Court Opinion

ID: 9387798
Source: CourtListenerOpinion
Date Created: 2023-04-19 00:00:27.103581+00
Date Added: 2024-06-11T17:18:15.525987
License: Public Domain

Case: 22-50265    Document: 00516716122        Page: 1     Date Filed: 04/18/2023

           United States Court of Appeals
                for the Fifth Circuit                               United States Court of Appeals
                                                                             Fifth Circuit

                               ____________                                FILED
                                                                       April 18, 2023
                                No. 22-50265                          Lyle W. Cayce
                               ____________                                Clerk

   Clay Buchholz; Lindsay Buchholz,

                                                         Plaintiffs—Appellants,

                                     versus

   Crestbrook Insurance Company, doing business as
   Nationwide Private Client,

                                           Defendant—Appellee.
                 ______________________________

                 Appeal from the United States District Court
                      for the Western District of Texas
                           USDC No. 1:20-CV-449
                 ______________________________

   Before Smith, Clement, and Wilson, Circuit Judges.
   Edith B. Clement, Circuit Judge:
         Clay and Lindsay Buchholz own a large ten-thousand-square-foot
   house in Austin, Texas. They insured their home with Crestbrook Insurance
   Company. Their policy included “Biological Deterioration or Damage Clean
   Up and Removal” coverage (“mold coverage”). In April 2019, the Buchholz
   family discovered a widespread mold infestation in their home. Although
   Crestbrook covered many of their losses, it denied a generalized claim for
   mold growing in the Buchholzes’ walls and heating, ventilation, and air
   conditioning system. On cross-motions for summary judgment, a magistrate
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   judge issued a report and recommendation in favor of Crestbrook, and the
   district court adopted the magistrate judge’s conclusions. We AFFIRM.
                                                I
                                               A
           The crux of this appeal is whether the optional mold coverage the
   Buchholzes purchased in their Crestbrook policy, which provided $1.6
   million in mold damage insurance in exchange for $4,554.53 in additional
   premiums, covers a generalized mold loss. In April 2019, the Buchholzes
   discovered mold growing inside the wall of their indoor basketball court when
   a ball accidentally smashed through it. They hired a contractor to inspect the
   home, and his inspection stumbled upon a mold infestation that affected the
   entire house. The Buchholzes submitted six claims to Crestbrook. It paid
   $745,778 in covered losses on five of the claims. However, Crestbrook sent a
   reservation of rights letter regarding the sixth claim for general mold growth
   and mold in the HVAC system.
           In response to that letter, the Buchholz family retained MLAW
   Forensics, Inc., to investigate the cause of their mold infestation. Crestbrook
   agreed to pay for the costs of MLAW’s investigation. Dean R. Read, P.E., 1
   wrote a causation report on what he concluded led to the mold growth at the
   Buchholzes’ house. His report found that “discrete leaks and a ‘global’ issue
   due to interruption or restriction of the moisture vapor drive drying process”
   caused the mold. Specifically, he concluded that the house’s HVAC system

           _____________________
   1
     “P.E.” stands for “Professional Engineer” and is a certified title that requires a degree,
   two examinations, and four years of engineering work experience. See National Society of
   Professional Engineers, What is a PE, https://www.nspe.org/resources/licensure/what-pe
   (last visited Apr. 10, 2023).

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   was “[i]mproperly designed or configured and non-functional,” which
   resulted in “elevated moisture content[]” and subsequent mold growth.
         Based on MLAW’s causation report and a supplemental investigation
   by Tom Green, P.E., on the malfunctioning HVAC system, Crestbrook
   denied Appellants’ mold claim. The denial letter stated:
         As noted in the MLAW Forensics report, workmanship and
         construction issues were discovered with the HVAC system,
         wall paint, and paneling and trim. Your policy contains
         exclusions for biological deterioration or damage, a defect or
         inadequacy in design, workmanship, construction and
         materials. In addition, the policy contains exclusions for
         weather conditions or dampness, and gradual or sudden loss
         due to a mechanical breakdown. Given the aforementioned
         exclusions, the biological deterioration or damage additional
         limited coverage would not apply to this claim.
                                       B
         On March 13, 2020, the Buchholzes sued Crestbrook in Travis
   County District Court, alleging their insurer wrongfully denied their sixth
   claim. Crestbrook timely removed the case to federal court. In their final
   complaint, the Buchholz family alleges that Crestbrook breached their
   insurance contract in bad faith and violated the Texas Insurance Code. They
   sought a declaratory judgment that Crestbrook’s policy covered their mold
   claim, an award of actual and exemplary damages, attorney’s fees, and costs.
         At the district court, the parties filed cross-motions for summary
   judgment. The Buchholzes moved for a partial judgment on their bad faith
   breach of contract claim and asked the court to construe the various
   exclusions found in the policy in their favor. Crestbrook counter-moved for
   entry of summary judgment, arguing that the Buchholz family failed to show
   they suffered from a covered cause of loss and that provisions in the policy
   excluded their claims. The magistrate judge handling the case recommended

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   the district court rule in Crestbrook’s favor, concluding that the Buchholz
   family had failed to demonstrate a “covered cause of loss” as required by
   their mold coverage. The district court summarily adopted the magistrate
   judge’s report and recommendation and entered judgment. The Buchholz
   family timely appealed.
                                          II
          “This court reviews a district court’s grant of summary judgment de
   novo, applying the same legal standards as the district court.” Tradewinds
   Env’t Restoration, Inc. v. St. Tammany Park, LLC, 578 F.3d 255, 258 (5th Cir.
   2009) (quoting Condrey v. SunTrust Bank of Ga., 429 F.3d 556, 562 (5th Cir.
   2005)). “Summary judgment is appropriate when ‘the movant shows that
   there is no genuine dispute as to any material fact and the movant is entitled
   to judgment as a matter of law.’” United States v. Nature’s Way Marine,
   L.L.C., 904 F.3d 416, 419 (5th Cir. 2018) (quoting Fed. R. Civ. P. 56(a)).
   The parties agree that this case is in federal court based on diversity
   jurisdiction and Texas law controls.
                                          III
                                          A

          The Buchholzes argue that the magistrate judge improperly required
   them to demonstrate a discrete cause of covered loss within the framework
   of an all-risks insurance policy. The Buchholz family says that the only way
   they could have met this burden would be by inverting the Texas law standard
   and requiring them to disprove every exclusion found in the underlying
   policy. Because of these errors, they request that we reverse the district
   court’s entry of summary judgment and remand the case for trial.
          Under Texas law, when deciding a dispute regarding insurance
   coverage, we first look to “the language of the policy because we presume

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   parties intend what the words of their contract say.” Gilbert Tex. Constr., L.P.
   v. Underwriters at Lloyd’s, London, 327 S.W.3d 118, 126 (Tex. 2010). We give
   the policy’s words “their ordinary and generally-accepted meaning unless
   the policy shows the words were meant in a technical or different sense.” Id.
   Insurance policies are contracts construed “according to general rules of
   contract construction to ascertain the parties’ intent.” Id. We also “examine
   the entire agreement and seek to harmonize and give effect to all provisions
   so that none will be meaningless.” Id.
          “Our analysis of the policy is confined within the four corners of the
   policy itself.” State Farm Lloyds v. Page, 315 S.W.3d 525, 527 (Tex. 2010).
   Whether an insurance contract is ambiguous is a question of law. Id. A
   disagreement between the parties regarding the meaning of policy terms or
   interaction between terms does not create ambiguity. Id. We may consider
   the policy ambiguous only if it is subject to two or more reasonable
   interpretations. Id. Where we determine policy language to be ambiguous,
   “we must resolve the uncertainty by adopting the construction that most
   favors the insured.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Hudson
   Energy Co., 811 S.W.2d 552, 555 (Tex. 1991).
          In a coverage dispute, the insured has the burden first to prove that
   their loss falls within the terms of the contract. Gilbert, 327 S.W.3d at 124
   (citation omitted). Once the insured demonstrates this, the burden shifts to
   the insurer, who, to avoid liability, must show that the loss falls into an
   exclusion to the policy’s coverage. Id.; see also Tex. Ins. Code § 554.002.
   Finally, “[i]f the insurer proves that an exclusion applies, the burden shifts
   back to the insured to show that an exception to the exclusion brings the claim
   back within coverage.” Gilbert, 327 S.W.3d at 124.

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         The magistrate judge correctly laid out the Texas insurance dispute
   burden-shifting framework in her report and recommendation. 4392. When
   analyzing the Buchholz family’s insurance contract, she concluded:
                [The Buchholzes] fail to identify the cause of the mold
         damage. Instead, [the Buchholzes] submit that the Policy is an
         inclusive, all risk policy that covers all-risk of accidental direct
         physical loss to the property unless an exception applies . . . .
         [The Buchholzes] skip the essential step of showing that the
         mold damage was caused [by] a covered cause of loss. The
         burden does not shift to Crestbrook to show an exclusion
         applies until [the Buchholzes] first show the mold damage
         resulted from a covered loss. [The Buchholz family] ha[s]
         neither identified a cause of the mold growth nor shown that a
         cause was a covered loss. Accordingly, [the Buchholzes] fail to
         meet their burden to show that the Mold Claim is covered
         under the [mold coverage] provision
                The Court need not address whether an exclusion
         applies because [the Buchholzes] fail on their first burden.
         In support of the magistrate judge’s conclusions, Crestbrook asks us
   to see the mold coverage as an independent coverage that stands apart from
   the all-risks coverage in the primary insurance contract. Therefore, says
   Crestbrook, the Buchholzes must show that their mold loss fell within the
   mold coverage’s terms. That provision provides:
         Biological Deterioration or Damage Clean Up and
         Removal. In the event that a covered cause of loss results in
         Biological Deterioration or Damage to property covered
         under Coverages A., B., and C., we will pay, up to the amount
         shown on the Declarations . . . .
   In Crestbrook’s telling, the Buchholz family needed to establish a “covered
   cause of loss” to trigger their mold coverage. But according to the insurer
   they have failed to do so, and the district court correctly entered summary
   judgment.

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           This seems logical as far as it goes. But Crestbrook glosses over an
   important step (as does the report and recommendation). If we accept the
   insurer’s argument that the mold coverage provision is separate from the rest
   of this all-risks policy, what is a “covered cause of loss”? 2 The Buchholzes
   reasonably suggest that in the absence of other contractual language, the
   underlying policy’s coverage of “any cause of loss resulting in accidental
   direct physical loss, except such causes as are excluded under the policy”
   should be considered a “covered cause of loss” under the mold coverage.
   Crestbrook does not provide its own definition for “covered cause of loss.”
   Instead, it argues that even if the report and recommendation skipped some
   analytical steps, the results are the same once the analysis is done correctly.
   However, we reject Crestbrook’s invitation to follow the report and
   recommendation’s lead and abridge the framework required by the Supreme
   Court of Texas. See Gilbert, 327 S.W.3d at 126.
           Simply put, the report and recommendation erred in its application of
   the Texas insurance dispute burden-shifting scheme. The mold coverage
   provision does not define “covered cause of loss,” rendering the term open
   to more than one reasonable interpretation. It is an ambiguous contractual
   term. See McDonnel Grp., L.L.C. v. Starr Surplus Lines Ins. Co., 15 F.4th 343,
   346 (5th Cir. 2021) (“A policy provision is ambiguous only if it is susceptible
   to two or more reasonable interpretations.”) (quotation marks and citation
   omitted). So, the report recommendation should have deferred to the
   Buchholzes’ reasonable interpretation of the policy language. Nat’l Union

           _____________________
   2
     We believe this is an unnatural reading of the policy. The mold coverage is part of an
   overall home insurance contract, and no language in the provision tends to show some sort
   of independence from the rest of the contract. See Carrizales v. State Farm Lloyds, 518 F.3d
   343, 347 (5th Cir. 2008) (insurance contract provisions that “are not really independent”
   can “make[] sense only in light” of reading them in conjunction). Therefore, we evaluate
   the mold coverage as an exception to an exclusion below.

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   Fire Ins., 811 S.W.2d at 555 (“[W]e must resolve the uncertainty by adopting
   the construction that most favors the insured.”). The Buchholz family’s
   proposed definition—that we should read “covered cause of loss” to mean
   “any cause of loss resulting in accidental direct physical loss, except such
   causes as are excluded under the policy”—is a reasonable adaptation of the
   underlying all-risk policy coverage. 3 As a result, we adopt this interpretation
   as the correct meaning of “covered cause of loss” within the context of the
   mold coverage, and we agree with the Buchholzes that the district court made
   an error by finding mold damage is not a direct physical loss.
           The report and recommendation then compounded its misapplication
   of “covered cause of loss” by concluding that the district court should enter
   summary judgment without first analyzing the exclusions and exceptions to
   the exclusions found in the policy. Crestbrook does not contend that mold
   damage is not a direct physical loss. Instead, Crestbrook argues it is an
   excluded loss. Consequently, the report and recommendation should have
   concluded that the Buchholzes suffered a direct physical loss covered by the
   terms of their insurance contract. The magistrate judge then needed to
   complete the Texas burden-shifting insurance coverage analysis by engaging
   with the parties’ arguments regarding exclusions and exceptions to the
   exclusions. In failing to do so, she incorrectly applied Texas insurance law.
                                                B
           Although the district court adopted an incorrect application of Texas
   insurance law, we agree with its ultimate judgment. We can affirm the district
   court on any grounds supported by the record on appeal. Sobranes Recovery
   Pool I, LLC v. Todd & Hughes Constr. Corp., 509 F.3d 216, 221 (5th Cir. 2007).

           _____________________
   3
    The policy states Crestbrook will “cover all risk of accidental direct physical loss to
   property . . . except for losses excluded . . . .”

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   In its motion for summary judgment, Crestbrook argued that a mold
   infestation is an excluded peril under the policy. So, contends Crestbrook,
   without another covered peril that caused the fungal growth, the mold
   coverage does not act as an exception to the “Biological Deterioration and
   Damage” exclusion (“mold exclusion”). Applying the Texas insurance
   burden-shifting framework, we agree with Crestbrook that the mold
   exclusion bars coverage for the Buchholz family’s claim.
         The MLAW causation report concluded that the most likely source of
   the mold was excess moisture in the walls due to a disruption of the “vapor
   drive drying process.” According to the report, the “vapor drive” or
   “moisture drive” is a natural process in which “water vapor migrates
   through the building . . . from a warmer[,] higher humidity” area to a
   “cooler[,]    lower   humidity”     location     “based    on   the   rules   of
   thermodynamics.” The report explained that polyester netting in the
   Buchholzes’ walls trapped particles that acted as a “food source” for the
   fungus. It described how the mold then relied on elevated moisture caused
   by a dysfunctional HVAC system to consume those food sources. In the
   MLAW engineer’s opinion, the HVAC system utilized two undersized and
   one significantly oversized air conditioning units, which failed to provide
   “the necessary dehumidification.” The interior paint, paneling, and trim
   further elevated humidity, preventing water vapor from moving freely
   through the home. Supplementing the MLAW report, Tom Green, P.E.,
   concluded that the building was likely kept at too low a temperature,
   exasperating the house’s vapor drive issues.
         The Buchholzes challenged these conclusions with the help of another
   expert, Sean O’Brien, P.E., who wrote, in his sworn declaration, that the
   Buchholz family’s home was exposed to significant water intrusion that the
   vapor drive process and a faulty HVAC system could not explain. He found
   that for the MLAW report to be correct, the interior of the Buchholzes’ home

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   would have had to be consistently at eighty degrees with 80% humidity—
   physically uncomfortable circumstances not attested to in the record.
   O’Brien also countered the claims made by Green, simulating the effects of
   keeping the temperature excessively low in the house. His model indicated
   that the Buchholz family should not have experienced such a severe mold
   infestation even at sixty-five degrees and fifty percent humidity. Finally,
   O’Brien disagreed that the paint, trim, or paneling influenced the vapor drive
   process in a way that promoted widespread mold growth. The O’Brien
   declaration did not state any specific reason for the mold infestation, only
   noting that the walls had been exposed to “significant water intrusion.”
             Under the Texas insurance dispute framework, the Buchholzes must
   first show a direct physical loss as required under their all-risk policy. Then
   Crestbrook can identify any exclusions to coverage of that loss. Finally, the
   Buchholzes may attempt to establish an exception in favor of coverage that
   applies to the identified exclusion.
             The Buchholz family points to the mold infestation as a direct physical
   loss. Crestbrook does not dispute that this is a direct physical loss. The
   burden thus shifts to the insurer to show the policy excludes the claim.
   Crestbrook argues that the mold and other property exclusions bar coverage
   for a generalized mold claim. Because the mold exclusion is dispositive in the
   insurer’s favor, we focus on how it excludes the Buchholz family’s claim.
             The policy excluded coverage for “loss to any property resulting
   directly or indirectly from any of the following . . . Biological Deterioration or
   Damage, except as provided by [the mold coverage].” 4 By Crestbrook’s
   telling, although O’Brien attacks the MLAW and Green reports’
   conclusions, he fails to identify a covered peril that resulted in fungal growth
             _____________________
   4
       The parties do not dispute that mold is “Biological Deterioration or Damage.”

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   as required for the mold coverage to come into effect. Thus, says the insurer,
   the generalized mold claim must fail under mold exclusion. The Buchholzes
   respond, saying they have argued all along that excess “water within the walls
   of their home” caused the mold.
          Countering the Buchholz family’s “water within the walls” theory,
   Crestbrook cites Aetna Casualty & Surety Company v. Yates, 344 F.2d 939,
   941 (5th Cir. 1965). In Yates, we found that an ensuing-loss provision in an
   all-risk policy with a mold exclusion did not cover mold damage resulting
   from unspecified excessive moisture inside a structure. We said, “[mold
   damage] may have ensued from water but not from water damage, and the
   damage ensuing from the rot was not the damage from the direct intrusion of
   water conveyed by the phrase ‘water damage.’” Id. Because mold can only
   result from excessive moisture in a building, we decided that generalized
   water intrusion could not be a covered peril when its primary effect was to
   cause a fungal infestation. Id. We reasoned to do otherwise would gut the
   mold exclusion. Id. The Supreme Court of Texas adopted our logic in Fiess v.
   State Farm Lloyds, 202 S.W.3d 744, 750–51 (Tex. 2006). The court wrote,
   “Surely [the Fifth Circuit] was correct. Mold does not grow without water;
   if every leak and drip is ‘water damage,’ then it is hard to imagine any mold,
   rust, or rot excluded by this policy, and the mold exclusion would be
   practically meaningless.” Id. at 276.
          Certainly, the case before us is slightly different in that Yates and Fiess
   evaluated an ensuing-loss provision rather than mold coverage. But their
   logic persuades us. The Supreme Court of Texas in Fiess noted that excess
   moisture in the walls is not “water damage” under an all-risks policy. Id. It
   follows that the ensuing-loss exception does not cover any resulting mold
   when faced with a mold exclusion. Id. We believe this reasoning is equally
   applicable to the Buchholzes’ mold coverage. To classify water intrusion as
   the covered peril underlying a generalized mold claim, the Buchholzes

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   needed to identify “something more substantial than” excess water within
   their walls. Id. at 751. Ruling to the contrary would cause the mold coverage
   to completely nullify the mold exclusion, an outcome Texas law instructs us
   to avoid. Gilbert, 327 S.W.3d at 126 (We “examine the entire agreement and
   seek to harmonize and give effect to all provisions so that none will be
   meaningless.”); see also Fiess, 202 S.W.3d at 751 (“Mold does not grow
   without water; if every leak and drip is ‘water damage,’ then . . . the mold
   exclusion would be practically meaningless.”).
          The Buchholzes have shown they suffered a mold infestation, nothing
   more. Their theory is that water intrusion caused mold. But water intrusion
   as such is not a loss covered by the policy when its only manifested harm to
   covered property is fungal growth. Consequently, the Buchholzes have not
   shown that their mold coverage serves as an exception to the mold exclusion.
   So, their generalized mold claim is excluded by the terms of their policy.
                                        IV
          The district court incorrectly applied the Texas insurance coverage
   burden-shifting framework. Crestbrook is entitled to summary judgment
   regardless. It has demonstrated that a generalized mold claim is excluded
   under the policy. The Buchholzes have not met their burden of showing that
   an exception to the exclusion in their insurance contract brings their claim
   back within coverage. We AFFIRM.

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