On Friday, February 22, the Fifth Circuit held the Texas Standardized Homeowners Policy-Form B did not cover mold contamination caused by a plumbing leak, but reversed and remanded the case for a new trial based on the jury instruction. Specifically, the court concluded an insured’s duty to mitigate may reduce his damage recovery from the carrier, but it was no affirmative defense to the carrier’s liability. In Carrizales v. State Farm Lloyds, 2008 WL 467097 (5th Cir. February 22, 2008), the insureds filed a claim for mold damages caused by a plumbing leak. State Farm paid more than $168,000 for the claim, but denied coverage for mold remediation claims totaling more than $200,000.

The insureds sued State Farm for alleged violations of the Texas Insurance Code, breach of contract and breach of the duty of good faith and fair dealing. The case proceeded to trial, but evidence related to mold was excluded based on an earlier summary judgment ruling. At the close of evidence, the court formulated the jury charge so as to require mitigation of damages on the part of the insureds as a condition precedent to State Farm’s liability. The instruction was based on State Farm’s claimed affirmative defense of failure to mitigate damages. The jury found for State Farm.

On appeal, the insureds challenged the summary judgment finding and the verdict and the jury instruction requiring mitigation of damages as a condition precedent to recovery. The primary issue related to the mold question dealt with the interaction of two provisions in the HOB policy -- the mold exclusion and the exclusion repeal provision. The court concluded the interaction of the two provisions created no ambiguity in the context of a homeowners mold claim and, thus, mold was not covered. The insured’s primary argument on coverage centered on the Texas Supreme Court’s 1998 decision in Balandran v. Safeco, 972 S.W. 738 (Tex. 1998). In Balandran, the Texas Supreme Court found an ambiguity in the policy based on an exclusion repeal provision in the personal property coverage section of the policy. Despite the Texas Supreme Court’s decision in 2006 holding mold damage was not covered under the Texas HOB policy (in Fiess v. State Farm Lloyds, 202 S.W.3d 744 (Tex. 2006), the insured argued in this case the Balandran decision was an exception to Fiess and mold was covered if caused by the accidental discharge of water from a plumbing system. The Fifth Circuit disagreed in its decision from last Friday and it found the factors leading to the decision in Balandran didn’t exist in mold claims – the precise position argued by State Farm before the trial court and on appeal.

Turning to the jury charge question, the court agreed with the insureds that mitigation of damages was an issue the jury should decide in determining the amount of damage to award, not a condition precedent (or affirmative defense) to liability. The court noted “Where the intent of the parties is doubtful . . . the agreement will be interpreted as creating a covenant rather than a condition.” The Fifth Circuit acknowledged Texas courts have not yet decided whether the duty to mitigate damages is a condition precedent or an offset to reimbursement under the general homeowner’s policy. Accordingly, the court made an Erie guess and concluded mitigation of damages is an offset to damages rather than a condition precedent to recovery under Texas law.

Chris Martin of our firm had the privilege of representing State Farm in arguing this case before the Fifth Circuit Court of Appeals.