United States: First Party Property Exclusions & Mold

When a mold claim is presented under a first-party property policy, it is important to consider whether one or more of the exclusions may apply. Below we discuss a number of exclusions common to a first-party property policy which may apply to a claim for property damage from mold. Although many of the cases discussed do not specifically deal with mold damage, they are instructive as to how exclusions in a property policy may or may not apply in the mold context.

A property policy may contain an exclusion for "mold" (or "fungi" or both). So far, however, very few courts have been called upon to interpret this exclusion. Two Texas cases are however noteworthy.

In Home Insurance Co. v. McClain, 2000 WL 144115 (Tex. App. 2000), rainwater entered a home through leaks in the roof of a new addition. The water collected behind interior walls, causing damage to walls, and damaged the walls, ceilings, and subfloors. This water provided an environment for mold to grow. The insureds made a claim against Home under a homeowner's policy for the water damage and for the mold and fungus infestation which allegedly rendered the home uninhabitable. The policy in question excluded loss caused by "mold or other fungi." The policy, however, covered "ensuing loss caused by . . . water damage . . . if the loss would otherwise be covered under this policy." Home contended that the mold exclusion applied even if the mold was caused by water damage. The insured maintained that the mold was an ensuing loss from water damage and, therefore, was covered. The court rejected Home’s position and held that mold would be an ensuing loss if it was a consequence of the water damage. Here the water damage from the leaking roof caused the mold, so the mold was a consequence of the water leak. Under such facts, a covered ensuing loss was present, and the court did not apply the exclusion for mold and fungi.

In Merrimack Mutual Fire Insurance Co. v. McCaffree, 486 S.W.2d 616 (Tex. App. 1972), a claim was made under a homeowners policy with regard to wood that rotted from fungus growth as a result of water leaking over many years because a shower stall was constructed without a shower pan to catch water under the shower floor. The policy, among other things, did not cover loss caused by " . . . rot, mold or other fungi; . . ." The court held that the claimed loss was excluded because the damage or deterioration was directly caused by fungi. The court then examined whether the loss fit within the exclusion’s exception for "ensuing loss caused by . . . water damage." The court found that an ensuing loss means a loss which follows or comes afterward as a consequence, and so to be covered, the ensuing loss must have been caused by water damage per se. The court then held that the deterioration or rot was caused by fungi, not "water damage" and was therefore excluded.

Rot or deterioration may be present where there is mold. Notably, "rot" or "deterioration" are often excluded under a first-party property policy.

In Ames Privilege Associates Ltd. Partnership v. Utica Mutual Insurance Co., 742 F. Supp. 704 (D. Mass. 1990), old factory buildings were renovated and converted into apartments. After taking occupancy, tenants began complaining of soft spots in the floors of some of the apartment units. This problem was the result of a leak in the roof, which allowed moisture into the apartments that caused a fungal infection, commonly known as wood rot, to damage wooden components of the structure. The policy excluded, among other things, loss caused by " . . . mold, wet or dry rot, . . .". The court determined that the policy clearly and unambiguously excluded damage resulting from rot. The court then considered whether coverage was afforded under the exception to the exclusion for an ensuing loss by a peril not excluded. The court stated that rot, an excluded peril, caused the damage alleged by plaintiff and there was thus no ensuing loss.

In Twin City Hide v. Transamerican Insurance Co., 358 N.W.2d 90 (Minn. App. 1984), water leaked through a factory roof. Initially the insured did not discover damage to any hides, but after shipping the hides to their destination, some were found to be damaged by rot. The policy excluded loss caused by " . . . wet or dry rot . . .". The court found the damage to the hides to be caused by rot, and held that it was thus excluded.

In Aetna Casualty and Surety Co. v. Yates, 344 F.2d 939 (5th Cir. 1965), the wood joists, sills and subflooring of the insured’s home rotted away as a result of inadequate ventilation in the "crawl space" under the home. Among other things, the policy excluded " . . . deterioration . . . rot . . . mold or other fungi . . .". The court determined that the loss was caused by rot, which was in turn caused by "fungi." The exclusion, however, had an exception for ensuing loss caused by " . . . water damage ." The court did not apply the exception, and emphasized that the rot and water damage had to be separate events. Here the loss was from a single phenomenon—rot and was therefore excluded.

In Murray v. State Farm Fire and Casualty Co., 268 Cal. Rpt. 33 (1990), water leaked from a break in a copper pipe due to the pipe’s exposure to moisture and acidic soil. Because of the leak, the ground underneath the pipe settled, causing a crack in a concrete slab above the pipe. The policy excluded "deterioration." Because the copper pipe failed over time, the loss was from deterioration and the exclusion applied. The court continued its analysis to see whether there was any "ensuing loss", which might be excepted from the exclusion. The only loss flowing from the deteriorated pipe was the crack in the cement slab above the pipe. The policy, however, separately excluded "settling, cracking . . .", so the court found no separately covered loss under the policy.

What if a roof is defectively installed and, as a consequence, water leaks into a house or building and then mold forms? Under such circumstances, consideration would have to be given to the exclusion for "faulty or defective design, workmanship or material," a typical exclusion in a first-party property policy.

In Laquila Construction, Inc. v. Travelers Indemnity Company of Illinois, 66 F. Supp. 2d 543 (S.D.N.Y. 1999), defective concrete was installed in the fifth floor structural slab during construction of a new building. The defective concrete had to be replaced, and shoring and reinforcing had to be installed while the corrective work took place. Also, the work of other contractors, such as heating, ventilation, and air-conditioning, had to be removed and reinstalled on the fifth floor. The policy excluded the "cost of making good faulty or defective workmanship or material, but this exclusion did not apply to physical damage resulting from faulty or defective workmanship or material. Plaintiff contended that all costs incurred were covered under the "resulting loss" provision. The court disagreed and held that the claimed costs related to making good the defective concrete and, therefore, fell squarely within the exclusion.

In Alwart v. State Farm Fire and Casualty Co., 508 S.E.2d 531 (N.C. App. 1998), the exterior walls of plaintiff’s home buckled, wrinkled, and bulged because the "synthetic stucco" was improperly installed. Plaintiff sought coverage for all "ensuing losses" resulting from the faulty, inadequate or defective workmanship. The court held that the policy excluded both the cost of repairing the faulty construction, workmanship and materials and the cost of repairing the "ensuing loss" caused by the faulty construction, workmanship and materials.

In Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338 (9^th Cir. 1989), the court applied an exclusion for "faulty materials or workmanship" to damages caused by negligent design and construction of an apartment building which resulted in cracking of the drywall, driveway, and slab of a building. The court noted that the exclusion for "faulty workmanship included losses caused by defects in the design and construction of a building." (Compare Allstate Insurance Co. v. Smith, 929 2d 447 (9^th Cir. 1991), in which an exclusion for "faulty workmanship" was not applied to damages resulting from the entry of rain into a building when a roofing contractor did not put a temporary cover over the exposed roof area. The court held that the term "faulty workmanship" was ambiguous and only applied to a flawed product and not to a flawed process of construction, such as protecting the premises during roof work.

Like the situation just mentioned, mold may grow in a home or building as a result of a "latent defect." If so, the "latent defect" exclusion may be implicated.

In Acme Galvanizing Co. Inc. v. Fireman’s Fund Insurance Co., 270 Cal. Rptr. 405 (1990), a defective weld ruptured on a steel kettle which allowed the molten zinc in the kettle to spill out and damage surrounding equipment. The policy excluded loss for "latent defect." The court concluded that the welding defect was a latent defect and therefore was excluded. Further, the court held that the damage to the surrounding equipment from the molten zinc was not an "ensuing loss." This was because an ensuing loss requires the occurrence of a separate and independent peril, resulting from the original excluded peril. In the case at hand, no peril separate from the rupture of the defective weld occurred. Therefore, the spilling of the molten zinc was part of the loss directly caused by the defective weld and not a new phenomenon. The kettle rupture and the resulting damage were thus excluded.

Another exclusion which needs to be considered in the context of a mold claim is that for "inherent vice." According to one case, inherent vice "does not relate to an extraneous cause but to a loss entirely from internal decomposition or some quality which brings about its own injury or destruction. The vice must be inherent in the property for which recovery is sought." Employers Casualty Co. v. Holm, 393 S.W.2d 363, 367 (Tex. App. 1965). Said differently, the property in question must carry the seeds of its own destruction. In State Farm Fire & Casualty Co. v. Volding, 426 S.W.2d 907 (Tex. App. 1968), rainwater entered the pores of brick on a home; the water then froze and caused the brick to crack and fall away. The porous condition of the brick was a fault or defect, a quality which could properly be called an "inherent vice." Therefore, the court deemed the damaged brick to be excluded under the "inherent vice" exclusion. (But compare, American Home Assurance Co. v. J.F. Shea Co., Inc., 445 F. Supp. 365, 368 (D.C. 1978), where threatened collapse of support of excavation system for subway construction, likely due to slippage of the earth, was not an "inherent vice" because the loss was due to the threat of an outside natural force.)

The above discussion demonstrates that, for a mold claim under a first-party property policy, various exclusions may apply. In considering whether an exclusion applies, attention must be paid to any language in the exclusion, especially that which may cover an "ensuing" loss caused by a peril not otherwise excluded, as well as to the facts surrounding a given mold claim.