The debate over ‘ensuing loss’ continues

Despite all the recent changes in policy forms, a number of claims still exist under policies using “ensuing loss” language. This language has been the source of a great deal of debate, and rose to the fore during the height of the mold “crisis” in Texas.

The language typically provides that, while mold is excluded, “ensuing loss” from covered water damage is excepted from the exclusion. The language gives rise to a chicken or egg conundrum: Must the ensuing loss follow the mold, or is mold covered if it ensues from a covered cause?

While the former position most closely tracks the grammatical and syntactical construction, the courts, and the commentators, have been split. The issue is pending before the Texas Supreme Court on certified question from the Fifth Circuit in the Fiess case.

The dispute continues in a recent case from the Houston Court of Appeals, Lundstrom v. United Services Automobile Association, Cause No. 14-04-00357-CV, 2006 Tex. App. LEXIS 605 (Tex. App.-Houston [14th Dist.], Jan. 26, 2006). At issue is the language of the Homeowners Form B policy.

In June 1998, the Lundstroms purchased a townhouse from the builder and insured the dwelling with USAA. The Lundstroms began noticing water shortly after they moved in. After a storm in the “early fall, late summer of ’98,” they discovered water in the stairwell. The Lundstroms notified the builder, but did not report a claim to USAA. In the fall of 1998, the Lundstroms discovered several wet spots, five or six inches in diameter, on the ceiling. Again, the Lundstroms notified the builder, but did not report a claim. Throughout 1999, the Lundstroms noticed more water problems, and continued to notify the builder, but not USAA. In 1999 and through the Spring of 2000, the problems continued with leaks in the bathroom, closet, and stairwell. The builder attempted, unsuccessfully, to remedy the problems. In the course of repairs, the builder also left holes uncovered, on several occasions, leading to additional water damage.

Finally, in May 2000–after heavy rain poured through a hole left by the builders–the Lundstroms reported a claim to USAA. They also filed suit against the builder and the real estate agent.

After testing revealed no plumbing leaks, an engineer concluded that a soda can blocking the roof scuppers was causing water to pond, and led to some of the interior damage. On further inspections by other consultants, leaks were also found in the sprinkler system.

USAA denied coverage but, after an appraisal in which the Lundstroms did not participate, made a partial payment for the “initial wetting,” of less than $2,000. The Lundstroms settled the suit with the builder and agent. As part of the settlement, the builder bought back the townhouse. In addition, the Lundstroms received over $300,000. They then brought suit against USAA.

Although there were a number of other issues, USAA contended, in part, that the claim was not covered.

First, the court dealt with issues of trigger and notice. The court recognized that the history of water damage dated back to 1998, although the Lundstroms contended that they did not believe the minor leak at that time was covered. They contended that it was not until Spring of 2000 that they determined the water damage and mold contamination had severely damaged the residence. The Lundstroms argued that their losses were covered under the provision for accidental discharge from within a plumbing system. They also argued that the sprinkler system and the overflow drains and scuppers should be considered part of the plumbing system.

The court reasoned that the water intrusions were in two separate areas of the town home, and that the earlier losses, related to the sprinkler systems and blocked scupper, were on the north side of the townhouse. As to these claims, the court found that the Lundstroms belief that the claims were not significant would not excuse their failure to provide notice. More significantly, however, the court accepted USAA’s argument that the Lundstroms had argued in their briefing that the water intrusion at issue occurred in May 2000. Therefore, the court construed the claim as being solely for the loss that resulted from the May 2000 rainstorm.

The underlying coverage issue
The court then addressed the appraisal, and concluded that the appraiser had not exceeded the scope of his authority, and had not addressed coverage issues in determining the evaluation. Finally, the court turned to the underlying coverage issue.

The policy included an exclusion for loss caused by “rust, rot, mold or other fungi” but included ensuing loss language providing that “we do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under this policy.” Further, the coverage of personal property included coverage for accidental discharge, leakage or overflow of water or steam within from within, plumbing, heating or air conditioning system or household appliance, and provided that “exclusions 1.a. through 1.h. under Section 1 Exclusions do not apply to loss caused by this peril.”

The court rejected the argument that the damage was caused by an accidental discharge from a plumbing system, as it had discounted the prior loss from the sprinkler system and the blocked scupper.

The court then focused upon the ensuing loss language of the mold exclusion. The court cited with approval a case from the San Antonio Court of Appeals explaining that, “to ‘ensue’ means ‘to follow as a consequence or in chronological succession; to result, as an ensuing conclusion or effect.’ and ‘ensuing loss,’ then, is a loss which follows as a consequence of some preceding event or circumstance.” Citing Lambros v. Standard Fire Ins. Co., 530 S.W.2d 138, 141 (Tex.App. — San Antonio 1975, writ. Ref’d).

The court adopted the reasoning of Lambros that the ensuring loss must be a loss that results or follows from the excluded risk. Therefore, the ensuing loss must be water damage that results from the mold, and not mold that results from water damage. The court noted that there were cases to the contrary, but reasoned that they were not binding as there were no published, post-Lambros cases from Texas holding otherwise, and the Supreme Court had refused review of Lambros on a “writ refused” basis (giving it the precedential effect of a Supreme Court opinion).

The court distinguished Home Insurance Co. v. McClain, 2000 Tex.App. LEXIS 969 (Tex.App. — Dallas, Feb. 10, 2000, no pet.) as it was not designated for publication and as it, in turn, relied on a case that preceded Lambros. The court also rejected Allstate Insurance Company v. Smith, 450 S.W.2d 957 (Tex.App. — Waco 1970, no writ.); and Employers Casualty Company v. Holm, 393 S.W.2d 363 (Tex.App. — Houston 1965, no writ.) presumably because they preceded Lambros. The court also noted that the only published case after Lambros followed the reasoning of the Lambros court. Zeidan v. State Farm Fire & Casualty Co., 960 S.W.2d 663 (Tex.App. — Al Paso 1997, no writ).

Finally, the court noted that virtually the same issue had been certified to the Texas Supreme Court by the Fifth Circuit in Fiess v. State Farm Lloyds, 392 F.3d 802, 811-812 (5th Cir. 2004). In doing so, the Fifth Circuit declined to grant judgment based solely on Lambros, and found that the conflicting cases would require an Erie guess, and it was preferable to allow the Supreme Court to resolve the issue.

The Houston court, however, concluded that–TITLE: at least until the Supreme Court rules on the Fiess case–Lambros was the law.

While the issue may ultimately be determined by the Supreme Court, when the opinion is rendered in the Feiss case, it appears that the intermediate courts will not be deterred from continuing the debate. It is also at least arguable that the chronological definition of “ensuing” has become the prevailing trend.

Stay tuned.

Beth Bradley is a partner in the Dallas firm of Tollefson Bradley Ball & Mitchel LLP. Her practice is focused on coverage analysis and insurance disputes.