A homeowner’s suit against Lexington Insurance Company to recover under a property policy for damages caused by shoddy roofing work that resulted in mold contamination was dismissed based on a coverage exclusion for mold.

The insurance policy covered any risks of loss to the structure unless caused by one of the listed exclusions.  It stated that “any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.”  One of the listed exclusions was mold.  The exclusion was specifically for loss caused by “smog, rust or other corrosion, fungus, mold, wet or dry rot.”

The crux of the dispute concerned the question of whether the coverage for “any ensuing loss to property,” in combination with the mold exclusion, should be read as excluding mold damages only when the losses were directly caused by mold.  The homeowner argued that since the loss was caused by shoddy workmanship or vandalism by the contractor which would be a covered loss under the policy, the mold ensuing from that work or vandalism must also be covered.  The court held that this position is not supported by the case law of the state.  In reviewing case precedents from several other states, the court explained that courts hold that “the ensuing loss provision does not reinsert coverage for excluded losses, but affirms coverage for secondary losses ultimately caused by excluded perils.”  In other words, if an uninsured peril causes a secondary loss of the type that is covered by the policy, that secondary loss will be covered only and this does not thereby result in the uninsured primary cause of that insured secondary loss being entitled to coverage under the policy as well.   In this case, the court held that mold, and the damage mold caused to the structure, are excluded.  Because the court found that claims for damages resulting from mold damage to the structure were not covered, it granted summary judgment in favor of Lexington Insurance Company.  Brick v. Lexington Insurance Company, (Superior Court of New Jersey , Docket No. ATL-L-1285-03 ( April 2, 2004 )).

Risk Management Note: This is an important decision in that it reiterates the intent of the insurance company that a mold exclusion is intended to exclude losses arising out of mold, regardless of how that mold was caused.  Mold exclusions have routinely become a standard exclusion in most policies, either in the text of the base policy itself or in an endorsement added to the policy by the underwriter.  The policy in question was a general liability property policy but the same concerns and exclusions are also seen in contractors’ general liability policies and in the professional liability policies of design professionals.

A wide variety of mold endorsements have been drafted by the Insurance Services Organization (ISO) and numerous insurance companies. Some endorsements may provide mold coverage subject to a sub-limit.  Others may provide a higher deductible for mold coverage than for the balance of the policy.  There are “bodily injury only” mold endorsements as well as “property damage only” endorsements.  And there are endorsements granting mold coverage provided it does not result from improper maintenance or in other cases from faulty workmanship or defective design.  Some endorsements may grant mold coverage on certain types of commercial facilities but exclude it on residential facilities. The possibilities are extensive.  This is definitely not a situation where one size fits all.   By working with its insurance broker and insurance company, the insured may be able to obtain coverage to at least cover some of its risk arising out of mold.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 6, No. 5 (Jun 2004).

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