A bill that was heard April 22 by a California Senate panel requiring insurers to cover mold will create affordability and availability problems across all property/casualty lines of business, according to the Alliance of American Insurers.
“As it currently stands, SB 1763 would make it difficult for insurers to seek exclusions on mold coverage as an ensuing loss,” Peter Gorman, vice president of the Alliance’s Western Region, remarked, in a letter to members of the California Senate Insurance Committee. “By mandating mold coverage, the bill would strip away an insurer’s ability to accurately underwrite property/casualty risks at a fair price, ultimately impacting solvency.”
SB 1763 would require all property liability insurance policies to cover mold as an ensuing loss. It also would create a duty on all insurers to disclose whether “mold is reasonably believed to have ensued from a covered loss.”
Although the bill permits insurers to exclude mold as a non-covered peril, it sets such high standards for exclusionary language as to be unattainable or unenforceable.
“It is often difficult, if not impossible, to express exclusions ‘clearly, explicitly and in readily understandable terms,’ as called for in the bill in a manner that will meet both this test and the scrutiny of prior case law,” Gorman wrote to the panel. “The result will be judicial overrule of policy language in favor of the injured. The Alliance believes that this imposes an unfair contractual disadvantage on the insurer and should not be expressed in a statute, exposing insurers to bad faith allegations.”
Gorman also characterized as “unreasonable” the bill’s requirement that insurers inform customers when they have “reason to suspect” that mold is likely to be present or results from a given claim. “SB 1763 creates a subjective standard that invites further bad faith allegations that an insurer ‘should have known’ that mold was present or would be present,” he wrote. “This is clearly an unreasonable burden to place on insurers. It would result in insurers having to conduct expensive laboratory testing in an effort to protect themselves. The net effect of SB 1763 would be to dramatically increase premiums for both residential and commercial property coverages.”
Following the hearing Monday, Gorman remarked, “As I understand it, the bill will be amended to limit exposures to exclude auto only; substitute the ‘exposures to perils’ language to ‘exposures to covered losses,’ add specific exclusion language to be used in policies, remove agents from disclosure requirements, and clean up the disclosure requirements for insurers to limit bad faith actions.”
According to Gorman, “It seems the intent of the Committee is to prohibit total mold damage exclusions, according to court decisions covering ‘proximate cause’ losses here in California. The author indicated that, of the 74 carrier exclusions filed for HO lines, 47 were for total exclusions. These are presumed to be in force, even though the Commissioner does not officially ‘approve’ or ‘disapprove’ them. He has only requested rate credit reductions of 1 to 3 percent for some of them. The bill was left ‘on call’ for insufficient votes, but we expect it will go out with these committee amendments.”
Gorman added that over the next week, all interested parties will meet with State Sen. Deborah Ortiz (author of the bill) to hammer out specific wording.
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