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The California Court of Appeal, Second Appellate District, affirmed the trial court's decision sustaining demurrer without leave to amend in favor of an insurer on the ground the insurer's denial of coverage for mold damage does not violate Insurance Code section 530 ("Section 530"). An insurer can limit coverage for some, but not all, manifestations of water damage. Here, the policy "plainly and precisely communicate[d]" that mold damage was excluded.
Appellant De Bruyn's home suffered significant water damage from a leaky toilet. As a result, his house became contaminated by mold.
De Bruyn submitted claims to Farmers Group, Inc., Fire Insurance Exchange and Farmers Insurance Exchange (collectively "Farmers") for damages caused by the overflowed toilet under De Bruyn's homeowner's policy written on an "all risk" basis for the dwelling. The policy excluded coverage for "water damage," defined to include "water which seeps, leaks, drips, escapes or is released out of any plumbing … system." The policy had an exception to the "water damage" exclusion in the event of a "sudden and accidental release of water." The policy stated: "We never, under any circumstances, cover rust, mold, fungus, or wet or dry rot," even if resulting from exceptions to the exclusion. The policy also had a separate exclusion for "rust, mold, fungus, or wet or dry rot" so that "any resulting loss is always excluded under this policy, however caused."
Farmers paid De Bruyn for the water damage. Farmers denied payment for mold-related damages based on the policy provisions excluding coverage for mold.
De Bruyn filed suit against Farmers for, among other causes of action, unfair competition under Business and Professions Code section 17200. De Bruyn alleged Farmer's reliance on the mold exclusion violated Section 530, known as the efficient proximate cause doctrine.
Section 530 provides: "An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause." De Bruyn argued that by excluding coverage for mold, even if caused by a "sudden and accidental release of water," Farmers improperly circumvented Section 530.
Farmers demurred as to De Bruyn's 17200 cause of action, arguing, in part, Section 530 did not apply. The trial court agreed and sustained Farmer's demurrer without leave to amend.
The Court of Appeal affirmed the trial court's ruling. The Court of Appeal reiterated California law prohibits insurers from drafting policy exclusions circumventing the efficient proximate cause doctrine. However, the Court of Appeal acknowledged an insurer's right to limit coverage for some, but not all, manifestations of a given peril, as long as a reasonable insured would readily understand from the policy language which perils are covered and which are not.
The Court of Appeal relied, in part, on the California Supreme Court's decision in Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, for the principle that an insurer can exclude coverage for particular injuries or damages in certain specified circumstances, while providing coverage for the same type of injuries or damages in other circumstances. In Julian, the policy excluded coverage for weather conditions, among other risks, but only if weather conditions contribute in any way with a cause or event excluded in paragraph 1. above to produce the loss." The policy excluded coverage for losses caused directly or indirectly by earth movement and water damage.
In Julian, the California Supreme Court construed the policy language as an attempt by the insurer to "plainly and precisely" communicate the excluded risk. The Supreme Court recognized the "limitations of our language" require an insurer to describe a specific peril in terms of a relationship between two otherwise distinct perils (e.g., rain and landslide). The Supreme Court stated, "In such a case, the fact that a policy provides coverage for some, but not all, manifestations of each constituent peril does not necessarily render the clause naming and excluding the 'combined' peril invalid pursuant to section 530 and the efficient proximate cause doctrine."
Here, the Court of Appeal held the Farmers policy's water damage exclusion did not violate Section 530 or the efficient proximate cause doctrine. Farmers sought to limit coverage for some manifestations of loss resulting from a sudden and accidental release of water. The policy covered water damage caused by a sudden and accidental release of water. However, mold damage caused by a sudden and accidental release of water was not covered.
This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.
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