Mold liability worries insurers

Large settlements could prompt exodus; Md. ruling sought on exclusions; Cost of repairing home might exceed its value

by Anne Lauren Hens lee : Special To The Sun
November 3, 2002

Maryland homeowners insurance could be reaching a critical juncture on an unlikely issue that might prove the final straw for insurance companies teetering from market woes and the impact of recent legislation.

Added to the familiar house assailants -- asbestos, lead paint and radon -- mold is deemed a new threat, one that thus far has had little consequence for the state's homeowners, but has become a potential catalyst for the entire industry.

Texas and Florida have accounted for most mold-related claims. Recent settlements for those claims have exceeded expectations, with one in Texas for $32 million -- a nightmare for insurers. Some claimants have lost their homes or their health has suffered as a consequence of mold damage.

And the geographical line has begun to shift, with the latest mold casualty in Delaware, where more than 300 residents were displaced recently when mold spores spread throughout their apartment complex in New Castle County.

The threat of prohibitive financial consequences has insurance companies looking for an out, with some claiming the potential cost could be too great for one company to bear.

For homeowners who would have to pay out-of-pocket for major structural repairs, the exclusion could present them with an expense that exceeds a home's value.

Insurance agents, who act as middlemen for insurance companies and homeowners, find themselves caught in between. If the state does not adopt an exclusion, one Maryland insurance agent argued, there will be a greater likelihood of more companies pulling out of Maryland.

The risk of losing more insurers in an unstable market, industry officials warn, could prove detrimental to insurers and to consumers, who could find their premiums rising substantially.

Insurance agencies hope for a balance that would satisfy both sides.

"With the mold litigation that occurred in Texas, among other places, and the large settlements, we can see where the carriers are coming from," said Shelley Arnold, executive vice president of the Independent Insurance Agents of Maryland, a statewide trade association. "On the other hand, we can also see the insurance commissioner's point of view, that nothing has been proven as far as this being a health-related issue. And, if that's the case, there is no reason to exclude it."

"Basically, if you look at a homeowners policy now, it excludes toxic mold, and it excludes mold damage. So, the way it is written now, mold is excluded if it naturally occurs, but if it is mold resulting from water damage, for example, then it is covered," she explained. "They are looking for clarification."

Agents, Arnold said, are hoping that Maryland will adopt a plan similar to Connecticut's, where the Department of Insurance recently assigned a $10,000 sublimit, or a cap, on first-party damage and a $50,000 cap on third-party damage. (A first party is the insured. A third party is not a party to the insurance contract -- not the insurer or the insured.)

"Carriers then would know what their probable maximum loss would be, and insurance would still be providing that type of coverage," Arnold said.

More than 200 property and casualty insurers have filed with the Maryland Insurance Administration to exclude or limit coverage for damage arising from mold or mold-related exposure. In response, Associate Commissioner Robert J. Becker will hold an information hearing in Baltimore at 10 a.m. Thursday to discuss filings that exclude or limit coverage in personal and commercial insurance policies for damage arising out of mold or related exposure.

"The commissioner asked for additional data," said Debbie Rosen McKerrow, director of communications and consumer services for the Maryland Insurance Administration.

"He has gotten some, but still not enough to let him to make the decision that he needs to make," McKerrow said. "That is why he wants to have the hearing on [Thursday], to invite industry people and consumers to lay it out on the table, get it on the record, and then he will have something to work from. If the information doesn't come, then that is going to tell us something also.

"The [associate] commissioner needs to make a decision based on facts. And he doesn't feel comfortable that, so far, he has been shown the kind of information that would allow him to make a decision. And it is an important thing," she added. "Once you allow an insurance company to make an exclusion for something, that's a road that is very difficult to turn back from."

Meanwhile, the industry is wary.

"We just had the credit-scoring bill passed last year that would not allow insurers to use credit-scoring in homeowners; we've had State Farm withdraw; we've had several other carriers withdraw. It's not just the mold issue here," Arnold emphasized.

"A lot of things are causing this market to be volatile right now. ... I believe this could be the straw that breaks the camel's back," she said.

The commission will make its decision after it has reviewed all the requested information and testimony at the hearing Thursday. No date has been set for its ruling.