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Congress Charges Into The Mold Wars - How Could They Resist?

Mold claims, which first made headlines in Texas are now beginning to escalate dramatically in other states. Insurers are taking defensive action and the reinsurance industry generally is excluding mold until there's more evidence to come up with Probable Maximum Loss estimates.

Gordon Stewart, President of the Insurance Information Institute, spelled out the issues in recent testimony before Congress. He reported that mold claims in Texas rose 1,306 percent between the first quarter of 2000 and the fourth quarter of 2001 with no change in the environment to pro-mote mold growth. This added about $850 million to insurance costs in Texas.

"The surge and frequency and costs of these mold claims in Texas cannot be explained by changes in the weather. They can't be explained by population growth. There has not been, as far as anybody knows, a new strain of mold, wildly toxic," Stewart said. The only apparent change is the flood of claims and lawsuits sparked by the trial bar.

"Mold damage has long been specifically excluded in most states, unless it is a result of a covered peril such as a burst pipe. The simple presence of mold, like termites or damage from vermin, is considered a home maintenance issue, not an insurance-covered issue. Now, however, the fear of litigation has led to great uncertainty about this long-standing coverage exclusion, and insurers are doing many things to strengthen it," Stewart testified.

Florida -where homeowners premiums already are the third highest in the nation even without the growing impact of mold - is the most vulnerable to a major new initiative by the trial bar. According to a study by Robert Hartwig, I.I.I. Senior Vice President and Chief Economist, the state is being targeted because of its "unique litigation environment and the location of the peninsula in the middle of hurricane alley." Hartwig pointed out that Florida law encourages litigation with its "one-way attorney fee statute in which there is no need to prove bad faith." Water damage following a hurricane and resulting mold from inadequate clean-up will drive up insurance costs if action is not taken now.

Unlike Texas, where the homeowners policy covers "seepage-type water losses," mold coverage under the Florida policy is limited to "sudden and accidental losses" such as burst pipes. However, in Florida's litigious environment, this may not be enough to prevent costly lawsuits and potentially ruinous judgments. "Unless solutions are put in place, Florida property insurance rates will skyrocket, property insurance will be far less available, and liability insurance also will be less available and affordable, according to the I.I.I. economist.

"Options are limited. Time is running out," Hartwig warned. Companies can, "include coverage and price it into policies; add sub-limits; exclude all coverage in the standard policy and offer it only as an endorsement; tighten contracts/underwriting by making 'sudden and accidental' more explicit; or exclude mold absolutely. Florida homeowners current rates do not reflect mold costs because real mold claims were small and infrequent before Texas mold judgments caught the attention of the Florida trial bar.

The insurance industry is reacting in Florida and other states. Candysse Miller, speaking for the Insurance Information Network of California, reported that mold and water damage claims have risen to new heights over the past five years, reaching $2 billion in California alone last year - higher than the cost of most natural disasters. According to press reports, the nation's largest homeowners insurer, State Farm, has excluded mold damage from coverage in 33 states. Other companies also are moving to deal with the mold crisis.