After public adjusters, acting on behalf of policyholders, began to contend that mold was a covered loss; insurance companies have spent hundreds of millions of dollars in connection with mold claims in Texas. Mary Melinda Ballard filed suit in 2001 against Fire Insurance Exchange, a member of the Farmers Insurance Group, on a mold claim and received a verdict in the amount of $32 million. Eventually, the verdict was reduced at judgment, but the amount is staggering when one considers the insurance premiums paid by Ballard are miniscule in comparison with the amount paid by her insurance company in connection with her mold claim.
Even though this case is extreme, it was not unusual for insurance companies to spend over $30,000 per claim when premiums were much less. All of this occurred when insurance underwriters believed that there could not be recovery for mold because it was expressly excluded under the Standard Broad Form of Homeowner’s Insurance Policies. There is nothing more disconcerting to an insurance company than to be held responsible for risks that were not contemplated. As a result of all of this, insurance companies began leaving Texas. Others instructed their agents not to write any new policies. The insurance industry was in a full-blown crisis.
The Standard Broad Form Homeowner’s Insurance Policy provides that mold is excluded. However, there is an exception to the exclusion that provides that there is coverage for “ensuing loss” caused by leakage or breakage of a plumbing system or appliance. Therefore, policyholders and their representatives contended that, even though mold is excluded, there is nevertheless coverage if it can be established that the mold was caused by leaks or breaks in a plumbing system or appliance. The Texas Department of Insurance supported that interpretation as did Texas trial courts and intermediate appellate courts.
One would think that all an insurance company had to do was simply change the wording of its policy to eliminate the mold loophole. However, in Texas, insurance is one of the most highly regulated industries. In fact, the Texas Standard Homeowners Broad Form Policy was actually written by the Texas Department of Insurance and any changes had to be made by the department. Finally, the Texas Insurance Commissioner, faced with a crisis, allowed changes to be made in the Texas Broad Form Policy in order to limit mold exposure. However, this did not solve the problem with claims arising out of policies that were in existence prior to mold limitations.
The interpretation of the Texas Homeowners Broad Form Policy was brought before the Texas Supreme Court in Fiess v. State Farm Lloyds. The case was argued on March 30, 2005, and an opinion was delivered by the Texas Supreme Court on Aug. 31, 2006.
In essence, the Texas Supreme Court held that the exception to the exclusion did not apply to mold claims regardless of the cause of the damage. However, the insurance policy that was being interpreted was the 1996 version of the Homeowners Broad Form Policy. Changes were made to the policy in 2002. As a result, the 2002 version of the Homeowners Broad Form Policy has exception to exclusions that are significantly different that the 1996 version. It remains to be seen whether Texas courts will distinguish the Supreme Court’s holding in the Fiess case because of the difference in policy wording. Therefore, insurance companies who write Broad Form Policies may still be faced with mold claims.
At least, as far as the 1996 version is concerned, the Texas Supreme Court has bleached mold claims.
Michael Johnston is a member of Johnston Legal Group, a Fort Worth-based law firm that represents insurance companies and self-insured businesses in insurance- and litigation-related matters throughout Texas. He is board certified in the fields of civil trial law and consumer and commercial law. Johnston may be contacted at 817-820-0825 or through the firm’s Web site, www.txinslaw.com.