"Efficient Proximate Cause" Doctrine does not Automatically Trump Mold Exclusions when Mold is not the Efficient Proximate Cause of the Loss

The post below is from Diane Polscer at the National Insurance Law Forum:

The Washington District Court finds that the "Efficient Proximate Cause" Doctrine does not Automatically Trump Mold Exclusions when Mold is not the Efficient Proximate Cause of the Loss

via National Insurance Law Forum by dpolscer@gordon-polscer.com (Diane Polscer) on 9/22/09

In AXIS Surplus Ins. Co., et. al v. Intracorp Real Estate, LLC, et. al., the Washington District Court, Judge Coughenour, recently ruled in favor of the Insurers on the application of Mold Exclusions irrespective of the fact that efficient proximate cause was potentially a covered peril. This coverage dispute arises out of a claim made by the insured under two “all-risk” Builders Risk insurance policies for alleged moisture, mold, and related damages to a mixed-use condominium project that resulted primarily from faulty and defective construction. The Claimants argued that because the efficient proximate cause was a covered peril, the Mold Exclusions have no application under Washington’s “efficient proximate cause” doctrine. The Insurers argued that the Mold Exclusions should apply regardless of the rule.

On competing cross-motions for summary judgment on the application of the various Mold Exclusions, the Court expressly rejected the claimant’s argument that if the efficient proximate cause of the loss is a covered peril, then the efficient proximate cause doctrine per se requires coverage regardless of any other potentially applicable exclusions. The Court was “persuaded” by the Insurers argument that a properly worded Mold Exclusion can operate to exclude “mold damage” irrespective of the application of the “efficient proximate cause” doctrine, even if the efficient proximate cause is a covered peril. At the Insurers urging, the court adopted the holding from the California Court of Appeals decision in DeBruyn v. Super. Ct. , 70 Cal. Rptr. 3d 652, 658-659 (2008) that when a policy “‘plainly and precisely communicates an excluded risk to a reasonable insured’ * * * the efficient proximate cause doctrine [does] not operate to cover the loss. * * * [I]nsurers ‘may limit coverage to 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.’” In so holding, the District Court went on to note that the “efficient proximate cause” rule “merely brings about ‘a fair result’ within the reasonable expectations of the parties.”

With respect to the language at issue in this case, the District Court held, in relevant part, that the “[mold] however caused” language in one of the insurers Mold Exclusions “is clear. It communicates to a reasonable insured that mold damage is excluded, even if it was caused by a covered peril.” With respect to the other insurers Mold Exclusion, the Court agreed (ostensibly based upon the “anti-current causation” language), under the same rationale, that it applied irrespective of the “efficient proximate cause” doctrine as well, but found that the Exclusion’s “resulting loss” exception potentially had application, and that was “an issue not before the Court.” The Court’s holding with respect to the later Exclusion is not a model of clarity.

As we all know, the “efficient proximate cause” rule is a very insured friendly doctrine. Washington Courts have not been shy to apply the rule ad nauseam to find coverage regardless of the express policy language. Having the District Court put the brakes on its application and look to the particular language of an exclusion that has application later in the chain of causation is a step in the right direction, and an encouraging result for property insurers in Washington. That being said, it is hard to predict what Washington State Court’s or the Ninth Circuit might do with the decision.