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
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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
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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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