Eleventh Circuit Finds Coverage for Legionnaire’s Outbreak Where Allegations Asserted Negligent Design of Plumbing and Filtration Systems

The U.S. Court of Appeals for the Eleventh Circuit, reversing a district court’s decision, has found coverage for an outbreak of Legionnaire’s disease at a hotel despite the insurance policy’s absolute pollution and fungi or bacteria exclusions because of allegations that the insured had negligently designed the hotel’s plumbing and filtration systems, which the circuit court found were unrelated to the Legionnaire’s disease claims.

The Case

A cruise ship passenger who stayed at the Epic Hotel and Residences contracted Legionnaire’s disease. The cruise line approached the local health department, claiming that the cruise line’s tests indicated the presence of legionella bacteria in the hotel’s water. The department tested the chlorine levels in the water and discovered that a water filter had been installed to remove chlorine. Two days later, the department issued a health advisory and the hotel was forced to close while it repaired the filtration system.

The hotel sued the hotel’s developers, claiming damages for economic losses arising from the costs of remediating the plumbing and filtration systems, closing for the repairs, and loss of good will. The developers then filed a third-party complaint against the design professionals, including Hufsey-Nicolaides-Garcia-Suarez (“HNGS”), the mechanical engineer responsible for the design and installation of the hotel’s plumbing and filtration systems.

The third-party complaint alleged that the water filtration system reduced the level of chlorine in the water delivered to the hotel’s patrons to an unsafe level. The indemnification and contribution claims against HNGS alleged that HNGS had failed to properly design the hotel’s plumbing and filtration systems and, therefore, that it was liable if the developers were held responsible for the damages the hotel sought in its complaint.

HNGS’s insurer sought a declaration that it had no duty to indemnify or defend HNGS in the underlying litigation because all of the claims directly or indirectly arose from the presence of legionella bacteria in the water and, thus, the policy’s absolute pollution exclusion and fungi or bacteria exclusion barred coverage.

The district court granted the insurer’s motion for summary judgment, and HNGS appealed.

The Eleventh Circuit’s Decision

The circuit court reversed.

In its decision, it found that the district court had erred because, regardless of whether the exclusions in the policy operated to bar some coverage, a portion of the allegations and damages claimed against HNGS in the underlying action fell outside the exclusions as they were “entirely unrelated to the presence of legionella bacteria.”

The Eleventh Circuit explained that the claims against HNGS alleged that HNGS had failed to properly design the hotel’s plumbing and filtration systems and, therefore, that it was liable if the developers were held responsible for the damages the hotel sought in its complaint. The hotel alleged that its damages included damages related to “remediation” efforts of the allegedly improperly designed plumbing and filtration systems. These allegations did “not relate to the presence of legionella bacteria,” the circuit court stated, but to the required repairs to the plumbing and filtration systems. It then concluded that they were sufficient to trigger the insurer’s duty to defend, which extended to all claims, even those that were not within the scope of coverage.

Accordingly, the Eleventh Circuit decided that the district court had committed reversible error when it had determined that the insurer did not have a duty to defend, and that it also had erred by concluding that the insurer did not have a duty to indemnify, at least in part.

The case is James River Ins. Co. v. Hufsey-Nicolaides-Garcia-Suarez Associates, Inc., No. 13-10631 (11th Cir. March 10, 2014).