Verdict Reduced in Landmark Mold Case

Below are summaries of recent court cases affecting the real estate industry.

February 1, 2003

A Texas appellate court has decided in favor of a challenge by the insurance company and reduced a jury verdict that awarded over $32 million dollars to homeowners whose house had become uninhabitable because of mold. The court affirmed the trial court’s award of approximately $4 million in actual damages to the 7,400 square foot home, plus interest, but found that the evidence didn't support the additional awards.

After reviewing the evidence presented to the jury, the Texas Court of Appeals, Third District, the court decided that although there was some evidence that the insurer had breached its fiduciary duty by failing to promptly settle for the full amount of the owners’ claims, it determined that the insurer hadn't violated the Texas consumer fraud statute and knowingly engaged in deceptive acts. Consequently, the court reversed the awards for punitive damages and mental anguish made by the trial jury. The appellate court also sent the case back to the trial court for reconsideration of the attorneys’ fees awarded to the owners.

The case began in 1996, when the home’s owners made the first of numerous claims for water damage to their home caused by continual plumbing problems. Although the insurer paid several claims over the course of three years, the owners were never able to have the plumbing problems completely repaired. Eventually, in 1999, the owners had air quality tests conducted in the home and discovered the presence of stachybotrys mold. They subsequently moved out of the home on the air quality specialist's advice.

After several attempts to resolve claims with the insurance company failed, the owners filed suit in May 1999, alleging breach of contract, deceptive trade practices, and breach of good faith. Two years later, a jury awarded over $32 million in total damages.

Broker Could Be Liable for Failing to Disclose Lead Paint

Even though a broker had no knowledge of the presence of lead-based paint in an apartment building, he might be guilty of negligent misrepresentation to the property's buyers. The broker had filed a motion to have the negligent misrepresentation allegations against it dismissed, but the U.S. District Court determined that under Illinois law, a party may allege negligent misrepresentation if another individual owed it a legal duty, that duty was breached, and damages arose from that breach. In addition, the court found that under Illinois case law, real estate licensees “occupy a position of trust with to purchasers with whom they are negotiating, …even in the absence of an agency relationship.” Looking at these legal standards, the court determined that the buyers could proceed with their suit, which also named the sellers as defendants.

Mold Exclusion May Not Enough to Deny Coverage

A federal appellate court has ruled that although one section of a homeowner’s insurance policy stated that it didn't cover mold loss, the homeowners may be covered for their loss, since another section of the policy didn't specifically state a mold exclusion.

A couple living abroad had a home built and purchased an insurance policy on the property. Even though they had asked their contractor to winterize the property, a water pipe froze and eventually burst, leaving standing water in the basement of the unoccupied house. Although the water itself didn't seriously damage the house, the standing water caused mold to grow on all of the home’s interior surfaces. The home was eventually demolished, and the owners filed a claim with the insurance company. When the insurer refused to pay, the couple sued.

The trial court found for the insurer, but the appellate court reversed the decision based on inconsistencies in the policy's language. In one section, the policy specifically states that mold coverage is excluded. However, in another section, mold isn't listed among the ten factors excluded from coverage.Moreover, the policy says that it does cover losses caused by water escaping from plumbing.

The appellate court found that the policy didn't automatically exclude mold and that the lower court would have to resolve the question of what was the dominant cause of the damage-- the mold or the broken water pipe--in order to resolve the case.

Massachusetts Court Strikes Down Forced Access Rule

The state’s highest court has rejected a regulation adopted by the state’s Department of Telecommunications and Energy that would have given telecommunications companies access “to any pole, duct, conduit, or right of way” in any building with four or more residential or commercial tenants. The department was able to apply this regulation to private landowners by defining them as utilities. However, the Supreme Judicial Court of Massachusetts held that legislative history didn't support the state agency's attempt to expand the definition of a utility within its regulations, noting that the regulation had been intended to apply to companies that transmitted or received electricity or telecommunications signals. Opposition to the regulation was supported by a variety of real estate groups, including the Greater Boston Real Estate Board, the Real Access Alliance, and the National Association of REALTORS®.

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