469_C295
HO DISPUTES
THIRD-PARTY EXCLUSION
|
Homeowners |
Mold |
|
Water Damage |
Breach of Contract |
In about the year 2000,
Bernard and Gail Freedman hired a contractor to remodel a bathroom in their
home. While hanging new drywall, the contractor drove a nail through a pipe. The
nail in the pipe apparently caused no leak at the time and went unnoticed until
August 2005, when corrosion around the nail caused a leak and extensive water
and mold damage.
The Freedmans
had a State Farm Insurance Company homeowners policy that provided coverage for
“all risks” except those specifically excepted or
excluded. Paragraph 2 of the policy excluded losses related to “wear, tear,
marring, scratching, deterioration, inherent vice, latent defect or mechanical
breakdown, corrosion, electrolysis or rust.” Paragraph 4 of the policy excluded
loss due to “Water Damage, meaning…continuous or repeated seepage or leakage of
water or steam from a….plumbing system.” Paragraph 5 of the policy excluded
losses due to third-party negligence.
The Freedmans
submitted a claim under their homeowners policy for damage caused by the leak,
including mold. When State Farm denied their claim, the Freedmans
sued the insurer for breach of contract, breach of the implied covenant of good
faith and fair dealing, and negligence. The lower court found in favor of State
Farm. The Freedmans appealed.
On appeal, the Freedmans argued that the contractor’s negligence was the
“efficient proximate cause” of their loss, i.e., the “predominant” or “most
important” cause of the loss. They argued that when third-party negligence is
the “efficient proximate cause” of a loss, it is a covered peril under the
language of the policy. The Court of Appeal, Second District, Division 1,
The Freedmans
also argued that the exclusion for continuous or repeated seepage or leakage of
water was not enforceable. First, they argued that the provision was ambiguous
because it did not say how long a leak must last in order to be “continuous.”
The court was not convinced by this argument. According to the court, the hole
through which the water leaked was very small, and the damage was extensive;
thus, the leak must have lasted a sufficiently long time to cause such damage.
Second, the Freedmans argued that the exclusion applied only to “normal
deterioration of the plumbing system,” not to leaks “caused by some force other
than deterioration.” The court rejected this argument as well. The policy
excluded “coverage for any loss which is caused by [continuous or repeated
seepage or leakage of water from a plumbing system], regardless of whether the
event occurs suddenly or gradually, involves isolated or widespread damage,
[or] arises from natural or external forces[.]” According to the court, the
policy language expressly provided that leaks were excluded, regardless of
whether they were caused by natural forces or external forces.
Finally, the Freedmans argued that because their policy included an
endorsement relating to mold, it followed that their mold damage was covered.
The court disagreed with this argument as well. The mold identified in the
endorsement was very specifically defined, and the Freedmans’
mold did not qualify. Because the Freedmans did not
identify a covered peril that was otherwise not excluded from coverage, the
mold was not covered.
The decision of the lower
court in favor of State Farm was affirmed.
Freedman
vs. State Farm Insurance Company-No. B202617-Court of Appeal, Second District, Division 1,