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Insurance Law News - November 2016

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CGL Policy's "Mold" Exclusion Does Not Relieve Insurer of Duty to Defend Insured Against Suit Alleging Property Damage Arising from Both Water Intrusion and Mold

A commercial general liability policy's "mold" exclusion did not relieve an insurer of a duty to defend its insured, a general contractor, against a lawsuit alleging property damage resulting from both water intrusion and mold. (Saarman Construction, Inc. v. Ironshore Specialty Insurance Company (2016) --- F.Supp.3d ---- 2016 WL 4411814)


The Westborough Court Condominiums is a condominium project that was built in the late 1990's. Following completion, the project experienced significant problems with water intrusion. The Westborough Court Condominiums Homeowners Association thus hired Saarman Construction, Inc. to perform repairs at the project.

John and Stella Lee owned a unit in the condominium development, and the Lees leased their unit to Tiffany Molock. Later, Molock filed a state court lawsuit against the Lees and the HOA. In her complaint, Molock alleged that the Lees and the HOA were responsible for various problems with the unit, including mold, plumbing leaks, and water intrusion.

The Lees and the HOA in turn filed cross-complaints for indemnity against Saarman. The Lees and the HOA both alleged that Saarman had negligently performed repair work at the condominium project, resulting in water intrusion and water damage that contributed to mold growth.

Saarman was the named insured on a commercial general liability policy issued by Ironshore Specialty Insurance Company. The policy provided in relevant part that Ironshore would indemnify Saarman against damages because of bodily injury and property damage not otherwise excluded, and that Ironshore would defend Saarman against any suit seeking covered damages. Ironshore declined to defend Saarman in the lawsuit, based in part on a "Mold, Fungi or Bacteria Exclusion" endorsement in the policy. That endorsement provided that the policy did not apply to "to any claim, demand, or 'suit' alleging" bodily injury or property damage "arising out of, in whole or in part, the actual, alleged, or threatened discharge, inhalation, ingestion, dispersal, seepage, migration, release, escape or existence of any mold, mildew, bacteria or fungus, or any materials containing them, at any time." Italics added.

Following Ironshore's refusal to defend Saarman, Saarman filed a federal court lawsuit against Ironshore for breach contract and bad faith. Saarman then moved for partial summary judgment that Ironshore had a duty to defend Saarman in the underlying state court lawsuit.


The federal district court, applying California law, held that Saarman was entitled to a defense from Ironshore in the underlying lawsuit. The court thus entered partial summary judgment in favor of Saarman and against Ironshore on the duty to defend issue.

The district court reasoned that in the underlying lawsuit, there were allegations that Saarman had caused water intrusion damage (and hence "property damage") to the condominium unit occupied by Molock. Because those allegations fell within the scope of the policy's basic insuring agreement, Ironshore had the burden of establishing that the policy's "mold" exclusion conclusively eliminated any potential for coverage.

Ironshore argued that the policy's mold exclusion barred coverage not just for "claims" that include mold allegations "in whole or in part," but also for "suits" that include mold allegations "in whole or in part." Ironshore argued that the underlying action was such a "suit," and that the mold exclusion thus relieved Ironshore of any duty to defend Saarman as to the entire underlying "suit."

The federal district court rejected Ironshore's argument. The court acknowledged the seeming conflict between the mold exclusion (which relieves the insurer of any duty to defend a "suit" that includes both mold allegations and non-mold allegations) and California case law (which requires an insurer to defend any "mixed action" that includes both covered claims and uncovered claims). Ultimately, the district court held that Ironshore "cannot contract around California law that requires insurers to defend the entire action if there is any potentially covered claim." The court concluded that, to the extent the mold exclusion purported to bar a defense for "any … 'suit' alleging [property damage] arising out of, in whole or in part, the ... alleged ... existence of any mold," the exclusion was "unenforceable."

The court also noted that under California's "concurrent causation" doctrine, coverage can exist when an insured commits two negligent acts – one covered and one uncovered – that combine to cause one loss. Here, Saarman's alleged conduct potentially involved a "single negligent act" that resulted in "two categories of damages – one category that is covered [i.e., water intrusion damage] and one category that is not covered [i.e., mold damage]." According to the court, California law prevents an insurer from escaping a duty to defend a mixed action simply because the insured's negligent act happens to result in both covered and uncovered damage. Thus, Ironshore had a duty to defend Saarman in the underlying lawsuit "for both the covered water damage claims and the non-covered mold damage claims."


The federal district court was faced with a conflict between the policy's mold exclusion (which on its face relieved the insurer of any duty to defend a "suit" based in whole or in part on mold allegations) and California case law (which holds that an insurer has a duty to defend any "mixed action" that includes both covered and uncovered claims). The court resolved the conflict by adhering to the case law requiring an insurer to defend a mixed action in its entirety. According to the court, an insurer has a duty to defend an insured against a mixed action, and the insurer cannot circumvent that rule by policy language that purports to make the duty to defend disappear if the "suit" includes an uncovered claim.

Ironshore also sought to avoid a duty to defend based on a separate policy exclusion that barred coverage for "continuous or progressive injury or damage" (i.e., injury or damage that begins before the policy period and then gets progressively worse during the policy period). However, in a separate part of the opinion, the district court held that the continuous or progressive injury or damage exclusion did not relieve Ironshore of a duty to defend Saarman in the underlying lawsuit.


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