IN THE SUPREME COURT OF TEXAS
════════════
No. 04-1104
Richard Fiess and Stephanie
Fiess, Appellants,
v.
State Farm Lloyds,
Appellee
════════════════════════════════════════════════════
On Certified Question from the United
States
Court of Appeals for the Fifth
Circuit
Argued March 30,
2005
Justice Medina, joined by Justice O’Neill, dissenting.
This case
comes to us on a certified question from the United States Court of Appeals for
the Fifth Circuit asking us to determine under what circumstances, if any, the
“ensuing-loss” provision of the Homeowners Form B (HO-B) insurance policy provides coverage for mold
contamination. In answering that question, the Court concludes that mold can
never be an ensuing loss within the meaning of that provision. The Court reasons
that the ensuing-loss provision is not an exception to the excluded perils it
modifies but rather an assurance that covered losses remain covered even when
they ensue from an excluded peril. Because I believe that the ensuing-loss
clause may also be read as an exception to the excluded perils it modifies, it
is susceptible to more than one reasonable interpretation and is therefore
ambiguous. As the Court acknowledges, such ambiguities must be construed in
favor of the insured. Applying that rule of construction here requires that we
answer yes to the question certified to us by the Fifth Circuit Court of
Appeals. Because the Court does not, I respectfully dissent.
I
In 2001, the
home of Richard and Stephanie Fiess sustained substantial flood damage from
Tropical Storm Allison. When the Fiesses began removing drywall damaged by the
flood, they discovered black mold growing throughout the house. The Fiesses sent
samples of the mold to a laboratory for analysis. The examiner concluded that
the samples contained hazardous stachybotrys mold, which, in his opinion, made
the house dangerous to inhabit. Upon subsequent examination of the Feiss house,
the examiner concluded that the flooding had caused some of the mold
contamination, but a significant percentage of the mold had been caused by roof
leaks, plumbing leaks, heating, air conditioning and ventilation leaks, exterior
door leaks, and window leaks before the flood.
The Fiesses
submitted a claim for mold damage under their homeowner’s insurance policy,
which explicitly excluded all damage caused by flooding. Their insurance
carrier, State Farm Lloyds (“State Farm”), inspected the home and, under a
reservation of rights, paid the Fiesses $34,425.00 for mold remediation in those
areas of the home where evidence of small pre-flood water leaks existed. Under
its reservation of rights, State Farm maintained that it was not obligated to
pay for mold damage.
Believing
State Farm’s payment to be inadequate to remediate the mold damage not caused by
the flood, the Fiesses filed suit in state court. State Farm thereafter removed
the case to federal court, where it obtained a summary judgment. The federal
district court concluded that the policy specifically excluded mold
contamination from coverage and that the ensuing-loss provision had no effect
upon this exclusion. The Fiesses appealed, arguing that coverage for the mold
at issue was extended under the policy’s ensuing-loss clause. Concluding that
the meaning of this clause was an unresolved question of state law important to
both Texas homeowners and insurers and appropriate for decision by this Court,
the Fifth Circuit certified the question to us.
II
We have
previously considered the meaning of the “ensuing-loss” provision in an earlier
version of the HO-B policy, but not in connection with mold damage. In
Lambros v. Standard Fire Insurance Co., a home sustained
structural damage when pressure from subsurface water caused the foundation to
shift. 530 S.W.2d 138 (Tex. Civ. App.–San Antonio 1975, writ ref’d). Exclusion k
of the homeowner’s insurance policy excluded loss caused by foundation movement,
but the policy’s “ensuing-loss” provision stated that “Exclusions i, j, and k .
. . shall not apply to ensuing loss caused by . . . water damage . . . provided
such losses would otherwise be covered under this policy.” Id. at 139.
The homeowners argued that the damage to their foundation should be covered
because the policy’s ensuing-loss provision provided for recovery for losses
caused by water damage. The court of appeals disagreed, holding that “‘ensuing
loss caused by water damage’ refers to water damage which is the result, rather
than the cause,” of the excluded event; i.e., foundation movement. Id. at
141. The court explained that “[t]o ‘ensue’ means ‘to follow as a consequence or
in chronological succession; to result, as an ensuing conclusion or effect.’“
Id. (quoting Webster’s New International Dictionary 852 (2d ed,
unabridged, 1959). Thus, “an ensuing loss caused by water damage is a loss
caused by water damage where the water damage itself is the result of a
preceding cause,” the preceding cause being one of the named, excluded perils.
Id. This interpretation suggests a three-step causal formula, requiring:
(1) a preceding cause (one of the excluded perils) leading to, (2) a proximate
cause (building collapse, water damage, or glass breakage) resulting in, (3) an
ensuing loss. We likewise accepted this three-step analysis by refusing the writ
in the case. See State ex rel McWilliams v. Town of Oak Point, 579 S.W.2d
460, 462-63 (Tex. 1979) (notation “refused” indicates this Court’s adoption of
the court of appeals’ judgment and opinion).
Lambros,
however, only dealt with the first element of its three-step formula. Because
the water damage was not caused by an excluded peril (the shifting foundation),
the court held it was not covered under the ensuing-loss provision. Conversely,
had the water damage been caused by an excluded peril, there might have been
coverage if such loss would otherwise have been covered under the policy. See
Lambros, 530 S.W.2d at 141. But because there was no
evidence of the requisite preceding cause, Lambros did not consider the
balance of the provision; i.e., the types of damage an ensuing loss might
include.
This Court
has not mentioned Lambros since our refusal of the writ in that case more
than thirty years ago. But the Court today again accepts its analysis of the
ensuing-loss provision as correct, and I agree with this. ___ S.W.3d at ___.
Moreover, although Lambros construed an earlier version of the HO-B
policy, the ensuing-loss provision here is nearly identical to the former clause
and should be construed similarly. But Lambros addresses only part of the
ensuing-loss clause and therefore does not provide a complete answer to our
present question. Having determined that the loss did not ensue from an excluded
peril, Lambros did not consider the balance of the provision or purport
to explain the meaning of a loss “otherwise . . . covered under this policy.” To
correctly define this type of loss, we must begin with the text of the
ensuing-loss provision and the relevant exclusion to which it applies.
III
Section
I-Exclusions, part 1.f. of the HO-B insurance policy provides:
f. We do
not cover loss caused by:
(1)
wear and tear, deterioration or loss caused by any quality in property that
causes it to damage or destroy itself.
(2)
rust, rot, mold or other fungi.
(3)
dampness of atmosphere, extremes of
temperature.
(4)
contamination.
(5)
rats, mice, termites, moths or other insects.
We do
cover ensuing loss caused by collapse of building or any part of the
building, water damage or breakage of glass which is part of the building
if the loss would otherwise be covered under this policy.
(emphasis added).
The Fiesses
argue that the ensuing-loss provision is an exception to the mold exclusion
designed to apply to any loss caused by covered water damage. According to the
Fiesses, this provision restores coverage for mold caused by water damage, as
long as the water damage itself is not excluded by one of the other provisions
in the policy. State Farm, on the other hand, argues that the ensuing-loss
provision merely reaffirms coverage when one of the listed excluded losses
causes a secondary loss that would “otherwise be covered under this policy.”
Because loss caused by mold is expressly excluded, however, State Farm concludes
that it cannot be considered “otherwise [] covered under this policy.” Thus,
State Farm interprets “otherwise covered” under the policy to negate the
ensuing-loss clause by reinstating the exclusion to which it applies.
William J.
Chriss, as amicus curiae, argues that neither party has it right. Amicus submits
that the Feisses interpret water damage from the ensuing-loss provision too
broadly, essentially ignoring Lambros and reading “ensuing” out of the
provision. The amicus further argues that State Farm’s circular interpretation
of the provision ignores the meaning of the word “otherwise,” thus depriving the
provision of virtually any meaning. Amicus submits that the correct and more
reasonable construction of “otherwise be covered” is that it refers to the
remainder of the policy other than the paragraph under consideration. Thus,
according to the amicus, water damage including mold, which results from an
excluded peril as Lambros requires, would be covered because such loss is
not excluded anywhere else in the policy other than in paragraph f.
The Texas
Department of Insurance, the author of the homeowner’s policy at issue and the
regulatory authority charged with ensuring compliance with state law in this
area, also has filed an amicus brief that similarly disputes the Court’s present
policy construction. Even though mold itself is initially listed as an
exclusion, the Department submits that it is nevertheless brought back into
coverage by the ensuing-loss language of paragraph 1.f., which provides an
exception to the exclusion for mold or other fungi if the mold loss ensues from
a covered peril. The Department further rejects the Court’s construction as
rendering the ensuing-loss provision superfluous and concludes that the
“provision can only be read to mean that despite any exclusion language, it
includes coverage for certain previously excluded damage which is caused by a
covered water loss.”
Although I do
not view this language to be as clear and unambiguous as the agency responsible
for its inclusion in the policy, I do accept the Department’s interpretation as
an alternative reasonable construction. When the language of an insurance policy
is capable of more than one reasonable interpretation, it is ambiguous, and when
the ambiguity concerns an exclusionary provision, any uncertainty as to its
meaning must be resolved in favor of the insured. Nat’l Union Fire Ins. Co.
v. Hudson Energy Co., Inc., 811 S.W.2d 552, 555 (Tex. 1991). Moreover, when
language in a contract is capable of more than one reasonable interpretation,
evidence extrinsic to the contract may be used to determine its intended
meaning. Nat’l Union Fire Ins. Co. v CBI Indus., Inc., 907 S.W.2d
517, 520-21 (Tex. 1995). Relevant Texas case law, as well as the history of the
ensuing-loss provision itself, support the view of the amicus that “otherwise .
. . covered” refers to parts of the policy other than the paragraph connected to
the ensuing-loss provision.
Employers
Casualty Co. v. Holm, 393 S.W.2d 363 (Tex. Civ. App.– Houston 1965, no
writ), was the first Texas case to apply the provision in this manner. There,
the excluded peril of inherent-vice was the preceding cause of water damage to a
home. A shower in the home was built without a shower pan (an inherent vice) and
the ensuing leak caused the wooden flooring to rot and deteriorate. After
holding that the negligence of the contractor did not destroy the accidental
nature of the loss, the court examined the inherent-vice exclusion and concluded
that water damage ensuing from the excluded cause was covered under the
ensuing-loss exception because it was not excluded elsewhere in the policy. The
court held that any loss caused by water damage ensuing from an excluded cause
is covered under the policy if: 1) the excluded cause has an ensuing-loss
exception, and 2) such water damage is not of a type otherwise excluded under a
separately enumerated exclusionary paragraph, such as damage from surface water
or naturally occurring ground water; i.e., another exclusion in the policy at
issue. Holm thus held that “otherwise covered” meant caused by a type of
water damage not excluded by other exclusions containing no ensuing-loss
provisions. See also Allstate Ins. Co. v. Smith, 450 S.W.2d 957 (Tex.
Civ. App.–Waco 1970, no writ) (following Holm).
Similarly, in
Park v. Hanover Ins. Co., 443 S.W.2d 940, 942 (Tex. Civ. App.– Amarillo
1969, no writ), the court stated that an ensuing loss is covered if it results
from water damage and is not otherwise excluded under a different exclusionary
paragraph. The court, however, found no coverage because the exclusion at issue
did not contain an ensuing-loss provision.
Other courts
have taken a more expansive view of the ensuing-loss provision, suggesting that
it means nothing more than that the occurrence happened during the policy
period, the insured complied with all conditions precedent and the like, and
that all ensuing damage should therefore be covered. See, e.g., Burditt,
86 F.3d at 477 (ensuing-loss provision extends coverage to all loss ensuing from
an excluded peril); Merrimack Mut. Fire Ins. Co. v. McCaffrey, 486
S.W.2d 616, 620 (Tex. Civ. App.-Dallas 1971, writ ref’d n.r.e.) (mold caused by
water damage ensuing from an excluded peril is covered if the excluded initial
cause has an ensuing-loss provision); McKool, 386 S.W.2d at 345-46
(“[A]lthough losses caused by extremes of temperature or cracking are not
covered by the policy, all ensuing losses . . . caused by water damages
are covered.”) (emphasis added). The history of the ensuing-loss provision,
however, indicates that Holm’s more restrictive application of the
provision is the correct one.
Before 1990,
the HO-B policy included one ensuing-loss provision placed at the end of the
policy section listing eleven exclusions, a - k. Exclusion i in this list
excepted from coverage:
i. Loss
caused by inherent vice, wear and tear, deterioration; rust, rot, mould or other
fungi; dampness of atmosphere, . . .;
j. * * *
k. * * *
The
foregoing Exclusions a through k shall not apply to ensuing loss caused by
fire, smoke or explosion and Exclusions i, j and k [exclusions f, g, and h in
the Fiesses’ policy] shall not apply to ensuing loss caused by collapse of
building, or any part thereof, water damage . . ., provided such losses would
otherwise be covered under this policy.
See
Lambros, 530 S.W.2d at 139 (emphasis added). In 1990, several exclusions
were moved to different paragraphs, and the letters identifying them were
changed accordingly. Paragraph i, (which had excluded losses caused by rust,
rot, mold and several other causes), became paragraph f, paragraph j, (which had
excluded losses cause by animals owned by the insured), became paragraph g, and
paragraph k, (which had excluded losses caused by settling foundation), became
paragraph h. The ensuing-loss provision was attached to each of the renumbered
paragraphs. These revisions were not intended to restrict or change the scope of
coverage but merely to simplify the
policy, making it easier to read. Balandran v. Safeco Ins. Co. of Am.,
972 S.W.2d 738, 741-42 (Tex. 1998).
Although
simplification was the intended purpose, the 1990 revisions have perhaps had the
opposite effect. Before 1990, it seemed apparent that the “otherwise covered
under this policy” language of the ensuing-loss provision referred to provisions
of the policy other than those it identified as applicable. Thus the pre-1990
policy expressly stated that the ensuing-loss provision superceded exclusions i,
j and k (now exclusions f, g and h). The remaining exclusions to which it did
not apply were not superceded; i.e., now exclusions a (loss to electrical
devices), b (industrial smoke), c (contents windstorm losses), d (theft), e
(mechanical breakdown), i (flood and surface water), j (freeze), and k
(landslide or earthquake). In other words, if a peril excluded by paragraphs f
(wear and tear, inherent vice, deterioration, rust, rot, mold, dampness,
contamination), g (animals kept by the insured), or h (foundation movement)
causes water damage, then the water damage ensuing from the excluded peril is
covered “if the loss would be otherwise covered under this policy” (i.e., if the
loss is not excluded in some other way by some other exclusions other than f, g
and h). Because no change in coverage was intended by the 1990 revisions, that
same analysis should hold true today. Balandran, 972 S.W.2d at
741-42.
In
conclusion, I would answer the question posed by the Fifth Circuit Court of
Appeals, yes, because the ensuing-loss clause may reasonably be read as an
exception to the mold exclusion. The Fifth Circuit offered the following
practical application of the provision which I think is correct as I have
modified it below:
An example
of the practical application of this "preceding cause-proximate cause-ensuing
loss" formulation is as follows: Rust, an excluded form of damage, causes a pipe
to burst. The damage to the pipe is clearly excluded under the policy exclusion
for rust. However, any damage resulting or ensuing from the water that escapes
as a result of the rust will be covered under the ensuing-loss provision [so
long as the loss is not excluded by some other provision of the policy other
than an exclusion with an ensuing-loss provision; i.e., paragraphs f, g, and h].
Plugging these facts into the formulation results in the following: the rust
eating through the pipe constitutes the preceding cause; the water escaping from
the pipe constitutes the proximate cause; and the damage caused by the escaping
water constitutes the ensuing loss.
392 F.3d at
810 n. 30 (as modified). In other words, the Texas Standard HO-B policy provides
coverage for losses, including mold, caused by water damage ensuing from any of
the perils listed in paragraphs 1.f, 1.g, or 1.h, so long as such damage is not
excluded by some other provision of the policy besides these three paragraphs.
Because the Court concludes that this is not a reasonable alternative
interpretation of the ensuing-loss provision and that the provision is therefore
not ambiguous, I respectfully dissent.
__________________________________________
David M.
Medina
Justice
Opinion
delivered: August 31, 2006