Moldy Water Keep on Rollin’: Mold Exclusion Does Not Apply to Claims Based on Mold-Infested Water

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In Acuity v. Reed & Associates of Tennessee, LLC, 2015 U.S. Dist. LEXIS 109412 (W.D. Tenn. August 19, 2015), the United States District Court for the Western District of Tennessee determined that an insurer had the duty to defend its policyholder in a case involving mold, even though the subject policy included a Fungi or Bacteria Exclusion (“Mold Exclusion”).  The court found that allegations of moldy water fell within an exception to the Mold Exclusion as a “product” or “good” “intended for bodily consumption.”  And we always thought the exception was intended to be limited to cheese.

The insurer filed a declaratory judgment seeking a finding that it did not have the duty to defend or indemnify its policyholder, a property management company, with respect to a lawsuit (“underlying lawsuit”) filed by tenants of the policyholder. The plaintiffs alleged that the policyholder violated state law when it evicted the tenants in retaliation for their complaints about mold infestation affecting their water supply.  In addition, the tenants alleged that they suffered injuries as a result of the mold infestation.  The insurer asserted that the allegations in the underlying lawsuit did not trigger coverage under the policy.

After reviewing the respective parties’ cross-motions for summary judgment, the district court concluded that the insurer owed the policyholder a defense.  No coverage attached to the claims regarding eviction because they did not constitute “bodily injury” or “property damage.”  However, the court determined that the mold infestation of the water supply did constitute “bodily injury” cause by an “occurrence,” even when the Mold Exclusion was taken into account.

While the Mold Exclusion generally bars coverage for damages relating to mold inhalation or ingestion, the district court noted the Mold Exclusion contained an exception for fungi/mold contained in a “good” or “product” intended for bodily consumption. The Mold Exclusion did not apply because the court reasoned that water was a good or product intended for bodily consumption.  So, it followed that moldy water fell within the Mold Exclusion’s exception. In so holding, the district court cited case law from other jurisdictions where water in a spa tub and a shower were considered to be a good or product intended for bodily consumption.  Thus, since at least some of the water in the house was intended for drinking, the exception to the Mold Exclusion applied.