Mold Exclusion Enforced and Bad Faith Rejected In Ninth Circuit Ruling
The Ninth Circuit Court of Appeals affirmed judgement for BatesCarey client Rockhill Insurance Companies, finding that Rockhill properly denied coverage for a mold remediation claim under its general liability coverage, and that Rockhill was not in bad faith for the manner in which it defended but could not settle the lawsuit under its Contractor’s Pollution coverage. Rockhill Insurance Companies v. CSAA Insurance Exchange, Case No. 3:17-cv-00496-HDM-WGC (9th Cir., Nov. 20, 2020) (Nevada law). Click here for the opinion.
This matter arose when a California home suffered water damage. The homeowner’s insurer, CSAA Insurance Exchange, hired Rockhill’s insured, Premier Restoration and Remodel, Inc., to provide remediation services. Premier misapplied a mold-prevention chemical, causing an alleged noxious odor in the home. CSAA determined that in order to fix the odor, it would tear down the house, rebuild it, and then sue Premier to recover the $2 million cost of the new house. Premier tendered the suit to Rockhill for defense and indemnity.
Rockhill believed the claim was excluded under its General Liability coverage by a mold exclusion, but Rockhill agreed to provide a defense under its Contractor’s Pollution Liability policy – which had a $1 million eroding limit. An underlying judgment was rendered against Premier for $2.2 million with an attorney fee award of over $800,000 against Premier. Rockhill tendered its remaining limit of $700,000 on its pollution coverage. CSAA then took an assignment from Rockhill’s policyholder, and demanded that Rockhill pay the entirety of the underlying award in addition to bad faith damages.
In analyzing the mold exclusion, the court found that although the claim and claimant were located in California, Nevada law would apply to the policy interpretation because the policy had been issued in Nevada. The mold exclusion generally barred coverage for a claim which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, growth, release or escape of mold. CSAA argued that, because the underlying loss was caused by the negligent over-application of a chemical, the exclusion doesn’t apply where there was no damage here caused by mold. The Ninth Circuit agreed with Rockhill’s reading that the chemical was applied to prevent the threatened growth of mold and concluded that the mold exclusion applied to bar coverage under the general liability form. Therefore, Rockhill had acted properly in defending the matter under its eroding $1 million limit of its Contractor’s Pollution coverage, and not under the un-eroding $1 million general liability coverage.
A fixture of CSAA’s arguments was that, even if Rockhill was correct on coverage, Rockhill’s conduct was still in bad faith because Rockhill didn’t advise either its own policyholder or the underlying claimant, CSAA, of the eroding nature of the Contractor’s Pollution limit under which the case was being defended. CSAA also argued that Rockhill committed bad faith by only making de minimis settlement offers in the underlying case, allegedly knowing that its policyholder would be liable for the multi-million cost of building a new luxury home if it lost the case.
The Ninth Circuit agreed with BatesCarey’s arguments that Rockhill could not be in bad faith because the only settlement demand ever made was $999,999, which was above the remaining limits of the Contractor’s Pollution coverage. The court also agreed that Rockhill had no affirmative obligation to inform the underlying claimant of the eroding policy limit, and that there can be no bad faith when Rockhill’s settlement offers throughout the underlying case were at or above the amounts consistent with advice of counsel.