891 F. Supp. 2d 1101
D.S.D.2012Background
- Plaintiffs Swenson and Stewart sue State Farm over a homeowner’s policy denial for damage to their partially constructed home.
- DJ Construction was the general contractor; the contract was revised in 2008 to a fixed price for the project.
- Construction began in 2007 and halted in 2009 due to inadequate protection of the site, leaving the home incomplete and exposed to weather.
- Fall 2009 inspections identified mold/fungal growth and moisture damage linked to prolonged water intrusion and construction practices.
- Plaintiffs filed a state-court suit against DJ Construction in 2009; they brought the current federal action for breach of contract and bad faith based on the insurer’s denial.
- Policy provides coverage for accidental direct physical loss unless excluded; key exclusions include fungus, deterioration/wet or dry rot, negligent construction, and other design/construction faults.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether fungus exclusion bars coverage regardless of proximate cause | Irmiter’s mold/fungus evidence supports water damage not solely fungus | Fungus exclusion with anticoncurrent clause precludes coverage for mold | fungus exclusion precludes coverage for losses not occurring absent fungus |
| Whether efficient proximate cause applies to defeat exclusions | Efficient proximate cause can attach coverage if a covered peril starts the chain | Anti-efficient proximate clause defeats EPC; exclusion applies | EPC doctrine does not apply to the fungus exclusion due to lead-in anticoncurrent clause; no coverage for fungus-based loss |
| Whether the loss is severable into water damage vs. fungus/mold for coverage | Water damage not severable from mold; seeks broader coverage | Loss primarily mold/fungal; exclusions apply; unrecoverable under policy terms | Loss falls within exclusions; policy excludes fungus/mold and related deterioration |
Key Cases Cited
- Lummel v. Nat’l Fire Ins. Co., 50 S.D. 502; 210 N.W.739 (SD 1926) (efficient proximate cause doctrine governing insured vs. excluded causes)
- TNT Speed & Sport Ctr., Inc. v. Am. States Ins. Co., 114 F.3d 731 (8th Cir. 1997) (district court may consider other jurisdictions on EPC contracting out)
- State Farm Fire & Cas. Co. v. Harbert, 2007 SD 107; 741 N.W.2d 228 (SD 2007) (insurance policy interpretation; plain meaning; liberal construction for insured when ambiguous)
- Auto-Owners Ins. Co. v. Hansen Hous., Inc., 2000 SD 13; 604 N.W.2d 504 (SD 2000) (insurer bears burden to prove exclusions apply)
- Fiess v. State Farm Lloyds, 202 S.W.3d 744 (Tex. 2006) (mold exclusion cannot be overridden by labeling as water damage)
- Chadwick v. Fire Ins. Exch., (Cal.Ct.App.1993) (Cal. Ct. App. 1993) (efficient proximate cause not applicable when single cause; labels don’t alter exclusions)