A decision by a panel of the North Carolina Court of Appeals this week adds to a body of case law that holds insurers liable for outbreaks of Legionnaire’s disease despite policy exclusions for injuries caused by bacteria.
The appellate panel on Tuesday affirmed a trial court decision that found the North Carolina Farm Bureau Mutual Insurance Co. has a duty to defend a hot tub retailer against lawsuits filed after 135 attendees at the Mountain State Fair were infected by Legionella bacteria in September 2019. An investigation by the state Public Health Division determined the most likely source of infections that killed four and hospitalized 95 people was the hot tubs displayed at the fair by All Pro Billiards and Spas.
The policy issued by Farm Bureau excluded from coverage damages caused by bacteria, but also included an exception to that exclusion for any good or product “intended for human consumption.” The three-judge panel ruled that the exception applied because the water in the hot tubs “was a part of the commodity for which purchasers of the hot tub paid.”
Coincidentally, a panel of experts at last week’s Property & Liability Resource Bureau Large Loss Conference warned insurers that Legionella is a growing risk.
Kristin Suga Heres, with the Zelle law firm in Boston, profiled decisions by courts in Florida, Georgia and Iowa that found typical standard-form policy exclusions for bacteria and pollution do not apply to claims for injuries caused by the Legionella bacteria — which are Legionnaire’s disease and Pontiac fever, a less severe form of infection. Most policies include an exception for infections caused by goods or products that are intended to be consumed.
The number of Legionella infections increasing. According to the Centers for Disease Control and Prevention, there were 8,890 reported cases of Legionnaire’s disease and Pontiac fever in the United States in 2019, compared to 6,141 in 2016.
The bacteria is frequently spread through water droplets in aerosolized water, such as from fountains, misters and hot tubs. Often outbreaks occur when the “biofilm,” or slime, that lines the inside of water pipes is disturbed. The bacteria thrives in hot water, but dies off when the temperature surpasses 140 degrees, according to the PLRB presentation by William Zoeller, vice president of environmental health and safety for J.S. Held.
In North Carolina, public health officials traced the 2019 outbreak at the Mountain State Fair to All Pro’s hot tub display in the Davis Event Center. The company had purchased a commercial general liability policy from Farm Bureau with a $1 million per-occurence limit.
After 12 lawsuits were filed alleging that All Pro was negligent, business owner Joshua Carpenter asked the insurer to defend him. Farm Bureau refused, pointing to the fungi and bacteria exclusion in the policy. The insurer filed a lawsuit in Wake County Superior Court seeking a declaration that it did not owe coverage.
Judge George Collins denied a motion by the insurer for a judgment on thepleadings, finding that the bacteria exclusion was ambiguous. Farm Bureau appealed.
The appellate panel said that when an insurance policy excludes coverage, any ambiguous provision will be construed against the insurer. While Farm Bureau’s policy excluded coverage for injuries caused by bacteria or fungi, the “consumption exemption” provided coverage for any good or product intended for human consumption.
That includes the hot water in All Pro’s hot tubs, the panel said.
“Indeed, defendants All Pro and Carpenter could have displayed their hot tubs without water, but the sight of the swirling water, smell of steam and evaporation of vapors within the atmosphere of the Davis Event Center was used as a marketing device to attract customers to purchase a hot tub,” the opinion says.
During her presentation at PLRB, Zelle attorney Heres warned insurers of exactly that sort of finding. In fact, Heres mentioned the same case that the North Carolina appellate court cited in its finding: Nationwide Mutual Fire Insurance Co. v. Dillard House from the US District Court for Northern Georgia. Federal courts in Iowa and Florida have reached similar conclusions, Heres said.
Heres offered insurers some glimmers of hope that their exclusions may apply. The Wisconsin Court of Appeals ruled in 2013 that water from a decorative water fountain in a hospital lobby, which was suspected of spreading Legionella, was not intended for “consumption” so the bacteria exclusion applied.
Also, the US District Court for Southern Florida found that the pollution exclusion in a policy written by James River Insurance Co. excluded Legionella because it included “biological infectants” in the definition of pollutants.