Mold Claim Problems Diminishing in Texas, But Plague Insurers Countrywide, Actuaries are Told

The problems of mold claims that exploded in 2002, costing companies that insure homeowners more than $1 billion – roughly five times the cost in 2002, are diminishing in Texas – the state where the problems began and caused many insurers to stop writing or renewing homeowner policies.

But because the problems have spread to other states, the issue is not completely behind the insurance industry, attendees at the Casualty Actuarial Society’s annual Seminar on Ratemaking were informed recently.

Texas Insurance Commissioner Jose Montemayor, addressing the group’s General Session on “Mold: An Emerging Frontier,” said he doesn’t see mold as an emerging frontier, “but rather something that’s already largely in our rearview mirror.”

“We’re really thankful,” he said, “that most of the effects have gone through the system and we’re now at the residual end of things – at least here in Texas.”

He said mold losses in Texas represented a man-made disaster that hit at the same time the state was experiencing natural disasters, causing a compounding effect.

“Water losses in 2001 more than doubled, claims spiked along the coast—especially in the Corpus Christi area – resulting in a billion dollars worth of water losses for insurance companies, so many large insurers, in response to the crisis, simply stopped writing new product and many started to nonrenew (policyholders) in large numbers,” the commissioner said.

At the Texas Insurance Department in 2001, we received a flood of calls from consumers complaining of dramatic increases in their homeowners’ insurance rates. They were shocked and didn’t expect that, Monetemayor said.

“Concerned over the effects of this, I held four separate hearings around the state, heard from some 900 people giving testimony — typically homeowners – but I also heard from the Centers for Disease Control, economists, health authorities, the insurance industry, bankers, realtors, builders and everybody was greatly concerned over what was going to happen with mold and its health effects,” he said. So far the only verifiable health effect that I have been able to pick up from mold that applies to the entire population was basically hysteria, he said laughingly.

As a result, we took the high-priced procedures of testing for and remediation of mold out of the basic homeowners policy and made it optional, the Texas Commissioner said. “Consumers could still have it (the coverage) if insurers were willing to offer it for additional premium or as some endorsement and that allowed us to get back to basics.”

Montemayor said he approved filings by several insurers and Insurance Services Office (ISO) on revised homeowners insurance forms to give consumers more choice on mold coverage. “I’m also asking the state Legislature to remove a barrier and allow any insurer to present any form that they wish to compete for and not have the restriction of having to be a ‘defined national insurer,’ he added.

“The commissioner’s role in this, in my view, is to restore market competition and I have great confidence in legislators that they will allow me to do a lot of this by rule, “he said.

Examining the mold problem from a national perspective, Robert Hartwig, Ph.D., senior vice president and chief economist for the Insurance Information Institute, said that while Commissioner Monteymayor stated the mold problem is sort of in the rearview mirror, “you know when you look in the rearview mirror it says ‘objects may be closer than they appear’ and this may be the case with mold; we may be past it but it’s a little to soon to change lanes at this point, so we have to think about how we proceed and how much further we need to go.”

Along with a lot of good things that are exported from Texas, one of its most notorious exports in recent years has been the mold crisis, Hartwig told the actuaries.

It is a complex issue, he observed, involving homeowners fear of mold – with hysteria in some areas; its effects on property, construction, workers’ compensation and liability issues; misinformation about an astounding array of ailments attributed to mold; trial lawyers profiting from fear and hype over mold, profiteering by mold remediators, increased media attention and insurance regulators struggling with the issue, but with limited options.

The number of mold claims in Texas rose 1,306 percent in 2001, Hartwig said, and the average per mold claim escalated from about $14,000 to about $35,000 or $36,000 by the middle of 2002 – a rapid escalation in costs. “It’s stunning how much these mold claims cost, usually around ten times more than a typical homeowners insurance claim,” he said.

Mold losses/claims peaked in the middle of 2002 – at about 25,000 claims resulting in water damage paid losses of about $200 million, but are finally moderating. “Based on this you could say we are heading in the right direction, but we are by no means out of the woods with respect to this issue, I think, in Texas or anywhere else for that matter; nevertheless it is a very encouraging sign,” Hartwig said.

Homeowners insurance in Texas has experienced a very high paid loss ratio, up 90.1 percent since 1999, the I.I.I. economist pointed out, while average premium is up only 40.1 percent. So you could argue, he said, that perhaps premium increases which have gone into force so far are entirely justified, and you could argue in many cases that they still may be inadequate.

Moving beyond Texas, Hartwig said, the mold problem has been exported to many other states. In California we have seen an amazing increase in water claims, in terms of frequency and costs. And this at a time when the state was experiencing its worst drought in decades, he said.

The reaction in many states was that at least 35 states approved ISO mold exclusions and many other states approved the exclusions or limitations put forth by individual insurance companies. In most states, there are some sort of restrictions on mold coverage now in the personal lines and increasingly on the commercial lines side, the I.I.I. official noted.

Homeowners insurance has been extremely affordable, with the average policy costing $600 or $650 and it is widely available, Hartwig said. But mold-induced rate increases will impact the affordability of homeowners insurance – consumers can’t afford mold and neither can insurers, cautioned Hartwig.

Examining the next battlefields for mold, Hartwig said the issue will probably migrate to the commercial area, affecting many lines such as commercial property, commercial liability, products liability, builders risk/construction defects and, to some degree, workers’ compensation.

He said the trend is toward class action lawsuits, since science doesn’t support massive individual non-economic damages that typically attract trial lawyers. It is much more lucrative to aggregate these smaller damages into a class action so the take for trial lawyers, who typically get 30 or 40 percent, is still very considerable.

In the regulatory arena, Texas insurers are drowning in a sea of new regulation with at least 66 pieces of legislation introduced, most of which would adversely impact insurers. And the number of homeowners’ insurers in the state has been declining steadily. The solutions will not be found in new, expansive and expensive regulations as proposed in the Legislature, he said. “The mold issue needs to be de-politicized, Hartwig concluded, and there is a need for market-based solutions that work to attract and retain insurers and fresh industry.”