The fear of mold claims was engendered in the insurance industry by the trial court decision in Ballard v. Fire Insurance Exchange (Texas District Court, Travis County, June 1, 2001). The decision encouraged a flood of “toxic mold” cases in Texas and across the United States.

The case began in 1990 when Ms. Ballard bought a large house in Dripping Springs, Texas, for $275,000 at a foreclosure sale. The main house was approximately 7,400 square feet and had serious physical problems. She began insuring the house with FIE, a member insurer of the Farmers Insurance Group, for $313,000 on the house and $187,800 for the contents. Ballard made multiple claims for water leaks and damages caused by ineffective plumbing.

Ballard obtained, by her pre-litigation claims, new sub-floors, custom-made hardwood flooring, and paint and plaster repairs. As the plumbing failed in different parts of her mini-mansion, Ballard was able to use the insurance claim money (all legitimately obtained) to remodel her house. As a person who was knowledgeable about insurance, she was able to save money on premiums by buying insurance for less than the replacement value of her house and still recover the full amount of her partial losses.

By the time litigation began, Ballard had had collected more from FIE than what she paid for the house. The last series of claims were assigned to an inexperienced adjuster, Theresa McConnell, who only had authority to settle claims equal to $20,000 without first obtaining permission from her superiors. Because of errors in the investigation and adjustment, and due to the aggressiveness of Ballard, the claim deteriorated and suit was filed claiming breach of the covenant of good faith and fair dealing. At trial, the jury returned a verdict against FIE for more than $32 million. The Court of Appeal reversed the punitive damages, but kept more than $4 million in compensatory damages. The case settled while pending before the Texas Supreme Court.

The Texas Court of Appeals, Third District, at Austin, reversed much of the trial court's opinion in Allison v. Fire Insurance Exchange (Tex. App. Dist. 3 Dec. 19, 2002), and explained the factual background that resulted in an improper and excessive judgment against the Fire Insurance Exchange. The Court of Appeals described the evidence presented at trial in detail necessary to the understanding of the decision.

The Texas Supreme Court has finally put the issue to rest. The fear of mold litigation was mostly misplaced. The thousands of mold suits filed in Texas after Ballard were not viable, and the excessive verdict was the result of poor claim handling. On Aug. 31, 2006, the Texas Supreme Court answered the following question asked of it by the U.S. Court of Appeals for the Fifth Circuit:

Does the ensuing loss provision contained in Section I-Exclusions, part 1(f) of the Homeowners Form B (HO-B) insurance policy as prescribed by the Texas Department of Insurance effective July 8, 1992 (Revised January 1, 1996), when read in conjunction with the remainder of the policy, provide coverage for mold contamination caused by water damage that is otherwise covered by the policy?

The Texas Supreme Court's Justice Brister delivered the opinion of the Court, in Richard Fiess and Stephanie Fiess, Appellants, v. State Farm Lloyds, Appellee. Chief Justice Jefferson, Justice Hecht, Justice Wainwright, Justice Green, Justice Johnson, and Justice Willett joined. Justice Medina filed a dissenting opinion, which Justice O'Neill joined.

Justice Brister, answering the question in the negative, summarized the opinion of the court succinctly:

The question in this case is not whether insurers should provide mold coverage in Texas, a public policy question beyond our jurisdiction as a court. The question instead is whether the language in an insurance policy provides such coverage, no more and no less.

The policy here provides that it does not cover “loss caused by mold.” While other parts of the policy sometimes make it difficult to decipher, we cannot hold that mold damage is covered when the policy expressly says it is not. Accordingly, we answer the Fifth Circuit's certified question “No.”

The language of the policy was that common in almost every homeowner's policy written in the U.S. before Mrs. Ballard-Allison started the mold litigation kerfuffle with a bad-faith verdict against Farmers Insurance. The Texas policy provided:

“We do not cover loss caused by:

Wear and tear, deterioration or loss caused by any quality in property that causes it to damage or destroy itself.
Rust, rot, mold, or other fungi.
Dampness of atmosphere, extremes of temperature.
Contamination.
Rats, mice, termites, moths, or other insects.

“We do cover ensuing loss caused by collapse of the building or any part of the building, water damage, or breakage of glass that is part of the building if the loss would otherwise be covered under this policy.”

The Supreme Court recognized that the language was clear and that it was hard to find any ambiguity in the ordinary meaning of the phrase, “We do not cover loss caused by mold.” The court reasoned, “While the ensuing-loss clause that follows may be difficult to parse … few ordinary people would imagine that it changes the meaning of the first sentence to read, 'We do too cover loss caused by mold.'”

The Texas Supreme Court's decision will bear on more than 250 similar cases pending against State Farm, and hundreds more involving other insurers in the state of Texas. It should eliminate cases across the state of Texas and the U.S. in federal courts who might wish to follow the Fifth Circuit that will, of necessity, apply the law of Texas.

In Texas, from this point forward, if an insurer can prove that the damage claimed was “caused by mold,” the insurer safely can deny the claim. Those insureds who collected millions on mold claims, like the plaintiffs in Ballard, cannot be expected to return the money to the insurers who paid in error.

A Never-Ending Issue

Of course, the issue will not die. At approximately the same time as the decision in Fiess, the Florida Court of Appeals ruled in Fisher v. Certain Interested Underwriters at Lloyd's (Fl. App. 4th Dist. 2006) that the Underwriters were obligated to pay for mold damage. The issue in Fisher related to whether the mold was a direct or consequential result of a water leak rather than an interpretation of an exclusion. The Florida court found that the damage was a direct result of the water damage even if the water never touched the personal property that was the subject of the loss. It found no coverage for other losses and although it found a direct loss, it affirmed the trial court's decision to order the insured to refund monies paid on losses not covered but paid, under reservation by the insurer.

Insureds and insurers who find mold in their homes or commercial structures should review their policies carefully to determine if coverage is available. Now, in Texas, it is clear that the simple language excluding mold is sufficient. Newer policies insure against losses caused by mold with minimal limits. Others have more convoluted exclusions. All, if as clear as the language quoted by the Fiess court, should be enforced. Trial courts outside of Texas should be and will be asked to follow the simple, direct, and intelligent decision of the Texas Supreme Court that they “cannot hold that mold damage is covered when the policy expressly says it is not.”

Barry Zalma is a California attorney and insurance claim consultant. He also is the author of “Mold: A Comprehensive Claims Guide,” which is published by Specialty Technical Publishers. He may be reached at zalma@zalma.com, www.zalma.com.

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