Author: VU Faculty

One of the worst scourges of the drug scene involves methamphetamines. Because the drugs are so inexpensive, increasing numbers of teens and others are becoming addicted. Because the drugs are so easy to make from over-the-counter pharmacy products, meth labs spring up all over the country, from urban to rural areas. The labs can also be dangerous to operate. If property is damaged, is there insurance coverage?

"When a building owner leases out the building to a tenant who operates a meth lab and the property is damaged due to this illegal activity, is there a way to protect the mortgagee? We had a financial institution ask this question that I wasn't able to answer. I expect our insured isn't covered because property in the course of illegal trade is not considered covered property."

Good question. First of all, this IS an increasing problem (for more information on meth, click here). A mortgagee is only insulated from fraudulent acts by the insured, not from policy exclusions. The mortgagee, in the absence of fraud on the part of the insured, has no greater coverage under the policy than the insured. For more on the coverage issue, keep reading....

"We have a client who owns hotels ask us about coverage when it is discovered that someone has cooked "meth" in one of their rooms. Apparently the expense of bringing in special hazardous material teams to decontaminate is very expensive. He wanted to know how his insurance policy would respond. It appears this is becoming a serious problem."

As noted in the above question, this is indeed an increasingly serious exposure. Below are some faculty responses, including several that specifically address the "polluting" nature of a meth lab.

I don't see anything in the CP 00 10 10 00 in question that takes away coverage for illegal activities except the exclusion of "contraband or property in the course of illegal transportation or trade" from the category of covered property.  Certainly the illegal drugs and related apparatus would be in this category, but I think it means movable property only.  I doubt that the building itself would be in this category unless there is a law that makes the whole place "contraband" subject to seizure, confiscation, or whatever.

The CP 10 30 10 00 Special Form excludes any "dishonest or criminal act" by the Named Insured, partners, employees, etc., and "anyone to whom you entrust the property for any purpose."  That last category is kind of vague, and might or might not include tenants (though highly unlikely), but in any case it only relates to the cause of loss (like an explosion of the drug-making equipment or something), not the coverage in general.

I think you are making a mountain out of a pile of meth.

First, the property involved in the illegal "trade" is the drug, not the building. It's the drug being trafficked, not the building.

Second, the mortgagee's policy is severable from the policy issued to the named insured and if it blows up and burns the structure down the mortgage is covered for loss by fire and explosion and very few exclusions, including arson by the insured, apply to the mortgagee.

If the mortgagee is worried it can also buy a blanket policy covering all of its properties if the mortgagor fails to insure or if the mortgagor's policy does not cover the loss. 

The production of methamphetamine in rented space is a terrible problem all over the United States, particularly in rural areas. Producing one pound of methamphetamine creates approximately four pounds of highly toxic residue. The residue is in the form of a fine powder and spreads over a wide area. The residue is toxic to people and animals. It is particularly toxic to small children.
 
I believe the best argument for coverage under even a named perils policy would be malicious mischief under the vandalism peril if you can equate "intent" to will and wanton misconduct. The individuals renting the space to manufacture methamphetamine do so because they are aware of the damage it will cause. I see it as intentional, willful and malicious damage to the property of another.

It sounds like a pollution loss to me. There is a provision in the Commercial Property Building and Personal Property Coverage form to pay for a specified limit of clean-up on the premises if it was caused by a Covered Cause of Loss. Was this done with the intention to cause damage to the insured’s property? If so, it could be vandalism. Or, if you have the Special Cause of Loss, where is the cause excluded in the form?
 
The 2nd set of exclusions, in "l. Discharge, dispersal, seepage, migration, release of pollutants….”, could be a problem. If it is, you fall back into finding a named peril from the Broad Causes of Loss since a named perils form should not provide broader coverage than an open perils form.

The CP 00 10 10 00 form in question provides $10,000 for Pollutant Clean Up and Removal if the discharge of pollutants is caused by or results from a covered cause of loss.  However, the CP 10 30 10 00 Special Cause of Loss form excludes damage caused by pollutants unless the discharge is caused by the "specified causes of loss" (fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collape; volcanic action; falling objects; weight of snow, ice or sleet; or water damage).  If you can convince the adjuster that the damage was caused by vandalism, you could trigger the cleanup coverage.  Otherwise it appears the insured might be out of luck unless the damage was due to another specified cause of loss like explosion.

An interesting note here is that coverage can often be found under named perils coverage since there is no "pollution" exclusion. According to ISO's 1991 Homeowners countrywide filing, the reason they gave for a change was to make sure that an open perils form did not provide lesser coverage than a named perils form. That being the case, I think if you can find named perils coverage (e.g., V&MM or explosion), you have a strong argument for coverage.

The only possible exclusion other than the obvious pollution exclusion is Exclusion 2.h. which says, "We will not pay for loss or damage caused by or resulting from dishonest or criminal acts by...anyone to whom you entrust the property for any purpose." The question is whether the premises were "entrusted" to the tenants. If so, then we have a problem with this exclusion removing coverage under the Special Causes of Loss form, yet there being coverage under the Broad Causes of Loss form because vandalism is a covered peril.

Also, if that's the case, then there's a conflict with the Common Policy Conditions...the CP 00 90, under Control of Property, says, "Any act or neglect of any person other than you beyond your direction or control will not affect this insurance." Unless the tenants are under the control of the landlord, this seems to conflict with Exclusion 2.h. above.

What do you think? If you have an opinion on this issue, email Nancy.Germond@iiaba.net and we'll update the post with your comments here. Include your name, agency, city, and state, or we'll assume you would like your comments to be posted anonymously.

You raise an interesting point about the problem of a criminal activity creating a pollution problem. The scenario you paint is not at all farfetched. However, I believe you erred in endorsing the idea that facts and wording should be twisted to expand coverage beyond that an Insured has actually purchased.  
 
Assuming the form CP 00 10 10 00 does not define ‘vandalism,’ I thought I would share with you the Webster’s definition. “Vandalism: willful or malicious destruction of public or private property.” This is clearly not the case in your article. Vandalism is a discrete act in its own right. Pollution can be a consequential damage from any particular criminal act, but that certainly does not make the crime ‘vandalism’ within the common meaning of that term.

You may encourage the Insured to argue to his insurer that drug manufacturing on his property is actually ‘vandalism.’ I, however, would argue to the local insurance department that he has engaged in a conspiracy to commit insurance fraud. Now, instead of one felon at the No-Frills Hotel, there are three.
 
Fortunately, there is an alternative. The Insured should be encouraged to actually buy coverage for the risk in the event that his property becomes polluted. For an applicant with only passive exposure to toxic materials, he might find the price quite reasonable. Then he could have something of value when he needs it by actually paying for it.

On the issue of vandalism, there is a significant amount of case law that expands the meaning of the word "vandalism" beyond what a dictionary might imply. Courts have generally found, particularly in criminal activity, that damage to property is evidence of malice if it results from wanton and reckless conduct. The mental state required by the courts may be as innocuous as simple recklessness, as opposed to deliberate and malicious destruction. In many states, vandalism is codified to include "willful or wanton disregard" for property.
 
Based on many court decisions, here is how Black's Law Dictionary defines vandalism: "Vandalism...means the willful and malicious destruction of property generally, and the destruction must have been intentional or in such reckless and wanton disregard of rights of others as to be equivalent of intent, and malice may be inferred from the act of destruction."
 
Here's how my state's statutes define vandalism: "Vandalism. One who 'knowingly causes damage to or the destruction of any real or personal property of another or of the state, the United States, any county, city, or town knowing that the person does not have the owner’s effective consent' is guilty of vandalism." T.C.A. § 39-14-408.
 
It's not much of a stretch that ACE could attempt to convince an adjuster that the operator of a meth lab KNOWS he is causing damage to property and, while the operation of the lab is not for the purpose of damaging the property, the end result is generally recognized by the courts as constituting vandalism. Here is a fairly recent case involving the specific issue of a meth lab and vandalism:
 
Harry Graff v. Allstate Insurance Company, Washington Court of Appeals (2002)
 
After a tenant's methamphetamine laboratory damaged his rental house, Graff filed a claim with Allstate for his clean up expenses. Allstate denied Graff's claim, citing the policy's contamination exclusion. According to the Court, "We hold that operation of a methamphetamine laboratory is vandalism, a covered event under the policy, and the claim is not barred due to the contamination exclusion."
 
Allstate contends that the policy's contamination exclusion bars Graff's claim. Graff, however, asserts that the vandalism and malicious mischief clause covers his loss under Bowers, 99 Wn. App. 41 (see complete details of Bowers case below). In that case, Ms. Bowers argued that her policy covered her loss under the vandalism and malicious mischief coverage.  (The court defined vandalism as ''willful or malicious destruction or defacement of things of beauty or of public or private property{,}'' and malicious mischief as ''willful, wanton, or reckless damage or destruction of another's property.''  Bowers, 99 Wn. App. at 45 (quoting Webster's Third New International Dictionary 2532, 1367 (1993)).) 
 
The Court concluded that the tenants' acts constituted vandalism, a covered loss, and were the efficient proximate cause of Ms. Bowers' loss. Bowers, 99 Wn. App. at 42.  The court rejected Farmers' argument that the tenants' conduct was not vandalism because it was not malicious.  It reasoned: "Malice may be inferred from the act of destruction.  It is sufficient if the actor is guilty of wanton or intentional disregard of the rights of others.  As stated in Frontier Lanes v. Canadian Indem. Co., 26 Wn. App. 342, 613 P.2d 166 (1980), '{p}roperty has been damaged "willfully and maliciously" if the damage results from an intentional act from which damage was reasonably expected to result.'"  The Court found that Ms. Bowers' tenants acted in conscious or intentional disregard for her property rights and that their acts were vandalism.
  
As for the cost, it certainly could be significant. According to the Koch Crime Institute, "Cleanups of labs are extremely resource-intensive and beyond the financial capabilities of most jurisdictions. The average cost of a cleanup is about $5,000 but some cost as much as $150,000."
 
Here is an anecdotal article where the owner of a rental property was told the cost of clean-up would be $5,000 - $10,000:

http://news.minnesota.publicradio.org/features/2005/12/13_steilm_methhouses/
 
Here is another story where the clean-up cost was $30,000:

http://web.kitsapsun.com/meth/methseries5.html
 
Here's an NPR interview with the owner of a meth clean-up company who says an apartment may cost up to $15,000 and a house $30,000 - $40,000:

http://www.npr.org/templates/story/story.php?storyId=5059893
 
Fortunately, within the ISO Commercial Property Coverage Part, an increased limit of coverage can be purchased for pollutant cleanup under the CP 04 07 - Pollutant Clean Up And Removal Additional Aggregate Limit of Insurance endorsement.

Here is a court cases that discusses what constitutes "vandalism," along with some related issues:
 
Bethany Bowers v. Farmers Insurance Exchange, Washington Court of Appeals (2000)
 
OPINION:   KURTZ, C.J. - Bethany Bowers was denied coverage by Farmers Insurance Exchange (Farmers) for mold damage to a rental house which occurred when her tenants, without the knowledge of Ms. Bowers, converted the house into a marijuana grow operation. The marijuana cultivation caused damage to the house, including mold growth throughout the house. Upon cross-motions for summary judgment, the court held in favor of Farmers. Ms. Bowers appeals contending the court erred in holding that the insurance did not cover the mold damage caused by the marijuana grow operation, and in not awarding her reasonable attorney fees.

We conclude the tenants' acts constitute vandalism, for which there is coverage under Ms. Bowers' landlord's insurance policy. We further conclude that the tenants' acts are the efficient proximate cause of Ms. Bowers' loss. The judgment of the superior court is reversed. Ms. Bowers is awarded her attorney fees.

FACTS

On November 1, 1997, Bethany Bowers rented her single family house to new tenants. Prior to being rented, the house had been well-maintained, without problems of mold or excess water vapor condensation. A Landlord's Protection Package insurance policy was issued by Farmers to Ms. Bowers and was in effect from November 1, 1997, to June 6, 1998.

The tenants converted a basement portion of the house into a hothouse for growing marijuana. Halide lights were used, the basement windows were covered, foil was put on the walls, and the marijuana grow operation was vented directly into the chimney. The house was otherwise sealed. All heat in the house was diverted to the basement grow operation room.

The lack of heat throughout the house, together with excessive water condensation from the halide lights and marijuana grow operation, caused mold to grow rapidly throughout the house. There were deposits of mold on floors, carpets, walls, paneling, doors, window coverings, insulation, rafters, joints and other surface areas in the house.

Initially, Ms. Bowers was unaware of the marijuana grow operation. However, after almost three months, she became suspicious and contacted the Spokane police. The marijuana grow operation was discovered and removed by the Spokane police.

Ms. Bowers thereafter submitted an insurance claim to Farmers for (1) replacement of warped paneling in the basement, and (2) an additional $ 14,802.90 for clean up of mold damage. Farmers paid for the warped wall paneling, but denied the claim for mold-related damage as not being covered under the policy. Ms. Bowers filed an action against Farmers for the repair costs and lost rent. Upon cross-motions for summary judgment, the trial court held in favor of Farmers. Ms. Bowers appeals.

ANALYSIS

An insurer is liable under a contract for insurance when a covered peril causes a loss. The court must first determine the scope of the policy's coverage. Graham v. Public Employees Mut. Ins. Co., 98 Wn.2d 533, 540, 656 P.2d 1077 (1983) ( Brachtenbach, J., dissenting). The court determines coverage by characterizing the perils contributing to the loss, and determining which perils the policy covers and which it excludes. Kish v. Insurance Co., 125 Wn.2d 164, 170, 883 P.2d 308 (1994). Interpretation of insurance policy language is a matter of law that we review de novo. McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 730-31, 837 P.2d 1000 (1992).

The Farmers policy's exclusion section states in relevant part:
 
We do not cover direct or indirect loss from:
 
. . . .
 
4. Vandalism or Malicious Mischief, breakage of glass and safety glazing materials if the dwelling has been vacant for more than 30 consecutive days just before the loss. A dwelling under construction is not considered vacant.
 
. . . .
 
6. Wear and tear; marring; deterioration; inherent vice; latent defect; mechanical breakdown; rust; mold; wet or dry rot; contamination; smog; smoke from farm smudging or industrial operations; settling, cracking, shrinking, bulging or expansion of pavements, patios, foundation, walls, floors, roofs or ceiling; birds, vermin, rodents, insects or domestic animals. If any of these cause water to suddenly and accidentally escape from a plumbing, heating, air conditioning system or household appliance, we cover loss caused by water. We also cover the cost of tearing out and replacing any part of a building necessary to repair the system or appliance not otherwise excluded under item 5 above. We do not cover loss to the system or appliance from which the water escaped.
 
(Emphasis added.)

Ms. Bowers contends the purpose of the Farmers' policy was to insure her as landlord from accidental loss to the insured rental property. She emphasizes that there is no dispute that the loss was "accidental" insofar as she was concerned. She argues there should be coverage for this loss under the coverage for vandalism or malicious mischief because the tenants willfully, wantonly and recklessly damaged her property. 

In response, Farmers argues the cause of Ms. Bowers' loss is mold, not vandalism or malicious mischief. In plain language, the policy excludes loss due to mold. Farmers maintains there is no ambiguity or provision in conflict with the exclusion. Farmers asks this court to enforce the exclusion.

The Farmers' policy specifically covers loss caused by vandalism or malicious mischief, but does not define those terms. "Courts interpret insurance contracts as an average insurance purchaser would understand them and give undefined terms in these contracts their 'plain, ordinary, and popular' meaning." Kish, 125 Wn.2d at 170 (quoting Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wn.2d 869, 877, 784 P.2d 507, 87 A.L.R.4th 405 (1990)); accord State Farm Gen. Ins. Co. v. Emerson, 102 Wn.2d 477, 480, 687 P.2d 1139 (1984).

"Vandalism" is defined as "willful or malicious destruction or defacement of things of beauty or of public or private property." Webster's third New International Dictionary 2532 (1993). "Malicious mischief" is defined as "willful, wanton, or reckless damage or destruction of another's property." Webster's third New International Dictionary, at 1367. A person who acts willfully acts knowingly. RCW 9A.08.010(4). The criminal statutes require that "malicious mischief" be done "knowingly and maliciously." RCW 9A.48.070, .080, .090.

Farmers argues that the tenants' conduct was not vandalism or malicious mischief because the conduct was not malicious. Farmers emphasizes that the tenants' conduct was not motivated by any ill will or malice towards the owner. In this context, malice does not require ill will, hatred, or vindictiveness of purpose. Malice may be inferred from the act of destruction. It is sufficient if the actor is guilty of wanton or intentional disregard of the rights of others. 13A George J. Couch, Couch on Insurance 2d sec. 48:210 (Mark S. Rhodes, rev. ed. (1982)); Michael A. Sabatino, Annotation, What Constitutes "Vandalism" or "Malicious Mischief" Within Meaning of Insurance Policy Specifically Extending Coverage to Losses from Such Causes, 56 A.L.R.5th 407 (1998). As stated in Frontier Lanes v. Canadian Indem. Co., 26 Wn. App. 342, 613 P.2d 166 (1980), "property has been damaged 'willfully and maliciously' if the damage results from an intentional act from which damage was reasonably expected to result." Id. at 347.

This is illustrated in Livaditis v. American Cas. Co., 117 Ga. App. 297, 160 S.E.2d 449 (1968), in which a tenant operated a moonshine still in a rental house. The moonshine operation was vented so that the smoke, fumes and vapor were pulled by a fan to the interior of the house. As a result of smoke and condensation, the paint in the rooms peeled, plaster was loosened, and rugs, drapes, and walls were stained, soiled and covered with mold. The issue before the court was whether the tenant's acts were vandalism, for which there was coverage. In concluding that the tenant's acts were vandalism, the court rejected the insurance company's contention that the owner was required to show that the tenant acted with specific intent to injure the property and was motivated by actual malice. Livaditis, 117 Ga. App. at 299-300.

In this case, the tenants diverted all of the heat from the furnace to the basement in order to create a marijuana grow room. They irrigated the marijuana plants under grow lights. This created a sauna-like environment in the basement. Additionally, they sealed the house and thereby trapped the water vapor generated by their activities in the basement. These activities caused certain damage to Ms. Bowers' house. The tenants acted in conscious or intentional disregard for her property rights. Malice may be inferred from their acts. We conclude that the tenants' acts are vandalism.

Ms. Bowers argues that the "efficient proximate cause" of her loss was not the mold, but the vandalism of her tenants. The question is whether the tenants' acts, the covered peril, or the mold, the excluded peril, are the proximate cause of Ms. Bowers' loss.

In Graham, the court addresses the issue of whether an all-risk insurance policy covers a loss caused by two or more perils when one of the perils is excluded and the other peril is covered. Graham held that where an insured peril "sets other causes in motion which, in an unbroken sequence and connection between the act and final loss, produce the result for which recovery is sought" that peril is the "proximate cause" of the loss. Graham, 98 Wn.2d at 538. The proximate cause is "the efficient or predominant cause," not necessarily the last act in a chain of events leading to the damage. Id. When the insured can identify an insured peril as the proximate cause, there is coverage "even if subsequent events in the causal chain are specifically excluded from coverage." Findlay v. United Pac. Ins. Co., 78 Wn. App. 17, 20, 895 P.2d 32 (1995), aff'd, 129 Wn.2d 368, 917 P.2d 116 (1996).

In Sunbreaker Condominium Assoc. v. Travelers Ins. Co., 79 Wn. App. 368, 901 P.2d 1079 (1995), the court applied the efficient proximate cause rule to find that where wind-driven rain was a distinct, covered peril under the policy, the policy's fungus damage exclusion did not necessarily bar recovery for fungus damage. Even though expert testimony identified rain as the cause of fungus, a jury could find that wind-driven rain was the efficient proximate cause of the loss. Similarly, Ms. Bowers recognizes that mold growth was the immediate cause of her loss but argues that her tenants' vandalism was the efficient proximate cause of the loss.

If the efficient proximate cause rule applies, the question of which peril constitutes the proximate cause is usually referred to the factfinder unless the facts are undisputed and there can be no reasonable difference of opinion regarding their meaning. In the latter case, the issue of proximate cause may be a question of law for the court. Kish, 125 Wn.2d at 170. Here, there can be no reasonable difference of opinion regarding the cause of Ms. Bowers' loss. It was the tenants' acts, which "in an unbroken sequence . . . [produced] the result for which recovery is sought[.]" Graham, 98 Wn.2d at 538. We conclude that the tenants' acts are the efficient proximate cause of the owner's loss.

The judgment of the superior court is reversed. Ms. Bowers is awarded  [*12]  her reasonable attorney fees in superior court and on appeal. Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 51-54, 811 P.2d 673 (1991). On remand, the trial court shall enter an order of partial summary judgment in favor of Bethany Bowers on the issue of coverage, and shall make an award of reasonable attorney fees pertaining to the issue of coverage. The matter is remanded for further proceedings consistent with this opinion.

Kurtz, C.J.

WE CONCUR:

Schultheis, J.

Brown, J. 

UPDATE: