Mold fears put landlords in bind

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Mold fears put landlords in bind

As insurers cut coverage, owners face soaring costs.

By LePage -- Bee Staff Writer

Published 7:24 a.m. PST Monday, Jan. 14, 2002

Fearful that growing mold litigation could spiral out of control, insurers

are beginning to exclude mold-related claims from general liability

policies.

Already hit by rising insurance costs, many rental-housing owners facing

these exclusions are afraid that they could get wiped out by a mold claim,

so they're scrambling to find coverage that could provide protection against

a tenant's mold litigation.

The problem, insurance brokers say, is that landlords' options are few and

often expensive. Some pollution or environmental policies can cost at least

double or triple the price of general liability insurance. Deductibles also

tend to be relatively high.

" I've been in this business for 30 years, and I can tell you, this is a

monster, " says Terry , vice president of risk management at ABD

Insurance and Financial Services in Sacramento, referring to mold's impact

on the cost and availability of insurance.

The trend of mold-related exclusions is " really exploding with the liability

coverage " that landlords rely on, said Maureen Mason, the state Department

of Insurance's deputy commissioner for rate regulation. " With the jury

awards, insurers are nervous about what they might have to pay out, given

they've never built anything into their rate base to compensate for it. "

Mason said her department can review such mold exclusion requests only to

determine whether they should affect the rates insurers charge, but not to

decide whether or not to approve the exclusion.

" There's no authority for us to say to insurers that you have to cover

mold, " Mason explained.

Local landlord Bill Bernhard, who owns about 50 apartment units in the

Sacramento area, recently received a letter from his property-liability

insurer stating that mold claims would be excluded from his renewed policy.

Bernhard said the cheapest pollution policy his broker could find costs

about $23,000 a year, which is about four times as much as his general

liability coverage. He hates the idea of spending that much, he said,

especially because he stays on top of his maintenance and responds quickly

to any water-intrusion problems that could spur mold in one of his units.

But at age 61, after more than 30 years as a rental property owner, Bernhard

is reluctant to take chances.

" I'm a small operator, and you hit me with something where I have to pay out

a couple of million dollars because I lose in a courtroom, and that's going

to pretty much (wipe out) my retirement, " Bernhard explained. " I'm just not

willing to take that risk. "

He said the cost of the special pollution coverage would boost his monthly

operating expenses by roughly $35 a unit -- an increase he would ultimately

attempt to pass on to tenants. If he can't, he said, he'd have to absorb the

additional expense.

This year landlords face not only a new expense in the way of special

coverage for mold, but double-digit increases in the rates on their standard

property and liability coverage. The price of the latter is rising as

insurers attempt to compensate for heavy losses caused by the Sept. 11

terrorist attacks and poor investment returns over the past two years.

Many in the rental property and even the insurance industry acknowledge some

mold-related claims are legitimate and that mold probably does cause

significant health problems for at least some people.

But industry leaders insist the potential for exaggerated claims or outright

fraud is enormous at a time when there are no government standards for

acceptable mold exposure limits.

There's also no licensing or regulation of so-called mold remediation firms,

which are sprouting statewide, and little if any scientific proof to justify

many of the health claims that tenants and homeowners have alleged in

mold-related lawsuits against property managers, landlords and insurance

companies.

Property managers and insurers say it often costs $5,000 to $10,000 to

investigate and remedy mold-related problems reported by tenants who've

insisted they've suffered mold-related health problems. Many landlords,

insurers and property managers have also set up policies where mold-related

complaints are instantly red-flagged and handled far more carefully than in

the past.

In the end, " it's not the $30 million jury verdicts they (insurers) are

worried about -- it's death by a 1,000 cuts, " said P. Sullivan, an

independent insurance industry analyst who edits the Property Insurance

Report, an industry newsletter.

Most of the major jury awards and settlements in mold-related lawsuits

brought by tenants or homeowners against landlords and insurance companies

have been in Texas or California, industry analysts point out.

One of the most significant cases is being litigated right here in

Sacramento. In November, a jury awarded a family living in a local apartment

complex $2.7 million after finding their former landlord guilty of

negligence stemming from mold in their apartment.

The defendants -- two local individual investors and the company that

managed the property -- plan to appeal the verdict, according to their

attorney, Rick Rodgers.

The plaintiffs, a couple in their early 30s and their 8-year-old son,

testified that they suffered from a host of serious health problems over

nearly three years because of mold in their rental unit in an apartment

complex on Watt Avenue.

At the same time, attorney Rodgers said, the landlord's insurance company is

suing the complex's owners, contending that the " pollution " exclusion in

their liability policy applies to mold, and therefore the insurer is off the

hook.

The latter case helps explain why the Monterey-based California Insurance

Group recently became one of the latest insurers to notify its policyholders

that, upon renewal, its liability coverage will not apply to any

mold-related claims.

" We have to make it clear that it was not our intent in the pricing of

policies ... to cover for third-party bodily injury due to mold, " said

Cazzolla, the insurer's chief executive. He said his company had already

experienced several third-party liability claims -- where a tenant sues the

landlord for mold-related injuries -- and decided such claims were likely to

get out of hand in the future.

Jim Lofgren, executive director of the Rental Housing Association of

Sacramento Valley, said such mold exclusions underscore just how serious a

threat mold has become for rental property owners, and why some people are

beginning to question whether rental property is too risky an investment.

" Many of these rental owners are not corporations but people who've invested

in real estate, and now they have no choice but to get (expensive) insurance

to protect their life savings or put everything at risk, " Lofgren said. " It

would just take one lawsuit to wipe them out financially. "

Attorneys specializing in mold-related cases and other sources that track

such litigation nationally said the recent $2.7 million jury verdict against

the Sacramento landlord was the largest in a mold case based on personal

injury. They cited a $32 million jury award last year in Texas, but in that

case health claims were not directly at issue; rather, it was a case

alleging property damage in a large house and bad-faith handling of the

claim by the insurer.

Rob Schneider, an attorney with Consumers Union in Texas, argues that it's

bad-faith handling of claims, not mold per se, that's causing most of the

problems in the insurance market.

" It's a bit disingenuous of the insurance companies to be hanging all of

their arguments on these multimillion-dollar jury awards when in many cases

it was their own fault, " Schneider contends. " Mold was involved, but the

cost really was the company dragging its feet and not fairly settling a

claim. "

Schneider said he expects mold-related insurance claims and insurers' fears

of big jury awards to taper off over the next year or two. He said most

insurers have gotten the critical message: Mold-related claims must be

handled immediately.

" The dragging the feet thing -- by landlords or insurers -- is over, and

that's the beneficial part of all of this, " says Sullivan, the insurance

industry analyst.

About the Writer

The Bee's LePage can be reached at (916) 321-1065 or

alepage@...