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MOLD EXCEPTION APPLIES | Zalma on insurance



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IN Clay Buchholz; Lindsay Buchholz v. Crestbrook Insurance Company, doing business as Nationwide Private Client, No. 22-50265, United States Court of Appeals, Fifth Circuit (April 18, 2023) Clay and Lindsay Buchholz sued their insurer after recovering $745,778 for damage to their ten thousand square foot home in Austin, Texas.

The Buchholz family insured their home with Crestbrook Insurance Company. Their policy included “Biological deterioration or damage cleaning and removal” coverage (“mold coverage”). The Buchholz family discovered a widespread mold infestation in their home. Although Crestbrook covered many of their losses, it denied a generalized allegation of mold growth in Buchholze’s walls and heating, ventilation and air conditioning systems. A judge issued a report and recommendation in favor of Crestbrook, and the district court adopted the judge’s findings.

FACTS

Crestbrook paid $745,778 in covered losses on five of the six claims. However, Crestbrook argued that the sixth claim regarding general mold growth and mold in the HVAC system was preempted. The Buchholz family hired MLAW Forensics, Inc. to investigate the cause of their mold infestation. Crestbrook paid for MLAW’s investigation. Dean R. Read, PE, wrote a cause-and-effect report on what he concluded led to the mold growth in Buchholze’s house which found that “discrete leaks and a ‘global’ problem due to interruption or limitation of the moisture vapor drive drying process” caused the mold. Specifically, he concluded that the house’s plumbing system was “[i]mproperly designed or configured and non-functional,” resulting in “elevated moisture content []” and subsequent mold growth.

Based on MLAW’s cause report, Crestbrook denied the appellants’ mold claim. The rejection letter cited policy exclusions for biological deterioration or damage, a defect or inadequacy in design, workmanship, construction and materials. In addition, the policy contained exclusions for weather conditions or moisture, and gradual or sudden loss due to a mechanical breakdown. Crestbrook concluded that the biological deterioration or further limited coverage would not apply to this claim.

In their latest complaint, the Buchholz family alleged that Crestbrook breached their insurance contract in bad faith and violated the Texas Insurance Code. The judge concluded that the Buchholz family had failed to show a “covered cause of loss” required by their mold coverage.

ANALYSIS

Under Texas law, when deciding a dispute regarding insurance coverage, the court first looks at the language of the policy because it assumes that the parties intended what was written in their contract. The court must give the words of the policy their ordinary and generally accepted meaning unless the policy shows that the words were intended in a technical or other sense. A disagreement between the parties as to the meaning of policy terms or the interaction of terms does not create ambiguity.

The insured’s burden

In a coverage dispute, the insured has the burden of first proving that their loss falls within the terms of the contract. When the insured shows this, the burden shifts to the insurer, who, to avoid liability, must show that the damage falls under an exception to the insurance’s coverage.

The Fifth Circuit concluded

The Fifth Circuit concluded that the judge correctly laid out the framework for burden-shifting in insurance litigation in Texas in her Report and Recommendation, which she concluded: “[The Buchholzes] fail to identify the cause of the mold damage. Instead, [the Buchholzes] argue that the policy is an all-risk policy that covers all risk of accidental direct physical loss of the property unless an exclusion applies… Consequently, [the Buchholzes] fails to meet its burden of showing that the mold claim is covered [mold coverage] provision.”

In its motion for summary judgment, Crestbrook argued that mold infestation is an excluded peril under the policy. Applying the Texas shifting insurance framework, the Fifth Circuit agreed with Crestbrook that the mold exception bars coverage for the Buchholz family’s claim. According to the Texas insurance dispute, the Buchholzes must first show a direct physical loss as required by their all-risk policy. Then Crestbrook can identify any exceptions to coverage for that loss.

The policy excluded coverage for “loss of property resulting directly or indirectly from any of the following . . . Biological deterioration or damage, except as provided by [the mold coverage].”

The Buchholze family showed that they suffered from mold infestation, nothing more.

Their theory is that water ingress causes mold. But water intrusion as such is not a loss covered by insurance when its only apparent damage to covered property is fungal growth. Accordingly, the Buchholzes did not demonstrate that their mold coverage constitutes an exception to the mold exception. So their generalized mold claim is excluded by the terms of their policy.

Even if the Fifth Circuit found that the district court misapplied the Texas insurance coverage burden-shifting framework, Crestbrook is still entitled to summary judgment because it has shown that a generalized mold claim is excluded under the policy.

The Fifth Circuit concluded that it was bound to interpret the policy as written and that the general mold claim was clearly and unambiguously excluded. Nothing more needs to be said. The Buchholzes should not have sued their insurer, they should have sued the contractor, designer or manufacturer of the defective plumbing system. In fact, they should join their insurer to seek damages from those who were responsible for the defects that caused the mold infestation.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com

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