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Continuous/Progressive Exclusion Bars Coverage

Kent Holland | January 5, 2018

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Person in a suit cleaning mold in an apartment

A mold exclusion was ruled unenforceable because covered damages were also alleged in an indemnification complaint, but the continuous/progressive exclusion barred coverage for damages arising out of work performed prior to policy inception.

In Saarman Constr., Ltd. v. Ironshore Specialty Ins. Co., 230 F. Supp. 3d 1068 (N.D. Cal. 2017), a condominium unit owner was sued by her tenant for damages resulting from water intrusion and mold. The unit owner filed an indemnification suit against a contractor alleging that his negligent performance of repair work to the building resulted in water intrusion and water damage to the interior of their unit, which contributed to mold growth. 

The contractor tendered the claim to its commercial general liability insurer, Ironshore Insurance, to defend it against the claim. The insurer refused to defend or indemnify the contractor, asserting that the claim was barred from coverage by both the mold exclusion and the continuous or progressive injury or damage (CP) exclusion of the policy. 

In the coverage dispute litigation that followed, the insurer filed a motion for summary judgment. The court found that the mold exclusion was not applicable to bar coverage because there were damages other than mold that could be covered under the policy, and state law obligated the insurer to defend a "mixed action" where there is a potentially covered claim, even if the action includes uncovered claims such as mold. 

The court granted the motion for summary judgment; however, because it found the contractor's work had been performed before policy inception and any damages arising out of work completed prior to policy, inception was clearly excluded by the "Continuous or Progressive Injury or Damage Exclusion."

The Policy Exclusions

The policy includes two coverage exclusions that are potentially relevant to this dispute. First, it contains the following "Mold, Fungi or Bacteria Exclusion" ("mold exclusion"), located in an endorsement separate from the main body of the policy:

Notwithstanding anything to the contrary contained in the policy or any endorsement attached thereto, this insurance does not apply to and shall not respond to any claim, demand, or "suit" alleging:

1. "Bodily Injury," "Property Damage," or "Personal and Advertising Injury" 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.

The second applicable exclusion was the CP exclusion, and it provided that:

This insurance does not apply to any "bodily injury" or "property damage":

1. which first existed, or is alleged to have first existed, prior to the inception of this policy. "Property damage" from "your work," or the work of any additional insured, performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such "property damage" is sudden and accidental and takes place within the policy period [sic]; or

2. which was, or is alleged to have been, in the process of taking place prior to the inception date of this policy, even if such "bodily injury" or "property damage" continued during this policy period; or

3. which is, or is alleged to be of the same general nature or type as a condition, circumstance or construction defect which resulted in "bodily injury" or "property damage" prior to the inception date of this policy.

Mold Exclusion Unenforceable

The indemnification complaint against the contractor clearly alleged that the contractor's activities resulted in mold infestation in the unit interior. The contractor argued, however, that because the complaint also included claims for water intrusion and water damages, separate and apart from the mold damage, that were potentially covered under the policy, the insurer had a duty to defend the entire underlying action, including the uncovered mold claim. 

In reviewing this aspect of the case, the court stated that the California Supreme Court has held that in a "mixed action" (i.e., an action that includes both potentially covered and uncovered claims), "the insurer has a duty to defend the action in its entirety." The court explained that the "duty to defend mixed actions prevents insurers from waiting time dividing potentially covered claims from uncovered claims in a way that would hamper an immediate meaningful defense." 

In this case, the court found that "Ironshore has attempted to circumvent that principle by hinging its duty to defend on the presence of any allegations of noncovered damages in the 'suit'—no matter how small or inconsequential those allegations may be." Moreover, concluded the court, "Ironshore cannot contract around California law that requires insurers to defend the entire action if there is any potentially covered claim. Because the language in the mold exclusion barring coverage for 'any claim, demand, or "suit" alleging [damage] arising out of, in whole or in part, the … alleged … existence of any mold' tries to do precisely that, it is unenforceable." 

CP Exclusion Is Enforced

The first paragraph of the CP exclusion bars coverage for "continuous or progressive injury or damage" that "first existed, or is alleged to have existed, prior to the inception of this policy." That paragraph also states that damage resulting from the insured's work "performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such 'property damage' is sudden and accidental and takes place within the policy period." 

The contractor didn't attempt to argue that the water damage was sudden and accidental. He argued instead that the damage was not "continuous" or "progressive" but rather was "intermittent" based on rainfall. In rejecting that argument, the court pointed out that it was not relevant that the exclusion contained the word "continuous" and "progressive" in its title since headings are not operative terms of a policy. 

"The operative language in the CP exclusion precludes coverage for any property damages that first existed prior to the policy period or that results from work performed by the insured prior to the policy period." "Ironshore's policy is not ambiguous as to the trigger of coverage. The general coverage clause provides that coverage is triggered by damage that occurs within the policy period."

In conclusion, the court found that because the contractor conceded that it finished its work on the property several years before the policy inception date, the CP exclusion deems any damages resulting from that work to have first existed prior to the policy period and excludes coverage for the damage that is not "sudden and accidental." Summary judgment was, therefore, granted to Ironshore.

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