Keeping the faith: as more mold complaints have surfaced, bad-faith claims have been increasing as well. (Property/Casualty: Claims Management).

Insurers and consumers took notice when a Texas jury awarded $32 million to homeowner Melinda Ballard in 2001 in her mold-related lawsuit against an affiliate of Farmers Insurance Group. That award, which included $12 million in punitive damages, was reduced to $4 million by the Texas Court of Appeals in December 2002, and the case is now pending before the Supreme Court of Texas.

Even in slashing the award, however, the appeals court agreed with jurors that the insurer, Fire Insurance Exchange, had breached its duty of good faith and fair dealing toward its policyholder. But the court found no evidence that the company did so "knowingly," prompting it to throw out the award for punitive damages and mental anguish damages.

In Texas alone, insurers have paid Out $4 billion in mold claims over the past three years, according to a recent study released by the Insurance Council of Texas. The frequency of mold claims in that state rose 1,286% in 2001, reported the Texas Department of Insurance and the Insurance Information Institute. And beyond the Lone Star State, homeowners insurers concerned about mold claims pushed po1icy rates higher by an average of 13% nationwide in 2002, according to the Consumer Federation of America.

Against this background, an increasing number of bad-faith claims also are showing up in the context of mold coverage, simply because more mold claims are surfacing, said Erwin E. Adler director of the insurance department at the law firm of Richards, Watson & Gershon, Los Angeles. The problem is compounded, he added, because of the indecision of a number of carriers that seem unclear on how best to handle these claims. "In part, it's because carriers are unsure of how their policy format, including exclusions, interrelates with these claims, and partly a matter of just plain confusion as to what the governing law is," Adler said.

Acting Reasonably

The covenant of good faith and fair dealing is implied by law in every insurance contract, said attorney Joann Selleck, a member of the Cozen O'Connor law firm. It means that neither party to the contract will do anything to mistreat or harm the other, she said. If an insured feels he or she has been mistreated or harmed by the carrier in connection with a claim, then a bad-faith claim can be initiated.

Bad-faith claims give rise to extra contractual damages above and beyond what the insured would be entitled to under an insurance contract, Selleck said.

"I look at the duty of good faith and fair dealing to be a duty of the insurance company to act reasonably toward its insured," she said. "Now, 'reasonably' can be defined by statute or by case law. It involves requirements such as a duty to investigate and investigate thoroughly, a duty to respond to the insured's communications and to act promptly, a duty to not interpret the insurance policy in an unreasonable fashion, and a duty to not unfairly withhold benefits that are due under an insurance policy."

Bolstering this is the Unfair Claims Settlement Practices Act, based on a model act prepared by the National Association of Insurance Commissioners and enacted in some form in all 50 states. In many instances, these laws outline claims-settlement practices that would be considered unfair methods of competition or unfair or deceptive acts by insurers.

Selleck said one problem with the mold issue stems from the many different types of homeowners insurance policies in use. "There may be substantial questions as to whether or not mold is even covered under a policy," Selleck said. "There may even be questions as to whether or not water intrusion is covered under a policy.

Additionally, the concept of 'causation' is frequently debated."

Some carriers have reacted by refusing to cover any type of fungus or mold claim regardless of its merit and have even declined to investigate such a claim, Adler said. But by doing nothing in these cases, carriers are actually triggering bad-faith claims, he noted, unless they have a viable mold/fungus exclusion.

"Most of the mold cases that are filed against insurance companies, because they involve a failure to pay a claim or a failure to act properly in a very generic sense, also have a bad-faith component when the litigation is filed," Selleck said.

Adler said the last thing he'd want to do as an attorney is to defend in court an insurance company that ignored a legitimate claim. He cited one recent case involving an aggessive fungus called meruliporia incrassata. "It grows arms called rhizomorphs, which can extend 25 feet to 40 feet away from the root ball and even penetrate non-cellulosic material, such as plaster, concrete and brick and, after having penetrated that barrier, eat the wood on the other side," he said. "In a relatively short period, this fungus can do a tremendous amount of damage to a home."

In this case, the carrier appeared eager to avoid paying the claim and, as a result, likened the fungus to dry rot. Further, it totally ignored the fact that it had provided collapse coverage in its policy for partial and total collapse, he said. "From the day that the claim was initially reported to the carrier, the carrier was aware that the living room floor had given way," Adler said. "At her deposition, the line adjuster admitted that 'giving way' was a form of partial collapse!'

Yet the carrier did nothing to cover the claim and even failed to answer letters from the policyholder's attorney who had raised the question of the collapse coverage, he said. "To me, that is a bad-faith claim that is difficult to deal with," said Adler, who is representing the plaintiff on appeal. "As far as I am concerned, the carrier has to react, and if it doesn't react, it can be in very dire circumstances. In this case, there was a total abdication of responsibility by the carrier. That is something that a carrier cannot do. It has to take ownership of the claim at least for the purposes of investigating."

If some insurers are digging in their heels on this issue, others are viewing it realistically and asking whether mold in general--or mold in a particular context--is covered. In doing so, they are following what Adler regards as the three primary steps a claims professional must adhere to: analyze the facts, determine whether the particular claim is covered by the policy, and then make efforts to ensure that the claim is handled properly.

Many highly publicized health concerns about mold contamination have yet to be resolved, and this, too, might be fueling some of the bad-faith litigation, Selleck said. The scientific and medical communities have yet to find any long-term, life-threatening results from mold exposure, which makes this issue different from asbestos and tobacco litigation, she noted. " For example, when the presence of mold is removed, unlike with asbestos and tobacco, symptoms due to the exposure to mold typically abate;' she said. "The concern on the part of the insureds and the general public is out there, and it makes it a more tense situation in dealing with some of the insurance issues that arise in connection with these claims!'

"If a claim is handled correctly, whether it's mold, fungus or any other type of claim, a carrier should not get a legitimate bad-faith complaint, period," Adler said. "In other words, those carriers that are handling the process correctly are not going to wind up seeing bad-faith claims that have any legitimacy."

The Right Way

He cited Safeco, among large insurers, and Insurance Company of the West Group, among smaller carriers, as two companies that seem to be handling these claims properly.

"It really doesn't sound very dramatic or exciting;' said Jim Arciere, vice president and director of claims for Safeco Personal Insurance. "It's just good claims handling and the training that goes along with it."

He said the seeds of the company's success in handling mold claims were sown more than a year ago in Safeco's structural reorganization of its claims department. The company realized there were some fundamental flaws in its model and it didn't have clear line of sight by specific products--for the personal-lines side, homeowners, auto liability and personal injury, Arciere said. "We really just said, 'Let's clean up our lines and our structure to support the specific lines of business."'

In doing so, the company tailored its training programs to be product-sensitive and product-driven, he said. "It really was just a fundamental retraining of our entire claims staff from the file handler all the way up, and then supporting the structure, which was line-of-business driven."

Over the past 18 months, Arciere also has made a conscious effort to inspect more claims by Safeco's adjusters. "When you train your people and you manage your people the same way, you get consistency across all lines," he said. "I think that's really starting to show the fruits of our labor. We are inspecting probably the highest percentage of property physical damage claims by our own staff than we have ever done."

With potential mold cases, Safeco's general guideline is to respond to the scene within 48 hours, "but we do everything in our power to get out there in advance of that." Arciere said. "As quickly as the loss is captured, that's where the clock starts running. And we make sure that our customers and our agents understand that the time limits--especially in handling property and water-intrusion claims--are where the opportunity is to strike fast."

Even in the troublesome Texas region, Safeco is seeing a lower frequency of mold claims these days, something that Arciere chalks up to the company's intensive education efforts directed at consumers and agents. For example, Safeco tells its policyholders that identifying water leaks or intrusions early on is extremely important. "The high for our number of mold claims was probably May 2002, and it has actually tailed off each month since then," he said. "I think the claims handling has lent itself to us getting out there faster and mitigating the losses. I know the numbers are dropping off."

The Quicker the Better

To avert mold claims, Insurance Company of the West Group has instituted a rapid-response strategy A policyholder can call an emergency number that will dispatch a commercial clean-up crew to the site. The company pledges action within 24 hours. "The key is to get them out right away and get the water mopped up--it's simple but pretty effective," said David Reilly, assistant vice president of property/casualty claims. "That prevents a lot of problems down the road. If mold doesn't start in the first place, you're better off."

ICW, a multiline property/casualty insurance group based in San Diego, has a large homeowners book of business. Like most other carriers in that line, it has implemented a mold-limitation endorsement that limits benefits to $5,000 per policy period. Since mold became a hot issue, the company has encountered few lawsuits, Reilly noted. "But we're very concerned about it, like everyone else," he said.

Before 2000 and the emergence of highly publicized water-damage cases, mold didn't even light up insurers' radar screens. "You didn't hear much about it in the news or even in the insurance industry," Selleck said. In recent years, however, the industry has realized that water losses that used to be perceived as not terribly severe can now have dramatic repercussions because of the threat of mold, she said. "So the concept of quick response to water and moisture claims, leaks and spills has certainly come to the forefront," Selleck said.

One way that policyholders are getting around the mold exclusion is to talk about "concurrent causation," Adler said. In other words, if a pipe bursts and causes water to pond in a particular location in a house and this, in turn, generates mold, policyholders' attorneys have argued that this is really concurrent causation, that is, two factors simultaneously causing the damage. "The first, they contend, is causation arising from the bursting pipe, and then there is the damage caused by a second cause, the mold," Adler said. "The attorneys are taking the position that there are two separate causes and it's for the jury to determine what the damage is that was covered, because most policies will cover the bursting pipe even if they exclude the mold."

But Adler argues that there really is a single chain of causation here. If a carrier excludes mold, he noted, "then the company is saying we don't cover mold regardless of what it was caused by," he said. "In short, a mold exclusion should be seen as excluding all mold, regardless of the cause which preceded the creation of the mold. At bottom, mold exclusion is causation neutral!"

In these cases, there's often a question of whether or not an individual has created the mold problem. Adler told of a case where condominium owners, who had an interior fountain spewing water vapor 24 hours a day, actually introduced a welcome environment for mold to thrive. "They attempted to pass this off as some kind of a construction defect," he said. That contention was unsuccessful, mainly because the carrier was aware of the facts and refused to accept the concurrent causation argument because it was incorrect, Adler said.

On the other hand, the concurrent causation argument was accepted in a case in Washington state, where a tenant was growing marijuana inside a house and using misters to spray the leaves. "The large quantity of water vapor that was kicked up created a giant problem inside that house in terms of mold," Adler said. The landlord filed a claim with the carrier, but the carrier refused coverage, saying mold was excluded. The appellate court, however, disagreed, holding that vandalism--that is, the growing of marijuana--was a concurrent cause of the damage. The court thus held that the claim was covered although the "vandalism" had led to the growth of mold.

In prior years, mold exclusions typically were found only in first-party policies, not in third-party policies, Adler said. "On a national basis, there are more and more claims with larger dollar values. Further, the claims arc coming from the commercial area-- homeowners associations, multi-unit developments and business structures, even involving courthouses," he said.

More Cases to Come

Adler thinks that the Ballard case could be a forerunner of cases to come. He sees it as more of a bad-faith claims-handling problem than a mold problem. "That's my concern," he said. "Unless carriers adopt a very good claims-handling philosophy, we will see more of these verdicts. Further, the carriers are going to have to educate their adjusters that the concurrent causation argument is a non sequitur. Overall, I think we're going to continue to see an increase in the number of bad-faith claims and, depending on how egregious the carrier's handling of the claim is, an increase in the number of bad-faith verdicts that are going to be of blockbuster numbers!'

But such large verdicts might not be representative of what's really happening in the courts, Selleck said. In fact, the court system is only beginning to handle these disputes; many cases are still somewhere in the legal pipeline and might take years to reach settlements or go to trial and then move through the appeals process.

"The whole body of law pertaining to mold claims and coverage for mold cases is still maturing, and we're only just starting to see appellate court decisions on some of these coverage and bad-faith cases involving issues specific to mold," Selleck said. "Not until you start to see cases coming out of the Court of Appeals do you have a developing body of case law that insurance companies can look to in assessing how they can handle issues that are very specific to mold cases."

With the passage of time, Selleck said, she expects mold claims will assume no more importance than any other type of loss. "It will be less of a hot issue--not an unimportant one--but people will become more accustomed to dealing with it, and it will be something that is a bit less newsworthy," she said.

RELATED ARTICLE: Mold News

* Texas insurers have paid out $4 billion in mold claims over the past three years, according to the Insurance Council of Texas.

* Georgia regulators are allowing property/casualty insurers to offer exclusions for mold remediation in commercial and home owners policies if minimum coverage is still provided.

* Mold drove homeowners insurance rates up an average of 13% in 2002, according to a survey of state insurance departments by the Consumer Federation of America.

* More than 200 insurance executives surveyed by the National Marketing Service Inc. ranked mold high on the list of potential problems for the industry.

Compiled from Best Wire

Measuring Moisture

Homeowners adjusters increasingly are using testing equipment to define and document the scope of repairs that might be necessary to resolve a water-damage claim.

For example, Tom Kirkpatrick, president of A.S.A.P. Adjustment Co., Westfield, Mass., equips his 10-member adjusting team with moisture meters to detect hidden moisture in wall cavities.

"By using test equipment, we aren't needlessly tearing out areas of the room that are not affected, thus minimizing the indemnity payment," Kirkpatrick said. "At the same time, our mapping of moisture readings through Out the room, and the inclusion for tear-out of areas that appear fine to the eye, protect our client company from allegations that proper levels of tear-out and remediation were not undertaken by the carrier at the onset of the claim."

Kirkpatrick said this is the best way to arrive at a satisfactory indemnity payment. "In this manner," he said, "we are providing the utmost in service to our client companies by compensating the insured fairly and eliminating any possible bad-faith situations."