Why it matters: An exclusion for "Fungi or Bacteria" did not prevent a federal court judge in Tennessee from ordering an insurer to provide a defense to a policyholder facing a lawsuit over allegedly moldy water. Tenants filed suit against a property management company, claiming that they were evicted after complaining about mold infestation in their water supply and that they suffered personal injury as a result of ingesting the moldy water. When the property management company requested a defense from its insurer, the carrier argued that coverage was precluded by an exclusion for "Fungi or Bacteria." The insurer sued for declaratory judgment, but the court sided with the policyholder. Relying on an exception within the exclusion for a "good or product intended for bodily consumption," the court found that the drinking water at issue qualified and the insurer therefore owed a defense for the lawsuit.

Detailed discussion: A couple rented a house from Reed & Associates of Tennessee, a property management company. The couple filed a two-count complaint in state court against Reed & Associates alleging that the company evicted them from the house after they complained about a mold infestation in their water. The company also failed to comply with building and housing codes, keep the area in a clean and safe condition, and keep the premises fit, all in violation of the Uniform Residential Landlord and Tenant Act, the couple claimed.

The couple alleged they incurred monetary losses and personal injury as a result of the moldy water.

Reed tendered defense of the suit to its insurer, Acuity, which accepted defense under a reservation of rights. Acuity then filed a declaratory judgment action in federal court arguing that the policy did not require coverage and that it should be allowed to cease its defense.

Applying Tennessee law—and noting that insurance contracts are subject to the same rules of interpretation that apply to any contract in the state—U.S. District Court Judge S. Thomas Anderson disagreed.

Under "Coverage A" of the policy, Acuity provided insurance for "bodily injury" and "property damage." The allegation of retaliatory eviction, which only stated damages for "unnecessary expenses for moving and storage" as well as money the couple had paid toward the purchase option of the house, did not give rise to coverage under the policy, the court said. The couple did allege bodily injury as a result of the mold infestation, however, including medical bills, which were covered under the policy.

Acuity pointed to the policy's Fungi or Bacteria Exclusion, which broadly precluded coverage for bodily injury or property damage caused, in whole or in part, by "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." The exclusion, however, had a carve out, such that it did not apply "to any fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption."

The court agreed that the exclusion, at first glance, appeared to preclude coverage for claims of bodily injury stemming from mold exposure. Further analysis, however, showed that the claims in the underlying complaint triggered the "intended for bodily consumption" carve out from the exclusion.

The couple's "complaint clearly alleges bodily injury as a result of a mold infestation affecting the water in the home," Judge Anderson wrote. "And the Court cannot ignore the 'exception' to the mold exclusion, which provides that the exclusion does not apply to preclude coverage for bodily injury suffered as a result of 'any fungi or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption.'"

Other courts have construed language similar to that in the exception to find that water constitutes a "good" or "product," the judge said, including federal courts in Florida and Georgia considering application of the phrase to a hotel hot tub and a vaporized spa tub and shower.

In those cases, the courts described a "good" as "something that has economic utility or satisfies an economic want," with "consumption" defined as "the utilization of economic goods in the satisfaction of wants."

"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 court said. "Therefore, the exception to the mold exclusion applies in this case to provide coverage over the [couple's] allegation that they suffered bodily injury as a result of mold in the water supply."

Judge Anderson denied Acuity's motion and entered summary judgment in favor of Reed & Associates on the duty to defend, saving a determination of the duty to indemnify for a later date.

To read the opinion in Acuity v. Reed & Associates of Tennessee, click here.