Texas cases will help determine industry's
future course on the mold exposure
By Brett Hanavan
"Mold's effect on human health is still debatable."
--Richard Arneal, Law partner, Brady, Vorwerck and Ryder, Walnut Creek, California
We often perceive it as musty and grotesque. In its rawest form, it stinks. It is difficult to eliminate from walls, crawl spaces and the backs of basements. And it is creating a wave of litigation that is tugging at profit margins of U.S. insurance carriers.
In a controlled environment, mold is a beneficial and health-giving substance. It has led to the development of vaccines and is used in the making of foodstuffs. But, out of control, it can lead to a devastating level of often-undue litigation and health claims.
It is in this latter context that the term "toxic" commonly precedes the word "mold." It is difficult to steer clear of this usage. The implication is that there are specific health ramifications from typical molds found within homes or buildings.
A mold is defined as a growth of tiny fungi that form on vegetable or animal matter, often in a furry covering or coating, and causes some sort of decay of the object on which it forms. Often associated with it is mildew. Mildew is disease of plants, often whitish in color, and forms when in contact with moisture.
Defense attorneys: two viewpoints
Richard Arneal is a partner in the law offices of Brady, Vorwerck and Ryder in Walnut Creek, California. He knows his mold. Arneal and his partners specialize in defending insurance carriers against mold claims.
"Potentially toxic molds, and molds in general, have been around for hundreds of thousands of years. We actually use these molds in our daily lives," Arneal points out. "From blue cheese to bread to beer, mold has been of great advantage to human kind."
Arneal says that the "mother of all molds" is Stachybotrys--a black-type of mold that forms in colonies but requires an organic base and water to establish and grow. In a construction setting, gypsum wallboard and minor water leaks can be a perfect breeding ground for Stachybotrys.
"Its effect on human health is still debatable," Arneal says. "Mold typically is not harmful if touched. It needs to be ingested or otherwise consumed by humans to have a toxic effect."
Mold is an allergen, which can produce adverse allergic reactions in some people while others will be unaffected.
The legal process for proving a mold claim is difficult and detailed, Arneal explains. First, an industrial hygienist is brought in to check for the potential of toxicity of the mold. The hygienist compares the inside mold level to the outside mold level, looking for an unusual number of mold spores on the inside. If mold growth is found within the dwelling, samples are sent to a qualified lab to determine the type of mold. At this point a toxicologist may be brought in to determine if the level is toxic. If the level of mold is not determined or is not considered sufficient to quantify a cause of illness, a doctor is consulted to review the individual's health records. Physicians typically used in this process have a solid background in immunology or allergies or both. The doctor can use the data to determine if the individual is "hypersensitive" to mold. Many people can be allergic to a mold type, but it does not necessarily make the person hypersensitive to the mold.
"Today, many insurance carriers are filing Declaratory Relief Actions in cases in which their insured has been sued due to toxic mold," Arneal says. "The cases typically rely on the pollution exclusion clause in the insurance contracts but, to date, there is no case law making a specific determination on this coverage issue. We expect further litigation and a definite response within the next year in that many of these cases are filed in federal as opposed to state court."
Arneal also points out that due to the nature of mold claims today, an aggressive approach is needed to make sure that a claim is potentially viable. "To date, there has been no published case that creates a link between toxic mold and personal injury. Most of the present cases deal with property damage, and not personal injury," he says.
However, health concerns still exist and can manifest themselves into large-dollar claims affecting builders, business owners, homeowners, developers, and contractors.
Toxicity of mold, experts say, is caused by and directly related to more air-tight and efficient buildings with more efficient heating and cooling systems. Claims arise out of air contaminants such as carbon dioxide, carbon monoxide, fumes from adhesives and paints, or bacteria such as legionella that reportedly become lodged in the building's air-tight systems and cannot escape. From this came tired building syndrome, and claims from workers that they are fatigued or ill. Even in older, less tight buildings, the birth, growth, and buildup of various molds can potentially affect one's health.
Attorney Steve Henning, a principal partner in the Los Angeles-based firm Wood, Smith, Henning & Berman, also monitors mold issues in relation to insurance, tort, and litigation. He is heavily involved in defending insurance carriers against these claims. His firm presents a series of seminars called "Defending the Toxic Mold Claim."
"Texas and California account for a majority of the U.S. mold claims, although we are seeing increases in Florida, Arizona, Nevada,
New York, Illinois and Pennsylvania."
--Pete Moraga, Communications Specialist, Insurance Information Institute
Henning says that owners and property managers of housing developments should have risk management strategies in place to address mold claims and that first-party premiums probably will be going up, with limited coverage in place, if any, for mold.
"We believe mold claims are growing in number for a battery of reasons. First, we have seen over the past 25 years, the judiciary nationwide limiting recoverable damages from defective construction," Henning says. "The coup last year for the insurance industry was the case of Aas v. Superior Court that restricted recovery of damages in tort without resulting damage. The plaintiff bar is responding to this limitation by looking for ways to maximize recoverable damages."
In other words, because there is less environmental work in the field, lawyers are out there looking for work. Henning also says the media is playing a major role in portraying mold as a hazardous substance.
"There is an amazing awareness of the issue--all hyped up and exaggerated," Henning says. "Time and People magazines, plus CBS's "48 Hours" all featured mold as an issue relating to health over the course of the past year. Major newspapers including The Wall Street Journal and The New York Times have featured mold as an issue. Unfortunately, these stories are alarmist and distort what is medically known about the causes of mold in the indoor environment."
To Henning all of this means several things. He says first-party coverage is going to be more restricted in the future--and more costly.
"Just look at Texas. They are battling right now whether to exclude mold from first-party policies or agree to a compromise proposal offered by the Texas Department of Insurance (TDI) that limits mold damages to $5,000," Henning explains. "This compromise proposal is drawing fire from consumer groups, who argue that the average remediation costs $17,000. Conversely, insurers argue that the $5,000 is akin to a blank check that will need a substantial increase in premium in order to write the policies."
The AIA released a statement on October 16 urging the TDI to adopt total mold exclusions within policies, but to include a buy-back option to provide coverage. This is in direct relation to residential property insurance coverage forms. AIA says its proposal would exclude mold and water losses regardless of cause.
According to AIA Vice President Ron Cobb, the primary concern is for the TDI to view mold and water damage together because from a claims standpoint it is extremely difficult to separate the two.
"If both mold and water were excluded, there would be no uncertainty regarding the cause of the loss and whether coverage limitations apply," Cobb said in a released statement.
With several first-party insurers no longer actively writing coverage in Texas, a potential crisis looms for buyers and sellers of new homes unable to get insurance coverage which is a condition of closing on the new mortgage. The country is watching Texas as they lead the first-party coverage charge.
Henning also foresees future restrictions on third-party coverage.
"Most carriers have placed mold exclusions on the third-party policies," he says. "Does this mean that the claims won't be filed if the damages are not covered? The jury is out on this one, but the fact remains that the policies in the future will not most likely cover mold."
Henning says risk management including contractual risk transfer mechanisms is paramount at present. He urges contractors to review protocols during construction to avoid mold claims. "Mold claims are not the next asbestos. They can be avoided," he emphasizes. "In order to do so, preparation now is the key for this emerging tort. Understanding the case of mold claims and implementation of strategies to avoid them now is critical."
Pete Moraga, communications specialist for the Insurance Information Institute (III), explains that the Centers for Disease Control and Prevention (CDC) has stated repeatedly that there are no scientific studies proving that molds inside homes can cause any unique or rare health conditions. So, the use of the term "toxic" with the term mold as an industry buzzword is not necessarily correct.
"Texas and California account for a majority of the U.S. mold claims, although we are seeing increases in Florida, Arizona, Nevada, New York, Illinois, and Pennsylvania," Moraga says. "Typical homeowners mold claims costs are between $15,000 to $30,000 with commercial mold claims much higher."
Moraga adds that study data indicate that in Texas, the number of mold claims rose 548% between 2000 and 2001, and that over the same period the average premium increase per Texas policyholder resulting from the increase in mold claims went from $17.09 to $147.68.
In New York City, the Henry Phipps Plaza Apartment Complex currently has $12 billion in mold lawsuits pending in court, according to Moraga. By comparison, the cost to rebuild the World Trade Center is estimated at $6.7 billion.
"For the insurance industry it is important to separate the homeowners (property coverage) from health claims because there are no first-party personal injury benefits in homeowners insurance policies," Moraga points out. "The costs of diagnosing or treating any claim of injury, illness or disease experienced by the owner/occupant of a home are not covered under the terms of a homeowners insurance policy."
The increased concern about mold has created many opportunities for abuse, Moraga says. These include
(1) potential abusive practices by
mold remediation services where unnecessary or improper work may
be done and contractors lack qualifications, (2) claim misrepresenta-tions made by policy-holders, and (3) unscrupulous public adjusters encouraging policyholders to allow situations to further deteriorate.
The Insurance Information Institute estimates that if the nation reaches a 1% mold claims frequency (percent of total homeowners policies), it could equal $18 billion. Texas, which leads the nation in mold claims, is experiencing about .2%, according to the III.
Deep in the heart of the Texas market:
carrier perspectives
Mold problems in Texas came to a head in the spring of 2001, when a Texas jury said that Fire Insurance Exchange, a Farmers Insurance affiliate, had to pay $30 million to a home owner who claimed that the insurer failed to adequately protect the home from claims resulting from mold infestation. The infestation was alleged to have caused health problems for the people who lived in the home.
Major insurance carriers in Texas have responded to mold concerns by cutting back on writing new homeowners business. Allstate Corp., Farmers Group, and Progressive stopped writing policies that cover homes that have had recent water damage claims.
According to Justin Schmitt, Allstate's corporate relations manager in Irving, Texas, Allstate has temporarily stopped offering new Texas customers homeowners HO-B policies, which offer the broadest coverage available. Rather than exiting the market altogether, Allstate is currently offering new homeowners HO-A policies that, among other things, exclude water coverage. By continuing to offer the HO-A policy, Allstate seeks to help maintain the availability of homeowners insurance in the state.
"No single reason is to blame for the current [mold claims] crisis," Schmitt says. "The highly publicized mold issue is only one factor. A significant part of the problem is the language of the Texas policy, specifically with regard to water coverage. In Texas, that language refers to accidental discharge of water, whereas in virtually every other U.S. state it refers to sudden and accidental discharge of water. That difference is significant. Without the word "sudden," the policy winds up covering many maintenance-type water losses, such as a leak under a sink that is not repaired and discharges water over a period of months, or even years."
Other regional problems, including an increasing number of weather-related catastrophes, skyrocketing construction and repair costs, and overall claim severity have also contributed to the property insurance problems in Texas, Schmitt says.
In September, State Farm, the largest writer of homeowners insurance in Texas with almost 31% of the market share, announced its decision to immediately stop accepting new business into State Farm Lloyds, its property affiliate in Texas. This applies to both commercial business and homeowners. The moratorium does not affect auto insurance customers in Texas or elsewhere.
"We cannot continue to add new business at existing rates with the mold losses and the chronic loss problems associated with wind and hail," says State Farm Senior Vice President Ron Dodd. "To continue would jeopardize the financial condition of State Farm Lloyds ... Much of the financial problem facing State Farm Lloyds is due to mold-related losses. We're seeing about five times as many claims involving mold this year as we did a year ago."
Farmers Insurance reportedly has said it will not offer new homeowners policies in Texas that offer any kind of coverage related to water claims.
Safeco also issued a moratorium on writing new homeowners business in Texas. Mary Eversole, an issues manager with Safeco, says the company issued its moratorium because "actions of other carriers that left the market placed an incredible strain on us [Safeco] to continue to write business."
The comfort zone: where it is all headed
However the market problems relating to mold are ultimately resolved, agents, MGAs and underwriters are devoting increasing scrutiny to the mold exposure. For homeowners risks they are asking questions such as:
* Has the home or building ever been tested for mold? If so, what types of tests were done? What were the findings?
* Are there possible water-related problems with the structure that may not involve construction defects? Has the building ever had problems with window leaks, roof leaks, crawl space ventilation, and shower/bath enclosures?
For insurance companies, the bottom line is how often mold-related litigation comes to the table and how they can underwrite and price for it, modifying policy forms as necessary. Insurance companies and legislators continue to wrestle with the problems presented by mold. Eventually we can hope that improvements in construction and building maintenance will minimize the problems created by mold. *