When Your Covered Water Loss Causes Mold Damage

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If you suffer a water loss to a building that is not attended to quickly, mold can develop.  Mold is a fungus which causes property damage and poses potential health hazards, and must be removed.  Mold damage to a home can be very serious.  Mold following a water loss is prevalent in Southern California.

Many property insurance policies, however, have exclusions or limitations related to mold damages.  Typical exclusions state they do not cover “fungus,” and a common sublimit for mold coverage is $5,000.  As a result, when the underlying event (like a water loss) is covered, but mold is excluded or limited, an insured might find him or herself in a position where they are receiving only partial coverage for a claim.  Insureds with water claims involving a mold component should be aware of California law relating to mold exclusions or limitations, and how to present the issue in the claims process.

California cases involving mold exclusions and limitations have generally enforced them.  Thus, in upholding a mold exclusion, the California Court of Appeal, Second Appellate District, which sits in Los Angeles, has held that an insurance company is “permitted to limit coverage for some . . . manifestations of water damage.” (De Bruyn v. Superior Court (2008) 158 Cal.App.4th 1213, 1223.) While there remains an argument that under the right circumstances, and depending on the policy language, full coverage may exist for a mold-related loss, where the policy has a mold exclusion or limitation, it is likely to be enforceable in California as a matter of contract.

That does not, however, foreclose recovery of damages associated with mold in a tort claim against the insurer for breach of the implied covenant of good faith and fair dealing (also known as insurance bad faith). The California Supreme Court has held that an “insurance company generally is liable for ‘any damages which are the proximate result” of its bad faith conduct. (PPG Industries, Inc. v. Transamerica Ins. Co.(1999) 20 Cal.4th 310, 315 (emphasis added, internal citations omitted).)

Where mold damages are caused by unreasonable, bad faith claims handling following a water loss, they can be pursued as tort damages in connection with a bad faith claim against the insurer.  In order to pursue such a claim, the insured will have to show that the insurer acted unreasonably in handling an insurance claim, causing the mold damages at issue.

Mold claims following a water loss are often well suited to a bad faith claim. This is because delays following a water loss, often attributable to the insurance company, occur regularly.  In such circumstances, there is frequently a basis for an argument the delay was unreasonable, and caused the mold problem.  In such circumstances, while mold damages may not be covered under the insurance policy, they may be recoverable as consequential damages from the insurance company’s bad faith delay in the handling of the covered water claim.

Another potential source of recovery for mold damages caused by a water loss is any water remediation company that was sent out to address the water loss prior to the development of mold. These companies are often sent by the insurance company, and have a pre-existing relationship with them. Complications can arise as to who is responsible for their conduct, and the resulting mold, often necessitating including the water remediation company in any legal action against the insurance company.

Policyholders who have suffered a water loss, and mold damages, and are faced with a mold exclusion or sublimit, need to be aware of California law, and the options available, if the mold was caused by the insurance company or its experts’ delays.