Mold Discovery During Hotel Renovations Denied Coverage, Says Court

When Sky Harbor Atlanta Northeast and Crestline Hotels & Resort were in the middle of a hotel remodel, mold was discovered growing on the premises.

Sky Harbor, which owned the hotel itself, and Crestline, which managed the property, turned to their commercial property insurer Affiliated FM Insurance Company for aid.

They valued the damage at just over $20 million.

The day after discovering the mold, an Affiliated representative visited the site.

Upon investigation, which took a year to complete, the insurer denied the claim. It said there was “no coverage for the claims … because the evidence indicated that the claimed damage existed prior to the effective coverage.”

Sky Harbor and Crestline filed suit. In their allegations, they claimed rainwater events during the policy period caused the damage. Affiliated countered by stating the damage was caused by various construction defects that existed well before the policy was in play.

The court reviewed policy language.

Under the policy, loss or damages stemming from “fungus, mold or mildew” were excluded “regardless of any other cause or event.”

Further, “defects in materials, faulty workmanship, faulty construction or faulty design” were also excluded.

That would mean, Affiliated argued, whether the mold grew from rainwater buildup or from faulty construction work well before the policy was issued, the property policy would not cover the damages at Sky Harbor and Crestline’s hotel.

Scorecard: Affiliated FM Insurance Company was granted its motion for summary judgment. It’s property policy excluded the mold damages.

Takeaway: Mold and other fungi are often excluded from property policies to begin with, meaning losses can take a huge financial toll on an affected business. Risk managers should review coverages before construction projects begin to identify gaps and avoid unpleasant and expensive surprises. &