An Illinois appellate court, applying Texas law, held that mold-related injuries allegedly caused by the faulty construction of a building were not barred by a pollution exclusion because the exclusion did not clearly and unambiguously apply to mold.

In 2001, a group of Texas government employees alleged that they sustained bodily injuries due to exposure to mold resulting from D. Reyna Construction, Inc.’s (“Reyna”) faulty construction of their new office building. Legion Insurance Company (“Legion”) issued a policy to Reyna in connection with the construction of the building.  Legion was subsequently placed in liquidation and is now controlled by the State of Illinois.

In June 2009, judgment was entered in favor of the claimants for $37,757,000.  Following the judgment, Reyna assigned its rights to any recovery under its Legion policy to the claimants, who then filed a proof of claim with the Legion liquidator.  The liquidator filed an underlying petition to disallow the contested claims, arguing that the “Pollution and Health Hazard” exclusions in the Legion policy barred the mold claim at issue.

The circuit court agreed with the liquidator that the injuries resulting from the mold exposure fell under the definition of “health hazard” and “pollutant.”  Under the policy, “health hazard” is defined as:

[A]ny chemical, alkali, radioactive material, or any other irritant or any pollutant or other substance, product, or waste product, or the fumes or other discharge or effects therefrom, whether liquid, gas or solid determined to be toxic or harmful to the health of any person, plant or animal.

“Pollutant” is defined as:

[A]ny smoke, vapors, soot, Electromagnetic Field Radiation, fumes, acids, alkalis, chemicals, liquids, solids, gases, radiation, thermal pollutants, noise or sound of any kind or any other kind of contaminant.

On appeal, the claimants argued that the exclusion does not include the words “mold, fungi, or any similar mold-like terms,” and does not unambiguously exclude mold-related claims from coverage.  They argued that those terms could have easily been added into the policy language, but they were not.

The appellate court agreed, and reversed the circuit court.  The appellate court held that while the policy does not have to specifically list the terms “mold” or “fungi” in the definitions of its health hazard exclusion, the intent to exclude coverage “must be expressed in clear and unambiguous language.”  The appellate court found that the trial court misapplied the well-settled rules of contract construction that require a court to look at the plain language of the contract to give effect to the parties’ intent and to interpret the exclusions narrowly and in favor of the insured.  Further, the appellate court found that if the exclusion were applied as broadly as the circuit court found it to be then the policy would be illusory.  The appellate court also noted that Legion had other liability and property insurance policies that they had previously filed with the Illinois Department of Insurance that clearly and unambiguously excluded mold and fungi from coverage by listing the terms in the exclusion sections.  In re Liquidation of Legion Indem. Co., No. 1-14-0452 (Ill. App. Ct. Sept. 30, 2015).