In its recent decision in James River Ins. Co. v. Hufsey-Nicolaides-Garcia-Suarez Associates, 2014 U.S. App. LEXIS 4415 (11th Cir. Mar. 10, 2014), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, had occasion to consider whether a pollution exclusion and a bacteria exclusion contained in a professional liability policy applied to bar coverage for a claim involving a mechanical engineer’s alleged negligent design of a plumbing system.

The underlying claim in Hufsey-Nicolaides arose out of an outbreak of legionella bacteria at the Epic Hotel in Florida.  It was determined that the hotel’s plumbing system did not allow sufficient levels of chlorine to enter the hotel’s water supply, thereby allowing the growth of water-borne illnesses.  The hotel filed suit against its developers for the costs associated with it having to repair the system and for loss of use.  The developers, in turn, brought a third-party action against its design professionals, including HNGS, which was the hotel’s mechanical engineer responsible for the design and installation of the plumbing and filtration system.  The third-party suit specifically alleged that the water filtration system reduced the level of chlorine in the hotel’s water, which allowed for unsafe water conditions, and that this was the result of HNGS’ defective design.

James River insured HNGS under a professional liability policy.  While James River conceded that the underlying suit alleged an act, error or omission concerning HNGS’ work, it nevertheless sought a declaration that it had no duty to defend or indemnify on the basis of a pollution exclusion applicable to claims “[b]ased on ordirectly or indirectly arising out of or resulting from or caused or contributed to by pollution/environmental impairment/contamination.”  The exclusion further specified that “[t]his exclusion applies regardless of whether an alleged cause for the injury or damage is the Insured's negligent hiring, placement, training, supervision, retention, or, 'Wrongful Act.'”  The policy also contained an exclusion applicable to fungi or bacteria. 

While the Southern District of Florida granted summary judgment in James River’s favor, on appeal, the Eleventh Circuit held that the underlying suit at the very least triggered a duty to defend.  Citing to Florida law, under which an insurer has a duty to defend an entire suit so long as one claim potentially comes within the policy’s coverage, the court considered whether each of the underlying allegations in the underlying suit came within the pollution and bacteria exclusions.  Notably, the court focused on the allegations concerning HNGS’ defective design, observing that:

The claims against HNGS allege, in relevant part, that HNGS failed to properly design the Hotel's plumbing and filtration systems, and therefore, that it is liable if the developers are held responsible for the damages the Hotel seeks in its complaint. The Hotel's damages include damages related to “remediation” efforts of the allegedly improperly designed plumbing and filtration systems.

These allegations, explained the court, did not relate to the presence of legionella bacteria per se, and therefore did not come within the policy’s exclusions.  Thus, because the underlying claims related, at least in part, to HNGS’ financial responsibility for repairing a defectively designed system, the exclusions did not bar coverage in its entirety.  While the court acknowledged the potential for damages relating to remediating the bacterial conditions, for which coverage would not be unavailable, the court nevertheless concluded that James River at the very least had a duty to defend based on the potential for remedial damages unrelated to bacteria for which James River could have an indemnity obligation.