October 2004
Where mold damage allegedly arose out of shoddy roofing work, a homeowner attempted to recover under its homeowners policy for the mold as an “ensuing loss” despite a provision of the policy specifically excluding coverage for mold contamination. In reviewing the policy language the court concluded that the mold exclusion was clear and unambiguous, and therefore, losses caused by mold were not covered.
by J. Kent Holland Jr.
ConstructionRisk.com LLC
In Brick v Lexington Insurance Company (No. ATL-L-1285-03 (April 2, 2004—Superior Ct of NJ)), a homeowner sought to recover property damage under its homeowners policy allegedly caused by poor work performed by a roofing contractor. There was a dispute as to whether the damage was due to vandalism or poor workmanship. The policy had an exclusion for damage or losses resulting from poor workmanship. The plaintiff argued that the damage was caused by vandalism by the contractor when it walked off the job. In addition, the plaintiff argued that the policy did not exclude coverage for mold contamination which was an “ensuing loss” to loss caused by vandalism.
The Lexington policy under Coverage A (Dwelling) and B (Other Structures) provided in pertinent part as follows:
- We insure against risk of direct loss to property described in Coverages A and B only if that loss is a physical loss to property. We do not insure, however, for loss: 2. caused by: e.(3) smog, rust or other corrosion, fungus, mold, wet or dry rot; [or] 3. Excluded under Section 1—Exclusions.
The policy also stated: “Under items 1 and 2, any ensuing loss to property described in Coverages A and B not excluded for excepted in this policy is covered.”
In analyzing whether Lexington should have been granted a motion for partial summary judgment, the court reviewed the language of the policy and stated that there is no ambiguity about exclusion of mold so that “losses caused by mold are not covered to the structure.” The court went on to explain, however, that the dispute focuses on the “ensuing loss” coverage of the policy. The plaintiff argued that while losses directly caused by mold are not covered, that where the loss is caused by vandalism which would be a covered loss and where mold ensues from vandalism, then mold damages would be covered. The court concluded that this position was not supported by case law or any reasonable interpretation of the policy. Decisions by courts in several other states were reviewed and quoted by this court in explaining its decision.
One decision reviewed by the court was from the case of Fiess v State Farm (SD Tex), in which the Texas court held that “for coverage to be restored via the ensuing loss clause an otherwise covered loss must result or ensue from the excluded loss.” The Texas court held that the “ensuing loss” language in the Fiess policy:
- means mold itself because it is specifically excluded is never covered but if mold caused a “covered loss,” then that “covered loss” would be covered under the “ensuing loss” language.
The New Jersey case in Lexington referenced four other decisions from various state courts and concluded that courts hold that:
- the ensuing loss provision does not reinsert coverage for excluded losses, but affirms coverage for secondary losses ultimately caused by excluded perils.
The ensuring loss provision means that if one of the specified uncovered events takes place, an ensuing loss that is otherwise covered remains covered but the uncovered event itself is never covered. Applying that reasoning in this case, the New Jersey court concluded that mold damage to the residence would not be covered under the terms of the policy or under the ensuing loss exception to the mold exclusion. To hold otherwise, said the court, “would render mold exclusions basically meaningless since mold always is caused by other events and therefore is always an ‘ensuing loss.'”
Practice Note
Although this particular decision dealt with a homeowners policy, the principles of policy interpretation explained by the court apply equally in the context of contractors’ general liability policies and design professional errors and omissions policies. Where there are clearly stated exclusions for damages arising out of mold growth or contamination, it should be anticipated that exceptions to the exclusions will be narrowly interpreted so as not to make meaningless the plain intent of “mold exclusions.” Contractors and design professionals that are concerned about coverage for mold may pursue various options for obtaining coverage by adding endorsements to their policies to specifically cover damages arising out of mold.
There are a number of ways that insurance carriers may be willing to provide mold coverage, including for example, a separate lower sublimit for mold or a higher deductible for mold. Other endorsements may provide mold coverage provided it does not result from poor workmanship or poor maintenance of a building. Whether mold coverage will be made available to a specific account will also depend on the nature of the construction (residential or commercial) and the location of the construction, and a number of other factors that insurer include in their underwriting guidelines.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, (Oct 2004).