall and flooring in the master bedroom and hall closet of the insured's residence. American Family paid for repairs to the dry wall and flooring, but, citing a policy exclusion, denied coverage for mold damage caused by the leak. While some might say that this looks like a situation where the mold damage should be covered because it is the result of a covered peril and not a home maintenance issue, the federal district court did not agree. The Cooper court noted that some courts have applied the "efficient proximate cause" rule to conclude that coverage exists when an insured can identify an insured peril as the proximate cause of the loss, even if subsequent or concurrent events are specifically excluded from coverage. Arizona, however, has not adopted the "efficient proximate cause" rule. Therefore, the court precluded coverage, notwithstanding that the policy at issue, which contained a mold exclusion at item 6 c., provided, "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." Cooper at 962 (italics added). The Cooper court held that the "resulting loss" provision does not reinsert coverage for excluded losses, but reaffirms coverage for secondary losses ultimately caused by excluded perils. "We interpret the ensuing loss provision to apply to the situation where there is a 'peril,' that is, 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." Cooper at 964 (citation omitted).39

Compare Cooper with Bowers v. Farmers Insurance Exchange, 991 P. 2d 734 (Wash. App. 2000). In Bowers, the insured sought coverage under a Landlord's Protection policy for mold damage to her home that resulted when her tenants converted her home into a marijuana-growing operation. The nature of the operation required that all heat in the house be diverted to the basement. This, and other related aspects...