Insurers fight mold bill

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http://www.bizjournals.com/sacramento/stories/2002/04/22/story1.html

April 19, 2002

Insurers fight mold bill

Surprise legislation requires coverage

Staff Writer

An influential state legislator wants to force insurance companies to cover

indoor mold damage, a health hazard that's increasingly being compared to

asbestos.

Insurers are fighting back hard, saying Senate Bill 1763 by state Sen.

Deborah Ortiz would send insurance costs higher and make coverage

unavailable. But supporters say the change is needed to protect property

owners and managers from losses and injuries caused by toxic mold.

Still in committee, SB 1763 is the Sacramento Democrat's latest effort to

grapple with the mold problem -- a problem that has become a crisis in

Texas. Last year she wrote a new law that tells the state Department of

Health Services to work toward developing standards for assessing and

treating indoor mold.

This latest bill, to be heard by the Senate Insurance Committee on Monday,

caught observers by surprise. SB 1763 would require insurers to cover mold

that results from a loss covered by an insurance policy, such as mold that

appears following water damage from a burst pipe. The mold must result from

some sudden covered incident.

If it becomes law, the legislation would, starting in January, void all the

mold coverage exclusions that insurers have recently won from the state

Department of Insurance.

Insurers could continue to exclude from coverage mold that develops as a

result of poor air circulation or lack of maintenance. SB 1763 also would

require insurers and their representatives to tell policyholders immediately

when they suspect mold is present.

The bill is opposed by insurance companies and insurance trade

organizations. It's supported by trial lawyers, a policyholders

organization, apartment owners and other real estate organizations.

The bill is partisan but has a decent shot at passing, given that the

Democrats control the Legislature and the governor's office.

Its chances " look pretty good, " said Fred Pilot, editor of Smart's Insurance

Bulletin, a trade publication that's following the issue. However, the bill

could get delayed until the Health Services department develops standards

for mold assessment and remediation, as directed by Ortiz's earlier bill.

One trade association, the American Insurance Association, insists it's too

early to tell what the bill's chances are.

Mold erodes Allstate's first quarter: Mold has become a huge cost for

insurers. California hasn't seen things get as bad as Texas, where mold has

made homeowner's insurance scarce and boosted insurance rates, but the

Golden State is next in line.

Mold claims sent to insurers have risen significantly during the past year.

Mahrt, local spokeswoman for the American Insurance Association, said

one commercial carrier operating in California, which she would not name,

has received 300 mold-related claims totaling $26 million in the last nine

months.

On Wednesday, Allstate Corp. (NYSE: ALL) reported that its first-quarter

profits dropped by 15 percent because it had to increase reserves to pay off

mold claims. Allstate took a $148 million charge to add to reserves for old

mold claims, especially in Texas.

Technically, insurance doesn't cover mold. Policyholders who don't clean

mold caused by everyday condensation in a bathroom, for example, can't

expect their carrier to pay if the mold grows into a hazard. Insurance

covers water damage, as from a burst pipe that results in mold.

Even so, insurers are seeing the frequency and severity of mold-related

claims skyrocket. They've also suffered through many bad-faith lawsuits in

which angry policyholders might allege the insurance company didn't act

responsibly in handling a water-damage incident, which led to a mold

problem.

Stories keep surfacing all over the state.

Last month, a local couple sued the builder of their Antelope home, wanting

the builder to buy it back because of a mold problem. Two years ago, a

Placerville man won a multimillion-dollar judgment against Allstate over

mold problems in his home. The decision is still on appeal. Local businesses

and agencies that have reported mold problems include the California Job

Journal and the Child Abuse Prevention Council of Sacramento Inc.

Last week, ny Carson's former sidekick Ed McMahon sued his insurance

company and contractors for $20 million. He alleges they botched the repair

of a broken pipe last summer, which allowed toxic mold to grow in his

mansion. He says he and his wife are sick, and their sheepdog died after

developing respiratory problems.

State Farm General Insurance Co., California's largest homeowner's insurer,

saw its financial strength rating downgraded earlier this year, and mold was

a factor.

State Farm still earns a " very good " ranking of B-plus with the A.M. Best

Co. But the move shows a concern about the carrier's increasing losses in

the homeowner's business, particularly from mold claims. Another rating

company, Standard & Poor's, put State Farm on credit watch in January,

saying the insurer needs to boost reserves.

State Farm is getting pickier about whom it will sell homeowner's insurance

to. The insurer isn't accepting new California customers who have filed

homeowner's claims for amounts exceeding their deductible in the past few

years.

Like trying to price terrorism: Insurance companies are responding to

California's mold problem by filing mold exclusions or caps on damages with

the California Department of Insurance. Late last year, Allstate gained

state approval to limit mold-related damage payouts to $5,000.

In all, the Department of Insurance has received in the last eight months

238 requests for mold exclusions or payout limits, said deputy press

secretary Nanci Kramer.

That doesn't mean 238 separate insurance companies. Some insurance

corporations like AIG and Hartford each filed a request for a half-dozen or

more individual insurance companies within the parent company.

Of the 238, 152 were for commercial carriers and 86 were for personal lines

insurers. Of the total, 116 were approved while 21 were withdrawn by the

companies. Typically the requests were withdrawn when the department asked

the carriers to justify charging the same rate for less coverage.

Mold was never really factored in the rates that insurance companies charge,

Mahrt said. The bill would limit insurers' ability to manage their exposure

to mold claims. " It's really a good comparison to terrorism, " she said.

Insurers can't predict their exposure to terrorism and therefore cannot

price any coverage appropriately.

A `California Mold Authority': The bill's coverage requirement " has the

potential for driving insurers out of the California market and escalating

insurance premiums for consumers, " said Sam Sorich, senior vice president

and general counsel locally for the National Association of Independent

Insurers, in a prepared statement.

" The bill would create impossible claims handling rules, " he said, " as well

as prevent insurers from taking action to keep insurance coverage available

and affordable. "

The owner of a $213,000 house who pays $625 a year for homeowner's insurance

could see that amount rise to $2,300, said Dan Dunmoyer, president of the

Personal Insurance Federation of California. He makes that calculation based

on the experience in Texas.

The mold coverage mandate could result in a situation similar to that caused

by the requirement to offer earthquake insurance as part of homeowner's

coverage. Insurance companies fled California, and insurance got scarce

until the state formed the California Earthquake Authority to offer

earthquake coverage.

An average premium in excess of $2,000 a year would push home ownership out

of bounds for most people, Dunmoyer said.

In a headline in his newsletter this week, Smart's Insurance editor Pilot

asked, somewhat tongue-in-cheek, " Is the California Mold Authority in our

future? "

Alan Borner is president of Healthy Indoor Environment Inc., a

Sacramento-based nonprofit that is building a national collaborative effort

to deal with the mold problem. The group, made up of medical experts,

insurance representatives and mold remediation professionals, is scheduled

to have an all-day symposium on mold today at Cal Expo.

Borner said he had economists from Harvard and the Massachusetts Institute

of Technology evaluate Ortiz's bill, and they contend the legislation would

" stop California's economy in its tracks. "

If it's like asbestos ...: If mold litigation ends up anything like the

asbestos problem, insurers and anyone else connected to the mold faces

potentially big liabilities.

Asbestos is a mineral that was widely used as a fire-resistant material in

construction in the first several decades of the last century. But

experience showed that inhaling asbestos could make people sick, if not kill

them. Litigation over asbestos began in the 1970s after millions of workers

were exposed to asbestos on the job, and the lawsuits became a booming

business. The pace of the suits grew during the next two decades.

The flood of lawsuits and resulting settlements forced more than 50

companies into bankruptcy.

Many cases filed on behalf of terribly sick victims were warranted. Some

other claims " have appeared opportunistic, " Time magazine reported last

month, including some from " healthy plaintiffs against companies that have

only peripheral connections to asbestos. "

What's insurance for? Insurance companies have been covering mold as an

ensuing loss for years and years and therefore have plenty of historical

data on which to base rates, say proponents of the bill.

They say the legislation would merely preserve what had been the status quo

before insurance companies starting seeking total exclusions for mold.

The bill is necessary, said Ortiz legislative consultant Ana Matosantos,

because of the rise statewide in mold problems faced by property owners,

renters and landlords. They're confused about what is covered. The bill's

supporters want insurance companies to respond responsibly when clients file

a claim for a water-damage incident that results in mold.

The big awards insurers face have nothing to do with mold coverage, she

said. They have to do with bad-faith claims. If insurance companies

investigate these sudden incidents of water intrusion fully and diligently,

then they won't get sued.

" This has always been covered, " said Debra Carlton, staff vice president of

policy and research for the Sacramento-based California Apartment

Association. Her group, which represents 50,000 rental property owners and

managers who are responsible for 2 million rental housing units, supports

Ortiz's bill.

The exclusions insurers have been seeking the past few months make insurance

policies practically worthless, she said.

It's ethical and necessary for insurance companies to disclose any actual or

potential mold growth, the group asserts. Ignoring mold growth " will damage

the property further and expose the owner to third-party claims that have

the potential to hurt more people both physically and economically, " the

organization wrote in its position statement.

The bill would require insurance companies to disclose potential mold

problems and treat the mold, which would protect property owners and

managers, Carlton said. Even if policyholders have to pay more for insurance

that covers mold, she said, at least they'll know their policy is worth

something.

The Department of Insurance hasn't taken a position on SB 1763, but

Commissioner Harry Low is concerned about mold exclusions. Consumers are

beginning to ask, spokeswoman Kramer said, what they are paying for when

they buy insurance.