Acknowledging that the insured's cotton was damaged by an occurrence, the Eighth Circuit nonetheless affirmed the district court's denial of coverage based upon an exclusion.  See Michigan Millers Mut. Ins. Co. v. DG&D Co., Inc., No. 08-2699, 2009 U.S. App. LEXIS 14236 (8th Cir. July 1, 2009).

    The insured operated a cotton gin.  After delivering 50,000 bales of cotton to warehouses, cotton brokers and purchasers asserted claims against the insured for losses caused by mold, mildew and hard spots found in the bales.  The damage appeared after delivery of the cotton bales to the warehouses.  Two brokers sued,alleging that excess moisture during the ginning process rendered the cotton unmerchantable.  Michigan Millers agreed to defend under a reservation of rights and filed suit for declaratory relief.

    The Commercial Agribusiness Policy covered damages the insured was legally obligated to pay because of property damage caused by an occurrence. The district court agreed damage to the cotton from excess moisture was "property damage."  Further, plaintiffs in the underlying suit alleged an "occurrence" – the insured's alleged negligence in adding excess water to the cotton during the ginning and packing process.  Nevertheless, there was no coverage because the policy excluded property damage to "personal property in the care, custody or control of the insured."

    On appeal, the insured argued the property damage occurred, not while the cotton was in the insured's care, custody and control, but in the warehouses when the rot, mildew and hardening were discovered.  The Eighth Circuit noted that the underlying suit alleged the insured's negligence at the cotton gin caused the excess moisture in the cotton.  If damaged at the gin, it did not matter if the cotton developed significant additional damage after it left the gin.  In cases of progressive damage, coverage issues were determined at the time the initial property damage occurred; progressive damage may affect the amount of the covered loss. 

    The policy expressly adopted this principle in its definition of property damage by providing that all loss "shall be deemed to occur at the time of the physical injury that caused it."  Thus, if the cotton suffered any physical injury when in the insured's care, custody, and control at the gin, the entire loss was excluded, even if it was aggravated when the bales sat in warehouses while mold and mildew developed.