In a claim by a church for coverage under its all-risk policy for losses caused by mold, the insurer, Cincinnati Insurance, denied coverage based on a fungus exclusion in the policy and based on an exclusion for “faulty, inadequate, or defective design, specifications, workmanship, repair, construction.”
The church filed suit against the insurer for breach of contract. Both the church and insurance company moved the court for summary judgment on the question of whether the exclusions were properly applied to loss and whether the policy language was ambiguous. In granting summary judgment to the insurance company, the U.S. District Court in Florida found the policy language was not unambiguous and it did not cover the damages the church suffered.
The Church of the Palms—Presbyterian (U.S.A.), Inc., was covered by an all-risk policy which excluded losses directly or indirectly caused by “rust, corrosion, fungus, decay, deterioration, hidden or latent defect or any quality in property that causes itself to damage or destroy itself” or for losses resulting from “faulty, inadequate, or defective design, specifications, workmanship, repair, construction …” unless the loss results in a covered cause of loss. After discovering mold in various parts of one of its buildings, the church hired an expert to study the problem. He determined the building’s negligent construction and design most likely caused the mold infestation.
The court explained that the expert identified several likely reasons for the mold. This included:
- roof deficiencies and improper installation of flashing; HVAC system disrepair and poor design that caused excess humidity; mold contamination in the walls between the drywall and the insulation; mold/microbial contamination of the interstitial wall space and metal stud framing system; mold/microbial contamination in the mechanical rooms and within the air conditioning duct work; improperly installed vapor barrier on exterior walls allowing moisture into interior side of exterior walls and inside air conditioning allowed temperature within wall cavity to reach the dew point causing condensation and excessive moisture; intrusion of unconditioned, hot moist air into space above the second floor ceiling due to lack of a ceiling separating the “attic” space from the inside space; and improperly vented bathrooms and laundry facilities.
In addition to excluding coverage where loss is caused by “fungus,” the policy excluded loss caused by negligent work and “inadequate or defective design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction …”
The court considered first the church’s argument concerning the omission of the word “mold” in the exclusions and its argument that the type of fungus complained of by the church is not the type intended to be excluded under the “fungus” exclusion of the policy. “Fungus” in the context of the exclusion of this policy included mold even though the term “mold” was not expressly included in the policy language.
The church argued that fungus contemplated by the party is the type of fungus caused by the natural decay of the building materials. Or, as the church claimed, the policy’s fungus is part of an “inherent vice” clause that “excludes coverage for losses flowing from the latent and inherent tendency of most organic and inorganic matter to decay.”
The court was obviously not impressed with the church’s argument when it concluded that:
- Having logically stepped out this far, the Church bootstraps this premise to argue the policy’s negligent construction exclusion (P 3(b)(3)(c)(2)) does not apply. Namely, because the Church’s mold is not the type contemplated by the policy’s exclusion, the policy covers it. And, therefore, because the Church’s fungus is a covered cause of loss, the negligent construction exclusion does not apply. This is an exclusion-to-the-exclusion argument.
In rejecting the church’s argument, the court found “the Church presents a strained, unnatural interpretation to the mold exclusion, especially since it concedes negligent workmanship or design flaws likely caused the mold. Indeed, neither exclusion is ambiguous.”
The purpose of “all-risk policies” like the one involved here, says the court, is to cover losses for “fortuitous events” that are dependent upon chance. Here, the church’s mold problems developed gradually, and the court found the problems were not associated with a single “covered fortuitous event.”
Because the court found there to be no disputed material facts as to the dominant causes of the mold, and because it found, “To interpret the exclusion as the Church argues would very nearly destroy the exclusion,” the court granted the insurance company’s motion for summary judgment. Church of the Palms-Presbyterian (U.S.A.), Inc. v. The Cincinnati Ins. Co., 404 F. Supp. 2d 1339; (U.S.D.C., Fl. 2005).
It continues to be a vexing question as to why a sophisticated buyer of insurance would choose not to purchase mold coverage (either by policy endorsement to an appropriate policy or by separate pollution legal liability (PLL) policy with no mold exclusion) rather than instead preferring to litigate and offer complex arguments to convince a court that mold coverage was intended under a policy that clearly, on its face, states that coverage is excluded pursuant to multiple exclusions. It may be that more education is needed so that owners of commercial buildings and churches understand that mold coverage is often available—for a premium.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, (July 2006).