Manifestation and Reporting of Mold Claims

New mold, even if it “ensues” from an old leak, may be covered.

Whether mold is ever covered under a homeowners policy—outside of the promulgated mold endorsements—is still a hotly debated issue. Although the mold crisis in Texas may have passed its apex, the claims still continue. Most courts finding coverage do so under the “ensuing loss” language of the Texas Homeowners Form B policy (HO-B), which excepts certain damages from the mold exclusion.

In response to the surge in mold claims, many companies began writing only on the more restrictive HO-A, which provides coverage only for specified perils, or drafted their own policy form, limiting coverage for water damage and mold. With the change in policy forms, many homeowners find themselves without coverage for current mold claims. Accordingly, there may be attempts to move the mold claim into a prior year, under a policy form that may provide coverage. The question of which policy, or policies, should respond raises issues of what trigger of coverage applies to mold, as well as the application of the notice and reporting provisions of the policies and the doctrines of fortuity and known loss as they apply under Texas law. A series of recent cases from the federal court for the Southern District of Texas help elucidate these principles.

A manifestation trigger
Although there is still scant case law, most courts have implicitly applied a manifestation trigger to property damage claims under homeowners policies, including claims involving mold.(1) The manifestation trigger typically means that property damage is deemed to occur at the time it is discovered or becomes discoverable. Of course, this presents some unique problems in the context of mold, which may exist under cabinets, under floors, or behind walls. Where the mold is clearly
visible, however, courts will likely conclude that
the damage existed, even if the full extent of
the problem was not apparent, or the risks
allegedly inherent in mold contamination were
not understood at the time the mold first
appeared.

Late reporting, or not?
Both because the date of discovery may be determinative, and because newer forms contain more restrictive coverage for water damage, policyholders may seek to now report claims under prior policy years. When doing so, they may then be faced by an argument from the insurance company that their late reporting, and failure to comply with the policy conditions concerning notice, defeat coverage. Again, there are few Texas cases discussing late notice under homeowners policies. Unlike many liability policies, there is no regulation or policy provision that expressly requires prejudice. Some courts have excused late notice in other
contexts, because the insured was unaware of the damage.

In one recent case, the court found that a failure to notify an insurer of a leak did not preclude coverage for a later manifestation of mold. Because the claim was based only on the mold, and not the leak, the court found there was no duty to notify the insurer until the mold became apparent, or manifested. The court also noted that, in most cases, late notice would be an issue of fact. The court found that fact issues existed as to whether notice was timely in regard to much of the mold, including that arising from leaks that arose three to four years prior to the claim, but also concluded there was late notice, as a matter of law, for areas of the house where the insureds had been aware of mold at least six months prior to notice of the claim.(2)

In another case, the court also found that there was late notice, where the insured was aware of mold growth, from periodic leaks in the air conditioning system, years before providing notice, and where the insured was aware of mold from a leak in the master bath shower pan at least a year before notice of the claim. The court found there was a fact issue, however, in regard to mold damage from more recent roof leaks.(3)

Fortuity and known loss
In addition to the issues of trigger of coverage and timely reporting, mold claims may also be affected by the doctrine of fortuity and known loss. Under Texas law, the “known loss” or “loss in progress” doctrine provides that public policy will not allow an insured to obtain coverage for a loss that has already occurred or begun, and is known to the insured.(4) Like the provision regarding timely notice, the doctrine will preclude coverage where the insured is aware of the mold, even if the insured does not understand the full scope or nature of the loss.(5) The fortuity doctrine has been applied to bar coverage where the insured was aware of various leaks and had observed black growth on the floors and ceilings five years before the claim was made. The court found it inconsequential that the insureds believed they had remedied the problem with household cleaners.(5)

In situations where the insured has been aware of the leaks—and the consequential mold—before policy inception, the loss is no longer fortuitous, and public policy may
preclude coverage under any policies issued subsequent to manifestation. On the other hand, new mold, even if it “ensues” from an old leak, may be covered. Of course, this presupposes that mold is covered as an ensuing loss—an issue which is far from resolved under current Texas law.

Three converging issues
The convergence of these three issues—manifestation, notice and fortuity—will undoubtedly make many mold claims extremely fact intensive as to when the mold growth began, and when it became
visible or apparent. And policyholders who seek to report “old mold” may face a dilemma: the preexisting loss may not be covered under a new policy, while a previous insurer may have late notice defenses. While the legal issues over policy construction present the first obstacle to mold claims, the factual issues over the timing and discovery of the mold present a second set of hurdles. An unintended benefit, however, may be that Texas law regarding late notice, fortuity and manifestation of damage is clarified by the litigation of mold claims.

1. See, e.g., Martinez v. Allstate Texas Lloyd’s, No. M-02-091 (S.D. Tex., Oct. 7, 2002).
2. See Flores v. Allstate Texas Lloyd’s Co., 278 F.Supp.2d 810 (S.D. Tex. 2003).
3. See Salinas v. Allstate Texas Lloyd’s Co., 278 F. Supp 2d 820 ( S.D. Tex. 2003)
4. See, e.g., Burch v. Commonwealth Mut. Ins. Co., 450 S.W.2d 838, 840-41 (Tex. 1970); Scottsdale Ins. Co. v. Travis, 68 S.W.3d 72 (Tex. App.—Dallas 2001, pet. denied).
5. Martinez v. Allstate Texas Lloyd’s Co., supra. 5. Id.

Beth D. Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage
practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners policies.