Daily Development for Monday, December 9, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

INSURANCE; MOLD: Mold developing from water leak over time is "fortuitous" loss, even though gradually occurring, not sudden, and, unless expressly excluded from coverage, is covered by policy notwithstanding exclusions for "deterioration" or "contamination."

Churchill v. Factory Mutual Ins. Co., No. C02-3872 (W.D. Wash. 10/23/02)

A shopping center suffered water intrusion in the walls, leading to the development over time of mold. The insurer, which had issued a policy described by the court as "all risk," refused to cover the loss. In the ensuing lawsuit, the federal district court here rejected the insurer's motion for summary judgment, concluding that the policy indeed should be construed to cover mold damages. The court concluded that the question of whether the mold damage was the "efficient proximate cause" of the insured's loss was a question of fact that could not be resolved on summary judgment, so the case proceeds on that basis.

Under Washington law, evidence extrinsic to the language of the policy may be taken into account even though policy language is not ruled ambiguous. Consequently, the court was able to evaluate the history of the insurer's standard form policy. This proved to be a particularly telling problem for the insurer, because the standard policy form it has used before the form involved in this dispute *and* the form that it used subsequently both expressly excluded mold from coverage. This form did not. Although this was good news for the insured here, this little piece of evidence obviously weakens the case as authority in situations where those facts are not present.

The court, however, did not rely entirely on this fact, but instead purported to construe, as it should have, the language contained within the four corners of the policy to reach the conclusion that mold damage was covered.

First, the insurer argued that the insured could not recover because policy of this nature cover only "fortuitous" losses. The court agreed with this legal precept, citing Crouch on Insurance, although the term "fortuitous"

is not stated as appearing in the policy. The court stated:

"The fortuity requirement exists as a matter of public policy because it woudlencourage fraud to permit recovery on an insurance loss which is certain to occur."

The insurer argued that the term "fortuitous" in this context ought to mean "cased by sudden, discrete, events." Here the court disagreed. Acknowledging that its duty was to construe Washington law on the issue, the court concluded that the fundamental question is whether the loss could reasonably have been foreseen. The definition the court found in recent Washington cases included the following elements:

"(a) a loss which was certain to occur cannot be considered fortuitous, and may not serve as the basis for recover under an all- risk insurance policy;

(b) in deciding whether a loss was fortuitous, a court should examine the parties' perception of risk at the time this policy was issued."

( c) ordinarily, a loss which could not reasonably be foreseen by the parties at the time the policy was issued is fortuitous."

The court also cited the somewhat different formulation of the concept set forth in the Restatement of Contracts - a formulation which it apparently viewed as the root of the test set forth above:

"A fortuitous event . . . is an event which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a pst event, such as the loss of a vessel, provided that the fact is unknown to the parties."

The court concluded that the insured bore the burden of showing that the mold damage in question fit within this definition. As indicated, it concluded that this question was one of act that cannot be resolved on summary judgment. But the fact that the gradual development of mold, arising even from causes that existed, although not known, at the time the policy was issued, certainly give the insured a fighting chance. Note, however, that it would appear to be the insured's duty to show that the mold arise during the period of coverage of this specific policy. Both the prior and subsequent policies exclude mold damage from coverage.

The insured then argued that the mold or other damage caused by water intrusion was covered by exclusions in the policy dealing with "deterioration, depletion, rust, corrosion or erosion, wear and tear, inherent vice or latent defect." It also invoked similarly generally worded general exclusions dealing with the physical condition of the property or construction or design defects. Here, of course, the fact that this list included mold damage in prior and subsequent versions of the same policy was telling. But it should be noted nevertheless that the court found as a matter of law that the policy language in question was not ambiguous, and that the insurer, having the burden of proof on the applicability of the exclusions, could not show that the express language covered mold damage.

Comment: One assumes that the insured will have difficulty demonstrating that the mold arose during the period of policy coverage, and further one can assume that any policy issued during the last few years will exclude mold coverage. Consequently, property owners with mold damaged property should postpone the victory bonfire. But any little win against insurers in this developing conflict is worth of note.

The court acknowledge that the insurer bears the risk of showing that the loss in question is "fortuitous" under this standard.