Homeowners, Insurance Industry Clash on Mold Issues

Homeowners turned out in force to testify and listen, and to applaud when they agreed with what they heard, at a June 26 Texas Department of Insurance (DOI) public hearing on issues related to toxic mold and insurance coverage.

Speaker after speaker related their own mold horror stories and urged Texas Insurance Commissioner José Montemayor to reject requests by insurance companies to remove mold coverage from homeowners’ insurance policies altogether. Although Montemayor repeatedly cautioned the crowd not to applaud individual speakers – such as Melinda Ballard, who recently received a $32 million award in her case against Farmers Insurance Group for mishandling mold damage claims on her Dripping Springs home – attendees cheered and clapped when Ballard told the commissioner to “just say ‘no’ to Farmers.”

Currently in Texas, mold damage is covered only when it results from an otherwise covered loss, such as water damage from roof leaks or plumbing failures. The hearing was prompted in part by Farmers’ request to have all mold coverage completely excluded from residential and general liability policies. An estimated 700 people attended the hearing. Montemayor said at the outset that he would be making no decision on the issue at the end of the day, and reminded those in attendance that at least two more public forums on mold issues are planned for Houston and Corpus Christi.

Insurance companies and insurance trade groups testified that homeowners premiums currently collected are not sufficient to handle the rapid increase in mold-related claims that have occurred over the past two years. In a statement, Sandra Ray, public affairs director of the Southwestern Insurance Information Service (SIIS) said, “Mold-related claims have increased sharply in the last few years and more public awareness about mold may be driving the increase rather than any specific health problems. In the last six months in Texas there were over 1,000 mold claims and the industry estimates show that the cost of an average mold-related claim can range from $10,000 to $100,000.”

The Austin American-Statesman reported that Farmers confirmed it has received over 1,000 new mold claims so far this year. Farmers asserted that if mold coverage continues to be included in homeowners policies, consumers would likely see a 40.5 percent increase in their insurance premiums.

But consumers and consumer advocacy groups repeatedly criticized insurance companies for refusing to adequately and promptly respond to mold claims. Such foot dragging, along with deceptive and delaying adjusters, are the reasons for the increasing costs, consumers said, because the longer the problems exist, the more extensive the mold damage becomes.

Rod Bordelon, public counsel for the Office of Public Insurance Counsel – an independent state agency that represents the interests of insurance consumers as a class in insurance matters – warned the DOI not to rush to judgement on the mold and mildew issue. “If mold and mildew are simply by-products of a water damage claim that is otherwise covered, where do you cut off…the claim? If you do what is being proposed by at least one insurance company, Farmers, you will necessarily be getting into water damage claims,” Bordelon said. “It is not as easy to simply say, ‘we’re not going to cover mold and mildew.'”

Bordelon conceded that there is no question that losses are increasing with respect to water damage, adding that the data he’s seen shows that the damage is unrelated to freezing or to slab failures. “How much is related to mold? I don’t know,” Bordelon said. “All we can do now is gather anecdotal evidence from consumers, from the insurance companies and then perhaps go back to the drawing board, look at the data that we collect, and see if we can’t collect additional data – to determine what the problem is, and why now.”

Rick Gentry, executive director of the Insurance Council of Texas, an industry trade group, underscored the industry’s assertion that water-damage claims in Texas have escalated dramatically in the past two years. Gentry said those claims include broken water pipe claims as well as mold-related claims, and the increases can not be explained away by population increases.

“After ruling out a sudden statewide failure of pipes carrying water, you simply must conclude the mold-related claims are driving those losses to previously unforeseen levels,” Gentry said. “How else can one explain a 135 percent increase in paid water damage losses in just two years?” He added that if the trend continued, water damage claims could approach $715 million this year, doubling the losses paid in 1999.

Gentry offered Montemayor some alternatives that might head off a crisis situation with regard to mold-related coverage. He suggested that one way to keep premiums and rates in check would be to allow insurers to offer consumers a homeowners policy that excludes mold-related coverage. Another alternative would be to create with the policy a sub-limit for mold-related claims, Gentry said. A third suggestion offered by Gentry would be to revise the policy form to expressly link coverage for mold and other fungi damage to the “sudden and accidental” discharge of water. The revision would have to be executed in such a way so that, “reasonable people could not disagree about whether coverage is provided,” Gentry said.

Along with his testimony, Gentry provided Montemayor with two charts that illustrate the increase in the average water damage loss per policy that has occurred in Texas over the last 10 years. The charts were compiled from data obtained from the Texas Department of Insurance and clearly show that the average water damage loss per policy has increased from $88 in 1991 to $249 so far this year. And in the last two years alone the increase has been 135 percent.

Consumers and their advocacy groups, along with remediation and foundation repair contractors, repeatedly questioned the insurance industry’s warning of an impending financial crisis as a result of the mold claims. Rob Schneider of the Consumers Union urged the Commissioner not to “succumb to unfounded fears that these claims will cause the demise of the insurance industry” and compared the industry’s current claims with its uproar over foundation claims in the 1990s. Insurers tried with no success to get the DOI to exclude coverage for water-damaged foundations on the grounds that rising claims would bankrupt the industry. The department refused and warnings of the industry’s demise turned out to be greatly exaggerated.

Insurers were not alone in being criticized by homeowners and their supporters. Builders were taken to task on the use of shoddy building materials, poor construction quality and for not standing behind their work. Consumer watchdog groups, such as Homeowners for Better Builders, urged homeowners and the insurance industry to work together to establish statewide standards for builders and construction contractors and to force the building industry to improve construction practices.

Topics Carriers Texas Claims Agribusiness Homeowners Market