In Nelson v. Hartford Underwriters Ins. Co., No. COA05-1052, 2006 WL 1526882 (N.C. App. June 6, 2006), the court found that homeowners did not show evidence that their insurer proximately caused their injury from mold contamination or that their insurer participated in unfair or deceptive practices in settling their claim.

The insureds, Donald and Dinah Nelson, purchased a new home in September 1996. Over the next couple of months, they could detect musty odors in the master bedroom and bathroom, which they later found out was mold. The Nelsons cancelled their previous insurance policy with a different insurer and purchased a Hartford policy in May 1999.

Both the insureds and Hartford agreed that the mold had three causes: an oversized HVAC system that failed to remove all of the humidity from the air; a water supply line leak, which insureds noticed in June 1997; and wet carpet and that resulted from a water leak in the master bathroom, discovered by the insureds in late 1998 or early 1999.

The Nelsons made a mold claim with Hartford in 2001, and Hartford hired an engineering firm inspect the home. At that time, the insureds did not mention the water leaks they had discovered earlier. The firm determined that the mold was associated with operation of the ventilation system. Hartford denied coverage, citing the mold and faulty workmanship exceptions.

The HVAC system was replaced, but the mold did not immediately diminish. So, the insureds filed a second claim, this time mentioning the water leaks. The home's general contractor's insurance carrier produced a report showing several types of mold in the home and suggested that the Nelsons move out, which they did. Hartford again dispatched the same engineering firm it used for the first claim to inspect the home, and they concluded that "the shower leak and its subsequent repair was the likely cause of the mold, which was then circulated in the house by the HVAC system."

While Hartford was reviewing the claim, the Nelsons sued for breach of contract and unfair claims settlement practices. The lower court granted Hartford summary judgment for the breach of contract claims because the events that gave rise to the mold damage occurred prior to Hartford's policy period.

The insureds appealed, and the appeals court said that the policy in effect when the injury occurred controls. Quoting an earlier opinion, the court said that "'even in situations where damage continues over time, if the court can determine when the defect occurred from which all subsequent damages flow, the court must use the date of the defect and trigger the coverage applicable on that date.'" The manifestation of the harm cannot be used as the trigger date. Thus, the summary judgment was upheld.

The court also examined the unfair trade practices claim because causes of action for unfair or deceptive practices are distinct from actions for breach of contract, and even if, as in this case, no breach of contract occurred, insurance companies must use business practices that are not unfair or deceptive. To establish a violation of North Carolina law, the insured "'must show: (1) an unfair or deceptive practice, (2) in or affecting commerce, and (3) which proximately caused injury to plaintiffs."

Although the insureds claimed that "Hartford's actions in this case prevented them from gaining full knowledge of the extent of the mold in their home and therefore slowed their remediation, and also precluded them from asserting a claim against their previous insurer," the court disagreed. The court found no violations of North Carolina law in Hartford's handling of the claim and that the insureds did not show that Hartford's actions were the proximate cause of their damage. The court said that Hartford was entitled to summary judgment on this claim as well.