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With hundreds of millions of dollars in claims riding on the answer, the 5th U.S. Circuit Court of Appeals has asked the Texas Supreme Court whether the ensuing loss provision in a homeowner’s insurance policy created coverage for mold that ensues from water damage. In Fiess v. State Farm Lloyds, decided on Dec. 7, a three-judge panel of the 5th Circuit certified a question to Texas’ highest civil court: Does the ensuing loss provision in Section I-Exclusions, Part 1(f) of the Homeowners Form B (HO-B) policy, when read in conjunction with the rest of the policy, provide coverage for mold contamination caused by water damage covered under the policy? “It’s a big issue,” says Robert G. Miller, appellate attorney for plaintiffs Richard and Stephanie Fiess. Although the Texas Department of Insurance (TDI) changed the standard forms for homeowners’ insurance effective Jan. 1, 2002, the Texas Supreme Court’s decision in Fiess will affect numerous cases already in the pipeline, says Miller, of counsel at O’Donnell, Ferebee & McGonigal in Houston. Levon Hovnatanian, an attorney for State Farm and a partner in Houston’s Martin, Disiere, Jefferson & Wisdom, says the insurance company asked the 5th Circuit during oral arguments in May to certify a question to the state Supreme Court regarding the application of the ensuing loss provision to the mold exclusion in the former HO-B policy. If the 5th Circuit had ruled on the ensuing loss issue, there still would be a question whether the Texas Supreme Court would rule in the same way, says Christopher W. Martin, another attorney representing State Farm. “We want a definitive answer,” says Martin, also a partner in Martin Disiere. Miller says, “We believe the 5th Circuit could have decided the issue without certifying a question to the Texas Supreme Court, but we look forward to arguing the issue in that court.” According to the 5th Circuit’s opinion, written by Judge Patrick Higginbotham, the case began in the aftermath of Tropical Storm Allison, which struck the Texas coast in the summer of 2001. The Deer Park, Texas, home the Fiesses owned sustained substantial flood damage. State Farm Fire and Casualty Co., the couple’s flood insurance carrier, paid them $48,626 for home repairs and replacement of personal property damaged by the flood, Higginbotham wrote in the opinion. As noted in the opinion, the Fiesses discovered black mold growing throughout their home when they began removing damaged sheetrock. The couple sent samples of the mold to NOVA Labs in Conroe, Texas, where Dr. Paul Pearce conducted tests and determined that the samples contained hazardous stachybotrys, which, in his opinion, made the house dangerous to inhabit, Higginbotham wrote. Higginbotham noted in the opinion that Pearce also found other types of mold growing in the Fiesses’ home and ultimately estimated that 70 percent of the mold in the house was not related to the storm flooding but was caused by pre-flood leaks in the roof, plumbing, heating, air conditioning and elsewhere, according to the opinion. State Farm Lloyds, the Fiesses’ insurance carrier, paid the couple $34,425 for noncovered mold remediation in parts of the house where there was evidence of small pre-flood water leaks but maintained that it was not obligated under the policy to honor the claim, Higginbotham wrote. Dissatisfied with the payment, the Fiesses sued State Farm Lloyds in the 127th District Court, asserting claims for violations of the Texas Deceptive Trade Practices Act, breach of contract, fraud and intentional misrepresentation. After the court granted State Farm’s request — based on diversity of citizenship — for the case to be moved to the U.S. District Court for the Southern District of Texas in Houston, the Fiesses filed an amended complaint in which they alleged violations of the Texas Insurance Code and breach of warranty. The couple appealed to the 5th Circuit when a federal magistrate judge ruled in State Farm’s favor. State Farm argued in its complaint to the trial court that the mold exclusion in the Fiesses’ homeowner’s policy excludes their loss. “When a policy specifically excludes mold, there’s no antidote to that in the same policy that says, ‘We were just kidding about mold being excluded,’” Hovnatanian says. The Fiesses argued in their complaint that water leaks arising from leaks in the home caused the mold. The mold exclusion in the policy does not apply, the Fiesses argued, because the mold damage in their home falls within an exception to that exclusion as an ensuing loss caused by water damage. In 2003, then-U.S. Magistrate Judge Marcia Crone, now a federal judge for the Eastern District of Texas in Beaumont, granted State Farm’s motion for summary judgment, noting in her memorandum opinion and order that exclusions in the homeowner’s policy provide that the insurer does not cover loss caused by “rust, rot, mold or other fungi.” Crone followed the reasoning of San Antonio’s 4th Court of Appeals in 1975′s Lambros v. Standard Fire Insurance Co. that an ensuing loss caused by water damage must be water damage that is the result, rather than the cause, of the excluded damage — mold, in this instance. MOLD LOSS Hovnatanian says State Farm’s position is that for a mold loss to be covered as an ensuing loss — in this case, water damage — the water damage must ensue from the mold. Miller calls State Farm’s position ridiculous, saying that water damage never ensues from mold. He points out that the 5th Circuit, in a footnote to the Fiess opinion, declined to accept Lambros as binding authority, as State Farm had urged. According to Footnote 27, the 5th Circuit recognizes that the state Supreme Court’s refusal to grant a writ in Lambros gives the case precedential value. But, according to the footnote, a number of state and federal courts, as well as TDI, have interpreted the ensuing loss provision at issue in Fiess in a manner inconsistent with Lambros. Michael Quinn, who represents insurers and policyholders in coverage disputes but who is not involved in Fiess, says an ensuing loss must ensue from — or be caused by — something on the policy’s list of ensuing losses. Quinn, principal in Austin, Texas’ Law Offices of Michael Sean Quinn, says Pearce, the Fiesses’ expert witness, testified that much of the mold damage in the couple’s home was caused by other water damage covered under the policy, and therefore the mold damage is covered. “I don’t think so,” Quinn says. “As far as I know, [mold] doesn’t cause water damage. I don’t see how ensuing loss damage applies to mold.” William J. Chriss, a Corpus Christi, Texas, solo who represents plaintiffs in insurance disputes but is not involved in Fiess, contends that State Farm’s argument is an argument that the company’s lawyers made up around 2000. Before then, State Farm and other insurance companies paid many mold claims based on the same argument now made by the Fiesses, he says. “If the policy really doesn’t cover mold, why have insurance companies been paying millions of dollars to settle mold claims?” Chriss asks. Martin says insurance companies did pay such claims if the mold resulted from a covered water event. “Rather than run the risk of getting sued over and over again, they paid the claims and reserved the right to challenge those claims,” Martin says. “They didn’t know mold claims were going to explode like they did.” Crone also held that the Fiesses’ claim failed under the doctrine of concurrent causation, because they did not raise a fact issue regarding the amount of mold contamination that resulted from water damage otherwise covered under the policy. The 5th Circuit reversed Crone’s ruling on that issue, finding that the Fiesses’ expert witness testified to evidence of water intrusions unrelated to flooding caused by Tropical Storm Allison. “In particular, [Pearce] testified to evidence of water running down studs from consistent water leaks in the roof, and evidence of water leaks from windows. This is evidence that the house had experienced water damage prior to Tropical Storm Allison’s arrival,” Higginbotham wrote for the 5th Circuit. Judges James L. Dennis and Edith Brown Clement joined him in the opinion. The state Supreme Court’s answer to the certified question on the ensuing loss issue is likely to have a major impact on Fiess and other similar cases. But Quinn says the wording of the former homeowner’s policies — and the new policies — could provide another way for policyholders to challenge the exclusion of losses due to mold. “Everything depends on the word ‘loss,’” Quinn says. The ensuing loss provision in the Section-I Exclusions states: “We do not cover loss caused by … rust, rot, mold or other fungi.” However, Quinn says the word “loss” is not defined in the policy. Quinn says that almost every time the word is used in the Section-I Exclusions, loss means a physical loss. But he says that at least once the word is used in the section to mean economic loss. If the term loss is ambiguous, that part of the policy has to be construed in favor of the policyholder, Quinn says. “The possibility for hell-raising here is unbelievable,” he says. “I’m very, very skeptical that that’s true,” Hovnatanian says. “If [the policy] is ambiguous, the 5th Circuit would have said that. I don’t think the Supreme Court is going to say it’s ambiguous.” Hovnatanian says the Washington Supreme Court held in 1992′s McDonald v. State Farm Fire & Casualty Co., “The ensuing loss clause may be confusing, but it is not ambiguous.”

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