Texas Supreme Ruling Favors Insurers That Changed Policy Forms to Stem Mold Claims

The Texas Supreme Court on Friday reversed lower court rulings and found that Farmers Insurance was within its rights when it decided 19 years ago not to renew homeowners’ policies that it feared would have forced it to cover mold damage.

The 7-0 decision overturns rulings that required the carrier to renew 400,000 insurance policies that were thought to include coverage for all risks to dwellings, not just named perils. The high court also reversed orders by the 13th Court of Appeals that would have brought a $4 million payday to class-action attorneys who shepherded the case through two decades of litigation, as well as a second group of attorneys who represented plaintiffs in a separate but related class-action lawsuit.

The opinion, written by Justice James D. Blacklock, explains that the case arose after Farmers and other insurers decided to stop using the HO-B policy form in 2001 because of numerous court rulings that found coverage was owed on claims for mold damage caused by leaking pipes. Insurers began using the HO-A policy form, which covered only named perils. The state Department of Insurance and attorney general approved the use of the new forms.

Homeowner Sandra Geter filed suit, however, asserting that her policy stated that Farmers was not allowed to refuse to renew her policy “because of claims for losses resulting from natural causes.” She said that she and all other policyholders with the same policy language had a contractual right to renew their policies because Farmers had admitted it was refusing to do so because of all the mold claims it had to cover statewide.

The trial court in Jefferson County and the Court of Appeals agreed. The Supreme Court, however, said both courts erred.

The opinion notes that in 2002 the Texas Department of Insurance issued a bulletin that said insurers could change the terms of their policies by notifying the policyholder that they had decided not to renew coverage no later than 30 days before policy expiration.

“Geter’s position is that Farmers bound itself by contract to perpetually renew all its HO-B policies regardless of its statewide financial results and regardless of whether TDI approved statewide changes to its policy forms,” the high court’s opinion says. “While courts will enforce contracts according to their plain meaning, we also cannot be blind to the commercial realities of the context in which the parties were operating.”

The court said the language in Geter’s policy does not mean Farmers cannot change its terms for coverage because of underwriting losses suffered statewide. The Supreme Court said “claims for losses resulting from natural causes” means claims made by the individual policyholder against a single policy.

“Likewise, references throughout the policy to ‘losses’ are references to losses of the individual policyholder, not to Farmers’ losses on a statewide scale,” the court said.

The flood of mold claims that prompted Texas insurers to change policy forms turned out to be less of a concern than initially feared. In 2006, the Supreme Court ruled in Fiess v. State Farm Lloyds that the HO-B policy form unambiguously excluded losses caused by mold.

The trial court had awarded the plaintiffs attorneys $3,046,246 in fees and costs of $486,789. The Court of Appeals had also ruled in favor of attorneys who intervened to assert a claim to collect fees for work they did that they said helped the plaintiffs. The Supreme Court reversed those judgments and remanded the case to the trial court to reconsider the issue of attorney fees.

The high court said that its usual practice is to allow trial courts to determine what attorney fees are equitable, but it also noted that “Geter and the class have not prevailed in any regard and have obtained no favorable results.”