Fiess: Texas Supreme Court speaks

Despite the mandate of new mold endorsements and adoption of new forms, there has been a great deal of continuing litigation in Texas under the Homeowners B form as to when mold is covered. The focus has been on the “ensuing loss” language, and on the “repeal” argument adopted by the court in Balandran v. Safeco Ins. Co., 972 S.W. 738 (Tex. 1998).

Balandran involved foundation and structural damage resulting from a plumbing leak. The court found coverage, despite an exclusion for settling, cracking and expansion of foundations, based on language in the Personal Property section.

Exclusion 1(h) of the Dwelling coverage provided:

We do not cover loss under Coverage A (Dwelling) caused by settling, cracking, bulging, shrinkage, or expansion of foundations, walls, floors, ceilings, roof structures, walks, drives, curbs, fences, retaining walls or swimming pools.

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.

Coverage B provided coverage for personal property on a named peril basis. One of the enumerated perils was:

Accidental Discharge, Leakage or Overflow of Water or Steam from within a plumbing, heating or air conditioning system or household appliance.

A loss resulting from this peril includes the cost of tearing out and replacing any part of the building necessary to repair or replace the system or appliance. But this does not include loss to the system or appliance from which the water or steam escaped.

Exclusions 1.a through 1.h under Section I Exclusions do not apply to loss caused by this peril.

The Balandrans argued that the “exclusion repeal” provision applied to both personal property and damage to the dwelling.

The Texas Supreme Court concluded the language was ambiguous, and had to be read in favor of coverage. The Court also reasoned that the insurer’s interpretation—that the exclusion applied only to the personal property section in which it was located—would render part of the policy meaningless, since exclusion h. applied, on its face, only to the dwelling, and would not apply to personal property losses.

The Balandrans also argued that the exclusion did not apply when the underlying cause—the plumbing leak—was not itself an excluded peril, and that the “ensuing loss” language created an exception. The Court did not reach these arguments, as it found coverage under the first argument.

After Balandran, and during the midst of the “mold crisis” commentators and courts disagreed over whether mold had to “ensue” from water damage or whether water damage had to “ensue” from mold. Yet, the issue remained unresolved until the Fiess case. Fiess first worked its way up the federal courts, to the Fifth Circuit. In light of the split in the case law, and the apparent lack of controlling precedent from the Texas Supreme Court, the Fifth Circuit certified the question to the Texas Supreme Court.

Then comes Fiess

he Texas Supreme Court took up the issue and concluded that there was no coverage for mold under the HO-B form. Fiess v. State Farm Lloyds, 49 Tex. Sup. Ct. J. 996 (Tex., Aug. 31, 2006).

The mold exclusion, 1.f under Coverage B (Dwelling) provided, in part that:

We do not cover loss caused by:

… (2) rust, rot, mold or other fungi. …

We do cover ensuing loss caused by collapse 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.

Fiess finally resolved the debate over “ensuing loss.” The court relied on the reasoning in a 1975 opinion form the San Antonio Court of Appeals, Lambros v. Standard Fire Insurance Company (530 S.W. 2d 138 (Tex. Civ. App. – San Antonio 1975, writ ref’d). (By refusing review, the Court essentially approved the reasoning in Lambros. Accordingly, in Fiess the Court noted that it had the same force and effect as a Supreme Court opinion.) The Supreme Court reasoned that the “ensuing loss” language, read literally, meant that water damage had to ensue from mold.

The loss that then ensued from water damage was the “ensuing loss.” So, mold is excluded, but if the mold causes collapse, water damage or breakage of glass, the ensuing loss is covered. Even in this event, however, resulting mold damage is excluded, as it is not “otherwise covered.” The Court also declined to discuss the scope of “water damage,” simply concluding that all mold would not be deemed water damage.

While the Court found no coverage for mold, personal property coverage for accidental discharge was not addressed, because the Fiesses failed to appeal that issue. Instead, the damages before the court included only those from roof and window leaks. Therefore, Fiess did not directly address the repeal provision argument or the coverage for mold arising from a plumbing leak.

Nevertheless, State Farm argued that Balandran should be distinguished in any event. The basis of this argument was that Balandran involved a foundation claim, which could not possibly include personal property, and therefore it was incongruous to read the repeal provision to exclude foundation losses only for personal property. In the case of mold, however, both personal property and damage to the dwelling may result, so the exclusion would be repealed as to personal property, but still apply to the dwelling.

Finding a distinction

A recent opinion from the Southern District, Gordon v. Allstate Texas Lloyds, No. H-04-1061 (S.D. Tex., Sept. 27, 2006), adopted this reasoning, and concluded there was no coverage for mold, despite the repeal provision. The court essentially adopted the distinction between the foundation exclusion—which was necessarily ambiguous—and the accidental discharge exclusion—which could be read separately for personal property and dwelling
coverage.

It will be interesting to see how other courts deal with the issue. Without saying so, it appears that the Supreme Court may be dissatisfied with the reasoning in Balandran, and may now be more sympathetic with Justice Owens’ dissent. It may avoid the need to overrule the prior opinion, by just allowing the lower courts to distinguish it into extinction.

We will see what ensues.

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.

Topics Texas Profit Loss Property