Last week, a federal magistrate judge in San Antonio conducted a careful examination of burdens of proof under a homeowners policy and recommended granting summary judgment in favor of the insurer.  Buchholz v. Crestbrook Ins. Co., No. 1-20-CV-449-RP, 2022 WL 378442 (W.D. Tex. Feb. 8, 2022) involved homeowners who bought a 10,000-square foot home and $6.4 million in homeowners insurance, with an endorsement adding an additional $1.6 million in “Biological Deterioration” coverage. 

After discovering mold behind the wall of the indoor basketball court, the plaintiffs undertook an investigation of the entire house and discovered numerous latent water leaks and resulting mold in various areas of the house, which led to six insurance claims being made.  Five of the claims were associated with specific water leaks, and the insurer determined they were covered and paid about $750,000 for repairs and mold remediation.  The sixth claim focused on mold growth throughout the house that was not directly associated with any known water leak and whose cause was mysterious.

An engineer agreed to by both parties undertook an investigation to determine the cause of the mold, and concluded the house had a design flaw:  both an improperly designed HVAC system and various finishes used throughout the house were preventing a normal “vapor drive” cycle and causing humidity from outside the house to enter the building envelope and then, instead of evaporating as it normally would, to condense and promote mold growth inside wall cavities.  The insurer denied the sixth claim on the ground that it was caused by design defect, faulty workmanship, inherent vice, or latent defect, leading to this lawsuit. 

The critical dispute was who owed the burden to either prove coverage or prove an exclusion.  The policy was an all-risk policy, covering “all risk of accidental direct physical loss… except for losses excluded…”  However, the Biological Deterioration endorsement’s coverage was limited to “a covered cause of loss [that] results in Biological Deterioration or Damage to property…”   Both sides moved for summary judgment, each contending the other owed the initial burden of proof.  Based on the all-risk wording, the homeowners contended the mold claim was covered unless the insurer proved a specific exclusion.  But based on the “covered cause of loss” wording in the endorsement, the insurer contended the burden was reversed and the homeowners must prove the cause of the mold. 

Significantly, the homeowners appear to have based their entire litigation strategy on the premise that it was the insurer’s burden to prove an exclusion.  They responded to discovery by refusing to answer questions about the cause of the mold and failed to comply with a court order requiring them to supplement that discovery answer.  Their retained expert (not the same expert who had inspected the house before suit) opined the insurer had failed to prove its alleged exclusions but declined to give any opinion on the actual cause of the mold.  And in their briefing, they continued to rely on the premise that the all-risk nature of the policy meant they only had to show there had been a direct physical loss in order to meet their initial burden.  The magistrate judge disagreed and concluded that even though the policy was an all-risk policy, the Biological Deterioration endorsement shifted the burden of proof to the homeowners to prove a “covered cause of loss,” and by declining to present any evidence of the cause of the mold, they had not met that burden.  The magistrate judge recommended summary judgment be granted for the insurer on both breach of contract and all extra-contractual causes of action.

Editor’s Note: A magistrate judge’s report and recommendation is not yet law, and the parties have 14 days to file objections.  However, magistrates’ recommendations are usually adopted by the district judge.

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