When an Exception to the “Mold Exclusion” Exposes Carriers to More Than Just Fungi or Bacteria
The recent New York City outbreak of Legionnaires’ disease (named for a 1976 outbreak of a type of pneumonia at an American Legion convention) has raised awareness of the illness. It has also renewed the courts’ interest in interpreting the Mold Exclusion. In the recent decision Acuity v. Reed & Associates, No. 15-2149 (W.D. Tenn. August 19, 2015), the court held the exception to the exclusion, i.e., fungi or bacteria contained in a good or product intended for bodily consumption, applied to provide coverage.
The Reed action arises out of a personal injury matter where the tenant filed suit against the insured Reed & Associates seeking damages for injuries allegedly sustained due to mold infestation of a house rented from Reed. Reed tendered its defense to Acuity, its insurer. Acuity agreed to defend under a reservation of rights and filed an action seeking a declaratory judgment that its policy did not provide coverage.
At issue was whether the policy’s “Fungi or Bacteria Exclusion” applied to exclude coverage.
The exclusion is as follows:
“Bodily injury or property which would not have occurred, in whole or in part, but for the actual alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of any fungi or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.”
This exclusion does not apply to any fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption.”
The Reed court initially noted that the exclusion is applicable as the claim of bodily injury clearly stems from mold exposure. In holding that coverage is afforded, however, the court pointed out that the underlying complaint alleged bodily injury as a result of a mold infestation affecting the water in the home and stated: “Other federal courts have construed the same language – ‘fungi or bacteria that are, are on, or are contained in a good or product intended for bodily consumption’ – and held that water constitutes a ‘good’ or ‘product.’”
In reaching that conclusion, the Reed court cited to Westport Ins. Corp. v. VN Hotel Group, LLC, 761 F. Supp. 2d 1337 (M.D. Fla. 2010), which in turn cited to Nationwide Mutual Fire Insurance Co. v. Dillard House, Inc., 651 F. Supp. 2d 1367 (N.D. Ga. 2009); both decisions dealt with coverage for Legionnaires’ disease allegedly contracted from the use of a spa tub and guestroom showers. In particular, the Reed court cited verbatim the holding of the Westport Court that “water in a hotel hot tub from which a bather allegedly contracted Legionnaires’ disease was found to be ‘a good or product intended for bodily consumption’ under the same Consumption Exception at issue here [Citation omitted]…. the court determined that bathing water in a hotel hot tub is a good…. The term ‘good’ plainly means ‘something that has economic utility or satisfies an economic want.’”
Furthermore, the Westport court reasoned that “‘consumption’ is ‘the utilization of economic goods in the satisfaction of wants,’ and the claimant hotel guests consumed the good – water – when using the spa tub and shower. If water in a spa tub and a shower is considered a good intended for consumption, it follows that water in a rented house, some of which will be ingested by drinking and bathing, is intended for consumption.”
The conventional wisdom for an underwriter was that the exception in the Mold Exclusion for fungi or bacteria contained in a good or product intended for bodily consumption is meant to apply to food items (e.g., mushrooms). The ingestion of water from bath, shower or similar amenities in a hotel or other such establishments was considered incidental and not “intended for consumption.” While Reed is not independently a groundbreaking decision, it reaffirms that Westport (FL) and Dillard House (GA) can no longer be viewed as aberrations, and underwriters should be aware of the potential pitfall of the consumption exception to the Mold Exclusion in writing coverage for hotels or similar establishments. As the recent Legionnaires’ outbreak in New York City, which resulted in close to a hundred reported cases and at least seven deaths, demonstrates, the consumption exception to the Mold Exclusion can have serious financial implications for insurance carriers.