Summary
holding that there may be a "direct physical loss" when property is "rendered uninhabitable by mold"
Summary of this case from SFDG LLC v. Cincinnati Ins. Co.Opinion
CV-01-1362-ST
June 18, 2002
AMENDED OPINION AND ORDER
Based on this court's rulings on Defendant's Motion for Reconsideration/Motion to Modify Order Under FRCP 60 (docket #76), this Amended Opinion and Order supersedes the Opinion and Order dated April 19, 2002, and vacated on June 14, 2002 (dockets #75 #88).
INTRODUCTION
Plaintiff, Prudential Property Casualty Insurance Company ("Prudential"), an Arizona corporation, filed this action on September 14, 2001, against defendant, Susan Lillard-Roberts ("Lillard-Roberts"), to whom it issued a homeowner's insurance policy. Prudential seeks declaratory relief that the policy does not cover Lillard-Roberts' claim for water and mold damage to her house, garage, and personal property because:
(1) there was no direct physical loss (First Claim);
(2) the insurance policy excludes property damage resulting from water and sewage backup (Second Claim);
(3) the insurance policy excludes property damage resulting from faulty workmanship (Third Claim);
(4) the damage to the personal property was not caused by any named peril (Fourth Claim);
(5) the insurance policy excludes damage to personal property caused by rain (Fifth Claim); and
(6) a proof of loss was not timely submitted (Sixth Claim).
The Sixth Claim is mistakenly labeled as the Fifth Claim in the Complaint.
In her Amended Answer, Lillard-Roberts contends that she is entitled to insurance coverage under the policy and alleges 10 affirmative defenses, including the invalidity of certain exclusions under ORS 742.246, coverage through promissory estoppel or reformation, violation of the implied covenant of good faith and fair dealing, breach of the standard practices of the insurance industry, and unclean hands and/or unconscionability. She also alleges the following counterclaims:
First Counterclaim: Fraud and misrepresentation Count One: Post-claim misrepresentations as to lack of coverage Count Two: Pre-claim misrepresentations to induce purchase of the policy Second Counterclaim: Outrageous conduct Third Counterclaim: Breach of contract Fourth Counterclaim: Negligence Fifth Counterclaim: Declaratory relief Sixth Counterclaim: Reformation
In addition, Lillard-Roberts filed a Third Party Complaint against Stan Primozich ("Primozich"), Prudential's insurance agent, alleging fraud and misrepresentation (both post- and pre-claim) and negligence (docket #6).
This court has federal jurisdiction based on diversity, 28 U.S.C. § 1332, and the Declaratory Judgment Act, 18 U.S.C. § 2201. All parties have consented to allow a Magistrate Judge to enter final orders and judgment in this case in accordance with FRCP 73 and 28 U.S.C. § 636(c).
It is within the discretion of the district court to determine whether it is "appropriate" to grant jurisdiction in a declaratory relief action based on diversity. See Wilton v. Seven Falls Co., 515 U.S. 277, 288-89 (1995) (finding that district court may use its discretion to stay or dismiss an action seeking a declaratory judgment); Government Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1223 (9th Cir. 1998) ("Dizol") (noting the permissive, non-mandatory terms of the Declaratory Judgment Act). However, a district court is not required, sua sponte, to address the appropriateness of maintaining jurisdiction over a declaratory relief action. Dizol, 133 F.3d at 1224. Here, the parties do not question jurisdiction, relieving this court of the burden of addressing the appropriateness of exercising jurisdiction over Prudential's declaratory judgment claims. Moreover, "when other claims are joined with an action for declaratory relief (e.g., bad faith, breach of contract, breach of fiduciary duty, rescission, or claims for other monetary relief), the district court should not, as a general rule, remand or decline to entertain the claim for declaratory relief." Id at 1225. Because Lillard-Roberts alleges a plethora of other "compulsory" counterclaims, as well as a third party complaint, exercise of jurisdiction over Prudential's declaratory judgment claims is warranted.
The following motions are now before the court: Prudential's Motion for Summary Judgment (docket #10); Lillard-Roberts' Motion to Stay Consideration of Prudential's Summary Judgment Motion and for Leave to Conduct Destructive Testing on Defendant's Residence at Prudential's Expense (docket #23); and Lillard-Roberts' Motion for Partial Summary Judgment (docket #50). For the reasons that follow, these motions are granted in part and denied in part.
LEGAL STANDARDS
FRCP 56(c) authorizes summary judgment if no genuine issue exists regarding any material fact and the moving party is entitled to judgment as a matter of law. The moving party must show an absence of an issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party does so, the non-moving party must go beyond the pleadings and designate specific facts showing a genuine issue for trial. Id at 324. The court must "not weigh the evidence or determine the truth of the matter, but only determines whether there is a genuine issue for trial." Balint v. Carson City, 180 F.3d 1047, 1054 (9th Cir. 1999). A "`scintilla of evidence,' or evidence that is `merely colorable' or `not significantly probative,'" does not present a genuine issue of material fact. United Steelworkers of Am. v. Phelps Dodge Corp., 865 F.2d 1539, 1542 (9th Cir.), cert denied, 493 U.S. 809 (1989) (citation omitted).
The substantive law governing a claim or defense determines whether a fact is material. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631-32 (9th Cir. 1987). The court must view the inferences drawn from the facts "in the light most favorable to the nonmoving party." Id at 631. Thus, reasonable doubts about the existence of a factual issue should be resolved against the moving party. Id at 630-31. However, when the non-moving party's claims are factually "implausible, that party must come forward with more persuasive evidence than would otherwise be [required]. . . ." California Architectural Bldg. Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir. 1987), cert denied, 484 U.S. 1006 (1988). The Ninth Circuit has found, "No longer can it be argued that any disagreement about a material issue of fact precludes the use of summary judgment." Id.
UNDISPUTED FACTS
A review of the parties' facts, as well as the other materials submitted by the parties, including affidavits, declarations, and deposition excerpts, reveal the following undisputed facts.
Submitted documents with various attachments include Affidavit of Calvin P. Vance (docket #28), Notice of Using Consecutive Exhibit Numbers Due to Incorporation of Moti[o]n to Stay Into Conditi[o]nal Opposition to Plaintiff's Motion for Summary Judgment (docket #49), and [Second] Affidavit of Everette Lee Herndon, Jr. (docket #79) (collectively, "Def's Ex"). Plaintiff's unauthenticated exhibits follow the Affidavit of Debbie Taegel in Support of Prudential's Motion for Summary Judgment ("Pltf's Ex") (docket #13). Apparently, Prudential neglected to file any attorney affidavit attesting to the authenticity of its exhibits. See FRCP 11(b). Since Lillard-Roberts made no objection to this omission, this court will consider Prudential's exhibits for purposes of these motions. Citations to affidavits, declarations, and depositions are identified by the last name of the affiant, declarant, or deponent, and citations are to the paragraph(s) of the affidavit, declaration or page(s) of the deposition transcript. All other citations are to the exhibit number of the parties' submissions.
I. Background
In early 1998, Lillard-Roberts bought a 1912 Victorian house in McMinnville, Oregon, and moved there from Nevada with her two children. She purchased a homeowner's insurance policy (hereafter referred to as the "policy"), effective March 13, 1999, from Prudential through Primozich, Prudential's McMinnville agent. In light of her request for protection from loss to her home and contents to the greatest extent possible, including water, flood, and earthquake damage, Primozich assured Lillard-Roberts that Prudential would provide the maximum coverage. Lillard-Roberts did not carefully read the policy, but believed she had coverage for any damage resulting from water, roof or plumbing leaks. After Prudential issued the policy, Primozich visited Lillard-Roberts at home and assured her that her precious antiques and collectibles had coverage for full replacement cost.
The policy was issued to Lillard-Roberts under her former name.
The renewed insurance policy for the period March 13, 2000, to March 13, 2001, provides coverage of $158,000 for the dwelling, $15,800 for other structures, and $100,600 for personal property. Pltf's Ex A.
The parties do not dispute that this is the controlling policy, even though it does not cover some of the relevant dates.
On or after November 29, 1999, Lillard-Roberts noticed that water had seeped down the wall of her dining room. In late December 1999, Lillard-Roberts called Primozich. Without visiting the house or sending an adjuster, Primozich advised her that she had no coverage and not to submit a claim. In February 2000, Lillard-Roberts sued the prior owners and home inspector, alleging that the prior owners knowingly and negligently repaired the roof and flashing around the upstairs dormer and chimney area, which resulted in water leakage and mold contamination.
Lillard-Roberts' submissions refer to two different dates, November 29, 1999 (Amended Answer, Counterclaims, ¶ 18), and December 1999 (Lillard-Roberts Aff, ¶ 9).
In November 2000, the plumbing system failed, backed up into the main floor bathroom, and flooded the main floor with approximately one inch of sewer water. Primozich again denied Lillard-Roberts' claim under the insurance policy without any investigation.
Lillard-Roberts was diagnosed with systemic fungal disease attributable to living in her house. On the advice of her physician and toxic mold expert, she and her family moved out of the house and into an apartment. The record is not clear as to when they moved. On January 13, 2001, Prudential received an insurance claim from Lillard-Roberts for damage to her dwelling, garage, and personal property that resulted from water, mold, and mycotoxin contamination. On February 21, 2001, Prudential provided Lillard-Roberts a copy of the Prudential Property and Claims Insurance Policy for the period of March 13, 1999, to March 13, 2000. Pltf's Ex E, p. 1.
II. Prudential's Investigation
On February 13, 2001, an independent adjuster hired by Prudential, James King ("King") with GAB Robins, issued a report after inspecting Lillard-Roberts' property. He noted that there were "active colonies of mold growing" on the garage roof. Pltf's Ex Q, p. 4. He also concluded that he had "no doubt that there is probably some mold in the house," from water damage due to defective workmanship in a repair to the roof, flashing surrounding the dormer and chimney, and water intrusion. Id at 3-5.
On February 21, 2001, Prudential sent Lillard-Roberts a blank Proof of Loss form and requested that she provide a list of written materials and submit to an Examination Under Oath during the week of March 12, 2001. Pltf's Ex E, pp. 1-2. Due to scheduling difficulties, Prudential was not able to conduct that Examination Under Oath until June 20, 2001. Pltf's Ex M.
On March 28, 2001, a mold remediation specialist hired by Prudential, Brad Johnson ("Johnson") of Paul Carlson Associates, Inc., issued an Industrial Hygiene Report which concluded that "mold contamination and possible growth has occurred in the home, likely resulting from water infiltration into ceiling areas from chronic roof leaks. This may be compounded by inadequate ventilation of attic and vaulted ceiling areas." Pltf's Ex R, p. 4. The report also found that the sewer flooding, accumulation of pet and bird droppings throughout the house, and antique furnishings may have previously been contaminated and contributed to the mold presence. Id at 5.
Prudential also hired Talbott Associates Incorporated ("TAI") to determine if water intrusion was the cause of the mold growth and spores. In its report dated July 27, 2001, TAI stated that water leakage was "probably the result of inadequate flashing or flashing installation" around a dormer and nearby skylight and "inadequately maintained tile grouting inside [the] shower unit." Pltf's Ex T, p. 5. It concluded that the home "has probably not been subject to quantities of mold growth which would lead to unhealthy conditions" and that "the amount of leakage evidence found is typical of many western Oregon homes that have minor leakage problems." Id at 6.
On July 23, 2001, Wise Steps, Inc., performed a Fungal Study for Prudential. According to its report dated August 20, 2001, visible fungal growth was found in three water damaged areas caused by leaks in the roof and/or skylight and shower, "although there is no testing or data to show that toxins are present." Pltf's Ex U, p. 3. It also concluded that "poor demolition practices used to find the water damage" likely dispersed the mold spores and found "potentially significant sources of fungal and bacterial contamination . . . [in] animal feces and bird droppings." Id.
III. Lillard-Roberts' Investigation
On April 17, 2001, at Lillard-Roberts' request, Charles McConnell ("McConnell") of American Management Associates, LLC, a mold remediation firm, surveyed the residence. McConnell issued a preliminary report dated June 15, 2001, finding four types of marker toxigenic mycotoxin producing fungi in the home at levels elevated far above the outdoor level. Pltf's Ex S, pp. 5-6. He concluded that the mold appeared to be caused by undetermined roof and shower leaks. Due to Lillard-Roberts' hypersensitivity to mold spores, he recommended further investigation to determine the origin and effects of the exposure and that the family should not return to the home. Id at 6.
Lillard-Roberts also hired Southern Cascade Construction to determine the extent of damage and cost of restoring the house. The preliminary restoration estimate, dated August 13, 2001, was $127,000 based on what could be seen without removing drywall, ceilings, and flooring. Pltf's Ex V, p. 2. Given that the house was once valued in the $170,000 range and that Southern Cascade Construction performed no destructive testing, a construction consultant, Ronald N. Eakin ("Eakin"), believes that the house may be a total loss. Affidavit of Ronald Eakin ("Eakin Aff"), ¶ 9.
IV. Proof of Loss
By letter dated February 21, 2001, Prudential mailed Lillard-Roberts' attorney a blank Proof of Loss form. Pltf's Ex E. On August 3, 2001, Lillard-Roberts' attorney mailed to Prudential a detailed analysis of the policy and its coverage. Def's Ex 4. By letter dated August 6, 2001, Prudential renewed its request for Lillard-Roberts' completed Proof of Loss form and indicated that it would "be pleased to respond to [the] coverage analysis if and when Prudential makes a final determination of coverage." Pltf's Ex P, p. 1.
Although she did not yet know the extent of contamination and therefore the extent of her loss, Lillard-Roberts submitted a Sworn Statement in Proof of Loss dated August 16, 2001, together with photographs of the damage, a CD-Rom, two itemized lists of her personal property, 57 pages detailing replacement costs, repair contractor estimates, an opinion letter concerning the damage estimate, and two health specialist reports concerning toxic mold. Pltf's Ex F; Affidavit of Susan Lillard-Roberts ("Lillard-Roberts Aff"), ¶ 14. Prudential rejected the Proof of Loss as defectively incomplete because she did not specify the amount of her loss. Prudential is still awaiting a satisfactory Proof of Loss statement from Lillard-Roberts. Meanwhile, Lillard-Roberts remains uncertain of the total value of her loss, but estimates the damage to be $122,000 to her house and $140,000 to her personal property. Unable to resolve the issue of coverage, Prudential filed this action on September 14, 2001.
ANALYSIS I. Motion to Stay
Prudential filed its Motion for Summary Judgment very early in this case before responding to Lillard-Roberts' discovery requests, before filing a reply to Lillard-Roberts' counterclaims, and even before Lillard-Roberts served her Third Party Complaint. Therefore, instead of responding on the merits to Prudential's Motion for Summary Judgment, Lillard-Roberts filed a Motion to Stay Consideration of Prudential's Summary Judgment Motion and for Leave to Conduct Destructive Testing on Defendant's Residence at Prudential's Expense (docket #23). She argues that she first needs to obtain documents responsive to her discovery requests and take depositions on at least two issues: (1) the actual, as opposed to the possible or probable, cause of the water damage that has led to the growth of the mold; and (2) whether she failed to cooperate in submitting her Proof of Loss, thereby justifying Prudential to declare a forfeiture of her rights under the policy.
With respect to the cause of the water damage, Prudential's adjuster, King, determined that all water damage resulted from defective and improper workmanship and repair to the roof and flashing surrounding the dormer and chimney. However, Lillard-Roberts has submitted an affidavit of insurance expert, Everette Lee Herndon ("Herndon"), who casts doubt on King's conclusion for failure to adhere to the standard practices in the insurance industry. In particular, Herndon faults King for not going onto the roof of the two-story house, but instead conducting his visual inspection from the ground, and not seeking out other possible causes of the damages. Moreover, King's report speaks only in terms of possibilities.
Eakin, a construction consultant, also opines that:
it is necessary for a construction or roofing expert to open up the ceiling and walls in the upstairs floor in order to determine the cause of the water infiltration into the home and the cause of the moisture in the shower area. Until this is done, the actual cause of the water damage cannot be ascertained.
Eakin Aff, ¶ 12.
For this reason, Eakin takes issue with the conclusions of King and TAI who did no invasive factual investigation. John Casto of Southern Cascade Construction concurs. Affidavit of John Casto in Support of Susan Lillard-Roberts' Motion to Stay Consideration of Motion for Summary Judgment and Motion for Leave to Perform Destructive Testing ("Casto Aff"), ¶¶ 4-6.
Furthermore, based on the affidavits submitted by Lillard-Roberts, the actual cause of the water leaks and source of the mold remain a question of fact, requiring further investigation. To the extent that Prudential's summary judgment motion is predicated on the actual cause of the water leaks and mold, a denial or continuance is appropriate under FRCP 56(f).
However, many issues raised in Prudential's summary judgment motion can be resolved without knowing the actual cause of the leaks and mold. Rather than continue Prudential's summary judgment motion, this court will decide those issues and deny the other issues that are dependent on the actual cause of the water leaks and mold based on disputed issues of fact with leave to renew upon the close of discovery, if appropriate.
With respect to whether Lillard-Roberts failed to cooperate in submitting her Proof of Loss, Lillard-Roberts seeks production of both Prudential's and Primozich's files. She believes that the contents of these files will show that she did cooperate in submitting evidence of her claims and these files may contain admissions. As discussed below, Lillard-Roberts is entitled to summary judgment on the issue of the timeliness and sufficiency of her Proof of Loss. Therefore, further discovery is not required to respond to the forfeiture defense premised on Lillard-Roberts' alleged failure to cooperate. Instead, it appears that Lillard-Roberts seeks these documents primarily to provide factual support for her counterclaims. For that purpose, Lillard-Roberts' Motion to Stay is denied.
Finally, Lillard-Roberts requests that the court order Prudential to pay for destructive testing to determine the actual cause of the water leaks and mold because Prudential has that duty and because she has insufficient funds to pay for such testing. Prudential has a duty to investigate to determine coverage under the policy, but not to provide evidence to support Lillard-Roberts' claims against it. Thus, this request is denied with leave to renew based on a showing that Prudential had no good faith basis to deny coverage based upon its own investigation. This denial is not intended to bar Lillard-Roberts from performing destructive testing at her own expense.
II. Cross Motions for Summary Judgment
Prudential moves for summary judgment on each of its claims alleging a lack of coverage and against the first five counterclaims filed by Lillard-Roberts. In response, Lillard-Roberts filed a Motion for Partial Summary Judgment which addresses the coverage issues in greater detail than her Conditional Opposition Memorandum. As best as this court can ascertain, Lillard-Roberts' motion is a cross-motion on the coverage issues alleged in Prudential's Complaint, as well as a motion for summary judgment on her Third Affirmative Defense alleging promissory estoppel and on her Fourth and Fifth Counterclaims alleging negligence and declaratory relief.
The Sixth Counterclaim for Reformation was added to the Amended Answer which was filed on the same day as Prudential's Motion for Summary Judgment. Therefore, it is not addressed by the pending motions.
This court will address the coverage issues raised by Prudential's motion and then the remaining issues raised by Lillard-Roberts' motion.
A. Direct, Physical Loss (First Claim) 1. Dwelling and Other Structures
With respect to coverage for the dwelling (Coverage A) and other structures (Coverage B), the policy provides as follows:
Section I Perils Insured Against
Coverage A Dwelling And Coverage B Other Structures
We cover against risks of direct loss to property described in Coverages A and B only if that loss is a physical loss to property and is not excluded in "Section 1 — Exclusions. . . ."
Policy, p. 12 (emphasis in original).
Prudential argues that the policy does not cover Lillard-Roberts' claim for mold damage to the dwelling and other structures because it is not a "direct" and "physical" loss. Lillard-Roberts counters that this is an "all risks" policy under which coverage must be presumed unless specifically excluded from coverage. Since Prudential is not relying on any specific exclusion for Coverages A and B for mold damage, Lillard-Roberts contends that the policy provides coverage for decontamination and restoration.
One listed exclusion is loss caused by "mold, fungus, spores, wet or dry rot, mildew, bacterium[.]" Policy, Section 1, p. 13. However, Prudential is not relying on this exclusion because it is not "preceded by a sufficiently explanatory title printed or written in type not smaller than eight-point capital letters" as required by ORS 742.246(2). See Fleming v. United Serv. Auto. Ass'n, 330 Or. 62, 69-70, 996 P.2d 501, 505-06 (2000) (applying ORS 742.246(2) to multi-peril insurance policy forms).
Who bears the burden of proof of loss and what constitutes physical damage under an "all risks" insurance policy under Oregon law has been addressed in Columbiaknit, Inc. v. Affiliated FM Ins. Co, 1999 WL 619100 (D Or 1999). Columbiaknit involved water damage to a warehouse resulting from rainwater entering a building and saturating some fabric and garments stored in the building. The insured submitted a claim for all of the property stored in the building, but the insurer paid only for damage to the building and the loss of water-saturated garments and fabrics. The insured sought coverage for the remainder of the property based on the theory that it had been damaged by elevated levels of microbial mold and fungi.
With respect to the burden of proof, Judge Hubel concluded that "`[a]ll risks' property insurance indemnifies the insured against physical losses resulting from `perils' not excluded under the policy" and that "[p]erils are active physical forces which cause the loss of or damages to the insured property." Id at *3 (citation omitted). As a result, "the insured's burden is limited. The insured need only show that a physical loss occurred to covered property." Id at *4. This court concurs.
Here, it is undisputed that Lillard-Roberts' dwelling and other structures are insured by the policy for all risks. Therefore, applying the burden of proof applicable to an "all risks" policy, Lillard-Roberts may avoid summary judgment by submitting a material question of fact whether her dwelling and other structures have suffered a "direct" and "physical" loss.
Prudential contends that a "direct" and "physical" loss requires physical damage close in time and place to the insured peril. Furthermore, "[t]he inclusion of [the] word [physical] negates any possibility that the policy was intended to include `consequential or intangible damage,' such as depreciation in value, within the term `property damage.'" Wyoming Sawmills, Inc. v. Transportation Ins. Co., 282 Or. 401, 406, 578 P.2d 1253, 1256 (1978) (footnote omitted) (holding that defective studs used in a building were insured, but not the labor expense incurred to remove and replace the defective studs). In Prudential's view, mold is equivalent to the existence of asbestos which is not deemed a "direct" and "physical" loss. For example, in Great N. Ins. Co. v. Benjamin Franklin Fed. Sav. Loan Ass'n, 793 F. Supp. 259, 263 (D Or 1990), aff'd, 953 F.2d 1387 (9th Cir. 1992), the court found no coverage for the cost of removing asbestos which was discovered during remodeling:
There is no evidence here of physical loss, direct or otherwise. The building has remained physically intact and undamaged. The only loss is economic. The policy, by its own terms, covers only direct physical loss. The inclusion of the terms "direct" and "physical" could only have been intended to exclude indirect, nonphysical losses.
Similarly, in Columbiaknit, applying Oregon law, Judge Hubel concluded that these terms unambiguously "exclude indirect, nonphysical losses," including consequential or intangible damages such as loss in value. Columbiaknit, 1999 WL 619100, *5.
Thus, the requirement of a "direct" and "physical" loss precludes Lillard-Roberts from recovering a loss in value to her dwelling and other structures due to the presence of mold. Instead, the critical issue in this case is whether, as a matter of law, Lillard-Roberts has a claim for loss due to physical damage to her dwelling and other structures caused by the presence of mold. Under Oregon law, the odor from methamphetamine "cooking" constitutes a "direct" and "physical loss" to a house. Farmers Ins. Co. of Oregon v. Trutanich, 123 Or. App. 6, 10-11, 858 P.2d 1332, 1335 (1993) (holding that the cost to remove the odor is a "direct physical" loss because "the house was physically damaged by the odor that persisted in it"); Largent v. State Farm Fire Cas. Co., 116 Or. App. 595, 597-98, 842 P.2d 445, 446 (1992), review denied, 316 Or. 528, 854 P.2d 940 (1993) (holding that chemical contamination to porous materials caused by the production of methamphetamine is not excluded under the policy as "contamination"). "These cases suggest that physical damage can occur at the molecular level and can be undetectable in a cursory inspection." Columbiaknit, 1999 WL 619100, *6. However, mold damage may be distinguishable from odor damage:
The recognition that physical damage or alternation of property may occur at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable. In the methamphetamine odor damage cases, the physical damage is demonstrated by the persistent, pervasive odor. In the absence of such odor, no physical damage could be found. The mere adherence of molecules to porous surfaces, without more, does not equate physical loss or damage.
Id at *7.
Prudential argues that mold, unlike methamphetamine odor, has caused no "distinct and demonstrable" damage to Lillard-Roberts' dwelling and other structures. However, even Prudential's experts, while disputing the cause and extent of mold contamination, refer to the existence of visible mold contamination in the house. Based on only what can be seen without any demolition for further investigation, Lillard-Roberts' experts opine that the house may be a total loss. Because the house has visible mold which may not be removable, the house has suffered "distinct and demonstrable" damage. That is sufficient to constitute a "direct" and "physical" loss.
Furthermore, although not involving mold, at least two courts have deemed the inability to inhabit a building as a "direct, physical loss" covered by insurance. Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (1968) (rendering church uninhabitable by gasoline vapors); Matzner v. Seaco Ins. Co., 1998 WL 566658 (Mass Super 1998) (rendering apartment building uninhabitable by carbon monoxide levels). This court perceives no analytical difference between these cases and the case here where a house has allegedly been rendered uninhabitable by mold.
Because mold may be a "direct" and "physical" loss covered by the policy in this case, Prudential is not entitled to summary judgment as to Coverages A and B.
2. Personal Property
With respect to coverage for personal property (Coverage C), the policy provides as follows:
Coverage C Personal Property
We cover direct physical loss to property described in Coverage C caused by a peril listed below unless the loss is:
— limited under "Special Limits;"
— not covered under "Property Not Covered;" or
— excluded in "Section I — Exclusions."
Policy, p. 13 (emphasis in original).
Prudential argues that the policy does not cover Lillard-Roberts' personal property because it has suffered no "direct" and "physical" loss due to mold and even if it has, it was due to one of the 16 specifically listed perils.
Unlike the "all risks" coverage for the dwelling and other structures, coverage for personal property is only for named perils. Therefore, Lillard-Roberts bears the burden to prove that the mold damage is covered. To do so, she relies on listed peril number 12 for "[a]ccidental discharge or overflow of water or steam from within a plumbing . . . system. . . ." Policy, p. 14 (emphasis in original).
Although the cause of the water leakage and resulting mold damage is as yet unknown, for purposes of summary judgment this court assumes that this named peril caused the mold damage. Even so, Prudential argues the mold damage to personal property is not a "direct" and "physical" loss because it is neither visible nor has a strong smell.
In determining damage covered by insurance, this court must consider the nature and intended use of the property and the purpose of the insurance contract. As noted in Columbiaknit, "what may constitute damage in the retail clothing industry might not constitute damage to the personal property of a homeowner." Columbiaknit, 1999 WL 619100, *6. As a result, coverage for a clothing manufacturer can include fabrics and garments which: (1) were visibly moldy; (2) had a pervasive, persistent or noxious odor; or (3) had increased microbial counts that will develop either an odor, mold or mildew. Id at *6-7.
Here the nature and intended use of Lillard-Roberts' personal property is the use and enjoyment of that property in the home. Although "the mere adherence of molecules to porous surfaces, without more," is not physical loss or damage, id, this case involves more, namely the inability of Lillard-Roberts and her family to use and enjoy the personal property because of the mold spores adhering to it. According to the report by American Management Associates, Lillard-Roberts has been forced to abandon all of her personal property, assuming that it is contaminated by mold and causing health issues. Def's Ex 1, p. 6. Mold spores do not attach to non-porous surfaces, namely metal and glass, which can easily be remediated. However, mold spores can attach to any porous surface, including "cloth, carpets, leather, wood, sheet rock, insulation (and on human foods) when moist conditions exist," which may not be subject to remediation. Id, Ex 11, p. 1. As a result, when viewing the record in the light most favorable to Lillard-Roberts, her porous personal property is sufficiently contaminated by mold to the point that it has become worthless to her.
Therefore, Prudential is not entitled to summary judgment as to the personal property on the ground that no "direct" and "physical" loss has occurred.
B. Exclusion for Water and Sewage Backup (Second Claim)
The policy contains specific exclusions to Coverages A, B, and C. One of those exclusions provides as follows:
Section I Exclusions
1. We do not cover loss caused directly or indirectly by any peril or event described below. Such loss is not covered even if some peril or event otherwise covered by this policy contributed concurrently or in any sequence in causing the loss.
* * *
c. Water Damage and Damage by Flowing Substances, meaning:
* * *
(2) water, sewage or any other substance which backs up through sewers or drains. . . .
Policy, p. 15 (emphasis in original).
As discussed above, at this point the evidence is disputed as to the cause of the mold contamination. Therefore, Prudential is not entitled to summary judgment based on this exclusion.
C. Exclusion for Faulty Workmanship (Third Claim)
The policy also contains the following exclusion:
Section I
Exclusions
2. We do not cover loss to property described in Coverages A and B caused by any of the following. Any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.
* * *
c. Faulty, inadequate or defective:
* * *
(2) design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
(3) materials used in repair, construction, renovation or remodeling; . . . of part or all of any property whether on or off the residence premises.
Id at 16 (emphasis in original).
Prudential argues that even if the loss is "direct" and "physical," it is excluded because it was caused by faulty workmanship. As discussed above, a fact issue as to causation precludes summary judgment on this exclusion.
D. Named Peril and Rain Damage (Fourth and Fifth Claims)
As discussed above, Coverage C provides coverage for "direct physical loss to property described in Coverage C caused by a peril listed below. . . ." The policy then list 16 perils which cover damage to personal property. Prudential argues that there is no evidence that any peril listed under Coverage C provides coverage for Lillard-Roberts' personal property. Additionally, Prudential argues that the policy specifically excludes damage to personal property caused by rain unless the rain enters through a roof opening caused by the force of wind or hail:
2. Windstorm or hail. We do not cover:
a. loss to the property contained in a building caused by rain, snow, sleet, sand or dust unless the direct force of wind or hail damages the building causing an opening in a roof or wall and the rain, snow, sleet, sand or dust enters through this opening. . . .
Id at 13 (emphasis in original).
Because the evidence is disputed as to the cause of the mold contamination, Prudential is not entitled to summary judgment based on this exclusion.
E. Failure to Submit Proof of Loss (Sixth Claim)
Pursuant to ORS 742.230, insurance companies must include a Proof of Loss in every policy provision. Prudential's provision is as follows:
"A fire insurance policy shall contain a provision as follows: `within 90 days after receipt of proof of loss forms from the company, unless such time is extended in writing . . ., the insured shall render . . . a proof of loss, signed and sworn to by the insured, stating the knowledge and belief of the insured as to the following: The time and origin of the loss, the interest of the insured and of all others in the property, the actual cash value of each item thereof and the amount of loss thereto, all encumbrances thereon, all other contracts of insurance, whether valid or not, covering any of said property, any changes in the title, use, occupation, location, possession or exposures of said property since the issuing of this policy by whom and for what purpose any building herein described and the several parts thereof were occupied at the time of loss. . . .'" ORS 742.230.
Section I
Conditions
* * *
2. Your Duties After Loss. In case of a loss to covered property, you must see that the following are done:
* * *
g. send to us, within [90] days after our request, your signed, sworn proof of loss which sets forth, to the best of your knowledge and belief:
Prudential's 60-day period for submitting Proof of Loss is reformed to 90 days pursuant to ORS 742.230.
(1) the time and cause of loss;
(2) the interest of the insured and all others in the property involved and all liens on the property;
(3) other insurance which may cover the loss;
(4) changes in title or occupancy of the property during the term of the policy;
(5) specifications of damaged buildings and detailed repair estimates;
(6) the inventory of damaged personal property described in 2e above;
(7) receipts for additional living expenses incurred and records that support any fair rental value loss. . . .
Policy at pp. 16-17 (emphasis in original).
Compliance with this requirement is met in Oregon when the insured's submissions fulfill the purpose of the proof of loss:
The purpose of a provision for proof of loss is to afford the insurer an adequate opportunity for investigation, to prevent fraud and imposition upon it, and to enable it to form an intelligent estimate of its rights and liabilities before it is obliged to pay. Its object is to furnish the insurer with the particulars of the loss and all data necessary to determine its liability and the amount thereof.
Sutton v. Fire Ins. Exch., 265 Or. 322, 325, 509 P.2d 418, 419 (1973) (citation and internal quotations omitted).
Prudential argues that Lillard-Roberts has yet to submit a properly completed Sworn Statement of Proof of Loss despite repeated requests to do so. Prudential believes that this breach of the insurance contract should bar any coverage because it has prejudiced its ability to adjust and investigate Lillard-Roberts' alleged loss. Lillard-Roberts counters in her Motion for Partial Summary Judgment that she has substantially complied with the Proof of Loss requirements.
Prudential first demanded a Proof of Loss on February 21, 2001, which Lillard-Roberts submitted on August 16, 2001. Prudential claims that it rejected this submission as defective because it merely lists the pertinent amounts of value and claims an amount "to be determined." Without a more detailed Proof of Loss, Prudential cannot set aside reserves to reimburse Lillard-Roberts for any losses which may be covered.
In order to assert a contractual suit limitation period, an insurance company is not required to show it has been prejudiced because of the necessity to set proper reserves.
Suit limitation provisions serve a different purpose [than the requirement that a policyholder submit timely notice of loss]. They enable an insurer to fix its present and future liabilities and to close stale claim files. Without such a limitation provision, an insurer could not accurately forecast its future liabilities, set aside proper reserves, or close even ancient claim files. Considering the purpose of suit limitation provisions, there is no legal basis or policy rationale for requiring [the insured] to show that it was prejudiced by plaintiff's untimely filing.
Herman v. Valley Ins. Co., 145 Or. App. 124, 132-33, 928 P.2d 985, 990-91 (1996) (internal citations omitted).
As a preliminary matter, the general rule is that when an insurance "policy is reasonably susceptible" to more than one construction, "it should be construed most favorably to the policy holder." George B. Wallace Co. v. State Farm Mut. Auto. Ins. Co., 220 Or. 520, 525, 349 P.2d 789, 791 (1960). The Section I Conditions require Lillard-Roberts to set forth, to the best of her knowledge and belief, the specifications of damage to her house with detailed repair estimates and the inventory of damaged personal property. Lillard-Roberts still does not yet know the extent of contamination, and therefore the extent of her loss, without opening the walls and ceilings. Nevertheless, she submitted a sworn statement of Proof of Loss dated August 16, 2001, together with voluminous supporting materials, including estimates of the damage. She also submitted to a day-long statement under oath.
Given that the full extent of damage has yet to be ascertained, nothing in the record supports a finding that Lillard-Roberts has not acted to the best of her knowledge and belief by submitting all the information available. This information has been more than enough for Prudential to investigate the claim and form an estimate of its rights and liabilities. And assuming that the house, structures, and personal property are complete losses, as Lillard-Roberts contends, Prudential can easily set its reserves equal to the policy limits.
Based on the record, this court can conceive of no basis to declare a forfeiture of the policy based on Lillard-Roberts' failure to specify the exact amount of her loss. Accordingly, Prudential's motion for summary judgment based on the insufficiency and untimeliness of the Proof of Loss is denied and Lillard-Roberts' motion for summary judgment on Prudential's Sixth Claim is granted.
III. Lillard-Roberts' Counterclaims and Affirmative Defenses A. Counterclaim for Fraud and Misrepresentation (First Counterclaim)
Lillard-Roberts' First Counterclaim alleges fraud and misrepresentation both pre-claim (Count Two) and post-claim (Count One). For the reasons that follow, Prudential is entitled to summary judgment on both Counts.
1. Pre-Claim Misrepresentations (Count Two)
"[I]n the event the court determines that no coverage exists," Lillard-Roberts alleges in the alternative that Prudential and Primozich made misrepresentations to induce the purchase of the policy. Amended Answer, Counterclaims, ¶¶ 22-23. Lillard-Roberts alleges that in March 1998, Primozich represented that the policy "provided the type and extent of coverage that she requested" and that, as a result, she "reasonably expected that she would be covered for any and all foreseeable losses to her home and contents, including damage arising from the accidental discharge of water through plumbing systems, water damage resulting from roof leaks, and other problems that occurred after the policy was issued." Id at ¶ 23. If she had known of the lack of coverage, then she "could have purchased an insurance policy from another insurer that would have extended coverage for the kind of losses she suffered to her home and contents." Id at ¶ 26. As a result, she alleges damages for repairs and remediation of the house, additional living expenses, loss of use or damage to household goods and personal property, past and future medical expenses, loss of the ability to earn a living, other non-economic damages, and punitive damages. Id at ¶ 27.
As discussed above, the source of the damage and whether coverage exists has yet to be determined. Thus, the following analysis is based on the assumption that coverage does not exist.
a. Legal Standard
The elements of fraud require a plaintiff to prove with clear and convincing evidence each of the following elements: "(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted on by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) and his consequent and proximate injury." Williams v. Philip Morris Inc., 2002 WL 1189763, *2 (Or App. 2002), quoting Conzelmann v. NWP D Prod. Co., 190 Or. 332, 350, 225 P.2d 757, 764-65 (1950) (internal quotations and footnote omitted); see also In re Conduct of Brown, 326 Or. 582, 595, 956 P.2d 188, 196 (1998); Riley Hill Gen. Contractor, Inc. v. Tandy Corp., 303 Or. 390, 405-06, 737 P.2d 595, 604 (1987). "[N]ondisclosure of material facts can be a form of misrepresentation where the defendant has made representations which would be misleading without full disclosure." Meade v. Cedarapids, Inc., 164 F.3d 1218, 1221-22 (9th Cir. 1999).
While
[s]ilence in the absence of a duty to speak is not a representation[,] . . . one who makes a representation that is misleading because it is in the nature of a `half-truth' assumes the obligation to make a full and fair disclosure of the whole truth. . . . The extent to which a representation is misleading and, therefore, imposes a duty of disclosure, is a question of fact.
Gregory v. Novak, 121 Or. App. 651, 655, 855 P.2d 1142, 1144 (1993) (internal citations and quotation omitted).
b. Analysis
Prudential argues that this claim is untimely, relying on ORS 12.110(1), which bars claims exceeding two years after the date of discovery. Discovery is a two-step process and requires: (1) sufficient knowledge to put a reasonable person on guard or make an inquiry; and (2) with such knowledge, it appears that a reasonably diligent inquiry would disclose the fraud based on that person's knowledge. Widing v. Schwabe, Williamson Wyatt, 154 Or. App. 276, 283-84, 961 P.2d 889, 893-94 (1998).
ORS 12.110(1) provides that: "An action for assault, battery, false imprisonment, or for any injury to the person or rights of another, not arising on contract . . . shall be commenced within two years; provided, that in an action at law based upon fraud or deceit, the limitation shall be deemed to commence only from the discovery of the fraud or deceit."
[T]he statute of limitations begins to run when the plaintiff knows or in the exercise of reasonable care should have known facts which would make a reasonable person aware of a substantial possibility that each of the three elements (harm, causation, and tortious conduct) exists. . . . In most cases, the [objective] inquiry will concern what a plaintiff should have known in the exercise of reasonable care. In such cases, the relevant inquiry is how a reasonable person of ordinary prudence would have acted in the same or similar situation. . . . Relevant to this analysis [is] plaintiff's failure to make a further inquiry if a reasonable person would have done so. The discovery rule does not protect those who sleep on their rights, but only those who, in exercising the diligence expected of a reasonable person, are unaware that they have suffered legally cognizable harm.
Gaston v. Parsons, 318 Or. 247, 256, 864 P.2d 1319, 1324 (1994).
Moreover, the "statute is not delayed until the plaintiff is or should be aware of the full extent of his or her damage or of all the details relevant to the claim." Widing, 154 Or App. at 284, 961 P.2d at 893-94.
Prudential contends that Lillard-Roberts should have known that her cause of action for fraud accrued in March 1998, when she admittedly read the insurance contract. See Franklin v. Western Pac. Ins. Co., 243 Or. 448, 452-53, 414 P.2d 343, 346 (1966) (holding that contracting parties have an obligation to read the contract and if they assent without so doing, they cannot later successfully contend that their agreement was different from that expressed in writing). Prudential believes that the policy's exclusions clearly and unambiguously exclude the causes of loss that Lillard-Roberts now, more than three and a half years later, alleges that she asked be included in her insurance contract.
The flaw in Prudential's argument is that although some of the policy's exclusions may clearly and unambiguously disclaim some losses from mold damage, not all types of losses from mold damage are clearly and unambiguously excluded, as evidenced by the disputed issues in this litigation. Furthermore, Lillard-Roberts had no reason to believe in March 1998 that she had a cause of action for fraud or misrepresentation. Instead, she first became aware of her damage and limited coverage on or after November 29, 1999, when she telephoned Primozich and learned that the water seeping down the wall of her dining room was not covered. Her counterclaim for misrepresentation was first filed on November 27, 2001, and was amended on December 11, 2001. This filing is within the two year statute of limitations.
Although timely, this claim fails for the second reason argued by Prudential, namely that Lillard-Roberts' claims and remedies against Prudential are contractual. As discussed below, the facts do not support Lillard-Roberts' promissory estoppel defense (Third Affirmative Defense), and those same facts support this claim for misrepresentation to induce the purchase of the policy. Both the estoppel defense and misrepresentation claim require reasonable, detrimental reliance by Lillard-Roberts on Primozich's oral representations concerning the scope of coverage that are contrary to the policy. As discussed below, Primozich's representations concerning the scope of coverage do not erroneously interpret any ambiguous policy provision. Instead, he allegedly induced Lillard-Roberts to purchase a policy that does not provide the scope of coverage that she intended to buy. An insured's claim under these circumstances, if any, is in the form of a claim against the agent for negligent failure to procure insurance, not against the insurer under the policy that was procured. DeJonge v. Mutual of Enumclaw, 315 Or. 237, 246, n8, 843 P.2d 914, 919, n8 (1992).
In fact, as Justice Unis points out in his dissent, an insured may have no tort remedy at all; the "harshness of the majority's rule" which applies contract principles in a tort context, combined with Onita Pac. Corp. v. Trustees of Bronson, 315 Or. 149, 160-63, 843 P.2d 890, 896-98 (1992), which limits the scope of a negligent misrepresentation claim, "jeopardizes the possibility that the facts of this case . . . may be actionable in tort." DeJonge, 315 Or at 257, 843 P.2d at 925.
Because Lillard-Roberts' claim, if any, is against Primozich for negligent failure to procure the insurance that she requested, rather than against Prudential for misrepresenting the scope of coverage, Prudential is entitled to summary judgment against Count Two of the First Counterclaim alleging pre-claim misrepresentation.
Even if Lillard-Roberts could pursue a claim for pre-claim fraud, this court has considerable concern about whether some of the damages claimed by Lillard-Roberts are recoverable. Had she purchased a policy that covers the mold damage, she still would have suffered additional living expenses, loss of use, medical expenses, and other noneconomic damages. The issue is whether any of those damages would have been less had she purchased sufficient insurance coverage.
2. Post-Claim Misrepresentations (Count One)
Count One alleges that after she submitted her claims, Prudential and Primozich misrepresented the extent of Lillard-Roberts' coverage without making any investigation for the purpose of discouraging her from pursuing her claims. In particular, they misrepresented that the policy did not cover "the roof leak above her dining room that was reported on or about November 29, 1999," "the leak in and around windows and broken skylight," and "an accidental leak in the upstairs plumbing system near her shower, discovered in early 200[1]." Amended Answer, Counterclaims, ¶ 18. Because the extent of Lillard-Roberts' coverage is defined by the policy, she cannot seek a remedy for Prudential's violation of its duties and obligations arising out of the policy. It is well-settled that:
the choice between contract and tort remedies is this: When the relationship involved is between contracting parties, and the gravamen of the complaint is that one party caused damaged to the other by negligently performing its obligations under the contract, then, and even though the relationship between the parties arises out of the contract, the injured party may bring a claim for negligence if the other party is subject to a standard of care independent of the terms of the contract. If the plaintiff's claim is based solely on a breach of a provision in the contract, which itself spells out the party's obligation, then the remedy normally will be only in contract, with contract measures of damages and contract statutes of limitation. That is so whether the breach of contract was negligent, intentional, or otherwise.
Georgetown Realty, Inc. v. Home Ins. Co., 313 Or. 97, 106, 831 P.2d 7, 12 (1992).
Despite this authority, Lillard-Roberts argues that the "special responsibility exception" applies to afford her a tort claim. That exception permits a claim in tort where one party has assumed responsibility to take care of the affairs of the other party:
[T]o bring a tort claim based on conduct that is also breach of a contract, a plaintiff must allege, first, that the defendant's conduct violated some standard of care that is not part of the defendant's explicit or implied contractual obligations; and, second, that the independent standard of care stems from a particular special relationship between the parties. . . . This special responsibility exists . . . in the type of situation . . . [when] one party has relinquished control over the subject matter of the relationship to the other party and has placed its potential monetary liability in the other's hands. In all those relationships, one party has authorized the other to exercise independent judgment in his or her behalf and, consequently, the party who owes the duty has a special responsibility to administer, oversee, or otherwise take care of certain affairs belonging to the other party.
Strader v. Grange Mut. Ins. Co., 179 Or. App. 329, 333-34, 39 P.3d 903, 906 (2002) (citations omitted and internal quotations omitted).
As the court held in Strader, "breaches of the insurance contract and . . . violations of independent standards of care," do not necessarily create "a special fiduciary-like relationship[.]" Id, 179 Or App. at 335, 39 P.3d at 906. A special responsibility is created when a defendant has a "mandate to exercise independent judgment for the sole benefit of plaintiffs." Id. An insured is permitted to bring a tort claim in cases where "an insurer refuses to settle within policy limits or refuses to undertake a defense, that is, situations in which the interests of the insurer come into conflict with the interests of the insured." Id, 179 Or App. at 335, 39 P.3d at 906-07 (internal quotations and citations omitted).
Lillard-Roberts has not relinquished control over the subject matter of her relationship with Prudential, nor has Prudential assumed a duty to exercise independent judgment on her behalf. To the contrary, as is typically the case involving an insurance claim, Prudential and Lillard-Roberts are contracting parties with competing interests.
Nor can Lillard-Roberts base a tort claim on an alleged "special responsibility" relationship with Primozich. A captive insurance agent has no special duty to a policyholder to support a tort claim. Lewis-Williamson v. Grange Mut. Ins. Co., 179 Or. App. 491, 495, 39 P.3d 947, 949-50 (2002).
[A]lthough the record on summary judgment shows that plaintiff placed her trust and reliance on Clute to take care of her insurance needs, she had no right to rely on him and he had no duty to act for her economic benefit; accordingly, no special relationship existed between plaintiff and Clute. . . . Although plaintiff trusted Clute to take care of her insurance needs, there is no evidence that she had reason to expect, other than through her trusting nature, that he would work on her economic behalf. He was not her insurance agent, because he wrote insurance exclusively for Grange Insurance. He may have been available to her for her convenience by virtue of his presence at Grange Hall meetings, but that was for the economic benefit of Grange Insurance and himself and not plaintiff. The fact that she trusted him and deferred to his judgment does not make him her agent or show that he was acting on her behalf. . . . Clute had no special relationship that gave rise to a duty to exercise reasonable care [on behalf of the policyholder].
Id, 179 Or App. at 496-97, 39 P.3d at 950-51 (emphasis in original).
Primozich is a captive insurance agent and thus no special responsibility can arise out of the policy. A tort-based counterclaim, such as misrepresentation, cannot stand because it is nothing more than a dispute over coverage under the policy. Accordingly, Prudential is entitled to summary judgment against Count One of the First Counterclaim for post-claim misrepresentations.
B. Counterclaim for Outrageous Conduct (Second Counterclaim) 1. Legal Standard
A claim for outrageous conduct requires that plaintiff prove: (1) defendant intended to inflict severe emotional distress on the plaintiff; (2) defendant's acts were the cause of plaintiff's severe emotional distress; and (3) defendant's acts constituted an extraordinary transgression of the bounds of socially tolerable conduct. Robinson v. U.S. Bancorp, 2000 WL 435468, *5 (D Or 2000); citing McGanty v. Staudenraus, 321 Or. 532, 543, 901 P.2d 841, 849 (1995). Conduct that is merely "rude, boorish, tyrannical, churlish and mean" does not constitute an extraordinary transgression of the bounds of socially tolerable conduct. Patton v. J.C. Penney Co., 301 Or. 117, 124, 719 P.2d 854, 858 (1986), abrogated on other grounds by McGanty, 321 Or at 544, 901 P.2d at 1010 (citation omitted and internal quotations omitted).
2. Analysis
Lillard-Roberts alleges that Prudential's conduct in denying coverage, failing to investigate her claim, engaging in a letter campaign, and cancelling her policy constitutes an extraordinary transgression of the bounds of socially tolerable conduct. This court disagrees.
As discussed above, a tort claim cannot be based on a contractual relationship. However, the Ninth Circuit has recognized the tort of outrageous conduct against an insurer. In Green v. State Farm Fire Cas. Co., 667 F.2d 22 (9th Cir. 1982), an insurer took a sworn statement from the insured in an effort to assist in a possible criminal indictment for arson and delivered a copy of the statement to a state police officer who came to insured's office. Id at 24. While the insurer characterized "its conduct as reasonable behavior for an insurer investigating a claim[,]" the Ninth Circuit held that such a claim can stand when "[a] carefully instructed jury decided otherwise, and the evidence fully supports that conclusion." Id.
This case does not begin to rise to an extraordinary transgression of the bounds of socially tolerable conduct. Unlike Green, Lillard-Roberts has not been summoned before a Grand Jury or threatened with criminal charges if she pursues her claim. Rather, this is merely a dispute over insurance coverage, an ordinary occurrence which cannot be characterized in any sense as outrageous. Accordingly, Prudential is entitled to summary judgment against the Second Counterclaim.
C. Counterclaim for Breach of Contract (Third Counterclaim)
The Third Counterclaim alleges that:
Plaintiff breached the agreement in that, upon receiving notice of the claims, it failed to promptly investigate them, failed to pay for necessary testing and discreet demolition necessary to determine the full extent of damage to the house, failed to extend benefits for defendant's loss of use and failed to extend coverage for defendant's losses.
Amended Answer, Counterclaims, ¶ 40.
Prudential argues that the policy does not cover Lillard-Roberts' claim and that the contract terms allegedly breached by Prudential do not exist. For example, the policy contains no contract term or provision imposing upon Prudential a duty to "promptly investigate" her claim, "to pay for necessary testing and discreet demolition," or to "extend benefits" and coverage when there is no coverage for the loss. A breach of contract claim cannot be based upon contractual terms that do not exist.
However, the lack of specific contract provisions does not bar a breach of contract claim for denial of coverage for any damage that resulted from a covered event. If Prudential improperly denied coverage, then it has breached the policy. Nor does the lack of a specific contract provision relieve Prudential of its contractual duty to investigate. See 14 COUCH ON INSURANCE § 198:28 (3rd ed 1999). After all, "so long as it is not inconsistent with the express terms of the contract, the duty of good faith is a contractual term that is implied by law into every contract[.]" McKenzie v. Pacific Health Life Ins. Co., 118 Or. App. 377, 381, 847 P.2d 879, 881 (1993) (citation omitted and emphasis in original) (holding that a health insurer has the duty to determine in good faith whether a claim is covered and to refrain from arbitrarily refusing to pre-authorize medical treatment).
As discussed above, the issue of causation remains undetermined, precluding summary judgment as to coverage under the policy. Additionally, a question of fact exists as to whether Prudential performed a satisfactory investigation. Thus, Prudential is not entitled to summary judgment on this counterclaim.
However, even if Lillard-Roberts prevails on this counterclaim, it appears that she may not be able to recover some of the damages that she seeks. She seeks to recover not only economic damages for repair and remediation, but also additional living expenses, loss of use or damage to household goods and personal property, past and future medical expenses, loss of ability to earn a living, and other non-economic damages. Amended Answer, Counterclaims, ¶ 42. To recover these damages, she will have to prove that Prudential improperly denied coverage or failed to ascertain earlier in time that the policy did not provide coverage by investigating and paying for necessary testing.
If the policy covers her loss, then the issue is what damages she suffered because of the delay in obtaining coverage. It is far from clear what those damages are. Clearly, contract damages do not include non-economic losses, except in unique situations. Specifically, emotional distress caused by economic loss is not recoverable for a breach of contract, unless it is caused by physical harm. McKenzie, 118 Or App. at 381-82, 847 P.2d at 882. Lillard-Roberts claims to have suffered physical harm from the presence of mold, but it is unclear when that harm was first suffered and whether it was as a result of Prudential's failure to acknowledge policy coverage. Alternatively, if Prudential unduly delayed its denial of coverage, then the issue is what damages, if any, Lillard-Roberts suffered as a result of that delay.
Given the state of the record, this court cannot resolve the damages issue at this point and reserves this issue for the future.
D. Counterclaim for Negligence (Fourth Counterclaim)
The Fourth Counterclaim alleges that Prudential was negligent by failing "to promptly and adequately investigate the claims, in violation of insurance industry standards, and simply denied her claims without conducting any investigation necessary to determine the cause and coverage of the claims." Amended Answer, Counterclaims, ¶ 46. As discussed above, those allegations concerning Prudential's conduct after Lillard-Roberts submitted her claims are based on duties and obligations imposed by the policy and cannot support a tort claim. An injured contracting party may only sue for negligence "if the other party is subject to a standard of care independent of the terms of the contract." Georgetown Realty, 313 Or at 106, 831 P.2d at 12. Given the arms-length transaction, there was no special or heightened duty for Prudential above and beyond the terms of the insurance contract.
The Fourth Counterclaim also alleges that in the event the policy does not provide coverage, Prudential was negligent "in that it failed to provide the kind of coverage and/or policy that defendant requested, failed to provide open perils coverage for personal property damage and/or failed to advise her that plaintiff did not provide the extent of coverage she requested." Amended Answer, Counterclaims, ¶ 47. These allegations apparently are based on Primozich's pre-claim conduct. If Primozich failed to procure adequate insurance or made representations, then, as discussed above, Lillard-Roberts must pursue the appropriate claim against Primozich.
As a matter of law, nothing supports Lillard-Roberts' negligence counterclaim against Prudential. Accordingly, Prudential is entitled to summary judgment against the Fourth Counterclaim.
E. Counterclaim for Declaratory Relief (Fifth Counterclaim)
The Fifth Counterclaim seeks a declaration that Lillard-Roberts' loss is covered because "[t]he policy does not exclude water damage or ensuing loss caused by rain or leaking roofs or resulting from the accidental discharge of water from a leak in the plumbing system or the failure of a shower or overflow of a toilet fixture." Amended Answer, Counterclaims, ¶ 53. As discussed above, genuine issues of material fact exist concerning causation. Thus, for the same reasons that Prudential's declaratory judgment claims are denied, Lillard-Roberts' counterclaim for declaratory relief is denied.
However, the Fifth Counterclaim raises one issue not discussed earlier concerning the scope of the "ensuing loss" exception to the exclusions. Lillard-Roberts contends that the faulty workmanship exclusion for damage to the building and other structures does not apply because the mold damage is covered as an "ensuing loss to property described in Coverages A and B not excluded or excepted in this policy." Policy, Section I, Exclusions (2), p. 16. In other words, Lillard-Roberts asserts that the "ensuing loss" provision reinstates coverage for mold damage "ensuing" from water leaks caused by faulty workmanship.
To the contrary, Prudential interprets the "ensuing loss" clause as applying in those rare cases where the reasonable damage expected to be caused by faulty workmanship leads to another peril that causes damage beyond that normally expected. For instance, if defectively installed roof flashing allows water to leak into the wall cavity, then subsequent damage caused by water, such as dry rot or mold, to the interior of the house is caused by the faulty workmanship and not covered. If, however, the water migrates into an electrical box and causes an electrical short which in turn causes a fire, then the fire damage is a covered "ensuing loss." Prudential argues that mold, unlike fire, is not an "ensuing loss" due to the lack of any intervening cause other than time beyond the initial water damage.
This court agrees with Prudential. The ensuing loss clause "does not reinsert coverage for excluded losses, but reaffirms coverage for secondary losses ultimately caused by excluded perils." Cooper v. American Family Mut. Ins. Co., 184 F. Supp.2d 960, 964 (D Ariz 2002), citing Schloss v. Cincinnati Ins. Co., 54 F. Supp.2d 1090, 1094-95 (M.D. Ala 1999), aff'd without opinion, 211 F.3d 131 (11th Cir. 2000); Ames Privilege Assoc. v. Utica Mut. Ins. Co., 742 F. Supp. 704, 708 (D Mass. 1990); McDonald v. State Farm Fire Cas. Co, 119 Wn.2d 724, 734, 837 P.2d 1000, 1005 (1992); Brodkin v. State Farm Fire Cas. Co., 217 Cal App.3d 210, 218, 265 Cal.Rptr. 710, 714 (1989). In other words, "an ensuing loss provision does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property itself." Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 139 F. Supp.2d 1374, 1380 (S.D. Fla 2001) (emphasis in original).
In Prudential's example of a water leak that causes an electrical short which starts a fire, the fire damage is a covered ensuing loss because it is an unforeseeable event occurring "wholly separate from the defective property itself," id, and, but for the excluded peril, would otherwise be a covered loss. See also Roberts v. State Farm Fire Cas. Co., 146 Ariz. 284, 286, 705 P.2d 1335, 1337 (1985), citing Aetna Ins. Co. v. Getchell Steel Treating Co., 395 F.2d 12 (8th Cir. 1968). The issue here is whether mold damage caused by a water leak falls under the same ensuing loss category as fire damage caused by a water leak.
Though not inevitable, mold is a natural event that often manifests after and as a direct result of the entry of water caused by some other peril, such as a roof opened by a hailstorm, a leaky pipe or defectively installed roof flashing. Mold cannot exist or sustain itself without some moisture source, such as water intrusion. When water intrudes into a residence, mold, unlike fire, is not a surprise, particularly in the damp northwestern United States. Because mold is a natural and expected, as opposed to a separate and independent, result of water damage, it cannot be an ensuing loss. An ensuing loss requires an unexpected loss due to an intervening or contributing cause other than the mere passage of time.
Mold may be a covered "direct" and "physical" loss if the initial event that causes a water intrusion event is covered. The policy in this case does not specifically exclude mold damage because the mold exclusion contained in the policy violates ORS 742.246(2). Therefore, if the policy covers certain types of water damage, then it will also cover mold damage which results from that covered peril.
Such sources are not limited to water leaks and apparently mold may result from animal feces or bird droppings. See Pltf's Ex U, p. 3.
Of course, mold can take on a life of its own and rise to toxic levels. Lillard-Roberts may be trying to hang her hat on the hook that toxicity from mold, unlike mold itself, is not foreseeable and thus is a covered ensuing loss. However, after careful consideration, this court concludes that toxic levels of mold are not an ensuing loss. "Molds . . . are ubiquitous on our planet." Def's Ex 11, p. 1. Molds release spores and mycotoxins into the air which are deemed toxic when they exceed certain levels. Id, Ex 1, p. 4 (noting that "[t]he general recommendation [is] that indoor mold concentrations be lower than outdoor concentrations and that no elevated `indicator/marker' organisms . . . be present in the indoor air in greater concentrations than outdoors"). Thus, it is expected that illness may result when an added moisture source, such as water intrusion, causes mold spores to proliferate in a residence, thereby increasing the mold quantities to a toxic level. However, "removal of the mold would presumably also remove the mycotoxins. As such, the mycotoxins do not constitute a separate and independent loss resulting from mold." Cooper, 184 F. Supp.2d at 965 (emphasis in original).
Cases outside of this jurisdiction interpreting ensuing loss clauses provide support for this court's interpretation of the ensuing loss provision. For example, in Acme Galvanizing Co. v. Fireman's Fund Ins. Co., 221 Cal App.3d 170, 270 Cal.Rptr. 405 (1990), a steel kettle ruptured due to a defective weld, allowing tons of molten zinc to spill and damage other property. The court ruled that the resulting damage was "caused by" the faulty weld and was not a covered ensuing loss.
We interpret the ensuing loss provision to apply to the situation where there is a "peril," i.e. a hazard or occurrence which causes a loss or injury, separate and independent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues . . . Here, there was no peril separate from and in addition to the initial excluded peril of the welding failure and kettle rupture. The spillage of molten zinc was part of the loss directly caused by such peril, not a new hazard or phenomenon. If the molten zinc had ignited a fire or caused an explosion which destroyed the plant, then the fire or explosion would have been a new covered peril with the ensuing loss covered. That did not occur.
Id, 221 Cal App.3d at 179-80 (emphasis in original).
In McDonald, 119 Wn.2d at 729 n3, 837 P.2d at 1002 n3, the Washington Supreme Court addressed an ensuing loss clause in a homeowner's policy that, similar to this policy, provided coverage for "any ensuing loss . . . unless the ensuing loss is itself a Loss Not Insured by this Section." The clause followed a list of exclusions, including a faulty workmanship and materials exclusion. The Washington Supreme Court took the appeals court to task for interpreting the ensuing loss clause as a grant of coverage for faulty or negligent construction or repairs.
[I]t is difficult to reasonably interpret the ensuing loss clause contained in the defective construction and materials exclusion to be a grant of coverage. The ensuing loss clause may be confusing, but it is not ambiguous. Reasonably interpreted, the ensuing loss clause says that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered. The uncovered event itself, however, is never covered. . . . [T]he intent of the ensuing loss clause is not to enlarge the list of items covered under the policy.
Id, 119 Wn.2d at 734, 837 P.2d at 1005 (citation and footnote omitted).
Arguing that the insurance industry has a contrary interpretation, Lillard-Roberts cites to an article published by the American Association of Insurance Services ("AAIS"), an association of property and casualty insurers of which Prudential is a member. That article is of little help to this court since it merely sets forth various sources of mold damage with a correlating potential basis for coverage and potential exclusions or limitations of coverage. It also admits that "many claims will fall in a `gray area.'" Def's Ex 17, p. 2. It does not state, as Lillard-Roberts contends, that mold is always a covered ensuing loss.
This article is at http://www.aaisonline.com/communications/mold.htm.
In conclusion, unless and until the Oregon appellate courts speak on this issue, this court concludes that Lillard-Roberts' loss due to mold may be covered, depending on the source, but not under the ensuing loss exception to the faulty workmanship exclusion. However, as previously noted, Prudential is not entitled to summary judgment on this claim, given the factual dispute over causation.
F. Promissory Estoppel (Third Affirmative Defense)
The Third Affirmative Defense alleges that Lillard-Roberts' "claims are either covered by the insurance policy, or should be deemed covered under the doctrine of estoppel or reformation because plaintiff failed to provide the insurance coverage requested by defendant, and which plaintiff led defendant to reasonably believe would be provided." Amended Answer, Third Affirmative Defense.
In particular, Lillard-Roberts asked Primozich for the "best insurance [she] could possibly buy," for coverage "against any losses that might typically happen to a home and its contents[,]" and in particular for "protection from water damages to [her] home and contents, in whatever form it might come-rain, snow or flood." Lillard-Roberts Aff, ¶¶ 2-3. Primozich responded that Prudential was issuing her a policy that covered her "fully, and included replacement cost coverage for [her] belongings." Id at ¶ 4. She contends that in spite of this promise, water damage caused the mold growth for which Prudential is now declining coverage.
Apparently Lillard-Roberts claims that she entered into an implied insurance agreement by relying on Primozich's promise that Prudential would furnish coverage for any loss that she suffered, including personal injury, from the growth of toxic mold caused by water entering her house, regardless of how or why the water entered her house. Prudential's policy contains various exclusions upon which Prudential has relied to deny coverage. Lillard-Roberts seeks to avoid those exclusions by relying on Primozich's very broad oral representations.
The scope of coverage by estoppel was thoroughly addressed by the Oregon Supreme Court in DeJonge v. Mutual of Enumclaw, 315 Or. 237, 843 P.2d 914 (1992). In that case, plaintiffs requested an insurance agent to provide "full" or "complete" coverage for their small grocery store. Id, 315 Or at 239, 843 P.2d at 915. Although the insurance agent knew plaintiffs sold alcoholic beverages at the store, he never specifically discussed coverage for liquor liability. The policy issued to the plaintiffs excluded coverage for liquor liability. Plaintiffs did not read the policy and were unaware of the exclusion until three years later when they were named as defendants in a wrongful death action. After a judgment was entered against them, plaintiffs sought declaratory judgment on coverage for their wrongful death liability despite the clear exclusion of such coverage.
Relying on its prior decision in ABCD . . . Vision v. Firemans' Fund Ins. Co., 304 Or. 301, 306-07, 744 P.2d 998, 1001-02 (1987), the Oregon Supreme Court reaffirmed the general rule that estoppel cannot be used to negate an express exclusion in an insurance policy:
The ABCD . . . Vision court distinguished between using estoppel affirmatively, to create a right to coverage not contained in the insuring clauses of the policy, and using it defensively, to preserve a right to coverage already acquired by preventing its forfeiture. The court held that estoppel is not available in the former situation to negate an express exclusion in the written contract but is available in the latter situation to avoid a condition of forfeiture of coverage.
DeJonge, 315 Or at 241, 843 P.2d at 916 (citation omitted) (emphasis in original).
To avoid application of that rule, plaintiffs argued that it is limited only to an insurer's conduct after the loss, not conduct before the loss. Based on its prior decisions and on ORS 742.016(1), the Oregon Supreme Court rejected any distinction by that rule between pre-loss and post-loss conduct:
"(2) If any life or health insurance policy is reinstated or renewed, and the insured . . . with a vested interest under such policy shall make written request to the insurer for a copy of the application . . ., the insurer shall, within 30 days after the receipt . . . of such request . . . deliver or mail to the person making such request a copy of such application. If such copy shall not be so delivered or mailed, the insurer shall be precluded from introducing such application as evidence in any action based upon or involving such policy or its reinstatement or renewal." ORS 742.016.
The often-expressed principle that estoppel cannot be invoked to negate an express exclusion in a written insurance policy applies even when the alleged representation occurred before the loss, at least where, as here, the exclusion on which the insurer relies is unambiguous and the insurer did not dissuade the insured from reading or understanding the exclusion. The parties' insurance policy excluded coverage for liability related to the sale of liquor to a minor, and defendant was not estopped to deny such coverage.
DeJonge, 315 Or at 245-46, 843 P.2d at 919 (footnotes omitted).
Lillard-Roberts' claim is indistinguishable from DeJonge. Just like the plaintiffs in DeJonge, Lillard-Roberts seeks to create coverage based on pre-loss statements by an agent regarding the scope of coverage where the insurer contends that no coverage exists under the policy. Lillard-Roberts does not argue that Prudential dissuaded her from reading or understanding the exclusions. Nor does she present other evidence warranting special consideration.
The only conceivable distinction from DeJonge is that the policy here has exclusions that do not clearly and unambiguously exclude all types of losses claimed by Lillard-Roberts. By requiring "direct" and "physical" loss, the policy unambiguously excludes a loss in value to the dwelling and other structures. However, this court was required to interpret the policy to determine if and when it covers a loss due to physical damage as a result of mold. Despite this ambiguity in the policy exclusions, the estoppel theory remains inapplicable.
The type of ambiguity which gives rise to an estoppel theory is described in Farley v. United Pac. Ins. Co, 269 Or. 549, 525 P.2d 1003 (1974). There the insurance agent read over the telephone to the insured the provision that would be included in the policy and told the insured that he was covered under that wording. The agent was wrong because the wording excluded the risk for which the insured later sought coverage. As explained by DeJonge:
It was the agent's construction of the policy provision that this court found pivotal: "It seems entirely reasonable to us that [the insured] should not appreciate the fact that the language of the policy would not cover him when considered in the face of the agent's assurance that he was covered. . . . [T]he insurance company is estopped to assert the actual meaning of the provisions of its policy because the insured is entitled to rely upon a contrary interpretation of those provisions by the company's general agent."
DeJonge, 315 Or at 246, n6, 843 P.2d at 919, n6, quoting Farley, 269 Or at 558-59, 525 P.2d at 1007-008 (internal citations omitted).
An estoppel theory permits Lillard-Roberts to rely upon Primozich's contrary interpretation of ambiguous policy provisions. Thus, an estoppel theory would be appropriate if Lillard-Roberts had expressed a concern about mold damage and Primozich had told Lillard-Roberts that contrary to the policy, she was insured for all losses that might result specifically from mold damage. However, Primozich did not posit an erroneous interpretation of any ambiguous policy provision. Instead, in response to Lillard-Roberts' request for the "best insurance that [she] could possibly buy" to provide coverage "against any losses that might typically happen to a home and its contents," he told her that Prudential was issuing her a policy that covered her "fully" and provided replacement cost coverage for her personal property. Lillard-Roberts' vague request and Primozich's vague assurances do not interpret, much less contradict, any policy provision. Absent Primozich's erroneous construction of a pivotal policy provision, an estoppel theory is not appropriate to expand the scope of coverage under the policy.
Lillard-Roberts also contends that this case is similar to Kabban v. Mackin, 104 Or. App. 422, 801 P.2d 883 (1990), which affirmed a jury verdict based on coverage by estoppel. The insurance agent knew that the building was unoccupied, but failed to disclose that an unoccupied building was not covered under the policy. The court stated, without further explanation, that the principle stated in ABCD . . . Vision did not apply "because plaintiff based his claim on conduct of the insurer that occurred before the loss" and "[i]n addition, the policy provision at issue is a condition of forfeiture which is always subject to estoppel." Id, 104 Or App. at 428-29, 801 P.2d at 888. Kabban has limited precedential value since it was decided before the Oregon Supreme Court clarified in DeJonge that ABCD. . . Vision applies to the insurer's conduct before a loss occurs. In any event, Kabban is distinguishable on its facts. Unlike the condition of forfeiture at issue in Kabban, Lillard-Roberts contests the scope of available coverage, as in DeJonge. Therefore, Lillard-Roberts' Third Affirmative Defense for promissory estoppel is dismissed.
ORDER
For the reasons stated above,
(1) Prudential's Motion for Summary Judgment (docket #10) is GRANTED on Counts One and Two of the First Counterclaim, Second Counterclaim, Fourth Counterclaim, and Third Affirmative Defense; and is otherwise DENIED;
(2) Lillard-Roberts' Motion to Stay Consideration on Plaintiff's Motion for Summary Judgment for Leave to Conduct Destructive Testing at Prudential's Expense (docket #23) is DENIED; and
(2) Lillard-Roberts' Motion for Partial Summary Judgment (docket #50) is GRANTED on the Sixth Claim for Relief and otherwise DENIED.