In this action, the insured filed a lawsuit against its insurer asserting that the insurer wrongfully denied its claim. This case is Universal Image Productions, Inc. v. Federal Insurance Company, 475 Fed. Appx. 569 (6th Cir. 2012). Note that this case was not selected for publication in the Federal Reporter.

Universal (the insured) is a television post-production company specializing in editing, special effects, and computer graphics. It leased a building for its work. After the insured moved in, the area experienced heavy rainstorms, and soon thereafter, a strong odor was detected on the first floor of the building. Numerous tests showed that the odor was caused by microbial contamination stemming from the sub-grade duct system on the first floor, and that a significant microbial contamination likely existed in the ventilation system. More tests revealed black mold and elevated bacteria in the ductwork. The HVAC system was shut down and the insured's business suffered severe disruptions. The insured eventually vacated the premises.

Universal provided notice to its insurer, Federal Insurance, of its alleged losses stemming from the mold and bacterial contamination. Specifically, Universal claimed damages by way of lost leasehold improvements, cleaning and moving expenses, and lost business income under its property insurance policy. Federal denied the claim and filed a motion for summary judgment. The district court held that Universal was not entitled to coverage under its policy and this appeal followed.

The appeals court noted that the policy applied to direct physical loss or damage to building or personal property caused by or resulting from a peril not otherwise excluded. The court also noted that left undefined by the policy is the phrase "direct physical loss or damage". The insurer contended that the mold and bacterial contamination experienced by Universal in the building did not constitute direct physical loss or damage because no tangible property was structurally damaged. The insured argued that it did suffer direct physical loss because the mold, odor, and bacterial contamination rendered the building uninhabitable or substantially unusable, forcing the evacuation of the building.

Since there was little Michigan authority providing the court with insight into the meaning of the phrase "direct physical loss or damage", the court looked to other jurisdictions. Court from Texas, Ohio, and California, as well as Couch on Insurance emphasized the point that a direct physical loss was one in which the insured suffered an alteration in the structural integrity of the property and that such a loss was a distinct, demonstrable, physical alteration of the property. Several other jurisdictions (Oregon, Colorado, and West Virginia) viewing the phrase in a more expansive mode, held that physical loss to a building occurs when the property becomes uninhabitable or substantially unusable.

After reviewing these rulings and the record of facts in this claim, the Sixth Circuit Court of Appeals held that Universal would not be entitled to coverage. The mold contamination did not alter the structural integrity of the building, and Universal failed to present a genuine issue of material fact regarding the uninhabitability or usability of the building. No expert recommended that Universal evacuate the building, so there is no evidence that Universal was unable to remain in the building. There was evidence that working in the building was difficult, but the insured did not prove that the building was substantially unusable. In sum, the court found that while the insured certainly suffered a large inconvenience as a result of the mold and bacterial contamination of the building, the damages resulting therefrom did not amount to any tangible damage to physical property, or loss of use of that property.

The ruling of the district court was affirmed.

Editor's Note: The U.S. Court of Appeals, Sixth Circuit, holds that mold contamination, while certainly inconvenient and irritating, does not result in a direct physical loss to a building. The court relied on the opinions of several other courts around the country in determining that direct physical loss or damage requires tangible damage, an actual physical change to the property, or a loss of use of the property. In this instance, mold contamination did not meet the requirements, and so, the insuring agreement pertaining to direct physical loss or damage was not met. The insured was not entitled to coverage under the terms of its policy.

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