A United States Appellate Court affirmed an insurer's duty to defend a Legionnaires' disease suit after finding that an exclusion applying to buildings or structures did not apply to a cooling tower. The case is Southern-Owners Ins. Co. v. Waterhouse Corp., 2023 U.S. App. LEXIS 16348 (11th Cir. 2023).

Background

Nursery Supplies, Inc., a manufacturer of horticulture products, hired Waterhouse Corporation to monitor, maintain, and treat the water in a cooling tower on its property. Nursery Supplies also hired Del-Air Heating and Air Conditioning to perform work on the same tower.

In early July 2019, Darrell Patterson, a plumber and electrician employed by Del-Air, performed work in and around the cooling tower. Two weeks later, he was hospitalized and diagnosed with Legionnaires' disease. Water samples drawn from the tower confirmed the presence of Legionella bacteria of the same subtype later found in Patterson's urine. In January 2021, Patterson sued Nursery Supplies and Waterhouse for negligence in a district court.

Waterhouse was insured by Southern-Owners under a commercial general liability policy and a commercial umbrella policy. Both policies contained fungi or bacteria exclusions barring coverage for bodily injury arising from the inhalation, ingestion, contact with, exposure to, or presence of fungi or bacteria "on or within a building or structure, including its contents."

Building Or Structure

Southern-Owners agreed to defend Waterhouse in the underlying action under a reservation of rights, then filed for declaratory judgment. Southern-Owners argued that the exclusions barred coverage because the cooling tower was a "structure." Nursery Supplies and Patterson filed responses in opposition, arguing that the tower did not meet the definition.

The district court denied Southern-Owners' summary judgment motion and found that the policies covered Patterson's claims because a cooling tower is not a building or structure, but rather large-scale machinery. The court ruled that Southern-Owners had a duty to defend and potentially indemnify Waterhouse in the underlying action. Southern-Owners appealed, and the case was brought to a United States Court of Appeals.

US Appellate Court

The court first stated that since the insurance policies were issued in Florida, Florida law applied. Florida law says that if policies are ambiguous, they are interpreted in favor of the insured and strictly against the insurer, and that exclusions are construed even more strictly against the insurer compared to coverage clauses.

The policies didn't define "building" or "structure", so the court turned to dictionary definitions. Merriam-Webster defines "building" as "a usually roofed and walled structure built for permanent use (as for a dwelling)," and "structure" as "something (such as a building) that is constructed."

A broad reading of structure could include a cooling tower as "something that is constructed", but the court invoked the doctrine of noscitur a sociis, or a word is known by the company it keeps. The court stated, "when applying this canon of construction, one examines the other words used within a string of concepts to derive the drafter's overall intent."

Applying the doctrine, the court interpreted "structure" in relation to "building" and deemed it to mean building-like structures. Southern-Owners argued that even under that definition, the cooling tower was still a building-like structure because it was two stories tall, had four sides, a bottom, and a door.
A cooling tower removes heat from a building by spraying water through the tower to exchange heat out the building. The cooled water is collected at the bottom and pumped back into the plant or building for reuse. Cooling towers are used primarily for heating, ventilation, air conditioning, and other industrial purposes.

The appellate court agreed with the district court's finding that a cooling tower is large-scale machinery or equipment rather than a building or building-like structure. The appellate court concluded that the fungi or bacteria exclusion of the CGL and umbrella policies did not apply to the cooling tower and affirmed the district court's ruling.

Editor's Note

The court affirmed the district court's ruling after applying the doctrine of noscitur a sociis, meaning "a word is known by the company it keeps." A broad interpretation of "structure" could include a cooling tower, but applying the doctrine and the tenet that ambiguous exclusions are to be held strictly against the insurer, the court took it to mean a building-like structure.

The court analyzed what the cooling tower was designed to do and determined that it was large-scale machinery and not a building or building-like structure, so the fungi or bacteria exclusion did not apply.

Ray Sugrim

Ray Sugrim

Ray Sugrim is an Insurance Editor with FC&S Expert Coverage Interpretation, a division of National Underwriter Company and Arc Network. Ray is responsible for helping develop and edit content for subscribers. Ray is a St John’s University graduate with a degree in Risk Management & Insurance and is a CPCU candidate.

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