MOLD: A Growing Problem.
The real and perceived threats of toxic mold are creating havoc in the homeowners insurance market. Mold claims have skyrocketed nationwide, and in Texas, where mold claims are especially prevalent, the top three homeowners insurers, State Farm, Allstate and Farmers, have stopped writing new business covering water-related damage.
Toxic mold spawns from water damage caused by everything from burst pipes to roof leaks. While some strains can cause severe damage to a home, the effect on health is still unproven. But claims of allergic reactions, asthma and memory loss from exposure to the toxic forms called stachybotrys have propelled mold into the national spotlight. "Because of the perceived personal danger, people are more upset now when mold appears in their home. They want to be assured by making property claims with the hope of stripping their homes to make sure there is no mold exposure," said Bob Riede, an attorney with Bullivant Houser Bailey PC.
Toxic mold has been found everywhere in the United States from mansions to schools. It also is becoming the focus for aggressive marketing by plaintiffs attorneys. Law firms are advertising on television and in newspapers and creating Web sites to attract clients.
"The drums are beating. Mold claims are the focus of the American Trial Lawyers Association. There are an estimated 2,000 plaintiffs in mold cases in California alone," said L.D. Simmons, head of the Insurance Practice Group at law firm Smith Helms Mulliss & Moore LLP. The saying "mold is gold" is circulating around trial lawyers' gatherings with good reason, according to the Alliance of American Insurers. Two homeowners claims related to mold were the subject of lawsuits that cost insurers $50 million.
One of those cases has reached legendary proportions. Attorneys and those in the insurance industry refer to it simply as the "Ballard case." In May, a Texas jury awarded Melinda Ballard and her family $32 million in their case against Farmers Insurance Group. A Texas jury found that Farmers improperly handled Ballard's water claim, which allegedly allowed toxic mold to form and eventually take over the family's $3 million home.
Claims handling of toxic mold requires special expertise and can be time consuming. At a GAB Robins' subsidiary Engineering & Fire Investigations Inc., the mold-claim workload grew from nothing in 2000 to more than 200 claims a month in 2001. Because there are so many types of mold--good and bad--when mold is detected from a water claim, it must be cultured and processed by a microbiologist, and that can take weeks to complete. Upon completion of the culture, a structural engineer tests the soundness of the building and a remediation design is created. The entire process can take up to seven weeks from the point of initial investigation to remediation design.
The rise of toxic mold reports can be traced to the trend toward air-tight construction, which exacerbates its growth. During recent public hearings in Texas, residents claimed shoddy construction practices, such as no flashing around windows, allow rain to seep in and provide an ideal environment for mold growth. The application of synthetic stucco exteriors also is tied to the problem. In addition, some Texas residents have complained about the lack of building inspection standards. Building inspection is done on the state and local level and is not required everywhere, according to the National Association of Home Builders.
Construction defects, intense media coverage, suspected health effects and a dash of celebrity have combined to make mold a national hot topic. Publicity surrounding the Ballard case was especially intense. Ballard, using her background in public relations, admittedly made sure the words "toxic mold" would send shivers down the spines of both homeowners and their insurers. During a particularly critical time in her claim with Farmers, when her 22-room mansion allegedly could still be salvaged, Ballard sent a letter to Farmers President and Chief Executive Officer Martin Feinstein explaining her case. "I told him if we go to court, I have the skill sets from years of running my own PR firm to make stachybotrys a household name throughout America. Damn if I didn't live up to it," Ballard said.
Industry observers say the $32 million verdict issued on the Ballard case--which is now under court mediation--propelled it to the national media spotlight. It was featured on CBS' television show "48 Hours" and was profiled in The New York Times Magazine. And a celebrity with mold problems added her experience to the mix. Erin Brockovich, whose anti-pollution crusade led to a movie bearing her name, bought a California dream home with her settlement money from Pacific Gas & Electric, only to have it become infested with toxic mold. And when a real-life Hollywood heroine tells her story about becoming ill from exposure to toxic mold, American homeowners listen.
Claims Exceed Premiums
The additional costs of mold claims come at a particularly bad time for the industry. Homeowners insurance, a loss leader for property/casualty personal lines insurers, showed universally poor results over the past decade, according to A.M. Best Co.'s Review/Preview 2001. The 1990s saw combined ratios of 116.3, with 2000, a quiet catastrophe year, showing a 109.5.The continued high combined ratios are due to a widening gap between homeowners insurance premiums and the cost of repairing a home, insurers report.
Texas Insurance Commissioner Jose Montemayor reports the state's average 1995 water-leak claim was about $4,000; now it's in the $30,000 to $40,000 range, sometimes spiking to $90,000 or $100,000. Homeowners insurers take into account catastrophe-prone areas when underwriting a policy, but mold claims were never factored into most insurers' rating structures.
"We base our rates on what our anticipated losses are going to be, and suddenly when something new is interjected and you don't have a rate base for it, the only way to handle it is through substantial rate increases," said Steve Williams, a State Farm spokesman.
State Farm, the largest homeowners writer in Texas with a 30% market share, recently raised its rates 14.5%, but that increase doesn't include the cost of mold claims. "We've seen mold claims almost everywhere in the United States but nothing on the scale of Texas," Williams said. More increases to cover the mold claims haven't been ruled out. "We're waiting to see the impact of legislation and from a regulatory standpoint where we're going to be. But now we're spending $1.77 in claims and expenses for every dollar of premium collected. We can't continue that; it's depleting our policyholder protection fund and depleting it at a pretty remarkable rate," Williams said.
Allstate raised its homeowners rates in Texas 25% so far this year, and mold claims aren't reflected in that increase, either. Allstate said mold claims weren't the only consideration in bowing out of Texas temporarily. "The general cost of construction and property repair has risen substantially in Texas. And the potential for property damage due to weather-related catastrophes--such as hailstorms, wind and hurricanes--is greater in Texas than any other state. Loss and expenses continue to surpass the amount of homeowners premium we collect in Texas," said Justin Schmitt, an Allstate spokesman.
Although Farmers has not written new business in Texas for the longest duration among insurers, Feinstein remains committed to writing business in the state. "We have more than 2,000 agents and more than 4,000 employees in Texas. Simply creating a disruption by not writing any more business was not fair," Feinstein said. Farmers' expected exposure to mold claims in 2001 is estimated at more than $85 million-a fivefold increase over 2000.
Farmers, Allstate and State Farm account for 67% of the homeowners market in Texas. Smaller players like Progressive and Safeco also have committed to a moratorium until regulations regarding mold claims are clarified to their satisfaction.
Texas isn't the only state experiencing a rise in water and mold claims. Insurers report heavy activity in California, Florida, Illinois and the Pacific Northwest. But toxic mold exacerbates an already hostile environment in Texas for insurers. The threat of hurricanes, tornadoes and hail have led to the highest homeowners insurance premiums in the country. Texans pay an average of $855, compared with the national average of $455, according to 1998 National Association of Insurance Commissioners data.
"Texas has had water problems for years. The percentage of water losses in Texas is greater than any other state," Feinstein said.
It also is ground zero for mold claims, because the Ballard home is in Dripping Springs, Texas. Besides having a humid climate that can foster mold growth and soil chemicals that deteriorate foundation slabs, Texas also offers a much broader coverage in its homeowners insurance policies, said Montemayor. The state's homeowners insurance policies cover accidental water discharges, while most other states' forms cover only sudden and accidental discharges, like a burst pipe or leaks caused by a damaged roof. "This allows coverage to slower leaks that are under the slab and up in the attic and behind walls that go undiscovered for a long time," Montemayor said. Although mold is excluded from all homeowners forms, it is covered in connection with another covered loss as part of the cleanup, and that has led to an unprecedented number of claims in terms of frequency and severity. "By the end of the year, we'll have 50,000 to 60,000 active mold claims across the state. It's unprecedented, and I don't think anyone w as prepared for it," Montemayor said.
A recent study commissioned by the Southwestern Insurance Information Service shows that Texas is likely to see homeowners rate increases of 25% to 40%. The study, by consultant Miller, Herbers, Lehmann & Associates, examined loss ratios for homeowners insurers in Texas over the past three years, as well as average claims payouts.
The study found that the loss ratio for the market rose from 45.4 in 1998 to 82.6 in 2000. The study attributed 3.6 points of the 2000 loss ratio to mold-related claims.
Water losses for all homeowners averaged $122 a year in the five-year period beginning in 1995, shooting up to $156 in 2000. For the first quarter of 2001, the average water-related loss was $249--59.6% higher than the average for the previous five years. The study looked at water-related losses, because losses related to mold typically are coded under the water peril, the Miller, Herbers study noted.
The study concluded that in 2000, homeowners premium rates were about 25% too low. Miller, Herbers estimated that, in addition to making up that 25% shortfall, insurers would have to add another 20% to premium rates to keep up with the skyrocketing claims related to water damage.
The combination of the harsh environment that brings lots of homeowners claims and the rising mold claims led to a crisis in the homeowners insurance market this year. The furor from the public and insurance community led the Texas Department of Insurance to call for a series of meetings about mold, culminating in a decision to be issued by the insurance commissioner on how mold would be covered. But as the hearings were held, three of the largest homeowners insurance writers announced that they wouldn't write any new standard Form HO-B homeowners insurance policies that cover water-related damages.
Following the public hearings, the state insurance department is calling for endorsements and rule changes that would cap basic coverage for mold at $5,000. Policyholders could buy additional coverage in amounts equal to 25%, 50% and 100% of policy limits. The insurance department's proposal on mold coverage was based on data reported from the state's top three homeowners insurers and gathered between the first quarter of 2000 and the second quarter of 2001. The data showed that slightly more than half of mold-related claims were for less than $5,000. In total, the top three companies tallied 15,612 mold claims in the time period, growing from 883 in the first quarter of 2000 to 5,722 in the second quarter of 2001.
But insurers and their critics alike are picking apart the proposal. Ballard says the $5,000 cap is not enough money to help anyone. "It's absurd; $5,000 is not getting anyone anywhere. Testing can't be done for less than $3,000, and then there are additional living and remediation expenses," Ballard said.
State Farm's Williams points out that the $5,000 cap will have to come from rate increases, which force policyholders who don't want the coverage to pay for it. "It creates a $5,000 threshold. Where that may not be enough for some policyholders, it may create some legal issues," Williams said.
Law firms nationwide--both defendants and plaintiffs bar--are busy forming practices specifically trained to deal with the toxic mold issue. For example, the firm Smith Helms Mulliss & Moore LLP brought in experts and attended seminars to learn about the science of mold, the epidemiology and medical causation issues to help its insurance industry clients develop a plan to handle the problem, said Simmons, a member of the firm's insurance practice.
In first-party property litigation, legal experts are urging homeowners insurance clients to address a water claim immediately. When insurers or contractors don't deal quickly or correctly with a water claim that could lead to mold growth, there is the potential for large jury awards. One attorney suggests that insurers brace for the added costs of duty to investigate during the early stages of a mold lawsuit. "Those costs don't go against the indemnity cost of the policy," Bullivant Houser's Riede said. "Insurers must invest in programs to respond quickly to determine coverage."
Water claims that turn into lawsuits over mold growth may originate in two key areas, according to attorneys. Suits can center on bad faith and failure to respond quickly to a claim or a personal-injury suit tied to health effects of exposure to toxic mold. Insurers are at risk for personal-injury claims not only because of how ubiquitous mold spores are in the environment, but also due to disagreements in the medical community about the toxicity of mold and the lack of standards concerning how much exposure is toxic to humans.
"Mold spores are everywhere, and there is no way to get rid of them in the environment, like you could with the problem of asbestos," said Penn Gheen, an attorney with Bullivant Houser Bailey PC.
Another major battleground in these cases is the qualifications of medical experts and the admission of their testimony concerning the relationship between mold and physical injury, Simmons said. So far, courts have both admitted and excluded such evidence. Attorneys are keeping a watchful eye on this area.
Insurers also face lawsuits stemming from the actions of the contractors who complete mold remediation services at the insurer's request, said Simmons of law firm Smith Helms Mulliss & Moore. If an insurer's contractor didn't deal with a water claim quickly or correctly, or both, and mold growth occurs, there is potential exposure for insurers. One key legal issue here is whether the contractor is deemed to be an agent of the insurer," Simmons said.
To separate the truth from the fiction in mold claims, insurers must educate themselves about the toxicology and medical aspects of the issue. "The risks if not educated are going to be huge," said Gheen.
State Farm already is trying to educate its policyholders by including information on how to avoid mold growth and the facts on health risks in its monthly bills and by providing information on its Web site. "A lot of education has to be done so that policyholders have the facts and not hysterical-type information. Prevention and education are the best way to attack the problem," Williams said.
Homeowners Multiperil, Top Writers in Texas--2000 The Top three homeowners writers in Texas have stopped writing new business covering water-related damage. ($ Thousands) Direct Premiums Market Company Written Share (%) State Farm Group $939,322 30.63 Zurich/Farmers Group 624,806 20.37 Allstate Insurance Group 474,796 15.48 USAA Group 207,479 6.77 Travelers/Citigroup Cos. 133,602 4.36 Nationwide Group 88,089 2.87 Safeco Insurance Cos. 61,103 1.99 Chubb Group of Insurance Cos. 57,078 1.86 Southern Farm Bureau Group 46,101 1.50 Liberty Mutual Insurance Group 35,167 1.15 Source: A.M. Best Statement and Competitive Analysis Report Products
Texas: In the Eye of the Storm
Texas Insurance Commissioner Jose Montemayor faced King Solomon-like decision about homeowners insurance coverage of toxic-mold claims in his state. Montemayor had to weigh the needs of homeowners insurers, who want higher premiums and tighter wording on mold-claim coverage, against the plight of the state's residents, who already pay the highest homeowners insurance premiums in the nation. Environmental factors and contract wording combine to make Texas a hotbed for toxic-mold claims, with 50,000 to 60,000 open mold claims expected by the end of the year Faced with skyrocketing combined ratios and increases in water-related losses, the top three homeowners insurance writers in the state--State Farm, Farmers and Allstate--placed a moratorium on writing policies that cover water-related claims.
Jose Montemayor was appointed Texas Commissioner of Insurance by then-Gov. George W Bush in 1999. He was reappointed to another two-year term by Gov. Rick Perry in February.
Montemayor came to the department after retiring from the U.S. Air Force in 1993 with the rank of major. He served two years as director of insurer services and then as associate commissioner for the financial program, overseeing the licensing, solvency and market conduct of more than 2,000 insurers and health maintenance organizations in Texas.
In this interview, held prior to the commissioner's mid-October decision on mold claims, Montemayor reflected on the complexity and human element of the issue.
Q: You were present at the mold hearings in Austin, Corpus Christi and Houston. What were your impressions of the testimony you heard from your fellow Texans?
It painted a pretty complex picture. Not only did I hear from people who said certain ailments have befallen them as a result of exposure to mold, but also from homeowners who are scientists who know about mold and who say, "Make sure I can opt out, because I don't want to pay higher rates on something that I can easily control in my home." I also heard from builders, trades and the industry, and I also invited testimony from federal and state environmental authorities, the Centers for Disease Control and state health authorities to try to get a picture of what we're dealing with. I have learned there are thousands of mold varieties; all but a handful are nontoxic. That handful of potentially toxic molds aren't toxic to everybody, because some people don't react to them at all. It's an enormously complex issue, and my focus is to keep affordability and availability in mind as I deliberate and come up with a fair, balanced solution.
Q: At one point, you specifically asked homeowners insurers to lift the freeze on the sale of new homeowners policies, saying you would expeditiously address the matter. What do you think of their actions?
I was quite concerned that I would end up with a destabilized market and we would end up getting each other's' rejections. If one does it as a protective action, it's OK. But when they do it uniformly I have a disaster of a 'market. A lot of people thought the insurers did this to pressure me. I think they did it out of self-defense. In the absence of my doing anything, they would be genuinely vulnerable. You see those kinds of harsh measures only when they feel overly exposed and feel the need to get a grip on themselves and take stock of what they've got. It's almost a circle-the-wagon mentality that developed. I didn't feel by them but by the impact on the economy and by the heaviness of the situation.
It's putting a heavy, heavy demand on the industry. I don't think it's anywhere near prepared to respond to that level of demand in terms of adjusting, adjudication of the policies, much less on the rate side. I know they weren't ready for that.
Q: What's the biggest challenge dealing with the mold-claims issue?
The lack of science on it and the level of emotions that run very deep. If I'm having someone stand there and relate a hardship or potential fatality that they are convinced is linked to mold, who am I to tell them it isn't? Those are the gut wrenching stories you're confronted with. The sheer size of it and the number of variables are a challenge.
Q: Are mold claims showing up in commercial property/casualty coverage?
I think we're already there. I've seen signs that this market is already impacted. I think we need to get serious about it. In reality, we're treating it like the new nuclear waste or the new asbestos of the decade. There is a lot of misinformation and a lot of knee-jerk reactions all over the place--not the least of which is coming from the insurers themselves. I need them to be sensible and go back to basics.
Q: What advice do you have for your fellow commissioners about this issue?
When I first briefed them on this six months ago, they thought I was insane. They told me that mold was not an issue. They didn't see it coming up. My advice is to come to grips with it squarely and address it, and we should give you a path to follow.
Dissecting Toxic Mold
Mold spores continually circulate through the air. They reproduce in damp areas and begin to eat and digest the material on which they are growing. Molds especially like wood, paper, carpeting and foods.
Most molds are innocuous, but stachy-botrys may cause health problems because it produces toxigenic spores that are potentially hazardous. The living stachybotrys mold is a wet, greenish-black, sticky fungus. When it dies, it becomes brittle and pieces of the dried spores can be inhaled, which may cause health problems.
The Centers for Disease Control report that certain people with chronic respiratory diseases may experience difficulty breathing after being exposed to molds. People with suppressed immune systems also could face increased risk for infection after exposure. And the CDC says there have been a few reported cases of toxic molds inside homes causing rare conditions such as pulmonary hemorrhage or memory loss. The government agency says "a causal link between the presence of toxic mold and these conditions has not been proven." The U.S. Environmental Protection Agency reports there are no regulations or guidelines for evaluating potential health risks of stachybotrys contamination and remediation.
To avoid mold growth, both government agencies advise the public to keep indoor humidity levels below 50%, to repair all leaks immediately, to make sure there is ventilation in bathrooms and kitchens, to clean bathrooms with mold-killing products and to remove and replace flooded carpeting.
Court Case Puts Mold on the Map
She calls herself "Moldy No. 1" and is proud that she is responsible for bringing toxic mold to the attention of millions of Americans. Melinda Ballard also won a landmark $32 million mold case against the third-largest property/casualty insurer in the United States--Farmers Insurance Group. In June, a Texas jury awarded Ballard and her husband $6 million for the house and its contents, $5 million for emotional distress, nearly $9 million in attorneys' fees and $12 million in punitive damages. The jury heard arguments concerning only the property claim; the judge didn't allow medical evidence to be heard. "Farmers...fumbled in handling the claim, to put it mildly," Ballard said.
Farmers believes it not only responded to the claim quickly, fairly and properly, but the company said it would handle it again the same way, spokeswoman Mary Flynn said, noting that Farmers responded to the initial claim to repair damaged hardwood floors and issued a check for $108,000 within six to eight weeks after receiving the claim. Although the check was cashed several clays later, it was used to upgrade the flooring to marble, Flynn said. The case has had a huge impact on the property/casualty insurance industry. "It single-handedly created anxiety and heightened interest in mold," she said. The case is in mediation with a decision due in October.
Ballard's story began in January 1999, when she had a small water leak repaired. After floors began to buckle and warp, she called her homeowners insurer, Farmers, and Ballard was paid to repair damage caused by the leak. But after receiving numerous additional claims from Ballard about the damage, Farmers requested that an appraiser make a final decision on the amount for remediation, said Flynn. Farmers issued a check for $1.2 million on Nov.21. "We asked them to tear up the floor, and they told us if we did we would lose coverage. I know how to read balance sheets--I know nothing about mold and listened stupidly to their advice. They kept postponing payment and using delaying tactics," Ballard said. The interior of Ballard's home eventually was destroyed by the toxic stachybotrys mold, and she sued Farmers, alleging that the insurer allowed the home to be destroyed by not reacting quickly enough to the claim.
Ballard no longer lives in her once-palatial home. She said 10,000 square feet of stachybotrys mold is growing in the 12,000-square-foot house, which is currently being used to test mold-inhibiting technology and to advance the science of the health effects of mold. She now rents a home in Austin, Texas, awaiting the outcome of another lawsuit she is involved in with her neighbor, before she can decide where to rebuild.
Ballard, who owns a bank in Little Rock, Ark., is planning to run on the Republican ticket for a state representative seat in the Texas Legislature.
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