Universal Image Productions sought to obtain damages from Federal Insurance Company on the basis of the insurance policy that covered claims for loss to commercial property. This case is Universal Image Productions, Inc. v. Chubb Corporation, 2010 WL 1257770 (E.D.Mich.).

Universal occupied portions of a building and had plans to expand this space for business purposes. During the second week of August in 2002, and following a very heavy rainfall, a foul odor began to permeate the area where Universal had its business. A representative from an independent air quality agency was called to the scene and found mold and bulkwater and high levels of bacteria inside the duct work of the building. He characterized the ventilation system as being hazardous and recommended its immediate shutdown. The landlord did this and had the ventilation system cleaned. However, the cleaning did not restore the building to its original condition and Universal moved its business to a new and permanent location in March of 2003.

Universal made a claim for direct physical loss to its business property in the form of pervasive odor, mold, and bacterial contamination as well as water damage. The insurer, Federal, denied coverage and said that neither mold contamination nor the threat thereof constituted direct physical loss under the express language of the commercial property coverage form. Universal then sued Federal and the insurer filed for summary judgment.

The United States District Court for the Eastern District of Michigan reviewed the case law that both parties submitted and found in favor of the insurer. The court said that Universal did not show that it suffered any structural or any other tangible damage to the insured property. Rather, the bulk of Universal's argument relied upon proof that it suffered such intangible harms as strong odors and the presence of mold or bacteria in the air and ventilation system. Therefore, inasmuch as the insured failed to show that it suffered a direct physical loss under the policy, the court ruled in favor of the insurer.

In this case, the insured also made a business interruption claim. However, the court said that this type of loss had to be caused by or result from direct physical loss or damage by a covered peril to property. Since the court found no direct physical loss here, this claim of the insured's was also denied.

Editor's Note: This case is another in a long list of court decisions pertaining to claims based on mold and bacterial contamination, and whether such claims fit the insuring agreement requirement under the terms of the commercial property coverage form of direct physical loss of or damage to covered property. Both the insured and the insurer in this trial presented case law from other jurisdictions to bolster their respective positions. The insurer noted cases from Ohio and the Ninth Circuit that held that no physical loss occurs unless a contaminant actually alters the structural integrity of the property. The insured countered with case law from Oregon, Massachusetts, and Colorado that held that strong, pervasive, persistent, and noxious odor can be seen as physical damage.

Even though this court sided with the insurer in finding no direct physical damage due to odors and contamination, the decision was based on the facts of this situation and this particular court's interpretation of the policy language. As the cited cases show, the coverage question is not settled and will continue to be decided on a case-by-case and court-by-court basis.