Ninth Circuit Affirms a Mold Exclusion

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Insurers Should Never Sue Other Insurers for Bad Faith

CSAA Insurance Exchange (“CSAA”) is a homeowner’s insurance company. Premier Restoration and Remodel, Inc. (“Premier”) is a home-repair contractor in CSAA’s network whose misapplication of an anti-mold chemical caused property damage to a residence insured by CSAA. Premier was insured by Rockhill Insurance Companies (“Rockhill”), and CSAA believed that coverage for the damage was available under Rockhill’s policy. 

In Rockhill Insurance Companies v. CSAA Insurance Exchange, dba AAA Insurance Exchange and Premier Restoration And Remodel, Inc., No. 19-16716, United States Court Of Appeals For The Ninth Circuit (November 20, 2020) after paying what it believed was the amount available under its policy, Rockhill filed an action against CSAA and Premier in the Nevada District Court, seeking a declaratory judgment that it had satisfied its obligations to Premier.

Applying Nevada law, the District Court granted Rockhill’s motion for summary judgment, finding:

  1. that Rockhill had paid the full available amount of its applicable Contractors Pollution Liability coverage (“Pollution Coverage”),
  2. that Rockhill’s Commercial General Liability coverage (“General Coverage”) did not apply because it contained a Mold, Fungus and Organic Pathogen Exclusion (“Mold Exclusion”) barring the kind of property damage that Premier caused; and
  3. The District Court dismissed CSAA’s counterclaim of bad faith.

ANALYSIS

The General Coverage provision in Rockhill’s insurance policy precluded coverage of CSAA’s claim because the provision is subject to the Mold Exclusion, which excludes any “property damage . . . which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, growth, release or escape of [mold] at any time.”

But for the actual, alleged, or threatened growth of mold in CSAA’s insured’s residence, the damaging application of the anti-mold chemical would not have occurred. Therefore, the General Coverage provision does not provide a means of recovery for the damage, and Rockhill’s obligation is limited to its Pollution Coverage provision, pursuant to which it has paid the full remaining amount of the policy limits.

Under Nevada law, an insurer does not waive its right to assert an exclusion where it has provided its insured with adequate notice of an unambiguous exclusion and here there is no reasonable basis in the record for finding Rockhill’s notice was prejudicially inadequate, because Premier conceded that it received Rockhill’s reservation of rights letter.

Bad faith can only be established where the insurer acts unreasonably and with knowledge that there is no reasonable basis for its conduct. Here, Rockhill followed the advice of its legal counsel in making multiple settlement offers, and CSAA failed ever to make a settlement demand within the coverage limits. Viewing the record as a whole, the Ninth Circuit concluded that no reasonable trier of fact could find that Rockhill acted unreasonably or in bad faith.

ZALMA OPINION

Insurance companies, professional litigants, should be able to avoid litigation especially with another insurer. In this case CSAA took a definite position that it was entitled to money from Rockhill even though there was no question Rockhill’s policy included a clear and unambiguous mold exclusion and added to the offensive action by accusing another insurer of committing the tort of bad faith. They failed because Rockhill followed the advice of its counsel and CSAA refused all reasonable settlement offers.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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