Bill Targets Handling of Mold Claims

California insurance companies are predicting everything from sky-high homeowner insurance rates to a slowdown in the housing market if legislation aimed at protecting policyholders against mold damage becomes law.

Senate Bill 1763 would mandate that insurers pay for mold damage caused by a covered loss such as a burst water pipe unless their policies specifically excluded it.

The measure, by state Sen. Deborah Ortiz (D-Sacramento), would also require insurers to tell property owners when an incident for which a claim is filed is likely to spawn mold.

The state Senate passed the bill 21 to 11 last month, sending it to the Assembly, where it awaits debate in the Insurance Committee.

Ortiz said that she wrote the measure after learning that insurance companies were seeking to limit or exclude mold coverage from their policies.

State Insurance Commissioner Harry Low told the Senate Insurance Committee in April that he had received more than 200 such requests from insurers in 18 months.

All of those requests were granted, said Low’s spokeswoman Nanci Kramer, because the commissioner does not have the authority to control what insurance companies cover, only how much they charge.

Since the mold exclusions kicked in, the insurers have dropped homeowners’ rates 1% to 7%, depending on the policy and the carrier, she said.

Ortiz accused insurers of acting rashly in limiting their coverage.

“They triggered this legislation by rushing to the commissioner,” Ortiz said.

No federal or state laws or regulations define unsafe levels of mold exposure or how to remove mold. Another Ortiz bill, last year’s SB 732, ordered the state Department of Health Services to study mold and set health standards by July 1, 2003.

Although Gov. Gray Davis signed the bill into law, he did not include money in his 2002-03 budget proposal to pay for it, and funding remains uncertain as legislators craft a budget compromise.

The insurance lobby started making overtures to the Assembly last week for a compromise: The insurers would pay for a state mold study if Ortiz would rewrite or pull back SB 1763.

“We’re willing to pay our fair share,” said Dan Dunmoyer of the Personal Insurance Federation of California, an insurance industry trade group. “We want to figure out the science of mold. People have been living with it for a couple of millennia, so we can wait for a few months before we jump off the cliff.”

Ortiz said that such offers won’t persuade her to reconsider the current legislation.

Until a few years ago, insurance carriers didn’t think much about mold and treated it like smoke damage after a fire. If water from a burst pipe produced mold, insurers repaired the plumbing and cleaned up the secondary damage. A soaked carpet would be dried out or replaced without much dispute. Sheetrock on a waterlogged wall would be stripped and repaired.

But that was before a series of high-profile cases got national attention and threw a scare into the industry.

Last year, a Texas woman won a $32-million judgment from Farmers Insurance Group to pay for mold damage to her 22-room mansion. Last summer a federal jury in California awarded $17.5 million in punitive damages to a homeowner whose insurer had declined coverage for mold damage. The trial judge reduced the award to $3 million, and the case is on appeal.

Entertainer Ed McMahon filed a $20-million lawsuit in April against American Equity Insurance Co. alleging that improperly treated toxic mold in his Beverly Hills house sickened him and his wife and killed their dog.

Industry lobbyists are calling mold cases “the new asbestos,” not because of any proven comparable health risks, but because they fuel public hysteria and feed a burgeoning industry of lawyers and environmental-cleanup specialists eager to capitalize on fear.

Consumer Attorneys of California and other advocacy groups say insurers are the ones panicking. They see SB 1763 as a “common sense” bill that does little more than maintain the status quo.

“Insurance companies already have a duty to investigate claims and keep policyholders informed of the status of their claims,” said Amy Bach of the nonprofit United Policyholders. “SB 1763 is a rational response to an overreaction by insurers to the cost of cleaning up mold damage.”

Both opponents and supporters of the bill agree on two things: Mold is everywhere, and some people are sensitive to it.

The Centers for Disease Control and Prevention notes that mold is common outdoors and indoors. It can grow on moist building materials, including wood, tile, paint, wallpaper, drywall and carpet. Like hay fever-producing plant pollen, mold has been linked to some respiratory illnesses.

Researchers have not conclusively proved whether toxic molds such as the infamous Stachybotrys chartarum cause memory loss or internal bleeding, two symptoms highlighted in national media stories on the subject.

The Insurance Information Network of California released survey results this month showing that water-damage payments are on the rise.

California insurers paid an average of $4,730 per water-damage claim in 2001, up more than $1,000 per claim from the previous year.

“That’s because of mold,” said Peter Moraga of the nonprofit Insurance Information Network of California. “You can see how the costs of mold remediation skyrocketed.”

In Texas, which has the highest homeowner premiums in the country, State Farm stopped underwriting property insurance in September after reporting a $500-million loss for the first eight months of 2001.

The company said much of that loss came from the growing mold-loss claims in the state, though a State Farm spokesman acknowledged that the exact cost is difficult to calculate because fungus cleanup has traditionally been broadly listed as a water-damage repair.

“We didn’t even start tracking mold-loss claims separately until recently, because it was never a big issue,” said Keith Androff, a Texas spokesman for State Farm.

The company has yet to resume writing new Texas policies, but since March existing customers have been able to pay 50% higher premiums to include mold coverage on their homeowner policies.

In California, State Farm withdrew from writing new homeowner policies May 1, citing uncertainty in the financial stability of the state’s property insurance market.

Now, insurers predict that if SB 1763 becomes law, other companies will follow suit or may raise premiums to offset expensive mold remediation costs and to fight lawsuits over what they say is vague language in the bill requiring companies to notify policyholders of possible mold hazards.

And, they warn, the damage could spill over into the state’s home construction and real estate industries if insurance becomes harder to find and afford in a market with fewer companies competing for business.

“I’m not delivering a threat here,” said Jerry Davies, spokesman for the Personal Insurance Federation of California. “But more insurers could decide to pull out of the state. Look at what happened to Texas. Do we want that to happen in California too? And you know, you can’t have a mortgage without homeowner’s insurance.”

The objections don’t surprise Ortiz. She expects the insurance lobby to ratchet up pressure on the Assembly as it debates her bill in coming weeks.

“They will say they’re losing money. They’re going to make the case that it harms their industry,” Ortiz said. “I’m not convinced. Many fear the potential cost, but our insurance law was never designed to ensure these companies make a fat profit. We expect our homeowner’s policies to cover losses like this, and they need to do that instead of running away from it.”

The Assembly Insurance Committee is scheduled to discuss SB 1763 on June 26.