Indiana CPCUs look at mold exposure

[Guest guest]

http://www.roughnotes.com/rnmagazine/2002/april02/04p92.htm

THE FUNGUS AMONG US

Indiana CPCUs look at mold exposure

By Bruce Hicks, CLU, CPCU

At the Central Indiana Chapter of CPCU/Rough Notes seminar, these experts

address mold-related topics (from left): Dr. Berry, research

professor, University of North Carolina at Chapel Hill; ph Harrington,

communications manager, American Association of Insurance Services (AAIS),

Bensenville, Illinois; Kurt Bolden, president, Bolden's Cleaning and

Restoration, Noblesville, Indiana; Reider, assistant vice president

with Allstate, Northbrook, Illinois; and Hinton, loss claim

specialist, Indiana Insurance, Indianapolis.

In days of old, royal hunters would lead a herd of pigs into the forests

hunting for dark, moist areas that held truffles, an edible treasure that

thrived in that atmosphere. Race ahead into current times and the scene

changes. Lawyers are leading homeowners into the courtroom seeking coverage

for damage caused to their homes because of dark, moist areas of toxic

mold--a litigious treasure trove.

If you're not familiar with the term " toxic mold, " you're part of a

dwindling group. The subject reared its head in Texas and is now the source

of market restrictions and new exclusionary language and class action

lawsuits. Certain types of mold have been found to cause damage beyond wet

or dry rot. Some types create air and waterborne spores that cause allergic

reactions and serious illness in some people.

On February 27, the Central Indiana Chapter of CPCU and The Rough Notes Co.

sponsored a seminar titled " The Fungus Among Us, " at the chapter's annual

All-Industry Day. The seminar featured a panel of experts on mold-related

issues, including Dr. Berry, research professor, University of North

Carolina, Chapel Hill; ph Harrington, communications manager, American

Association of Insurance Services (AAIS), Bensenville, Illinois; Kurt

Bolden, president, Bolden's Cleaning and Restoration, Noblesville, Indiana;

Reider, assistant vice president with Allstate, Northbrook, Illinois;

and Hinton, loss claim specialist, Indiana Insurance, Indianapolis.

Cunningham, technical training consultant, Indiana Insurance, served as

moderator. He opened the seminar with examples of how the mold problem has

already triggered a number of significant claims in Indiana and pointed out

that understanding the exposure has to begin with an understanding of mold.

What is mold/fungus?

Dr. Berry noted that mold has existed for more than 4 billion years and is

part of more than 1.5 million species of fungi. He added that, in his

opinion, the American public is overly anxious about mold and fungi. Rather

than being feared, mold should be understood and managed, he suggested. Dr.

Berry pointed out that fungi play an important part in the ecological cycle,

working to decompose organic matter; however, certain species of fungi are

potentially harmful to humans, creating spores that can be toxic. Such toxic

molds are biopollutants--living organisms that can cause an adverse effect

in human beings.

According to Dr. Berry, molds need three things to survive and multiply--a

food source, water at an acceptable temperature and time. Sanitary water

plus unsanitary surface plus time produces unsanitary conditions, which can

create mold. However, he pointed out that the indoor environment is filled

with elements other than mold that can create allergic reactions. Dust

mites, cats and bacteria are far greater dangers to human beings than is

mold. He noted that washing your hands is probably the single most effective

way to reduce illness and death caused by bacteria.

The human immune system is highly efficient, and adverse reactions to mold

are rare. Even rarer still is a fatal reaction, Dr. Berry continued. He

added that the sense of smell was very important in detecting problems.

Molds excrete organic compounds, which we can smell. He said it was most

important to use your sense of smell to detect and handle problems instead

of masking odors.

Getting rid of moisture is the best way to get rid of mold and bacteria

problems. Older buildings were built in a manner that permitted a lot of

airflow to remove moisture. Newer buildings and homes are sealed, so there's

a much higher likelihood that moisture is trapped, creating bacteria and

mold and resulting in what is termed " sick building syndrome " . Symptoms

include:

* Sensory irritation in the eyes, nose and throat

* Skin irritation

* Neurotoxic symptoms

* Hypersensitivity reactions

* Odor and taste symptoms

The easiest way to detect possible mold problems is to look for signs of

water damage on the ceiling and for sources of standing or leaking water.

Flat-roofed buildings and failed ventilation systems are the greatest

sources of moisture. Mold identification can be done simply by following

olfactory cues. Dr. Berry encouraged the audience to visit the Minnesota

Department of Health and the Environmental Protection Agency Web sites for

information on mold.

What is covered?

Joe Harrington from AAIS discussed how AAIS's insurance products respond to

mold. The information, though specific to AAIS products, is generally

applicable to ISO and independent company forms. He said that personal lines

property provisions typically include several areas that may trigger either

coverage or exclusions. In general, coverage exists if the mold arose from a

covered cause of loss or from accidental discharge of overflow from a

plumbing, heating, air conditioning, or sprinkler system. Coverage would be

excluded if mold arose from " errors, omissions, or defects " or if it

occurred due to insured neglect. He presented examples of cases where

coverage probably would exist. A windstorm might create an opening in

covered property that would allow moisture into the home. Water from

fighting a fire might create a moist area that is hidden from an insured

where mold could grow. Coverage may exist because fire was the proximate

cause.

Dr. Berry: The American public is overly anxious about mold and

fungi. Rather than being feared, mold should be understood and managed.

Kurt Bolden: The public should be educated about mold. For instance, mold

grows only in the presence of moist, organic material.

Joe Harrington: Insurers should try to use approaches that respond to some

losses that fall within an insured's reasonable coverage expectations.

Reider: Mold problems in Texas originally arose because the state

policy forms didn't include " sudden and accidental " language.

Hinton: Adjusters must recognize and deal with mold damage, even if

coverage for such damage is subject to exclusion.

Another potential area that could trigger coverage is the increased cost to

correct mold damage to meet requirements of a building regulation. This

might be covered as an incidental coverage with a separate sub-limit.

Coverage also may be triggered when local authorities require testing or

monitoring for mold, or from laws that require homeowners to install

features that act as preventative measures after mold damage is discovered.

Harrington mentioned that it is important for insurers to spread to

regulators and consumers the message that insurance is not a substitute for

home maintenance. Property owners have the responsibility of maintaining

their property and should not depend upon an insurance contract to handle

poor or nonexistent maintenance.

Insurance contracts and endorsements typically are written in three

different ways:

1. Complete exclusion endorsement barring coverage for all mold perils

(perhaps with exception of coverage for food poisoning)

2. Limited coverage for mold damage that arises from covered perils provided

under an annual aggregate limit and limited liability coverage, also on an

annual aggregate limit, with exception for food poisoning

3. Limited coverage for mold damage that arises from accidental discharge.

Harrington emphasized that, while it might be easier to create and use

absolute exclusions against mold damage, insurers should avoid hysteria and

try to use approaches that respond to some losses that fall within an

insured's reasonable coverage expectations. He encouraged everyone to visit

www.aaisonline.org to get full information on the mold exposure.

Cleaning up after mold

Kurt Bolden spoke about remediation of water and mold damage. His cleaning

and restoration company, which has been in business for 20 years, responds

to about 1,000 water-related losses annually. In his experience, although

mold and moisture problems exist in Indiana, they are much more of a problem

in humid states.

His business has established the " Hydrolab " which is one of only three

advanced-training centers on drying structures in the country. The lab

creates experiments on mold growth in various conditions and various

materials. The Hydrolab has flooded its test facility more than two dozen

times with 500 gallons of water--allowing it to set from anywhere from 24 to

48 hours--and then dried the structure without any significant mold growth.

Training is offered to people in both the structure treatment and insurance

industries. Available also is a guide of industry standards for his industry

(restoration contractors). It is called the IICRC S500 Standard and

Reference Guide for Professional Water Damage Restoration.

Bolden emphasized that treating sources of moisture is critical to handling

mold. He also stated that it is important that the public be educated about

mold. For instance, mold growth does not occur unless there is moist,

organic material. Further, mold growth is not rapid and can be reduced or

eliminated by keeping the environment clean, getting rid of excess water and

getting rid of sources of moisture. Extracting water from wet surfaces is

important, but disposal of all wet materials is usually a drastic and

unnecessary step. He emphasized that mold growth takes time and that allows

time for mitigation and prevention. The key to preventing mold is drying the

structure. Keeping structures clean and dry is the most important element

for avoiding or mitigating mold loss.

Bolden suggested that restoration contractors should be able to prove to

insurers and adjusters that they have expertise in handling water losses.

They also should have the right training and equipment to properly detect

and monitor moisture levels in key areas of a building so that a party can

be sure that a structure has been dried.

Personal lines mold claims

Reider pointed out that the following conditions contribute to mold

problems:

* Temperature

* Lack of air movement

* Water source

* Plaintiff's bar

* Public adjusters

In Reider's experience, the outbreak of mold as a serious insurance industry

issue is due primarily to the publicity about high-profile mold claims. He

said the problems in Texas originally arose because the state policy forms

did not include " sudden and accidental " language, so coverage for mold loss

existed. The state's insurers have responded by substantially increasing

pricing and adding exclusions. In some instances, premiums have doubled,

creating intense regulatory scrutiny and possible coverage reform.

Allstate has introduced mold exclusion endorsements countrywide. In

comparison, ISO created forms that allow policyholders to add optional mold

coverage of $10,000 annual aggregate coverage with the ability to add

increased coverage limits. Reider pointed out that ISO's approach has the

potential of creating adverse selection as well as increasing expectations

of coverage and pricing difficulties due to the lack of credible data to

determine the price of mold coverage.

Allstate's position is to eliminate mold as an expected coverage. To do

otherwise would be to continue to endanger its homeowners line's

profitability and affordability. In addition, Allstate has responded to its

mold experience by studying effective ways to deal with losses involving

water and mold; training its personnel on these issues; and creating

centralized, dedicated claims centers called " Handling Units, " that

specialize in efficiently managing mold-related losses.

Commercial lines mold claims

Hinton stressed that, in commercial lines, mold claims can become

large and complicated. It is important that insurers approach these claims

by hiring a proper contractor, establishing the contractor's expertise in

mitigating mold problems, and supervising the contractor's remediation

efforts. An insurer must be involved in contractor selection so that

mitigation can proceed efficiently. It is important that adjusters recognize

and deal with mold damage, even if coverage for such damage is subject to

exclusion. Hinton outlined several steps that insurance companies should use

when faced with a property claim that may involve a mold loss:

* Quickly determine whether or not mold damage is involved with the claim.

* If coverage exists, determine how much mitigation and remediation work is

necessary.

* If coverage does not exist, notify the insured immediately so that he or

she can minimize further loss.

* Communicate openly and quickly with all affected parties, even when the

news is negative.

When claims arise, it's important that a claims person locate the right

people to assist in investigating the loss, with a priority on establishing

whether coverage exists and communicating properly with the insured. It is

critical to determine whether an insured's action or inaction created the

mold loss. Insurers should make it part of their practice to do the

following:

* Begin with a non-waiver agreement or a reservations of rights letter.

* Conduct a thorough loss investigation.

* Determine the cause of loss, including ruling out what did NOT cause the

loss.

* Decide whether the particular claim is eligible for coverage.

Hinton illustrated his points by discussing a local claim that involved a

very large amount of mold damage, exceeding $1 million. An inspection of the

insured's building made it obvious that extensive mold damage was present.

However, a detailed investigation, using specialists, revealed that two

factors created the loss. One was that the insured maintained an excessively

high level of humidity in the building, which created a moist environment.

The second, more damaging factor involved defective construction. The

building's exterior consisted of porous stone, which allowed water to enter

the building where, because of vapor barriers, it collected. Mold formed

and, over time, spread throughout the property. In this case, while it was

definitely a mold loss, it was not covered by the insurance policy. The

insured was denied coverage and the efficient, complete investigation

avoided legal action from the insured.

According to the viewpoints expressed by the " Fungus Among Us " panel, the

insurance industry clearly has the tools to deal with mold losses--without

overreacting. *