Fuzzy Logic:
Mold Strives for Immortality in Construction Defects Litigation

By B. SHAWN COX and BRAD A. ALLEN

Although diminishing, courthouse filings related to the explosion of residential mold cases ignited by the now infamous 2001 Ballard case are not dead yet.1 Mold existed long before Ballard and undoubtedly shall exist long after Texas consumers and their counsel have forgotten about coverage disputes under the old Homeowner’s Form B (HOB) policy. The diminishing residential mold docket is encouraging an increase in commercial mold claims and construction defects claims, both commercial and residential, and with or without mold.2 In fact, construction defect litigation is rapidly growing, with signs of even more growth on the horizon. Attorneys and clients new to construction defect litigation will find more questions than answers as they evaluate new cases. This article identifies the questions most commonly asked when evaluating construction defect cases. In addition, the article highlights some of the answers expected from the courts in the near future.

The Complex Background of Mold Litigation in Texas
Residential mold litigation has its own share of difficult questions. With respect to coverage for mold, the Texas legal landscape should soon have a definitive answer from the Texas Supreme Court regarding coverage for ensuing losses for mold damage under an HOB policy, but the residual impact of the Ballard case remains.3 The effects of the newly enacted House Bill 359, which in part regulates the mold remediation and rebuild industry, combined with the demise of the HOB policy with its now infamous ensuing loss provision, preempted a dramatic reduction in residential mold litigation.4 However, residential structures are not the only man-made architectures that can fall victim to mold growth. The effects of mold are still being felt outside of the residential construction litigation arena, and are part of the dynamic growth in construction defect litigation.
The finger of blame can be pointed in many directions for water and moisture infiltration and resulting mold accumulation. Molds tend to form where there is a combination of moisture and poor ventilation; therefore, any construction activity that has the propensity to lead to water infiltration or restricted ventilation presents a mold risk. Moisture control is a significant aspect of many structural systems. For example, fundamental to all air-conditioning systems is the manipulation of humidity levels, air temperature and air movement. The building envelope or skin is designed to keep water out. Additionally, the plumbing system only releases water on command and where requested, if functioning correctly. Disturbing the delicate balance between one or more of these building systems creates an environment supporting mold growth, especially in high humidity climates. The list of those involved in construction that could later be blamed for mold problems includes a wide spectrum of contractors, such as roofers, plumbers, window, sheetrock or siding installers, HVAC contractors, and anyone performing grading, landscaping, or foundation work on the property.
Texas appears to be on the horizon of a new era of mold and construction defect litigation as the proverbial wheel of liability has been spun, once again, and the possibility of recovery has and can point toward every aspect and element of building construction, including design, manufacture and the actual construction itself. In our modern world we take these intricate systems for granted, but when some part of the system fails to function properly, the battle against the water intrusion begins. As attorneys on both sides of the bar, we must determine not only what caused the mold or damage, but also who is responsible — or who can be held responsible — for the resulting damage and repair. This responsibility and liability ties directly to a litany of litigation strategies bound together loosely under the proverbial insurance umbrella.
Property damage claims are being brought against contractors, subcontractors, architects, engineers and their insurers for constructing or designing a building that afforded an opportunity for mold growth or other damage from construction defects. Often these situations become a blame game among those involved in the construction, with multiple Commercial General Liability (CGL) policies at issue. These types of cases allege that the source of the moisture giving rise to the mold problem include faulty HVAC and mechanical systems, leaking windows, curtain walls, synthetic stucco or EFIS, and any other defects that result in wet and damp building materials which in turn serve as a breeding ground for mold, mildew, and other organisms. Although health concerns may be an issue in this type of litigation, the primary issue is usually to recover remediation and reconstruction damages rather than to prove that mold exposure caused the occupants’ medical conditions.5
Finding sources of funds to pay legal costs to defend these expert intensive lawsuits and to pay subsequent judgments or settlements can be a challenge for all parties. The constant target for payment is insurance. Regardless of the ultimate responsibility or verdict, the liability camps are forced to litigate the exclusions and coverage arguments of the various insuring agreements from each potential defendant. In this arena, the Texas legal landscape includes a variety of conflicting decisions creating difficulties in the quest for coverage for shoddy workmanship, design flaws, defective products, and resulting water damage that creates an environment conducive to mold growth.
The architect, engineer or other design professional should, but may not, have some type of professional insurance. The type and amount of coverage is most often defined in the contractual agreement created between the design professional and the owner. Assuming that the design professional has insurance, the primary inquiries include (1) the amount of coverage available and (2) whether defense costs reduce the policy limits. It is not uncommon for design professionals, even on large projects, to have contractual obligations for coverage limits of $1 million or less. It is also not uncommon for these insurance policies to include provisions whereby the cost of litigating the dispute reduces the total amount of coverage. These policies are usually either “claims made” or “occurrence” policies. Both plaintiff and defense counsel should be mindful regarding professionals’ liability insurance and determine whether the policy is a “claims made” or an “occurrence” policy. Claims made policies cover only those claims actually made during the policy period, regardless of when they arose. This type of policy would present barriers to coverage in many mold cases where the mold occurs long after the building has been completed. Occurrence policies cover claims that arose during the policy period, regardless of when they are made.6 Assuming basic coverage arguments do not preclude recovery, factual inquires into proof of a design or specification flaw are fertile grounds for contradictory and confusing expert testimony.
Builders Risk Insurance is usually purchased to cover possible property damage during the construction stage of a project. If requested by the owner, the policy can include the owner as an “additional insured.” One infamous “additional insured” case involved the Polk County Courthouse, one of the first “sick buildings” in the United States that involved construction defects and mold contamination. In this case, mold resulted from water leaks through the walls and windows and defects within the air-conditioning system. The County was named as an additional insured on the general contractor’s builder’s risk policy. The County sued the architect and the general contractor alleging design and a variety of construction defects. The builder’s risk insurer that originally denied the claim was also sued for breach of contract. The contractor and the architect settled for $12.8 million, but allegations against the insurance company’s claim went before a jury trial that awarded a $25.9 million judgment. The case settled on appeal.7
At this point there are conflicting arguments with respect to applicability of CGL or any other policy for construction defect claims, with or without mold as a factor. Further, the broad variety of possible claims and fact scenarios makes it difficult to generally state mold or specific construction defects are or are not covered. The owner, general contractor and subcontractors should carefully examine the CGL policy, exclusions and endorsement with each case. From the owner’s standpoint, the CGL might become a source for paying a settlement or a judgment. From the standpoint of a general contractor or subcontractor, the CGL carrier may have the obligation to defend a lawsuit. Whether you represent the insureds or claimants, there are multiple issues related to potential coverage for construction defects.

Who is Insured?
Although this seems like a simple question, it is often the first of many battles for plaintiffs seeking to recover damages for construction defects. Most policies contain a “Who is an Insured” provision that defines who, in addition to the named insured, is covered under the policy. Depending on the specific policy language, insureds may include, for example, partners, spouses, officers and directors, stockholders, and employees. The policy may also have a “blanket contract” additional insured endorsement that provides, to the extent the named insured is obligated by written contract to name a person or company as an additional insured, that additional entity is covered. Such language usually includes the clause that the additional insureds are only covered to the extent there is liability “arising out of” the work of the named insured. Texas courts continue to provide different interpretations of the term “arising out of.” Although Texas courts tend to find the work of the additional insured “arises out of” the named insured’s work, counsel must avoid generalizations. The nature of this analysis is extremely fact specific.

The Duty to Defend
To determine whether an insurer has a duty to defend, Texas follows a relatively strict version of the “eight corners” rule or “complaint allegation” rule.8 Under these rules, courts compare the allegations contained within the four corners of the plaintiffs’ petition to the coverage provided within the four corners of the insurance policy to determine whether coverage exists under that policy. “Under Texas law, the court must refer to the latest of the amended pleadings in determining an insurer’s duty to defend.”9
Whether a petition has alleged facts sufficient to invoke coverage is very important in determining whether coverage is triggered. In American Physicians Insurance Exchange v. Garcia,10 the Texas Supreme Court reiterated the usual rule regarding determining the duty to defend. The court stated that the duty to defend is determined solely by the allegations in the pleadings filed against the insured. If the petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured.11 The duty to defend does not depend on what the facts actually are, but only on what the facts are alleged to be in the pleadings.12 Construing the allegations in favor of the insured, the insurer must defend if the allegations state a claim that could potentially give rise to coverage under the policy.13 If the facts as alleged fall within the exclusions within the policy, however, the insurer is not required to defend.14 Under Texas law, the duty to defend is broader than the duty to indemnify.15

The Duty to Indemnify
When determining whether an insured contractor is afforded coverage under its CGL policy for liability for damages that arise out of its performance on a project, in the absence of a clearly defined test, Texas courts generally examine two issues. First, whether the alleged damages constitute “property damage” as defined in the policy, and if so, whether the damages arise out of an “occurrence” defined in the policy. Both of these questions have generated numerous complicated holdings.16

What is “Property Damage” and Does It Matter?
Determining whether there was property damage, as defined by the policy, is often a non-issue with a CGL policy because property damage can be either physical injury, a consequential loss of use of the damaged property, or loss of use of tangible property that has not been physically injured.17 This definition is so broad that, in only the most rare of situations, when the plaintiff seeks purely economic damages (investigating, testing, or mitigating work), will a court deny coverage to an insured on the basis that there was no property damage.18

What is an “Occurrence”?
Further, lack of consistency among the courts creates ambiguity as to whether or not an occurrence has, in fact or law, occurred. Instead, courts applying current Texas law base coverage determinations defining “occurrence” on one or both of the following factors:
Was the insured’s alleged faulty workmanship the result of its conscious or deliberate failure to complete the job per plans and specifications?
Did the alleged faulty workman-ship result in damage to the policyholder’s work or damage to third-party property?19
A typical CGL policy defines an occurrence as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. From the perspective of the building owner, most often the plaintiff, there is usually ample authority to argue there was an “occurrence” under the CGL, but this authority is divided and contradictory.20
For now, we must wait until a specific test is articulated by the Texas Supreme Court in a construction defect case as to the factors that apply to an “occurrence” and the application of specific facts to those factors. Until that time, the varied case law creates a tremendous battleground for argument and analysis of whether or not an “occurrence” has in fact, or in law, occurred.

Is Faulty Workmanship an “Occurrence”?
The more specific question often asked in construction defect cases is whether faulty workmanship by the insured (contractor, subcontractor, and manufacturer) is an occurrence as defined by the policy. A comparison and contrast of the numerous cases that have held faulty workmanship was or was not an occurrence is beyond the scope of this article.21 In short, this is often a complex question that requires detailed analysis of the applicable policy and the specific facts of the case.

If There Was an Occurrence, When Was It Triggered?
Another potential bar to coverage, especially applicable to the long term progressive and often hidden damage caused by an undiscovered water source and mold, is the “trigger” of coverage.22 The typical CGL requires that the “property damage” occur during the policy period.23 Courts interpreting this provision have held that the actual damage must take place in the policy period, not merely the act or omission that causes the injury.24 Unfortunately, no less than five separate “trigger” concepts have been devised, and lower Texas courts and federal courts applying Texas law have created a split of authority as to the appropriate trigger method for “property damage.”25

If There Were a Covered Occurrence, What Damages Would Be Covered?
Under the plain language of the policy, a CGL policy generally does not cover the cost to repair or to replace defective work or the material itself, but covers consequential damages arising from defective work.26 Consequential damages may include loss of use of the building, damages to furniture and fixtures and, in some cases, the cost to repair other portions of the work. Further, the language of the standard general contractor’s CGL policy states that defective work performed by subcontractors is covered, but defective work the general contractor performed itself is not covered.
Further, under the plain language of the policy, an insurer is obligated to pay only those “sums that an insured become legally obligated to pay as damages because of . . . ‘property damage’ to which this insurance applies.”27 Both the “legally obligated to pay” provision as well as the “property damage” language has created diverse legal precedent.28 This area of Texas law remains unsettled.

Do Any Exclusions Bar or Limit Coverage?
Even if there is property damage from an occurrence that was triggered during the applicable policy period, the CGL policy likely contains multiple exclusions that could either limit or bar recovery. Perhaps the most often cited exclusion from CGL policies in construction defects cases relating to mold is a clause commonly referred to as the pollution exclusion.29 In response to the explosion of mold lawsuits, a mold specific pollution exclusion has been inserted in many policies. Generally, it states that the policy does not apply to any claim based upon, arising out of, or in any way involving the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants. In many ways, mold and fungus do not fit the typical “pollution” definition.30 Unlike asbestos, water damage to a building is usually not a result of pollution, but is the means by which mold (arguably a pollutant) is created. By definition, water damage is “not a release, discharge, or dispersal of a pollutant.” Some opponents have successfully argued the older pollution exclusion in the CGL policy should not apply to mold cases, but this result is not universal.31 Expert testimony illustrating that mold spores are released into the air paralleling standard airborne pollution has been persuasive in some instances, while inserting “fungus” into the definition of pollution has been persuasive to bar coverage in others.32 Therefore, coverage for repairing the alleged building defects, in the event they are sought from the insured contractor, will need to be evaluated pursuant to the traditional analysis of property damage claims involving defective work under the CGL policy.
In its limited application, this exclusion has had only limited success in blocking mold claims, and the Insurance Services Office (“ISO”) has adopted a specific fungi or bacteria exclusion. The ISO approved a new fungi and bacteria exclusion that would factor into coverage analysis.33 The ISO fungi or bacteria exclusion purports to exclude insurance coverage for any property damage or bodily injury due to the presence of mold. It is not yet clear how broad the application of this new and improved exclusion will be. If this exclusion is fully and uniformly utilized and enforced, there will be no insurance coverage for mold damage claims under a CGL policy absent coverage being bought back with endorsements. The burden of paying those damages will then fall on the insured.

The Battle of the Policies
CGL policies usually contain an “other insurance” provision. These clauses often provide in part that if there is other collectible insurance available, then the policy is excess over any other insurance. This is important because an excess policy, generally, is not triggered until exhaustion of any underlying policy limits.34
Courts generally enforce these “other insurance” and “excess” provisions unless there are two or more policies with the same exclusionary language. Excess insurers have neither an express nor an implied duty to share in defense costs before exhaustion of the underlying policy limits. If there are multiple policies with overlapping coverage, and one is not excess to the others, then there is typically a battle of who will pay what. These issues were addressed in Keene Corp. v. Insurance Company of North America.35 As the Keene court explained, “there is nothing in the policy that provides for a reduction of the insurer’s liability if an injury occurs only in part during a policy period.”36 After determining that each insurer independently owed a duty to fully indemnify the injured, and noting that the duty to defend is broader than the duty to indemnify, the court held that each insurer was fully liable for defense costs.37
The Texas Supreme Court has quoted Keene for the following propositions: [1] that concurrent coverage does not permit an insured to stack the limits of multiple policies that do not overlap, and [2] that the insured may select the policy under which it is to be indemnified.38 These principles are fully consistent with the notion that each of several insurers on concurrently triggered policies is obligated to provide a full defense to the insured.39 In addition, the Austin Court of Appeals has held that an insurer’s duty to indemnify its insured is not reduced when there is concurrent coverage among consecutive insurers, because there is nothing in the policies that provides for reduction of the insurer’s liability if an injury occurs only in part during a policy period.40 Some Texas courts have held that when a claim falls partially within and partially outside of a coverage period, the insurer’s duty is to provide its insured with a complete defense.41 This is because the insurance contract obligates the insurer to defend its insured, not to provide a pro rata defense.42
There are multiple Texas cases that have held differently than Keene’s absolute duty to a full defense. For example, in Utica National,43 the Austin Court of Appeals, citing its holding in Southwest Aggregates, affirmed a trial court’s award of pro rata allocation of defense costs.44 When reviewing Utica National, the Texas Supreme Court held that, “[w]e agree with the court of appeals holding that the trial court properly held Utica liable for its share of the defense costs.”45 The latest progeny of Southwest Aggregates and Utica National makes it abundantly clear that allocation of defense costs is a possibility under Texas law. Other appellate courts in Texas have not followed Southwest Aggregates imposing defense obligations for non-covered claims. The El Paso, Houston and San Antonio Courts of Appeals have issued opinions endorsing segregation of the duty to defend between covered and non-covered claims in opposition to Keene.46
Because of the numerous variations of policies on the market and the divergent case law, it is important that coverage counsel analyze all the applicable policies and facts before making decisions on the duty to defend and duty to indemnify.

Conclusion – or Just the Beginning?
This article is only the start of the analysis of the many issues to be considered by counsel, and yet to be decided by Texas courts in determining whether coverage is available to an insured for construction defects. These issues will continue to be addressed by the courts in light of the proliferation of construction defects cases (with and without mold). If past experience with court treatment of mold issues is any indication, the results should be interesting and controversial. Until then, the nature of these cases will be both fact specific and legally complex, requiring counsel on all sides to plan in advance, constantly update the ever-changing law in Texas, and execute relentless attention to detail.

Endnotes
1. Allison v. Fire Ins. Exchange, 98 S.W.3d 227 (Tex. App.–Austin 2002), rehearing overruled (Feb 13, 2003), rehearing overruled (Feb 21, 2003), petition withdrawn (1 pet.) (Nov 21, 2003), petition for review abated (2 pets.) (Mar 02, 2004), review granted, judgment vacated, and remanded by agreement (Mar 26, 2004). 2. Insurers have noted marked increases in the frequency of mold-related claims in commercial buildings over the past few years according to Robert P. Hartwig, chief economist at the Insurance Information Institute. See http:// www.astm.org/cgi-bin/SoftCart.exe/COMMIT/COMMITTEE/E50.htm?E+mystore. 3. Fiess v. State Farm Lloyds, 392 F.3d 802 (5th Cir. (Tex.) 2004), certified question accepted, Jan 21, 2005. Oral arguments are set for March 30, 2005. 4. Fono, Andrew and Cox, B. Shawn, Pandora’s Box: Texas Passes Mold Legislation, The Houston Lawyer, March/April 2004, at 12-15. 5. Abba I. Terr, M.D., Are Indoor Molds Causing a New Disease?, J. of Allergy and Clinical Immunology (Feb. 2004) (holding that “[I]n recent years there has been widespread reportage in the news media about black mold and lawsuits filed in “which claims have been made for compensation for property damage and health injury as a result of exposure to toxic mold in residential or office buildings. Several studies have suggested some associations between the presence of molds and various disease manifestations; however, strong supporting evidence for a causal relationship is still lacking.”) 6. It is important to note that most polices have late notice provisions that require claimants to provide timely notice of their claim, and most policies also contractually limit the time for filing suit as well as setting forth conditions precedent to suit. 7. “Buildings Get Bad Air Blame,” Tampa Tribune, March 20, 1999, at 1. See also Barton-Malow Co. v. Grunau Co., 835 So. 2d 1164, 1165-66 (Fla. Dist. Ct. App. 2002) (briefly describing underlying suit for “sick building” damages). 8. See Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720, 723 (5th Cir. 1999); National Union Fire Ins. Co. v. Merchants Fast Motor Lines, 939 S.W.2d 139, 141 (Tex. 1997). 9. John Deere Ins. Co. v. Truckin’ U.S.A., 122 F.3d 270, 273 FN 1 (5th Cir. 1997) (citing Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th Cir. 1983) (“[T]he duty to defend is determined by examining the latest, and only the latest, amended pleadings.”) 10. American Physicians Ins Exch. v. Garcia, 876 S.W.2 842, 848 (Tex. 1994). 11. Id. at 847-48. 12. Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 636 (Tex. 1973). 13. Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965) 14. Fidelity Guarantee Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787, 788 (Tex. 1982). 15. See American States Ins. Co. v. Bailey, 133 F.3d 363 (5th Cir. 1998) (citing Gulf Chem. and Metallurgical Corp. v. Associated Metals & Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993)). 16. Allstate Ins. Co. v. Hicks, 134 S.W.3d 304 (Tex. App.–Amarillo 2003) (if a petition does not allege facts within the scope of coverage, a liability insurer is not required to defend a suit against its insured); Interstate Serv. Ins. Co. v. Ball, 392 S.W.2d 158 (Tex. App.–Houston 1965, writ ref’d n.r.e.); see also Guaranty Nat’l Ins. Co. v. Azrock Indus., Inc., 211 F.3d 239 (5th Cir. 2000). 17. Travelers Indem. Co. v. Page & Assocs. Constr. Co., No. 07-97-0338-CV, 1998 WL 720957 (Tex. App.–Amarillo Oct. 15, 1998, pet. denied) and First Tex. Homes, Inc. v. Mid-Continent Cas. Co., No. 3-00-CV-1048-BD, 2001 WL 238112 at *3 (N.D. Tex. Mar. 7, 2001). 18. Gibson & Assoc., Inc. v. Home Ins. Co., 966 F., Supp. 468, 473-74 (N.D. Tex. 1997). 19. For an extensive coverage discussion regarding these factors, see generally Cronin, Jim M.’s “Common Insurance Coverage Battles in the Construct Defect Arena: Unresolved Disputes Between Insureds, Additional Insureds and Their Carriers,” and Shidlofsky, Lee H., “CGL Coverage for Defective Work,” both presented at South Texas College of Law, Texas Insurance Law Symposium, Houston, Texas, January 27-28, 2005. 20. See id. 21. See Shidlofsy, Lee H., Demystifying CGL Coverage for Residential Defective Construction Claims, 5 J. Tex. Ins. Law 1, 43-45 (Feb. 2004). 22. See Vesta Fire Ins. Corp. v. Nutmeg Ins. Co., No. A-00-CA-468-SS, 2003 WL 22508504 (W.D. Tex. Sept. 29, 2003). The property damage in Vesta Fire Inc. Corp. was allegedly due to the failure to properly design, install, and maintain an air conditioning system, causing mold damage. The court was not convinced that mold contamination is like PCE contamination, thus warranting the use of the exposure theory to account for property damage over time. Accordingly, following Azrock, and in accordance with other district courts that have considered the issue, the Court held that the manifestation trigger applies to property damage claims due to mold. See also Flores v. Allstate Tex. Lloyd’s Co., 278 F. Supp. 2d 810, 815-16 (S.D. Tex. 2003). 23. See id. 24. Guaranty Nat’l, 211 F.3d at 244. 25. The Fifth Circuit has ruled that property damage claims under liability insurance are subject to a manifestation trigger under Texas law. American Home Assur. Co. v. Unitramp, 146 F.3d 311, 313 (5th Cir. 1998); see Cullen/Frost Bank of Dallas v. Commonwealth Lloyd’s Ins. Co., 852 S.W.2d 252, 257 (Tex. App.–Dallas 1993, writ denied); Dorchester Dev. Corp. v. Safeco Ins. Co., 737 S.W.2d 380, 383 (Tex. App.–Dallas 1987, no writ). The Guarantee National court stated that it was constrained to follow Texas law in holding that property damage due to asbestos was subject to a manifestation trigger. Guarantee Nat’l at 248. 26. See Gar-Tex Constr. Co. v. Employers Cas. Co., 771 S.W.2d 639, 643-44 (Tex. App.–Dallas 1989, writ denied). 27. See Scott C. Turner, Insurance Coverage for Construction Disputes, § 6.8 (2d ed. 1999) (Supp. 2004). 28. See id., and also Hi-Port, Inc. v. American Int’l Specialty Lines Ins. Co., 22 F. Supp. 2d 596 (S.D. Tex. 1977); Venure Encoding Serv., Inc. v. Atlantic Mut. Ins. Co., 107 S.W.3d 729 (Tex. App.–Fort Worth 2002, pet. denied); Data Specialties, Inc. v. Transcon. Ins. Co. 125 F.3d 909 (5th Cir. 1997). 29. In response to the onslaught of mold litigation, the pollution exclusion has gone though several variations over the past few years. See infra note 34. 30. The Texas Supreme Court has held an older absolute pollution exclusion to be clear, unambiguous, and enforceable. However, it has not addressed the older pollution exclusion’s applicability for alleged “mold pollution.” See Nat’l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 522 (Tex. 1995) (“This pollution exclusion is just what it purports to be – absolute”) (quoting Alcolac v. Cal. Union Ins. Co., 716 F.Supp. 1546, 1549 (D. Md. 1989)). The exclusion stated: “This policy does not apply to . . . any Personal Injury or Property Damage arising out of the actual or threatened discharge, dispersal, release or escape of pollutants, anywhere in the world; . . . ‘Pollutants’ means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste material. Waste materials include materials which are intended to be or have been recycled, reconditioned or reclaimed.” 31. One case involving the pollution exclusion with “fungi” in the definition of pollutant is Lexington Ins. Co. v. Unity/Waterford-Fair Oaks Ltd., No. Civ.A. 399CV1623D, 2002 WL 356756 (N.D. Tex. Mar. 5, 2002). It holds that the pollution exclusion barred coverage under a first party policy that included the word “fungi” in the definition of pollutant. 32. Bruner and O’Connor on Construction Law § 11:87.40, § 11:87.40. Commercial general liability (CGL) coverage — Coverage for pollution-related injury — Pollution exclusion and sick buildings — Insurance coverage for mold damage (2005). 33. ISO released a special endorsement to CGL policies titled “Fungi or Bacteria Exclusion,” effective May 1, 2002. The exclusion states in part:
2. Exclusions
This insurance does not apply to: Fungi or Bacteria
A. “bodily injury” or “property damage” which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any “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. B. Any loss, cost or expense arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the effects of, “fungi” or bacteria, by any insured or by any other person or entity. “Fungi” is defined as “any type or form of fungus, including mold or mildew and any mycotoxins, spores, scents or byproducts produced or released by fungi. The exclusion, CG 21 67 04 02, would apply to both Section I-Coverage A (Bodily Injury and Property Damage Liability) and Coverage B (Personal and Advertising Injury Liability) of the CGL policy. 34. Couch on Insurance § 198:20. See also Texas Employers Ins. Ass’n v. Underwriting Members of Lloyds, 836 F. Supp. 398 (S.D. Tex. 1993). 35. 667 F.2d 1034 (D.C. Cir. 1981), cert. denied, 455 U.S. 1007 (1982). Keene held that once coverage under an insurance policy is triggered, an insurer is liable up to its policy limits, subject to “other insurance” clauses. 36. Id. at 1048. 37. See id. at 1050. 38. See American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 854-55 (Tex. 1994). 39. Texas Prop. & Cas .Ins. Guar. Ass’n / Southwest Aggregates, Inc. v. Southwest Aggregates, Inc., 982 S.W.2d 600, 604-05 (Tex. App.–Austin 1998, no writ). 40. CNA Lloyds of Tex. v. St. Paul Ins. Co., 902 S.W.2d 657, 661 (Tex. App.–Austin 1995, writ dism’d by agr.). 41. Texas Property and Casualty Ins. Guaranty Ass’n., 982 S.W.2d at 604-05. 42. CNA Lloyds, 902 S.W.2d at 661. 43. Utica Nat’l Ins. Co. of Tex. v. Tex. Prop. & Cas. Ins. Guar. Ass’n, 110 S.W.3d 450 (Tex. App.–Austin 2001). See also Utica Nat’l Ins. Co. of Tex. v. Texas Prop. & Cas. Ins. Guar. Ass’n, 141 S.W.3d 198 (Tex. 2004). The Austin Court of Appeals holding was affirmed in part, and reversed and remanded in part by the Texas Supreme Court. 44. See id., at 458. 45. Utica Nat’l, 141 S.W.3d at 203 (emphasis added). 46. American Eagle Ins. Co. v. Nettleton, 932 S.W.2d 169 (Tex. App.–El Paso 1996, writ denied); Comsys Info. Tech. Serv., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181 (Tex. App.–Houston [14th Dist.] 2004, pet. granted); Reser v. State Farm Fire & Cas. Co., 981 S.W.2d 260, 263 (Tex. App.–San Antonio 1998, no pet.).

B. Shawn Cox is an associate with Martin, Disiere, Jefferson & Wisdom, L.L.P. He has extensive experience with complex civil
litigation and transactional matters involving residential and commercial construction, insurance, real estate, land development, environmental and general business matters. He is a former in-house counsel with one of the nation’s largest homebuilders and has a professional background in architecture.

Brad A. Allen is Senior Counsel with Martin, Disiere, Jefferson & Wisdom, L.L.P. He specializes in the evaluation and handling of insurance matters and disputes involving questions of coverage, claims handling, legal exposure, class actions, and other legal issues. Allen earned his B.A. degree from Baylor University and his J.D. from the Baylor School of Law. The authors wish to thank Gretchen Allen for her contributions to this article.

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