Mold, California’s Ticking Time Bomb’

California insurers have a ticking time bomb on their hands according to many in the industry. Others, however, say the supposed bomb is being blown out of proportion. Who do you believe?

The reported bomb is mold, and insurers across the country are keeping a close eye on California and Texas to see if mold is going to drive insurers out of the two states.

A just released study by the Insurance Information Network of California (IINC), which was answered by all the major homeowners insurers in California, reports that rising household water damage claims have impacted state insurers to the tune of billions of dollars, putting a stranglehold on the California homeowners market.

According to the figures, the cost of water damage has risen in each of the last four years, jumping $47 million over the last two-year period alone. On average, individual water claims cost surveyed insurers $4,730 last year, approximately double the $2,537 average water claim at the start of the survey period.

Despite those numbers, some industry experts view the situation in California as an issue, but not on the level of the mold concerns in Texas.

“I see Texas as a much more volatile area than California,” says Andy Rosenfeld, president of California’s Canon Insurance Service.

“I think California is still responding to what is going on in Texas. It’s just not clear what is going to develop here. I don’t know that mold is as a big of problem in California as all the hype is making it out to be. I think the original intention of all property policies was to exclude it—it was just some fancy litigation that got around the traditional property exclusions that brought it in. Having discussed this with some mold remediation contractors—they’re responding to the situation, but their own feeling is that people are over-reacting. In terms of legislation, there is so much posturing, that until something actually comes out that is law, it is more effective for us to respond to what is law.”

Jeff Craig, a partner with California-based Monterey Insurance Agencies, notes, “Virtually all our standard companies—if there’s any type of water damage claim—will not provide new coverage. I can understand the industry’s reaction to third party liability. However, I really feel the industry is dramatically over-reacting to the situation.

“There hasn’t been a large influx of first party claims where the insurance companies had to pay anything. I really think they’re having a knee-jerk reaction. I would doubt there’s any home over four or five years old that hasn’t had a leaky pipe at sometime and a plumber’s come in and fixed it, and no claim has been made. It is something people don’t understand. Unless it was a water damage loss where mold formed shortly afterward, it was a loss that was never covered anyway. It was part of an exclusion that was always in the policy. That’s not being made clear to people.”

If it is a knee-jerk reaction, it is still one that is costing insurers where it hurts them the most—in their accounts.

In the IINC survey, insurers note that the cost of these claims grew by an average of more than $56 million annually during the survey period. Representing more than 60 percent of California’s homeowners insurance market, the survey reports that water claims represented 24 percent of all homeowners claims five years ago, growing to 32 percent by 2001. The cost of water damage claims in the Golden State exceeds that of many natural disasters.

Candysse Miller, the IINC’s executive director, remarks, “We’ve known through talking to company by company that water and of course mold, are a huge problem in California, maybe not to the level of Texas, but we fear we’re headed in that direction. The results are consistent from company to company. Water accounts for about one-third of all homeowners claims and that’s out of whack.”

State Farm’s announcement earlier this year that it would stop writing new homeowners policies due to financial losses in California had a major impact on the industry, according to Miller.

“A company that size, making an announcement that dramatic, indicates that the market is ill,” says Miller. “What really stood out to us in the survey was just the increased dollar amounts from year to year outstrips most natural disasters.”

Where’s mold been?
As Jeff Craig points out, “Mold is around us everywhere—it’s been around for 10,000 years. We’ve seen people pull out of markets. It has created a dramatic increase on homeowners business that we’re writing.”

Have changes in how home and office buildings are built in California contributed to the problem the last couple of decades?

“One of the ironies of the mold problem is that you didn’t necessarily see a mold problem per se in the old homes,” says Miller. “They (mold problems) tend to be in the newer, energy-efficient homes. It’s not to say that we shouldn’t be building energy-efficient homes, we should be. What’s happened in all of this is that homeowners don’t necessarily remember to do a couple of key things. They need to ventilate their homes, run the bathroom exhaust fans, fans in the laundry room. You need to open up the house and let it breathe.

“While mold has been with us since the dawn of time, as an insurance issue, it has emerged very rapidly over the last couple of years. It certainly has put insurers to the test to get out there very quickly with information campaigns that not everyone understands.”

In an effort to get the word out, Miller said the IINC earlier this month was working with a number of organizations to reach out to homeowners and talk about home maintenance and how important that is. “We think of our homes as maintenance-free. That’s a mistake. A number of insurers are working internally on getting the information out to their clients on this.”

All eyes on California?
While Texas may have the bulk of the attention in mold news, California is not far behind, and its impact has affected the homeowners market.

“The market in general right now is kind of tough,” comments Darlene Penfold, owner/manager of California-based Penfold-Leavitt Insurance Agency.

“We’re experiencing the combination of factors that contribute to the hard market cycle. The 9/11 situation didn’t help matters. The main concern I’m hearing about right now is the withdrawal of markets from California because of the issues we’re facing, including mold. The fear is that it is going to get a lot worse before it gets better. Right now the homeowners problem has hit more in the metropolitan areas than the rural ones. This (mold) isn’t just a homeowners problem, but an entire building trade problem. My concern is that more companies will make a mass exodus out of California. Some carriers have tried to address the problem by endorsement, but we haven’t tested those endorsements in court yet. The way we build homes and apartments today is quite different from what we did 15 years ago. We need as a state to take a hard look at how we’re doing things and what that might be contributing to the problem. It effects insurance, the building trades, health issues. We should be looking at the big picture instead of just looking at it as an insurance issue. I think the national media has really blown the mold issue out of proportion.”

One company who caught the attention of many industry experts was State Farm with its announcement a couple of months ago that it was ceasing from writing new homeowners policies in California.

In an April discussion with Insurance Journal West, State Farm spokesman Bill Sirola commented, “We’ve been facing some real financial challenges with the homeowners company (State Farm General) in the state,” in reference to the company’s decision to put a halt to writing new homeowners policies in the state. State Farm, which gained approval for a pair of 6.9 percent increases earlier, and just recently gained approval for a 6.7 percent increase, has approximately 1.5 million customers with homeowners insurance in the state.

Two months later, Sirola said not much has changed for the company, indicating it still will not write new homeowners policies in the state.

“We’re still operating with a moratorium on new homeowners policies, but we’re still taking care of our existing customers,” says Sirola.

When asked if mold has been a driving factor in State Farm’s decision, Sirola points out, “I can tell you the water loss issue is a major issue. We’re seeing indications that mold is playing a very big role in driving the claims.”

Despite mold, homeowners market perseveres for many
With all the talk of mold, is the homeowners market in California on the verge of collapse? Honestly, it depends on just who you talk to and what numbers they have in front of them. Some see a crisis while others still see a profit to be made.

According to Andy Rosenfeld, “Our particular area we write in is the high value homeowners area and in my opinion, it is still a fairly competitive area.

“If there is a challenge for agents, I’m presuming it has more to do with the area where the value of the dwelling is less than $500,000 or $600,000,” continues Rosenfeld. “Above that, there is no shortage of capacity and no shortage of marketplace, whether it be in the surplus lines market or the admitted market. To the extent smaller agents don’t represent some of the traditional admitted markets like a Chubb or Fireman’s Fund…there’s certainly plenty of surplus line quality markets that have plenty of market capacity to offer.

“To the extent the admitted market has problems with the mold and feels it can’t craft exclusions that they will be able to file and get accepted, they will probably shy away from writing more business. The direct writers have always been spotty in the high valued arena. They dabble in it, but I don’t consider them to be major players in the high valued homeowners arena. Their concern is going to have a much stronger impact on homes under $500,000.”

According to Rosenfeld, in the absence of any major kind of catastrophe—be it terrorist activity or earthquake in California—”I would expect no major changes in the high valued homeowners arena. High valued homeowners has continued to be one of the most stable areas of insurance that continues to be attractive to both the admitted and non-admitted market. It’s always a market that seems to be attractive to most quality insurers.”

Jeff Craig hears of problems, but then adds, “All our carriers are telling us the homeowners market is deteriorating, but these are the same carriers at our annual meetings who talk about their great results, so I’m not sure what to believe. It does seem a little silly to attach mold exclusions, then not write anybody with a water damage. My hope is that the industry will feel comfortable that their exclusions will hold up in court and get back into the business of writing homeowners. We still have a lot of surplus lines markets that are issuing policies with the mold exclusion and they’re feeling comfortable with that total mold exclusion. Most of our companies on the property end rather than excluding mold completely are putting a cap on it. Every home that was ever built suffered water damage, so that again is why I think it is a bit of a knee-jerk reaction.”

Legislation looks to be around the corner
With the mold situation a growing concern for many in the industry, Senate Bill 1763, designed to limit insurance companies from authoring mold and liability restrictions into their policies, was recently approved by California senators.

The bill, introduced by Senator Deborah Ortiz (D-Sacramento), would mandate new disclosures and would require policies being issued or renewed on or after Jan. 1, 2003 to provide mold coverage as an “ensuing loss.”

Nicole Mahrt, public affairs director, for the western region of the American Insurance Association (AIA), in a June 10 interview with Insurance Journal West, remarked that the prompting for the bill was that Sen. Ortiz heard reports that insurers were filing ‘exclusions’ with the Department of Insurance over mold. Mahrt told IJ West, that, “Basically, the very nature of mold has really changed in the last two years. And the premiums that were charged for homeowners insurance previously did not include the potential losses and the losses that we’re facing now from mold claims.

“The majority of those ‘exclusions’ that have been filed with the Department of Insurance are simply clarifications of what their policy does and does not cover. Some people are filing complete mold exclusions, whether or not that’s going to work remains to be seen.”

SB 1763 has two sections—the first establishes new disclosure requirements, which Mahrt said is “basically an attempt by the trial bar to set a trap to generate lawsuits. They’re using very broad and ambiguous language, that in some cases conflicts with existing law, and it’s their way of kind of setting more traps so that they can file more suits.” The second part of it “essentially prevents insurers from working with the Department of Insurance to clarify what their policies do and do not cover,” although Mahrt added that there is a dispute as to the understanding of what exactly the second part of the bill will do.

If it had its wishes, the AIA said it would like to see an Ortiz bill that gained passage last year go into effect, which called for a study to be conducted by the Department of Health Services to examine the causes of mold and put standards into effect for the industry—both for the health effects and remediation.

Dietmar Grellmann, counsel for Norwood & Associates, representing Insurance Agents and Brokers Legislative Counsel, notes, “We’re seeing a pull back in the homeowners market, and it appears to be happening in the commercial side of the business as well as the personal lines.

“I had an agent call me a couple of days ago and tell me that his last insurer that would write habitational apartment buildings had pulled out of the market, and he’s very concerned because no one else is writing that. It has followed very much the track that hit construction defects. I think if the Ortiz legislation passes, you will see major policy changes at the end of this year. Most companies are taking incremental steps at this point. Some have gotten sublimit approvals for $5,000 and $10,000. The Department of Insurance has applications for capping at $5,000 and $10,000. ISO has submitted policy forms putting in sublimit caps. That is where the industry is moving and that is why the trial lawyers have sponsored this legislation.”

According to Grellmann, the bill is in the assembly insurance committee and the hearing is June 26.

“If you were going to kill a bad bill, the assembly insurance committee is the place to do it,” comments Grellmann. “It will be a feat to get all the agents and insurers on the same page as the property owners on the sublimits. If you do get them on the same page, the trial lawyers may not agree to play ball on a compromise. This is the number one issue for agents, insurers, property owners and chambers of commerce. The legislation is going to drive everything going forward. My suspicion is that legislators given the political nature of this issue aren’t waiting for good science. If a compromise is struck with reasonable sublimits, I think everyone wins.

“What’s really disconcerting about mold is that’s it is largely a manufactured crisis,” continues Grellmann. “The science on this issue is totally confusing. No one really knows if mold really is harmful, and if it is, on what levels. The second part of it is what are the standards for remediation? Insurers are expected to cover a loss that no one is even sure if it is a loss. Some insurers are saying lets do a study, and since there is no money for it, we’ll pay part of it. The other angle is to treat mold as a water damage has been treated for years. It isn’t so much a health medical issue, but as more of a debris cleanup issue. The trial lawyers have said this is their number one issue. They sponsored the legislation (Ortiz) because they don’t want sub limits. They see this as a cash cow. There’s a certain hysteria that’s associated with this. I think the Department of Insurance is trying to be a little more careful in how they treat mold.”

CDI reacts to insurers’, policyholders’ concerns
“I don’t think we would term where we’re at a crisis,” says Nanci Kramer, a spokesperson for California’s Department of Insurance. “There is still a scientific debate on whether mold is toxic or what the health risks are.”

According to the CDI’s current filings as of June 1, the total number of exclusions received for requests to exclude mold was 336. Of that number, 224 were for commercial lines. “Those exclusion s are dominating business insurance. One-hundred-twelve of those are for personal lines, including some for auto. One-hundred of them are pending, while twenty-nine of them have been withdrawn. Of that number, two-hundred-seven have been approved. Virtually every major insurer has requested some kind of exclusion or complete exclusion.

“In general, I’d say with the hard market in homeowners, there is some sticker shock currently with homeowners, but the Commissioner (Harry Low) doesn’t see it as a crisis at the moment. We have not had calls from insureds that they can’t find insurance. We’ve not had calls from insureds that insurance is priced so outrageously they can’t secure it.

“I think the jury is still out on mold. There’s an awful lot of hype on it all of sudden,” continues Kramer. There has to be a balance between what an insurer is responsible for and what a homeowner is responsible for. One of the concerns here is not that claims are increasing in numbers, but they’re increasing in costs. That’s why insurers are moving like they are. The big question is how we can get costs under control?

“As a consumer protection department, we have two obligations. One, is to make sure insurers are following the letter of the law according to regulations. Second, is making sure there is a stable market place and finding that balance between price and availability. If you chase the companies out of the state or overregulate them, you may hurt consumers because then they have limited choice. This Commissioner says it’s very important to have a vibrant, competitive market place. I think insurers have supplied sufficient data to raise rates. For homeowners, there has been substantial data. Homeowners’ insurers are getting increases that they haven’t asked for in 10 years.”

Increases that are not likely to get moldy any time soon.

And as State Farm’s Sirola points out, “There is a huge amount of publicity out there about mold. The issue is there is no science on mold, and that makes the issue very difficult. At this point, it is critical to get some real scientific knowledge to bear out the issue.”

Cynthia Beisiegel contributed to this story. To comment on this story, e-mail: dthomas@insurancejournal.com.