Is lignicolous a word used in a specific context, or is it common to say "that is a lignicolous bug"?
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The Corpus of Contemporary American English doesn't have any match for it, nor does the New Oxford American Dictionary, so it's not that common.
It means “that lives in or on wood or wood debris”. It is mostly used in academic or scientific writing, so you mean learn more about its usage from the Google Scholar search. Apparently, it is mainly applied to fungi, as in “lignicolous fungi of the forests of New Hampshire”.
As an adjective, lignicolous is appropriate to describe anything growing or living on or in wood. However, I would suggest considering whether your audience has experience with that word, or handy access to a dictionary.
You could just as easily say "That bug lives in wood."