Ariz. Jury Awards Homeowner
More Than $4 Million
In Mold Bad Faith Case

PHOENIX — An Arizona jury on Nov. 24 awarded a homeowner and his family more than $4 million in a case in which an insurance carrier allegedly delayed in remediating mold contamination (Daniel Hatley, et al. v. Century-National Insurance Co., et al., No. CV 2000-006713, Ariz. Super., Maricopa Co.).

(Summary Judgment Ruling, Order on Verdict in Section D. Document #42-011203-115R.)

Daniel Hatley and his family sued their homeowners carrier, Century-National Insurance Co., after discovering mold in the bathroom and the kitchen. The mold was discovered after Hatley’s 7-year-old son was hospitalized and it was discovered that in addition to his pre-existing cystic fibrosis, he had Aspergillus mold spores in his lungs.

A doctor advised Hatley to check his home for mold. Hatley filed a notice of claim with Century-National, informing it that he was advised by the doctor to remove the mold.

Coverage Denied

Century National denied coverage under various theories. According to sources, Century National contended that the kitchen damage was pre-existing. Another defense raised by Century National was based upon a long-term water seepage exclusion that was contained in the carrier’s California policies but not its Arizona policies, sources said. The sources noted that the carrier later admitted that it incorrectly examined the claim under its California policy standards instead of its Arizona policy standards.

However, sources noted that Hatley maintained that before the claim was denied, there was a note in the claims file that Arizona policies do not contain the long-term water seepage exclusion. Therefore, sources said, Hatley maintained that there was no reason for denial of coverage based on that exclusion.

Although the Arizona policy did not contain a long-term water seepage exclusion, it did contain a mold exclusion. According to sources, the carrier argued that Hatley’s claims were barred by the mold exclusion. However, the sources said Hatley argued that the exclusion did not apply because the water damage was a covered loss.

Summary Judgment

Before Maricopa County Superior Court Judge Colleen McNally, Century National moved for summary judgment on the claims of breach of contract, bad faith, punitive damages and personal injury and medical expenses.

According to the judge, Century National denied Hatley’s request for alternative living expenses so that the family could move out of the home. After Hatley obtained a private adjuster, complained to the Department of Insurance and received public support through the media, the judge noted that Century National reversed its position. After Hatley sued, Century National paid approximately $72,000 for mold remediation and alternative living expenses.

Century National moved for summary judgment regarding the breach of contact claim on the basis that it has paid all claims submitted to the insurance policy.

“Although a jury could find that the facts set forth by Plaintiffs constitute a breach of contract by Defendant, there are no damages for the breach of the insurance contract itself, since all of the claims have been paid. It is therefore ordered granting Defendant’s motion for summary judgment regarding breach of contract,” the judge said.

Bad Faith

Century National also moved for summary judgment regarding the bad faith claims on the basis that Hatley presented no evidence to support the higher standard of wrongful conduct guided by evil motives.

“Although this appears to the court to be a close question, in viewing all of the facts alleged in the light most favorable to the Plaintiffs, the Court finds that a reasonable jury could find that Defendant’s conduct warrants punitive damages,” the judge said.

Additionally, Century National moved for summary judgment on claims of personal injury and medical expenses.

“It is uncontroverted that the only time period of potential harm that could be attributed to Defendant would be after the notice of claim was filed on November 16, 1999, and before Plaintiffs moved their son out of the home on December 21, 1999. Defendant claims that Plaintiffs have failed to come forward with any evidence to support the allegation that during that time period, Plaintiffs’ son suffered any exacerbation or acceleration of the Aspergillus condition that occurred prior to November 16, 1999. Defendant cites lack of proof regarding injury, causation, and damages. The Court finds there is no evidence before the Court to support a claim for personal injury and medical expenses,” the judge ruled.

Verdict

Trial began Nov. 5, and the jury deliberated for about five hours. The jury awarded the Hatleys $244,000 in compensatory damages and $4 million in punitive damages.

Experts testifying on behalf of the Hatleys included Gregory Legries, treating physician in Phoenix; Tom Carter, bad faith expert in Murrietta, Calif.; and James Faas of ACT Environmental Technologies Inc. in Phoenix, who conducted mold testing at the home. Gene Irizarry near San Diego testified as a defense expert on insurance bad faith.

The Hatleys are represented by Steven Dawson of Dawson & Rosenthal in Phoenix and Steve Gruenemier in Phoenix. Century National is represented by Douglas Christian and Steven Kramer of Christian & Mariano in Phoenix.

[Editor’s Note: In a Nov. 28 news bulletin, we incorrectly reported the compensatory damages in the amount of $237,349. We regret the error.]

 

California Jury Awards Family
$2.7 Million In Injury Case

SACRAMENTO, Calif. — A California jury on Nov. 7 awarded a family living in an apartment complex $2.7 million for injuries allegedly caused by mold exposure (Darren Mazza, et al. v. Raymond Schurtz, et al., No. 00AS04795, Calif. Super., Sacramento Calif.).

(Verdict Sheet in Section A. Document #42-011203-101V.)

Sources told Mealey Publications that Darren Mazza, his wife, Marcy, and his son, Bryce, allege that they were repeatedly hospitalized for injuries caused by mold after moving into their apartment. Alleged injuries include breathing problems, severe headaches and gastrointestinal problems. Medical bills for the family were more than $110,000, sources said.

Named defendants were the owners of the apartments, the managers and general partners: Raymond Schurtz, Partridge Pointe Investors, The Raymond L. Schurtz Revocable Irrevocable Trust, Partridge Pointe Investors Joint Venture, Partridge Pointe SPC Inc. and Sacramento Partridge Pointe and Westcount Management.

According to sources, water intrusion was first noticed in November 1999 through a vent in the master bathroom. The sources said it was later discovered that water was leaking from the toilet upstairs. Sources said the defendants disputed the plaintiffs’ position that although management was notified of the leak, the leak persisted until they moved out of the apartment in June 2000.

Sources said that in December 1999, a leak was discovered in the kitchen window. Sources said the kitchen window leak was later attributed to a broken dishwasher in the unit above. At that time, sources said the maintenance crew discovered mold in the bathroom. Additionally, sources said Mazza alleged that the sprinkler system was hitting the exterior wood siding.

Sources said the mold discovered within the apartment include Stachybotrys, Penicillium, and Aspergillus.

According to sources, the defendants maintained that they had no notice of the alleged damages. Although sources said Mazza maintained that he verbally notified the defendants of the alleged defects, the defendants countered that there was no written notice given of the alleged defects.

The sources continued that Mazza maintained that the defendants had constructive notice because there were similar problems in other units. However, they said the defendants countered that though there were similar problems outside of the Mazza unit, those problems were not discovered until after the Mazzas moved out.

Claims Presented

Claims presented to the jury included negligence, breach of contract, nuisance, negligent infliction of emotional distress and constructive eviction.

The jury answered yes to the following questions: Were any of the defendants negligent? Was the defendants’ negligence a cause of injury? Did any of the defendants breach the lease? Was the breach of lease a cause of damages? Did any of the defendants breach the implied warranty of habitability? Was the defendants’ breach a cause of damage? Did the act or omission of any defendant create a condition constituting a nuisance? Was the nuisance a cause of injury? Did the defendants engage negligently in conduct that caused serious emotional distress? Were the plaintiffs constructively evicted? Was the constructive eviction a cause of damage?

The jury awarded Darren Mazza $146,615 in economic damages and $950,625 in noneconomic damages. The jury awarded Marcie Mazza $90,016 in economic damages and $699,850 in noneconomic damages. Additionally, the jury awarded Bryce Mazza $93,355 in economic damages and $740,910 in noneconomic damages.

Plaintiffs experts included Frederick Herman, an allergist and immunologist in Roseville, Calif., and Vincent Marinkovich, an allergist in Redwood City, Calif.

Defense experts included Eric Gershwin, an allergist and immunologist in Davis, Calif.

Environmental testing on behalf of the defendants was conducted by Rick Beale of Hazard Management Services in Sacramento. Environmental testing for the plaintiffs was conducted by John Beneta of Restoration Consultants in Sacramento.

Sources said that the trial lasted under three weeks and the jury deliberated for approximately six hours. Additionally, sources said a pretrial demand of $1 million was made, which was the policy limit, and an offer of $75,000 was made and refused. An appeal is expected.

The plaintiffs are represented by John C. Miller of Charter Miller Davis in Sacramento. Counsel for the defense includes Rick Rogers of Dillon & Rogers Sacramento.

 

Confidential Settlement Reached
In New York Apartment Case

NEW YORK — A confidential settlement was reached Nov. 29 after nearly two months of trial in a case involving 495 New York apartment residents who claimed that they were injured by mold, sources told Mealey Publications (Samaris S. Davis, et al. v. Henry Phipps Plaza South, et al., No. 116331/98, N.Y. Sup., New York Co.).

Phipps Plaza South and Phipps Housing Services Inc. own the apartment building. Plaza South operated, maintained, managed and controlled the common areas and the building structure and was responsible for the overall building maintenance. Phipps Housing was responsible for the maintenance and upkeep of the building.

The plaintiffs sought approximately $9 billion in damages from the two New York apartment building owners, sources said. Samaris S. Davis and other residents maintained that mold and fungi contamination caused personal injury and property damage.

Davis moved for class certification on behalf of 495 apartment residents with respect to liability only. As an alternative to class certification, Davis moved for intervention in a proposed class action initiated by Bobbi Oke, who also lives in Phipps Plaza. As another alternative, the plaintiffs moved for consolidation or joint trial of 10 actions.

New York County Supreme Court Justice Louise G. Gans on Aug. 8 denied the plaintiffs’ class certification and consolidation motions but agreed to a joint trial of seven cases in which apartment residents were allegedly injured by mold exposure. The judge subsequently issued a gag order that was in place during trial.

Defense counsel includes Daniel S. Moretti and James Davies of Landman Corsi Ballaine & Ford in New York. Plaintiff counsel includes Steve Goldman of Goldman & Goldman in New York.

[Editor’s Note: A more detailed story will be in the January issue.]

 

Nationwide Class Certification
Sought In Bad Paint Case
Filed In Illinois State Court

BELLEVILLE, Ill. — Plaintiffs who maintain that wood sealants failed to prevent mold and mildew growth on Sept. 18 asked an Illinois state court to certify a proposed nationwide class action (Kevin Caliper, et al. v. Masco Corp., et al., No. 01 L 232, Ill. Cir., St. Clair Co.; See related story in this issue).

(Memorandum Supporting Class Certification in Section C. Document #42-011203-104M).

Behr Process Corp., Masco Corp. and Home Depot U.S.A. sell assorted wood finishing products throughout the country. Kevin Caliper and others maintain that the defendants should be held liable for failing to disclose material facts about Behr products’ inability to preserve and protect outdoor wood products from mold, mildew and fungus.

Proposed Class

The proposed class consists of all purchasers of the Behr products from April 17, 1991, until the date the class is certified (the Behr class). The case is also brought on behalf of a subclass consisting of all purchasers who bought Behr products from Home Depot from May 1998 until the date the class is certified (the Home Depot subclass).

For each plaintiff, Caliper seeks monetary relief to restore or replace the wood surfaces damaged by Behr products or, alternatively, a refund of all amounts paid for the products, but no more than $75,000 per class member.

“The Behr Class and the Home Depot Subclass are so numerous that joinder of all members is impracticable. Both classes include thousands of persons geographically dispersed throughout the United States and the State of Illinois. Any attempt to join such a large number of plaintiffs in a single suit would be impossible (and unmanageable), while multiple separate claims would be economically impracticable for both the litigants and the courts,” Caliber asserts. “Where there are a large number of potential claimants, and the individual amount of each claim is small, redress on an individual basis is difficult, if not impossible, and Illinois courts have been particularly receptive to proceeding on a class action basis under such circumstances.”

Common Issues

Caliper says common issues of both fact and law predominate for the proposed class and predominate over any questions affecting only individual class members. According to Caliper, the common questions of law include whether the defendants’ conduct constitutes statutory fraud, whether Behr products are defective, whether the Behr products encourage or promote the growth of mold, fungus and mildew, whether plaintiffs have been damaged and, if so, in what amount and whether and when Home Depot knew about the inherent defectiveness of the Behr products.

“A class action is an appropriate method for the fair and efficient adjudication of this litigation for several reasons. First, joinder of all putative class members nationwide is impossible. Second, individual litigation would magnify the delay and expense to all parties in litigating the wrongdoing, injuries, and damages caused by Behr. The class action device, by contrast, presents few, if any, management difficulties and provides the benefits of unitary adjudication, economies of scale, and comprehensive supervision by a single court. Finally, concentrating the litigation in one forum aids judicial economy and efficiency and promotes parity among the claims of the putative classes, as well as judicial consistency,” Caliper asserts.

Caliper is represented by Paul M. Weiss, Philip A. Bock, Tod A. Lewis and Ilan J. Chorowsky of Freed & Weiss in Chicago, Jodee Favre of Favre & Allen in Belleville, Kenneth A. Wexler and Edward A. Wallace of Kenneth A. Wexler & Associates in Chicago, L. Thomas Lakin, Bradley M. Lakin, Richard J. Burke and Jeffrey A.J. Millar of the Lakin Law Firm in Wood River, Ill., Randy Patchett of Patchett Law Office in Marion, Ill., and Michael J. Freed and Christopher J. Stuart of Much, Shelist, Freed, Denenberg, Ament & Rubenstein in Chicago.

 

Class Certification In
Washington Paint Case
Appropriate, Plaintiffs Say

MONTESANO, Wash. — Class certification on a nationwide basis is appropriate in a case in which wood sealants allegedly failed to protect against mildew and fungus, according to a motion (Joe Stipic, et al. v. Behr Process Corp., et al., No. 00-2-1105-5, Wash. Super., Grays Harbor Co.; See related story in this issue).

However, the paint company counters that class certification on a nationwide basis fails for several reasons, including inability to properly represent the class.

(Class certification motion available. Document #42-011203-009M. Opposition available. Document #42-011203-010M.)

Joe Stipic seeks to certify a nationwide class action of people who purchased and applied two products made by Behr Process Corp.: Super Liquid Rawhide and Natural Seal Plus. Stipic alleges that the products failed to protect wood from mold and mildew.

Stipic further claims that the following representations made by Behr were false and deceptive: that the products would outlast the competitors two-to-one and would double the life compared with competitive brands, representations about mildewcide and promises of a natural wood finish claiming the products to be the ultimate in durability and that mildew could be wiped off without degrading the wood.

Also named as a defendant in the Grays Harbor County Superior Court is Masco International.

Class Certification

“This record establishes that the questions of fact of relevance in this case related to the products’ defects and deceptive marketing are all common questions of fact nationally. These essential facts do not vary from state to state or region to region and thus make a national class the most judicially efficient manner of proceeding in order to resolve the factual and legal issues in this case. Even Behr’s main defense, that customer product misuse caused their mildew formation, presents the common factual question on a national basis — whether mildew would develop even if application of the Behr products was performed in accordance with Behr’s application instructions,” Stipic argues in his July 9 class certification motion.

Additionally, Stipic maintains that California law should apply because there is no question that Behr’s extensive contacts within the State of California create a strong state interest in the application of California law to its conduct.

Stipic adds that certification of a national class in Washington and the application of California law satisfy the constitutional requirements of due process for both Behr and for all nonresident class members under the U.S. Supreme Court decision Phillips Petroleum v. Shutts (472 U.S. 797 [1985]).

Stipic further argues that the criteria for class certification are met.

“Behr products are sold in thousands of separate retail outlets throughout the United States, and their advertising and marketing claims have encouraged tens of thousands of property owners to purchase them. There is no way to ascertain the exact size of the class at this stage of the litigation. However, it is clear that the class will include tens of thousands of property owners in the United States. A consumer class of this size clearly renders the joinder of all class members impracticable,” Stipic maintains.

Opposition

However, Behr notes in an Aug. 24 opposition that the court cannot decide the plaintiffs’ motion for nationwide class certification before deciding whether the proposed second amended complaint may be filed and before it has had a chance to frame the issues through answers, affirmative defenses or other responsive pleadings.

Behr also argues that Washington choice of law principles afford no basis for applying California law to the claims of the named plaintiffs.
“Two critical impediments prevent this Court from certifying Plaintiffs’ proposed nationwide class under California law: First, Plaintiffs have failed to show how the application of California law to consumers nationwide would satisfy constitutional due process requirements. Second, the laws of the 46 jurisdictions Plaintiffs propose to embrace in their nationwide class differ in numerous material ways, rending this action completely inappropriate as a single class tried under one state’s laws,” the company argues.

Behr says that even if Stipic is permitted to leave to amend to assert claims on behalf of a nationwide class under California law, Stipic cannot satisfy the fundamental requirements for class certification there.

“The Named Plaintiffs cannot adequately advance claims under California statutory and common law on behalf of consumers in 46 states because they themselves cannot bring such claims against Defendants. Further, the Named Plaintiffs and their counsel cannot adequately represent the interests of consumers nationwide given the conflicts created by their counsel’s strategy of simultaneously pursuing both nationwide and statewide litigation against Behr and Mosco on behalf of overlapping classes,” Behr argues.

3 Valid Surveys

The company continues that of three statistically valid surveys conducted by recognized experts, all demonstrate that the named plaintiffs’ claims of mildew damage allegedly caused by the Behr wood coating products are highly atypical of the experience of the nationwide class of consumers they seek to represent.

“Moreover, each of the Named Plaintiffs’ claims turns on facts, and is subject to defenses unique to them, and cannot be extrapolated to the claims of consumers nationwide,” Behr adds.
The company also maintains that certification of the implied warranty claim must be denied because the claims will necessarily vary from plaintiff to plaintiff.

“Examining Behr’s product literature, and determining whether the putative class members relied on them, just scratches the surface of what would be needed to try the claims of the proposed class. The jury’s task becomes still more complicated in determining the central issue in this case: the efficiency of Behr’s products, and their actual performance on the homes of the putative class members. This issue, with all of its nuances, must be addressed with respect to each of Plaintiffs’ claims. For all claims, the jury must assess product performance in order to determine issues of causation and, if necessary, damages,” Behr asserts.

The plaintiffs are represented by Paul L. Stritmatter, Michael E. Withey and Kevin Coluccio of Stritmatter Kessler Whelan Withey Coluccio in Seattle, David Edwards of Edwards & Hagen in Seattle and Bruce Simon of Cotchett, Pitre & Simon in Seattle. Behr is represented by Timothy H. Butler, Matthew Geyman and Maura S. Blank of Heller Ehrman White & McAuliffe in Seattle and Paul W. Sugarman of Heller Ehrman White & McAuliffe in San Francisco.

 

Proposed Class Action Filed
By Louisiana Employees

NEW ORLEANS — Louisiana employees allege in a Nov. 6 proposed class action that mold exposure caused respiratory problems, headaches and fatigue (Kristen M. Rhodes, et al. v. BG Real Estate Services Inc., et al., No. 2001-18355, La. Dist., Orleans Parish; See related story in this issue).
(Complaint in Section B. Document #42-011201-102C.)

Kristen Rhodes and others sued leasing and management agent BG Real Estate Services Inc., Baha Towers Limited Partnership, Bahar Development Inc., building owner Noob I GP Llc., Noob I L.P. and surplus line insurer Evanston Insurance Co. The petition for damages was filed in the Louisiana District Court for the Parish of Orleans.

The proposed class action was filed on behalf of employees who worked within offices at the Plaza Tower. According to the complaint, plaintiffs have complained of water leaks, defective elevators and the presence of unknown toxic substances. The plaintiffs allege that due to the occupancy of the Plaza Tower, they have suffered from sinus and allergy problems, debilitating headaches, skin irritation, watery eyes and fatigue.

Mold Reports

“Plaintiffs have been made aware of a report dated September 4, 2001, indicating that Plaza Tower contains toxic mold, and further have seen newspaper and television reports as to the danger of such substances. Defendants, owners and agents of the building, had actual and constructive knowledge of the defects, including but not limited to water leaks and mold and failed to warn plaintiffs,” Rhodes asserts.

Rhodes adds that the defendants failed to make repairs, failed to exercise reasonable care and failed to take immediate steps to mitigate or repair the defects.

According Rhodes, the proposed class can be defined as follows: “All present or past employees assigned by their employers to work in Plaza Tower at any time from 1996 to present, who have been exposed to toxic substances and all individuals assigned after the date of the filing of this petition.”

Rhodes is represented by Robert G. Creely, Nicole L. Hackkett and Madro Bandaries of Amoto & Creely in Gretna, La., and Mickey P. Landry and Frank J. Swarr of Landry & Swarr in New Orleans.

 

Louisiana State Employees
File Proposed Class Action
For Mold Exposure, Injuries

NEW ORLEANS — Louisiana state employees seek class certification in a mold exposure case, according to an Oct. 25 complaint (Sherry Watters, et al. v. Department of Social Services, et al., No. 2001-17775, La. Dist., Orleans Parish; See related story in this issue).

(Complaint available. Document #42-011203-003C.)

The complaint was filed in the Louisiana District Court for the Parish of Orleans. Named defendants are the Department of Social Services, the Department of Health and Hospitals, Division of Administration, BG Real Estate Services Inc., Baha Towers Limited Partnership, Bahar Development Inc., Noob I GP LLC, Noob I LP and ABC Insurance Co.

Sherry Watters and others worked at the Plaza Tower for the Department of Social Services and the Department of Health and Hospitals. Watters maintains that the employees have complained of water leaks and the presence of unknown toxic substances and safety hazards. During their occupancy of Plaza Tower, Watters alleges that the employees have suffered from excessive illness, including sinus and allergy problems, debilitating headaches, skin irritation, watery eyes and fatigue.

Watters further alleges that Plaza Tower contained toxic mold. Watters continues that the defendants’ actions were grossly negligent.

The proposed class is defined as “all present and past individuals employed by the state who worked in Plaza Tower at any time from 1996 to present, who have been exposed to toxic substances and all individuals assigned after the date of the filing of this petition.”

The plaintiffs are represented by Robert G. Creely, Nicole L. Hackett and Madro Bandries of Amoto & Creely in Gretna, La., and Mickey P. Landry and Frank J. Swarr of Landry & Swarr in New Orleans.

 

Texan Homeowners Will
Be Covered For Certain
Mold Damage

AUSTIN — In resolving the ongoing battle in Texas over mold insurance coverage, the Texas insurance commissioner on Nov. 28 adopted a restructured homeowners policy that will retain basic mold coverage while eliminating other coverages that have contributed to steep premium hikes.

Jose Montemayor’s order upholds coverage for the removal of mold caused by a covered water damage claim but not for expensive testing, treating, containing or disposal of mold beyond basic repairs to property damaged by water.

(Order adopting amendments available. Document #42-011203-013X.)

“The order provides coverage in the basic policy for removal of mold that results from water discharge, leak or overflow that is sudden and accidental, including those that are hidden or concealed. If a policyholder continuously ignores indications of an obvious water problem, such as wet carpeting, the claim for mold removal could be denied,” a department press release explained.

The order also prohibits stacking of claims within the same policy year to prevent homeowners from recovering beyond a policy limit.

No Cap

The commissioner refused to adopt the $5,000 cap on coverage recommended by his staff. Insurers instead must offer additional levels of coverage for mold in amounts 25, 50 or 100 percent of existing policy limits, he ordered. Montemayor will consider the individual filings of insurers for alternative levels of coverage.

Montemayor credits his new policy as a common sense approach to protecting availability of insurance for consumers and keeping policies affordable by eliminating elements that drive up costs to the carriers.
Insurers had petitioned for the removal of mold and certain water coverage in response to the drastic rise in mold-related claims. In a series of public hearings, homeowners insisted that coverage be left alone, while some embraced a change that might lower the increasing premiums they were being charged.

Insurers will be directed to begin selling the new, less expensive policy from Jan. 1, 2002, until Jan. 1, 2003. Homeowners who choose the new policy will be entitled to a refund for the remainder of their old policy.

The commissioner plans to call on a task force to develop recommended mold claim handling procedures.

Meanwhile, the Florida Department of Insurance has been asked to address the situation as well. A department official told Mealey Publications that 40 to 50 insurers filed exclusions for approval with the department. However, most have withdrawn their request, according the source. The department is currently working with the Insurance Services Office Inc. and the National Association of Insurance Commissioners to develop a nationwide uniform response to mold-related claims, the source said.

 

Wis. Restaurant Owners
Sue Carrier For Bad Faith
In Mold, Water Damage Case

WAUKESHA, Wis. — Wisconsin restaurant owners allege in a Nov. 5 complaint that an insurance carrier committed bad faith in handling a water, mold damage claim (John and Kathleen Schultz, d/b/a Kettle Moraine Inn v. Society Insurance, No. 01-2655, Wis. Cir., Waukesha Co.).

(Complaint available. Document #25-011120-106C.)

John and Kathleen Schultz own the Kettle Moraine Inn restaurant in Eagle, Wis., and insured the property with Society Insurance. The Schultzes purchased an insurance policy with an effective date of June 1, 2001.

When purchasing the policy, the Schultzes requested the same policy terms issued to the previous owner of the restaurant, except for a reduction in the personal property and an increase in the deductible. The Schultzes never signed an application and did not receive a copy of the policy until after they reported a loss.

The policy provided that the insurer would pay for direct physical loss of or damage to the Kettle Moraine Inn. Society Insurance originally agreed to issue the policy with replacement cost coverage but later changed the replacement cost coverage to actual cash value coverage.

Claim Filed

In July 2001, a water pipe broke at the Kettle Moraine Inn, causing damage to property in the restaurant. A claim for the loss was filed with Society Insurance the following day. The insurer wrote to the Schultzes, notifying them that it would not pay for damage caused “directly or indirectly by fungus.”

The Schultzes hired ServPro, a contractor, to prepare an estimate of the damage and clean up the water damage. ServPro estimated the damages at $40,000. The insurer said the policy was written at “actual cash value” and 30 percent depreciation would be deducted from all items needing to be replaced.

After being asked to pay for the loss as covered by the policy, the insurer agreed that the mold growth was caused by a covered cause of loss but said that if Society Insurance was forced to cover the entire loss, it would apply an even greater depreciation to the damages.

On Oct. 25, Society rejected the Schultzes’ proof of loss of $30,926.31, adjusted the amount of depreciation to 50 percent and issued a check for $15,613.16. This cause of action followed. The Schultzes are alleging breach of contract and bad faith against Society.

Complaint Filed

The Schultzes allege that Society breached the policy by failing to pay for the direct physical loss or damage to the covered property resulting from a covered cause of loss.

“[A]s a result of Society Insurance’s breach of the policy, to wit; failure to pay for direct physical loss of or damage to covered property, Plaintiffs have been responsible for paying over $30,000 for repairs to the covered building; have and will suffer loss of business income as insured for under the policy; have and will incur attorney fees and expenses; and will incur other expenses, including, but not limited to, interest on loans, expert fees, travel time and expenses,” the Schultzes allege.

In adjusting the claim, the Schultzes maintain that Society Insurance acted intentionally, willfully, unreasonably and with reckless disregard for the Schultzes’ rights. According to the couple, Society did so by changing the policy from replacement cost coverage to actual cash value, by withholding payment and by forcing the Schultzes to pay for the damage.

As a result of Society Insurance’s bad faith in handling the claim, the Schultzes allege that they have suffered harm by being required to pay repair bills in excess of $40,000, incurring loss of business income, incurring legal expenses and incurring interest expense on loans obtained.

The complaint was filed by Paul F. Reilly of Hippenmeyer, Reilly, Moodie & Blum in Waukesha.

 

Claim For Mold Damage
Fairly Debatable, Iowa
Appeals Court Rules

DES MOINES, Iowa — The Iowa Court of Appeals on Nov. 16 affirmed a directed verdict on a bad faith claim against a homeowners insurer that denied a supplemental damage claim for mold and mildew damage, finding that the claim was fairly debatable (Robert Rossmanith v. Union Insurance Company of Providence, et al., No. 1-280/00-1138, Iowa App.).

(Opinion available. Document #03-011127-104Z.)

Robert Rossmanith sued his homeowners insurers, Union Insurance Company of Providence and EMC Insurance Cos., for breach of contract and bad faith in the handling and partial denial of his property damage claims. Rossmanith’s home was damaged in 1998 during a hailstorm. The storm broke windows and damaged his tile roof.

Dispute Over Damages

EMC hired an independent adjusting company, GAB Robins, to review Rossmanith’s claim. Bill Agin of GAB inspected Rossmanith’s home and advised him to do temporary repairs to the roof to prevent further damage. Rooftop Builders was hired to put a temporary cover on the roof, but it did not complete the job for another week, leaving the home exposed to a rainstorm on June 14, 1998, resulting in further damage to the inside of the home. Rossmanith moved out of the home after the rainstorm.

For the next two weeks, Rossmanith received bids for permanent repairs but spent some time trying to decide whether he wanted to replace the roof with tile or shingles. In July 1998, the roofing company removed the tarp cover and put a felt cover over the roof. Agin conducted a final inspection in late July, setting damages at $57,896. The damage amount included the additional damage caused by the rain on June 14, 1998.

Rossmanith found that the damage amount reached by EMC was not enough to cover all the damage. Rossmanith raised concerns about mold and mildew growth that had developed in the home. Rossmanith hired public adjuster Ron Hetland, who inspected the house in September 1998, finding $154,957 in damages. Hetland submitted a supplemental claim to EMC for $157,957.

EMC adjuster Steve Rehmann reviewed the supplemental claim and found that the majority of the damage cited was likely caused by the extended delay in reroofing the home rather than a loss from the storm. Rehmann cited Agin’s initial inspection reports, which did not mention mold, the delay in time between Agin’s and Hetland’s inspections and that the interior had been covered only by a felt layer over the summer. EMC denied coverage for the majority of the supplemental claim, finding that Rossmanith failed to protect the property from further damage as required by the policy.

Directed Verdict

The trial court granted EMC a directed verdict on the bad faith claim at the close of Rossmanith’s case. The jury found in favor of Rossmanith on the breach of contract claim for $59,190. Rossmanith appealed the directed verdict granted on the bad faith claim, arguing that the evidence at trial showed there was no reasonable basis for denial of his supplemental claim.

To establish a bad faith claim, the insured must show there was no reasonable basis for claim denial, the court said, citing Stahl v. Preston Mut. Ins. Ass’n (517 N.W.2d 201, 203 [Iowa 1994]) and Dolan v. Aid Ins. Co. (431 N.W.2d 790, 794 [Iowa 1988]). Here, the appeals court held, the evidence supports EMC’s argument that the claim was fairly debatable.

The evidence shows that “Agin did a thorough appraisal after Rossmanith’s initial claim and found no mold present at that time; Rossmanith did not sufficiently regulate the humidity and temperature in the home once he moved out; reroofing the home with a permanent roof, which was the responsibility of Rossmanith under the terms of the insurance contract, was substantially delayed while Rossmanith decided what type of roof to use; and damage to the felt covering had created the opportunity for additional water to enter the house and cause damage not attributable to the May 30 storm and water entry. These facts, from which EMC reasonably could and did conclude the mold problem which accounted for the majority of the additional damages requested in the supplemental claim was not caused by the initial storm and water entry, rendered the supplemental claim ‘fairly debatable,’” the appeals court ruled.

The appeals court affirmed the trial court’s grant of directed verdict on the bad faith claim, finding that the claim was fairly debatable as to whether it was covered under the policy or excluded under the conditions clauses.

Rossmanith is represented by Dee Ann Wunschel and Russell S. Wunschel of Carroll, Iowa. The defendants are represented by David J. Proctor and Sean M. O’Brien of Bradshaw, Fowler, Proctor & Fairgrave in Des Moines.

California County Employees
Allege Injuries Caused
By Mold, Lead Dust Exposure

SALINAS, Calif. — California employees who worked for a county jail maintain in a Nov. 15 complaint that they were injured by mold and lead dust exposure (Michael Baldwin, et al. v. County of Monterey, No. Not Yet Assigned, Calif. Super., Monterey Co.).

(Complaint in Section E. Document #42-011203-105C.)

Monterey County faces claims for fraudulent concealment, negligence and continuing nuisance. The complaint was filed in the Monterey County Superior Court. Unnamed defendants are general contractors, subcontractors, material suppliers, engineers, architects, environmental consultants and environmental abatement contractors who are allegedly responsible for the design, engineering, construction, maintenance and abatement of environmental hazards.

Michael Baldwin and others worked for the county within the Old Monterey County Jail. Baldwin argues that while he worked in the jail, he was exposed to toxic mold and lead dust. Alleged injuries include respiratory distress, allergic reactions, skin rashes, chronic headaches, nausea, hair loss, vertigo, memory loss, cognitive dysfunction, chronic fatigue and suppression of the immune system. Baldwin notes that the cause of the injuries was discovered within the past year.

Injuries Known, Concealed

According to the complaint, the county knew that the plaintiffs were injured by mold and lead dust but concealed the connection between the injuries and the plaintiffs’ employment at the jail.

Baldwin says that when the county concealed the true cause of injuries, it did so with the intent to deceive and defraud him.

“Plaintiffs, at the time of the suppression and concealment of these facts occurred, were ignorant of the existence of the facts Defendants concealed or suppressed. Plaintiffs had no reason to be aware of these facts, which were fraudulently concealed by Defendants. Had Plaintiffs been aware of the existence of the facts not disclosed and actively suppressed by Defendants, Plaintiffs would have taken measures to prevent their exposure to highly toxic, allergenic, and carcinogenic fungi and lead dust,” Baldwin says. “As a direct and proximate result of their exposure, Plaintiffs’ injuries have been aggravated following the County’s concealment.

“As a further direct and proximate result of such exposure, Plaintiffs suffered serious personal injury, including emotional distress and have a reasonable and significant risk of contracting serious latent disease, illnesses, and/or injuries. Such increased risk makes periodic diagnostic medical examinations reasonably necessary.”

The plaintiffs are represented by Alexander Robertson IV and Mark J. Uyeno of Robertson, Vick & Capello in Woodland Hills, Calif.

 

Ohio Resident Sues
Landlord For Mold Injuries

CINCINNATI — An Ohio apartment resident alleges that his landlord’s failure to repair water intrusion caused mold contamination that subsequently caused personal injuries (James Krueger v. E.C. Denton, No. A0107333, Ohio Comm. Pls., Hamilton Co.).

(Complaint available. Document #42-011203-006C.)

E.C. Denton faces claims for negligence and breach of contract. The complaint was filed in the Hamilton County Court of Common Pleas.

James Krueger entered into a verbal contact to rent property from Denton. Krueger alleges that while he lived there, he discovered that there were multiple sources of water intrusion. Krueger further claims that Denton refused to adequately repair the defects. According to Krueger, the water intrusion caused mold contamination.

“Plaintiff has sustained and continues to sustain adverse health consequences from toxic mold exposure, and thus has received and continues to receive medical treatment and thus continues to incur medical expenses, has endured lost time from the pursuit of his employment, has had his personal life interfered with, has endured and continues to endure pain and suffering, and has sustained permanent injury and/or disability as the direct and proximate result of the negligence,” Krueger alleges.

Krueger is represented by Robert N. Trainor in Newport, Ky.

 

Previous Homeowner Faces
Mold Contamination Claims

CINCINNATI — A mold contamination and personal injury lawsuit filed Aug. 10 alleges that a previous homeowner failed to disclose water damage (Kristine Flinchum, et al. v. Daniel M. Hennessy, et al., No. A0105517, Ohio Comm. Pls., Hamilton Co.).

(Complaint available. Document #42-011203-007C.)
Named defendants are Daniel M. Hennessy, Jennifer Hennessy, M. McNally and AAA Engineering & Inspection Services Inc. The complaint was filed in the Hamilton County Court of Common Pleas.

Kristine Flinchum purchased property from the Hennessys. According to Flinchum, the disclosure form said there was no water leakage, water accumulation, excess dampness or other defects in the basement. However, Flinchum maintains that she experienced serious water intrusions in the basement of the property.

“As a direct and proximate result of the water incursion into the basement of the Property, Flinchum has sustained damages, including but not limited to, water damage and mold damage to the Property and to personalty contained within the property,” the complaint alleges. “Defendants Daniel M. Hennesy and Jennifer Hennessy knew the basement of the Property was leaking or had leaked at the time of the sale, but they failed to disclose this defect to Flinchum.”

Flinchum is represented by Robert N. Trainor in Newport, Ky.

 

Kentucky Employee Sues
Over Mold Exposure

CINCINNATI — A Kentucky employee alleges in a Sept. 19 complaint that she was injured by mold exposure (Christina E. Hughes v. Jorgensen Maintenance Services Inc., et al., No. A0106410, Ohio Comm. Pls., Hamilton Co.).

(Complaint available. Document #42-011203-014C.)

Christine Hughes sued Jorgensen Maintenance Services Inc. and Jorgensen Maintenance Technologies Inc. in the Hamilton County Court of Common Pleas.

Hughes notes in her complaint that she was an employee at Toyota Motor Distributors. Jorgensen was retained by Toyota to maintain all buildings and mechanical systems at the premises.

Sources told Mealey Publications that Hughes alleges that she was injured by mold exposure.

“Jorgensen, by and through its employees, breached its duty to protect the safety of those who frequent the premises, specifically Hughes, when it failed to use reasonable care in performing work at and on the Premises and when it failed to perform said work in a workmanlike manner. As a direct and proximate result of Jorgensen’s breach of its duty, Hughes has sustained lost wages, medical expenses; pain, suffering, and emotional distress; loss of enjoyment of life; and permanent and total disability,” Hughes alleges.

Claims asserted include negligence and gross negligence.

Hughes is represented by Robert N. Trainor in Newport, Ky.

 

Kentucky Homeowner Sues
Carrier For Untimely Response
To Water, Mold Damage

COVINGTON, Ky. — A Kentucky homeowner sued an insurance carrier Sept. 6 for allegedly failing to respond in a timely manner to water damage that resulted in mold contamination (Janet Schroder v. Kentucky Farm Bureau Mutual Insurance Co., et al., No. 01-CI-01876, Ky. Cir., Kenton Co.).

(Complaint available. Document #42-011203-012C.)

The complaint was filed in the Kenton County Circuit Court. Named defendants are Paul Davis Systems of Tri-State Area Inc. and Kentucky Farm Bureau Mutual Insurance Co. (KFB).

Janet Schroder had a homeowners policy with KFB that covered damage from fire loss, according to the complaint. Schroder notes that a fire started in the kitchen and dining room. While the fire was being extinguished, Shroder maintains that water penetrated the basement.

Sources told Mealey Publications that Schroder maintains that the water damage resulted in mold contamination.

“KFB has breached the terms of the contract identified as the Policy by failing to respond within a reasonable time to repair the condition of the Property, by failing to address the total damage to the Property or to stop it, and by failing to properly supervise and monitor remediation performed at its request by Defendant Paul Davis,” according to Schroeder.

Schroder is represented by Robert N. Trainor of Newport, Ky.

 

Kentucky Condo Owner Sues
Over Water, Mold Damage

NEWPORT, Ky. — A Kentucky condominium owner alleges in a Nov. 14 complaint that her unit suffered from water intrusion and mold damage (Betty J. Roy v. Highland Trace Condominiums Council of Co-Owners Inc., et al., No. 01-CI-1470, Ky. Cir., Campbell Co.).

(Complaint available. Document #42-011203-011C.)

Named defendants are Highland Trace Condominiums Council of Co-Owners Inc., Douglas Cull and Company Inc. and Brenda Sprague, president and director. The complaint was filed in the Campbell County Circuit Court. Claims asserted include breach of contract and negligence.

Condominium owner Betty Roy alleges that she informed the defendants of water intrusion into her property from the exterior and asked that it be fixed. She alleges that despite the responsibility of the condo council to maintain the exterior of the property, she had to pay for the repairs herself.

Sources told Mealey Publications that the condominium was also contaminated with mold.

“Plaintiff has suffered adverse health consequences necessitating the receipt of medical treatment and thus the incurring of medical expenses, both past, present and future, is enduring and continues to endure significant pain and suffering, lost time from the pursuit of her employment, substantial interference with her personal life, permanent disability, and the loss of the use and enjoyment of her homestead, all directly and proximately caused by the breach of contract,” Roy alleges.

The complaint was filed by Robert N. Trainor in Newport.

 

California Company Argues
Nuisance Claim Not Viable
In Construction Defect Case

SANTA ANA, Calif. — Damages for a nuisance claim is not a viable cause of action in a mold construction defect case, according to a Nov. 2 motion (James Schaff, et al. v. JMS Boulder Creek LLC., et al., No.SCVSS080577, Calif. Super., San Bernardino Co.; See September 2001, Page 3).

(Motions available. Document #42-011203-008M.)

James Schaff and others maintain that the housing development of Boulder Creek in Mentone, Calif., contained numerous construction defects.

Claims

The complaint was filed in the San Bernardino County Superior Court. Claims asserted include breach of implied warranty of merchantability, breach of implied warranty of fitness, breach of written warranty, strict liability in tort, negligent design, manufacturing and planning, nuisance and bodily injury.

Named defendants are JMS Boulder Creek LLC, JMS Mentone L.P., JMS Properties Inc., Ed Raymond Construction Co., Ralph S. Binney General Contractor, Alliance Mechanical, Cole Plumbing, Golden State Fence, High Valley Roofing Co. Inc., Irvine West Heating & Air, Nuwal Co. Inc., Southwest Finish & Supply Inc., Steiner Construction Inc., Steve McKenzie Painting, Sunair Window Corp. and Westfall Construction Co. Inc.

According to Schaff, the homes “do not comply with minimum building standards imposed by law and have created an environment where natural and artificial materials, including wood, concrete, stucco, paint, steel and other components and portions of the buildings and structures were injured and/or damaged in recurring cycles. In turn, these conditions have created an environment inside the dwellings unfit for human habitation, including the creation of molds and fungi generating toxins and spores which are injurious and detrimental to human health.”

Schaff says mold exposure caused personal injuries, including coughs, congestion, runny nose, eye irritation and breathing problems.

Motion To Strike

Subsequently, JMS filed a motion to strike portions of the first amended complaint, arguing that the allegations are improper and not drawn in conformity with California law because nuisance cannot be pleaded in this case.

In a demurrer filed concurrently, JMS asserts that “Plaintiffs’ First Amended Complaint (‘FAC’) seeks damages for nuisance, which is not a viable cause of action in a construction defect setting. The FAC improperly seeks emotional distress damages in a construction defect claim. Lastly, Plaintiffs seek recovery of bystander emotional distress damages, which are not proper in the context of this construction defect claim. Such improper and unrecoverable claims should be eliminated from this case at its outset to prevent the burdens and expense resulting from the need to address such matters in discovery, law and motion and settlement. An Order striking such allegations from the FAC best serves this purpose.”

JMS is represented by Michael S. Orr and John A. O’Hara of Newmeyer & Dillion in Newport Beach, Calif. The plaintiffs are represented by Kenneth S. Kasdan and Randi E. Pinckes of Kasdan, Simonds & Epstein in Irvine, Calif.

 

Michigan Court: Economic
Loss Doctrine Does Not
Apply To Mold, EIFS Case

SOUTHFIELD, Mich. — A state appellate court on Oct. 19 reversed a trial court’s decision granting summary judgment to a manufacturer of Exterior Insulation Finishing System (EIFS), saying the claim is not barred by the statute of limitations (Harry Blackward, et al. v. Simplex Products Division, et al., No. 221066, Mich. App., 2nd Dist.).

(Opinion available. Document #09-011114-018Z.)

Harry Blackward and D’Anne Kleinsmith sued Simplex Products Division and K2 Inc., alleging defective EIFS, which resulted in swelling doors, mold and cracked ceilings in their home.

The plaintiffs alleged breach of implied and express warranties and product liability.

Economic Loss Doctrine

The trial court granted summary judgment to the defendants on the ground that the economic loss doctrine applied to the case and, therefore, the Uniform Commercial Code (UCC) provided the plaintiffs an exclusive remedy.

The court also said any claim under the UCC was barred by the applicable statute of limitations under Michigan Compiled Laws 440.2725.

The plaintiffs argued that the trial court erred in granting summary judgment because the economic loss doctrine does not apply to their claims and, therefore, the case is not governed by the UCC’s statute of limitations.

Precedent

The Second District Court of Appeals cited state Supreme Court case Neibarger v. Universal Cooperatives Inc. (439 Mich 512; 486 NW2d 612), which distinguished between “transactions involving the sale of goods for commercial purposes where economic expectations are protected by commercial and contract law, and those involving the sale of defective products to individual consumers who are injured in a manner which has traditionally been remedied by resort [sic] to the law of torts.”

Since Neibarger, the Court of Appeals said it has applied the economic loss doctrine on several occasions, and in each instance, it has acknowledged that the economic loss doctrine applies to claims involving the sale of products for commercial purposes.

“The economic loss doctrine as adopted in Michigan clearly distinguishes between transactions involving the sale of goods for commercial purposes, where there are economic expectations attached to the purchases and those involving the sale of defective products which result in losses traditionally remedied by resort [sic] to tort law,” the Court of Appeals said.

Neibarger Applied

The court said that if the economic loss doctrine as defined by Neibarger were applied to transactions involving individual consumers making noncommercial purchases, it would render the language of the product liability statute useless and obliterate the use of product liability actions for damage to property caused by defective products.

“This case does not involve the ‘usual commercial loss,’ and the parties were not a commercial business,” the court said. “While the losses are economic in the sense that they are monetary, they are not encompassed by the economic loss doctrine as defined by our courts.”

The court disagreed with the defendants’ argument that summary judgment was proper based on a release signed by the plaintiffs with regard to other litigation and claims arising out of the construction project.

Separate Opinion / Dissent

Judge K.F. Kelly concurred with the majority but wrote separately to “underscore the notion that in my estimation the specific purposes underlying the [UCC] are not furthered when applied to transactions involving individual consumers which are, by definition, not ‘commercial transactions.’”

The crucial question, Judge Kelly said, is whether it was a “commercial transaction in goods,” which is the “hallmark” of transactions governed by the UCC.

The case presents a classic consumer transaction, Judge Kelly said, and it is undisputed that the plaintiffs did not have an economic interest or objective when the EIFS was purchased for use on a personal residence.

Judge Peter D. O’Connell dissented, saying, “Although this court may address unpreserved questions of law where the record is factually sufficient, I would decline to do so in the present case.”

 

The ‘Economic Loss Doctrine’ As A Defense To Mold Claims

By
Patrick J. Perrone
Whitney A. Klein
and
Nicole A. Corona

[Editor’s Note: Patrick J. Perrone is a partner and Whitney A. Klein and Nicole A. Corona are associates in the law firm of McCarter & English, LLP. Mr. Perrone, Ms. Klein and Ms. Corona represent defendants in construction defect and product liability litigation. The law firm of McCarter & English, LLP specializes in — among other things — tort and insurance coverage litigation on behalf of large and small companies. Copyright 2001 by the authors. Responses to this commentary are welcome].

I. Introduction — A Typical Fact Pattern

A property owner purchases a new home or building and the structure begins to leak because of alleged defects in the roofing, siding, and/or windows. As a result, mold begins to grow. The mold damages interior walls and ceilings and requires the owner to repair and replace these building components. Although no one is sick, property damage exists. The property owner sues the builder or building product manufacturer for the cost of replacement and repair. The property owner’s claims include breach of contract, negligence, and strict liability. Although the damages available for breach of contract can be limited by the terms of the contract itself, no such limits apply to the tort claims. Accordingly, it is important to eliminate the tort claims if possible. The “economic loss rule” can accomplish this task.

II. The Economic Loss Rule

A. The Basis For The Rule

The economic loss rule is a “judicially created doctrine that prohibits recovery in tort where a product has damaged only itself and the only losses suffered are economic in nature.”1 In such cases, the losses must be sought under contract theories.2 The rule springs from the distinction between tort and contract. Tort law compensates consumers for physical injury or damage to property other than the allegedly defective product itself. Contract law, on the other hand, compensates consumers for disappointed economic expectations.3 The economic loss rule maintains the distinction between tort and contract by requiring that claims for economic loss (i.e. disappointed economic expectations) be brought in contract.4

B. The Definition Of Economic Loss

Economic loss is defined as “damages for inadequate value, costs of repair and replacement of the defective product or consequent loss of profits – without any claim of personal injury or damage to other property.”5 Simply stated, economic loss involves disappointed economic expectations.6

C. The Benefits Of The Economic Loss Rule

The economic loss rule is important for builders and building product manufacturers because it provides predictability by limiting a plaintiff’s damages to those contemplated by the parties at the time of contract negotiation. This means that builders and building product manufacturers should not be subject to the type of unlimited liability that is often associated with tort claims.7

III. Property Damage Caused By Mold Growth Constitutes An Economic Loss

In the typical mold case, plaintiffs will claim that defects in construction or defects in building materials resulted in leaks that caused mold growth. The plaintiff’s alleged damages will most likely consist of the costs to repair and replace the allegedly defective building materials and the costs to repair and replace other building materials that got wet (like ceilings and walls). Such damages are classic examples of “economic loss.” As such, courts should require that plaintiffs sue for breach of contract and should not permit plaintiffs to sue in tort.

For example, in Stoney v. Franklin, the plaintiff hired the defendant to build a home. The builder applied an exterior insulation finish system to the outside. After the construction was complete, the plaintiff noticed leakage in various parts of his home. The plaintiff’s inspector determined that water was entering through the siding.8

The plaintiff sued the builder for breach of contract based on the builder’s use of an allegedly defective siding material. In addition to the contract claim, the plaintiff added a tort-based negligence claim.9 Relying on the economic loss rule, the court dismissed the plaintiff’s tort claim. The court reasoned that the parties had the opportunity to secure appropriate remedies when they created the contract and that the parties should be limited to those contractual remedies.10

A similar result was reached in Crowder v. Vandendeale.11 In that case, plaintiff brought a tort-based negligence claim against a builder for failure to construct the plaintiff’s home in a workmanlike manner. Plaintiff sought damages for the costs to repair cracks in the home’s brickwork and foundation. The Missouri Supreme Court concluded that “liability imposed for mere deterioration or loss of bargain resulting from latent structural defects is contractual” and that contract law provided an adequate and appropriate remedy in such cases. As such, the court dismissed the homeowner’s tort claims.13

IV. Plaintiffs Cannot Circumvent The Economic Loss Rule By Claiming That Damage To Walls And Ceilings Constitutes ‘Other Property Damage’

As stated, the economic loss rule does not apply to cases involving damage to “other property.”14 As such, most plaintiffs will claim that this exception applies. More particularly, plaintiffs will contend that defect in windows, roofs, siding, etc. caused leaks that resulted in “damage” to interior walls and ceilings. Claiming that this is damage to “other property,” plaintiffs will argue that the economic loss rule does not apply. This argument should be rejected.

In determining whether a party has suffered damage to “other property,” the question for the court is whether property other than the defective property itself, or property other than that into which the defective property has been incorporated, has been damaged.15 Under this definition of damage to “other property,” courts have consistently denied recovery in tort for economic loss notwithstanding the fact that an allegedly defective product has damaged other structural components.

For example, in Chicago Heights Venture v. Dynamit Nobel of Am., Inc., plaintiff apartment owners sought damages resulting from a roofing material that “tore away from the roof of each apartment building,” resulting in “water leak[ing] into the buildings and damag[ing] the ceilings and walls of the lower floors.”16 The Seventh Circuit affirmed the dismissal of the negligence and strict liability counts. The Court stated:

Fairly read, the complaint alleges a malfunction over time which given the nature of the product, manifested itself most acutely in times of adverse weather. Since it was necessarily attached to the structure, [the roof’s] malfunction necessarily caused incidental damage to the surrounding parts of the structure. The gravamen of the complaint — simply stated — is that the roof did not work.

Finding no damage to “other property,” the Court held that plaintiff was limited to its contractual remedies.17

Similarly, in Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., the Supreme Court of Virginia applied the economic loss rule to preclude a negligence claim brought by homeowners against an architect and pool installer.18 There, plaintiff alleged that the fill beneath his pool settled, causing water pipes to break. As a result, the bottom of the pool and a part of the home’s foundation cracked. In dismissing plaintiff’s tort claims, the Court stated:

The plaintiffs here allege nothing more than disappointed economic expectations. They contracted with a builder for the purchase of a package. The package included land, design services, and construction of a dwelling. The package also included a foundation for the dwelling, a pool, and a pool enclosure. The package is alleged to have been defective — one or more of its component parts was sufficiently substandard as to cause damage to other parts. The effect of the failure of the substandard parts to meet the bargained-for level of quality was to cause a diminution in the value of the whole, measured by the cost of repair. This is a purely economic loss, for which the law of contracts provides the sole remedy.19

In Casa Clara Condominium Ass’n, Inc. v. Charley Toppino & Sons, Inc., the plaintiff homeowners sought to recover from a general contractor for damage caused by defective concrete used to build their homes.20 Specifically, the plaintiffs alleged that the concrete contained excessive chlorides, which caused the reinforcing steel in their homes to rust and expand.21 The expanding steel caused the structural components of the building to crack. Because of the alleged deterioration, vast repair work was required.22 Affirming dismissal of plaintiffs’ tort claims, the court reasoned that the concrete was a component part of the homes, and the resulting damage to the homes, therefore, was not damage to other property.23

Finally, in Redarowicz v. Ohlendorf, plaintiff homeowner commenced an action against the builder to recover damages caused when the “chimney and adjoining brick wall [began] to pull away from the rest of the house . . . [with the result that] the basement wall was cracked . . . [causing] water leakage in the basement as well as leakage in the roof area around the chimney.”24 The Illinois Supreme Court held that the homeowner’s economic losses, resulting from faulty construction, were not recoverable in tort. The Court reasoned:

To recover in negligence there must be a showing of harm above and beyond disappointed expectations. A buyer’s desire to enjoy the benefit of his bargain is not an interest that tort law traditionally protects.25

As illustrated by the foregoing cases, where leaks from roofing materials, siding materials and other building materials cause interior water and mold damage, such losses should not be recoverable in tort. Consistent with the analysis set forth in the foregoing cases, once building materials are installed, they become an integral part of the project. Accordingly, no damage to “other property” exists and the economic loss rule requires that all property damage claims be brought in contract.

V. Practice Tips

Builders and building product manufacturers can limit their potential liability for property damage by placing damage limitations in their contracts. For example, a builder or building product manufacturer might limit liability to the cost of replacing the allegedly defective product only, and exclude liability for consequential losses (like the water damage to walls and ceilings). If plaintiffs then try to circumvent these contractual limitations by reliance on tort based theories of recovery, defendants can move to dismiss such claims on the grounds that such claims are barred by the economic loss rule.

Builders and manufacturers should also consider including a choice of law provision in their contracts to ensure that the economic loss doctrine will be applied in the event of a lawsuit. For example, although states like New York, New Jersey, and Pennsylvania recognize the economic loss rule, other states like Arkansas do not.

VI. Conclusion

The economic loss rule should be considered by builders and building product manufacturers in any mold-related case where plaintiffs seek to recover in tort for property damage. By moving to dismiss tort claims, builders and building product manufacturers should be able to limit their potential damages by reference to previously negotiated contracts.

ENDNOTES

1. Danforth v. Acorn Structures, Inc., 608 A.2d 1194, 1195 (Del. 1992).

2. Swartz v. Schering-Plough Corp., 53 F.Supp.2d 95, 104 (D. Mass. 1999); Lewis v. Gen. Elec. Co., 37 F.Supp.2d 55, 59 (D. Mass. 1999); Sebago, Inc. v. Beazer East, Inc., 18 F.Supp.2d 70, 89 (D. Mass. 1998); Arthur D. Little Int’l, Inc. v. Dooyang Corp., 928 F.Supp. 1189, 1202 (D. Mass. 1996); Clark v. Rowe, 701 N.E.2d 624, 626 (Mass. 1998).

3. See Marcil v. John Deere Indus. Equip. Co., 403 N.E.2d 430, 434 (Mass. App. 1980). See also Sebago, 18 F.Supp.2d at 89.

4. Id.

5. Marcil v. John Deere, 403 N.E.2d at 434, n.3.

6. Commonwealth v. Johnson Insulation, 682 N.E.2d 1323, 1334 (Mass. 1997).

7. Louis R. Pepe and James Budinetz, “The Death Knell of the Economic Loss Doctrine in Connecticut,” 17 CTLA Forum, January/February 1999.

8. Stoney v. Franklin, 2001 WL 683963 (Va. Cir. Ct. 2001).

9. Id. at 1.

10. Id. at 3.

11. Crowder v. Vandendeale, 564 S.W.2d 879 (Mo. 1978).

12. Id. at 881 and 884.

13. Id.

14. Marcil v. John Deere, 403 N.E.2d at 434, n.3.

15. See East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986); Aetna Life & Casualty Co. v. Therm-O-Disc, Inc., 511 So.2d 992 (Fla. 1987); Northern Power & Engineering Corp. v. Caterpillar Tractor Co., 623 P.2d 324 (Alaska 1981).

16. Chicago Heights Venture v. Dynamit Nobel of Am., Inc., 782 F.2d 723, 724 (7th Cir. 1986)

17. Id. at 729.

18. Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 374 S.E.2d 55, 58 (Va. 1988.)

19. Id. at 58.

20. Casa Clara Condominium Ass’n, Inc. v. Charley Toppino & Sons, Inc., 588 So.2d 631 (Fla. Dist. Ct. App. 1991).

21. Id. at 632.

22. Id.

23. Id. at 633-34.

24. Redarowicz v. Ohlendorf, 441 N.E.2d 324, 326 (Ill. 1982).

25. Id. at 327.

 

The ‘Molden’ State: Evaluating Third-Party Mold Claims Under California Law

By
Linda Bondi Morrison

[Editor’s Note: Linda Bondi Morrison is a senior associate in the Costa Mesa, California office of Tressler, Soderstrom, Maloney & Priess, where she concentrates her practice on the nationwide litigation of complex insurance coverage matters. Tressler, Soderstrom, Maloney & Priess is a full-service law firm with over 100 attorneys coast to coast. The firm regularly represents insurers in litigation and provides a broad array of insurance consulting services to its clientele. The information contained herein is meant to provide a general overview and should not be relied upon as legal advice. Any expression of opinions contained herein are those of the author, and not those of Tressler, Soderstrom, Maloney & Priess or its clients. Copyright 2001 by the author. Responses to this commentary are welcome.]

I. Introduction

The past several years have seen a significant increase in the number of lawsuits involving mold. With heightened media attention and public awareness, the number of claims for mold-related property damage and bodily injury has risen dramatically. One California lawyer alone is reputed to be handling mold complaints for 1,000 clients.1

New legislation in California highlights the attention this issue has recently received.2 On October 5, 2001, Governor Davis signed two bills relating to mold in indoor environments. The most controversial of the bills was Senate Bill No. 732, entitled the Toxic Mold Protection Act of 2001.

Among other things, Senate Bill No. 732 requires that a task force be convened to conduct studies to attempt to set permissible exposure limits to mold in indoor environments. After the adoption of permissible exposure limits, the bill would require written disclosure in most cases of the presence of mold in excess of permissible levels by sellers or lessors of residential, commercial or industrial property, to potential buyers, renters or occupants. Specifically, any entity that owns, leases or operates a building, who knows or has reasonable cause to believe that mold is or has been present on the property, would be required to provide disclosure if the level exceeds permissible exposure limits. If permissible exposure limits cannot be established, general guidelines will be set to enable enforcement agencies to assess the health threat posed by the presence of mold.

Assembly Bill No. 284 was also signed by Governor Davis. This bill establishes a California Department of Health Services mold program. Under Assembly Bill No. 284, the California Research Bureau is required to perform a study of, and publish findings on, fungal contamination in indoor environments. This bill was designed to assist the State of California in providing guidance as to what it sees as a growing public concern about options for avoiding and remediating problems posed by fungal contamination.

A third bill, Assembly Bill No. 178, was also proposed in the 2001-2002 California legislative session. This bill proposes to amend the California Health and Safety Code. It would require landlords to disclose to tenants or prospective tenants the presence of mold in buildings if the level exceeded certain standards.

The high profile mold has achieved in the California legislature, as well as the intense media attention focused on the issue, demonstrates that mold has become a significant concern to many. This concern is likely to translate into an increase in claims against insurers. Although claims may be made under different types of policies and in different jurisdictions, this article will focus on the application of California law to third-party claims made under general liability policies and some of the issues which should be considered when evaluating a potential defense and indemnity obligation.

II. Duty To Defend

A. When Does A Duty To Defend A Mold Claim Arise?

Unless specific policy provisions indicate otherwise, an insurer has no duty to defend a claim against its insured in the absence of a lawsuit against the insured. 3 A duty to defend exists if the allegations of the complaint, when compared to the policy, reveal a possibility that the claim may be covered by the policy. 4 In addition, if the insurer is aware of facts which do not appear in the complaint, but which would create a potential for coverage, a duty is triggered.5 Consequently, if an insurer were aware that its insured’s premises were infested with toxic mold which resulted in bodily injury to a third party during its policy period, yet the complaint against the insured did not allege contamination during that time frame, a defense obligation would likely be found to have been triggered. Similarly, under California law, an insurer may rely upon extrinsic evidence to defeat a defense obligation.6

B. Reimbursement Of Defense Costs For Noncovered Claims

Once a duty to defend has been triggered, an insurer must defend the entire action against its insured, including those claims for which there is no potential for coverage under the policy.7 However, if an insurer properly reserves its rights, it may seek reimbursement from the insured for defense fees and costs which are incurred solely for the defense of noncovered claims.8

As described in more detail below, mold suits may involve claims which clearly do not present the potential for coverage. An example would be a claim which alleges a purely economic loss, such as loss of business goodwill, as a result of mold contamination.9 Since purely economic losses do not qualify as “property damage” under most policies, no potential for coverage would exist.
A proper reservation of rights would be required to preserve an insurer’s right to recover costs incurred in connection with noncovered claims. Therefore, using the example above, an insurer would need to reserve its right to recover fees and costs incurred solely in the defense of the “loss of business goodwill” claim.

III. Bodily Injury Claims

Exposure to certain molds has been alleged to be associated with a wide range of physical, cognitive and psychiatric symptoms. The symptoms are often ill defined, such as burning eyes, fatigue, respiratory difficulties, skin irritation, headaches, poor memory and concentration, and insomnia. Asthma, hypersensitivity and allergic reactions are also alleged to have resulted from mold exposure. Additionally, articles published in the medical arena have suggested a link between exposure to toxic mold and pulmonary hemorrhage in infants. It is often difficult to prove, however, that a claimant’s illness is caused by mold because of the non-specific symptoms generally associated with mold-related illness.

Most general liability policies provide that an insurer will pay “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’” to which the policy applies. “Bodily injury” is often defined as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” Sometimes “bodily injury” is defined to include “mental or emotional injury, sickness, disease, disability, anguish or shock.” If a complaint alleges emotional distress which is accompanied by physical injury, courts would probably find “bodily injury,” even if the definition does not include “mental or emotional injury . . .”. In the absence of some physical injury, California courts are split as to whether claims for emotional distress fall within the definition of “bodily injury.”10

Emotional distress claims may arise in the context of a claimant’s fear of returning to a previously mold-infested building (either home or office) on the grounds that contamination may still exist. Claims may also arise by homeowners who have lost their personal or sentimental belongings due to mold, or by business owners who claim to have lost their livelihood because of mold contamination. Although an insurer may not ultimately have an indemnity obligation for certain emotional distress claims, it is likely that such claims would be found to have triggered a duty to defend under California law.

IV. Property Damage Claims

Mold growth can result in property damage claims against many different categories of insureds. For example, landlords and property managers are subject to claims by tenants resulting from mold growth in units. These claims may be based on breach of a lease agreement or grounded in tort, such as negligence or failure to warn.

In addition, architects and engineers may face liability for failure to select a proper construction site or materials, or to design a building. General contractors or developers may also be sued for breach of warranty or negligent selection of subcontractors, and the subcontractors themselves may be sued for faulty workmanship or materials.

Individuals or companies that install or service heating, ventilation and air conditioning systems may also face liability for inadequate design, construction, installation or maintenance. Landscapers may be sued based on negligent design or installation of drainage systems which cause water accumulation and mold growth. In addition, realtors may face liability for failure to discover defects or for negligent misrepresentation as to the condition of certain properties. The list of potential defendants is virtually endless.

Most general liability policies define “property damage” to include “physical injury to or loss of use” of a third-party’s “tangible property.” There is no coverage under this definition for damage to intangible interests in property, such as leaseholds.11 Therefore, a claim alleging that a lessee was constructively evicted as a result of mold contamination would not in and of itself qualify as “property damage.” Similarly, strictly economic losses, such as lost profits, loss of goodwill, and loss of the anticipated benefit of a bargain do not qualify as “property damage.”12

With respect to construction defect claims, purely economic loss resulting from inferior materials or workmanship that does not damage any other property does not qualify as third-party “property damage.”13 Coverage may be found, however, when the insured’s poor workmanship or materials result in physical injury to a third-party’s property.14 Therefore, if defective roofing allows water and resulting mold to damage tenants’ or homeowners’ personal property, “property damage” may be found to exist.15

Consequently, when a mold claim is presented, it is necessary to carefully evaluate the exact nature and extent of the alleged losses and whether they qualify as “property damage” as defined in the policy.

V. Personal Injury Claims

“Personal injury” coverage is often provided under general liability policies for specific enumerated offenses. Coverage is triggered by the specific offense, and not the injury caused by the offense. Liability policies which provide coverage for “personal injury” generally define offenses which trigger coverage to include: the wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor.

Claims for coverage may arise when tenants allege they were forced to vacate their leased space because of mold contamination. Consequently, an insured landlord may seek “personal injury” coverage for wrongful eviction claims. The term “wrongful eviction” is commonly used in a situation where a party already in possession of premises is evicted without legal justification. This term is usually limited to landlord-tenant or other possessory relationships.16

“Wrongful entry” and “invasion of the right of private occupancy” have also been construed to relate to the physical invasion of an interest in real property. 17 While the term “wrongful entry” can describe a tort in which the defendant has “the specific purpose of dispossessing the owner or occupant of land,” it also can describe a “more general ‘simple trespass’ involving no intent to dispossess.” 18 Therefore, a tenant’s complaint against an insured landlord alleging that mold contamination has forced the tenant to leave the leased property may be found to allege “personal injury.”

VI. Trigger Of Coverage

Trigger issues will be significant in evaluating mold claims. Trigger refers to the circumstances which must occur to activate an insurer’s defense and indemnity obligations.19 For coverage to be triggered under most policies, there must be “bodily injury” or “property damage” during the policy period.

For injury or damage which is continuous or progressively deteriorating throughout successive policy periods, California courts have applied a “continuous” trigger to find that the “bodily injury” or “property damage” is potentially covered by all policies in effect while the injury or damage occurred.20 All policies in effect while the injury or damage occurs will be triggered.21

In the mold context, this means that each policy which was in effect during a claimant’s alleged “bodily injury” may be called upon to respond. Similarly, policies in effect while “property damage” was alleged to be ongoing may be triggered. Claimants may allege that such injuries or damage were contemporaneous with exposure to mold or the release of the harmful mold spores.

A “continuous” trigger has also been applied to construction defect claims involving progressive damage over a period of time.22 Even if property damage resulting from a design or construction defect first becomes apparent after a policy has expired, a continuous trigger will apply.23

“Personal injury” coverage is limited to offenses committed during the policy period. With respect to claims such as wrongful eviction, this would mean that an “eviction” must occur during the policy period. Therefore, in the landlord-tenant context, the date the tenant ceased occupying the property would be the trigger date for “personal injury” coverage.

Trigger issues will also create significant issues of fact. For example, it may b