AUSTIN — Standard policies used by homeowners to claim billions of dollars in mold losses in the early part of the decade actually didn't cover mold, the Texas Supreme Court ruled Thursday.
In a 7-2 decision, the court sided with State Farm, which argued that its policy excluded mold coverage. The ruling came in a case involving a Deer Park family who discovered mold after their home was damaged in 2001 by Tropical Storm Allison.
The decision probably will affect more than 250 similar cases pending against State Farm, and hundreds more involving other insurers.
At the time, companies were forced to use a standard policy by the Texas Department of Insurance. In 2002, regulators let companies use their own policies, which often offered mold coverage for an additional cost.
"Although we didn't believe mold was a covered loss, there was no definitive legal opinion (at the time)," said State Farm spokeswoman Sophie Harbert. "We handled the claims under a reservation of right, which means policyholders were informed that it was questionable whether the policy provided coverage for mold. Our investigation and handling of the claims was not intended to convey coverage."
Jay Thompson, an attorney for the insurance industry, said regulators' slowness to approve new policy forms contributed to the deluge of mold claims that led to huge increases in homeowners' insurance premiums.
"I think the mold crisis could have been averted had companies been more aggressive in asserting to the regulator the need to get these new forms approved," Thompson said.
The Insurance Department, which filed a brief siding with the homeowners, declined to comment on the ruling.
Robert Miller, an attorney for Richard and Stephanie Fiess, said the court's ruling "changes decades of law." He said he is discussing with the couple whether to seek a rehearing.
The plaintiffs' attorney said it is "puzzling" that State Farm and other companies paid mold claims when, according to the court, such damages were never covered.
The court's decision came in a certified question from the U.S. 5th Circuit Court of Appeals, which is considering the Fiesses' appeal of a ruling from a federal district court.
The federal appeals court asked the Texas Supreme Court to determine whether a specific exclusion for mold contamination should be disregarded because the policy also says, "We do cover ensuing loss caused by water damage."
Justice Scott Brister said in the majority ruling that the policy means what it says.
"The policy here provides that it does not cover 'loss caused by mold.' While other parts of the policy sometimes make it difficult to decipher, we cannot hold that mold damage is covered when the policy expressly says it is not," Brister said.
Justice David Medina said in a dissenting opinion, joined by Justice Harriet O'Neill, that the policy "is susceptible to more than one reasonable interpretation and is therefore ambiguous." He said such ambiguities "must be construed in favor of the insured."
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