Insurers Look to Wipe Clean Toxic Mold Claims

For U.S. insurers, reinsurers, and property professionals still reeling from the $32 million a Texas jury awarded Melinda Ballard in her toxic mold lawsuit against Farmers Insurance last year and the $18.5 million a California jury awarded Thomas Anderson in a similar suit against AllState Insurance the year before, the news just got worse.

The rising number and cost of mold-related claims is continuing to skyrocket at a pace far exceeding the 9,000 mold and mildew-related claims filed in the U.S. and Canada in the last 10 years.

For instance, Farmer’s insurance had 10,150 mold-related claims in the first 10 months of 2001, according to a company spokesperson. In Texas alone, the cost of mold-related claims for the three largest insurers in the state jumped from $9.1 million in the first quarter of 2000 to $79.5 million in the first quarter of 2001, according to the Texas Department of Insurance.

State Farm Lloyds, the Texas property insurance subsidiary of Bloomington, Ill.-based State Farm, took $648 million of underwriting losses in Texas through last October, according to a company spokesperson, when it ceased writing mold-related homeowners policies. This January Standard & Poor’s lowered its ratings on the insurer, citing “extremely large losses” incurred from mold claims. At a recent presentation, Robert P. Hartwig, Ph.D., vice president and chief economist for the Insurance Information Institute, noted the average cost per policyholder in Texas increased nearly 800 percent between 2000 and 2001, largely due to a spike in mold-related claims.

Compounding the risk to insurers, property professionals, and others with deep pockets is the threat of serial litigation, where a group of lawyers representing claimants organizes to share information, witnesses, and documents against a target of defendants. The result can be enough to bring on bankruptcy, according to Peter J. Lynch, an insurance attorney with Philadelphia-based Christine Pabarue Mortensen and Young. “Serial litigation is a bet-the-company problem as Johns-Manville and other makers of asbestos products can attest,” says Lynch, also the co-author of a recent article with environmental engineer Kurt B. Martin titled “Mold: Serial Litigation Strikes Again.” “Fen-Phen, tobacco, and now toxic mold cases are just the latest wave.”

With the potential number of buildings affected, the number of people exposed, the types of policies that could be affected, the defense costs associated with these complex claims, and the global potential for claims activity, toxic mold could very well rival asbestos. Insurers covering property/casualty have already begun to see claims rising due to toxic mold contamination, but those providing homeowners, general liability, personal and/or commercial umbrella, as well as
standard property lines such as commercial package and commercial multi-peril may all be impacted.

Lawyers are already zeroing in on strict liability, professional malpractice, breach of implied warrantees, workers’ compensation, and failure to disclose in the sale of property. While toxic mold bodily injury claims still face legal issues, in civil lawsuits lawyers only need a preponderance of evidence, not absolute certainty. And exposure that may have occurred over multiple policy years raises the specter of legal limit stacking, for increased litigation risk.

The Nation’s toxic mold problem
The insurance industry is not alone in facing the dramatic rise in toxic mold claims and litigation. Property owner/managers, as well as builders, subcontractors, realtors, and others are also subject to dramatic liability risks.

Across the nation, toxic mold awareness has spiked as outbreaks have appeared in millions of U.S. homes, offices, schools, and public buildings, including Austin, Texas’ Hill Elementary School which was closed for over 18 months due to mold. Recently, California Gov. Gray Davis responded to the groundswell of health concerns surrounding mold by signing the Toxic Mold Protection Act, which directs state health officials to set exposure limits for homes, schools, businesses, and public buildings. The law, which took effect Jan. 2002, also requires landlords and real estate owners to disclose when forthcoming mold limits are exceeded. The message is clear: insurers, re-insurers, and property professionals ignore toxic mold at their peril as claims are rising, legal precedent has been set, and toxic mold legislation is being enacted nationwide.

Insurers, initially caught off guard by the proliferation of toxic mold claims and litigation, are beginning to respond with mold exclusion lines and premium hikes. A few are even pulling out of some markets completely—as AllState, Safeco Insurance, Farmer’s Insurance, and State Farm Lloyd’s did when they temporarily stopped selling new homeowners policies in Texas due to the rising number of mold and water damage claims in the state.

While shifting responsibility for toxic mold to consumers, businesses, and builders may save some of the insurance industry’s short-term pain, it carries the risk of not only disrupting realtor and lender markets, but also of energizing consumer groups and even legislators if citizens are left with no insurance, unaffordable insurance, or worse—opt to walk away from homes or buildings taken over by toxic mold growth.

“Toxic mold is a problem that the nation’s insurers and property professionals can no longer ignore,” said John Regan, chairman and CEO of PDG Environmental (OTC BB PDGE).

“While there is a degree of sensationalism that the media has created about mold issues, mold contamination is a very real problem that must be handled in a timely and professional manner.”

Until recently, insurers and property professionals have tended to view mold remediation as a simple clean up task. But as the full extent of health, liability, and property risk unfolds, many are looking to mold remediation professionals to avoid turning a small problem into a large one. Remediation cleans or removes contaminated materials and prevents mold from spreading to other areas while protecting the health of abatement workers.

“Of course, insurance companies want to reduce their risk of litigation and further mold claims, but many still aren’t pre-qualifying their contractors or educating themselves on proper work practices as well as they should,” continues Regan. “Without proper area isolation, engineering controls, and work practices, a job of just a few days can balloon into one requiring months of remediation, which would likely increase the chances of litigation as well.”

Experienced professional mold remediators should carry multi-million dollar liability insurance to protect the client if liability gets out of hand. They should also follow OSHA and other specified safety protocols to protect the health and safety of both the mold remediators and building occupants, which can minimize liability risk.

Mold has been around for ages, but the current toxic mold epidemic has modern roots.

“Changes in building design from the 1970s onward have heightened today’s mold problems,” says Regan. “The drive toward energy efficiency had the unintended effect of sealing off indoor airflow so moisture doesn’t evaporate well once introduced. Also, building materials are now more cellulose-based, with higher paper content, which mold thrives on. Unchecked mold growth can be serious. In second homes with absentee ownership and the right conditions, you can get the ‘Jurassic Park effect’ with mold overwhelming an environment and hanging down from the ceiling in as little as a month. In large commercial properties, the liability and property damage can be extensive, since mold may stay hidden longer with more room to grow.”

While liability issues may be debated among insurers, property professionals, and others, uncontrolled mold growth will only heighten property and health claims unless quickly checked and remediated.

According to the U.S. Environmental Protection Agency, there are a number of questions to consider before remediating a mold problem:

• Are there existing moisture problems in the building?
• Have building materials been wet more than 48 hours?
• Are there hidden sources of water, or is the humidity too high (high enough to cause condensation)?
• Are building occupants reporting musty or moldy odors?
• Are building occupants reporting health problems?
• Are building materials or furnishings visibly damaged?
• Has maintenance been delayed or the maintenance plan been altered?
• Has the building been recently remodeled or has building use changed?
• Is consultation with medical or health professionals indicated?

Four Steps Toward Mold Remediation
Regan advises a four-step approach for insurance and property professionals combating a mold problem: solve the water problem, get the mold tested, possibly vacate people nearby with mold sensitivity, then get professional remediation help. A skilled mold remediator can help prevent potentially severe tenant or staff health problems and costly litigation.

“Proactive remediation is preferable to delay since mold can destroy whatever it grows on, and can take hold in as little as 24 to 48 hours when exposed to water or excessive moisture,” says Regan. “Ceiling tile, carpet, drywall, insulation, and other common building materials are great food sources for mold, which can spread rapidly since its spores surround us and are carried from place to place by air currents and ventilation equipment.

“As new strategies are developed to combat mold growth, prevention will also play a part,” says Regan.

“Already remediators such as PDGE are partnering with builders to test and implement mold-inhibiting coatings that can be applied to new or existing structures. Prevention will be an important tool in heading off mold at the pass, and insurers and property professionals should be looking at that option as well to limit future mold claims and liability.”

PDG Environmental, Inc., a national environmental remediation contractor with local presence and service, provides up to $10 million of liability protection through A++ rated insurance companies and can provide performance bonds for the largest projects. PDGE is a member of both the AMIAQ andIAQA, and has both CMRS and CMR certified specialists. For more information about toxic mold remediation, visit www.pdge.com.

Del Williams is a technical writer based in Torrance, Calif.

Topics Lawsuits Carriers USA Texas Claims Property Pollution