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 Featured in this issue:    Mold and Homeowners Insurance: Costs, Consequences
                            and Solutions
Mold and Homeowners
                            By: Robert Hartwig, Ph.D.
     Insurance: Costs,      Vice President and Chief Economist, Insurance Information Institute
    Consequences and
                            Used by permission. The article has been shortened from the original version. A
            Solutions       companion presentation is available at

Why All Risks Have A        Introduction
                            Molds, a type of microscopic fungus, are found in virtually every ecosystem in every
  Pollution Exposure        climate on the earth. They have existed in the natural environment for hundreds of
                            millions of years and humans have co-existed in the presence of mold and other fungi
                            throughout of our evolution. Mold exists indoors and out.
       SEiP's Featured
       Resource: Mold       While some mold species can damage property and some species affect people with
            Resources       allergies and immune deficiencies, most mold can be cleaned up befo re it spreads. Most
                            people never become sick. Humans use molds and other fungi in the production of
                            everything from foods to medicines.
          MarketPlace       Recently, however, stories of infestation by “toxic” or “killer” mold have been
                            appearing with increasing frequency in the news media, with saturation reporting in
                            some parts of the country. Insurers who processed few, if any, mold claims two years
                            ago are now seeing hundreds if not thousands of such claims.

                            The traditional homeowners policy contract, which specifically excludes mold except as
                            the result of an otherwise covered peril, is suddenly being asked to deal with a surge of
                            claims for mold damage and related health problems for which there is no coverage and
                            no premium has been collected. Should the longstanding homeowners coverage
                            exclusion for mold be eroded by jury verdicts or judicial interpretation, a basic premise
                            on which the property insurance contract is based will be overturned, and the
                            consequences will be severe.

 Society of Environmental   In today’s highly charged atmosphere, as thousands of mold claims alleging property
  Insurance Professionals   damage and a wide array of illnesses swamp insurers, the expenses associated with those
    4901 Pine Cone Circle   claims are soaring. Two years ago, the few claims that insurers did see were handled for
    Middleton, WI 53562     a few thousand dollars. But today the costs have risen to $100,000 or more per claim.
                            Insurers report that the average mold claim now costs between $10,000 and $30,000 to
          1-877-735-0800       Potential rate increases needed to cover the cost of unprecedented mold claims threaten      to make home insurance coverage unaffordable for some and unavailable for others. In
                            some states major insurers are restricting sales of water damage c    overage or have
                            stopped offering new homeowners policies altogether. A crisis in the price and
             Winter 2002    availability of homeowners coverage could have far-reaching effects on home sales and,
                            as a result, the economy as a whole. Averting such a crisis is still possible, but will
                            require regulators to swiftly adopt market-oriented solutions.

                                                                                                  (Continued on page 2)
         (Continued from page 1)                               Availability and Affordabi lity of Insurance
                                                               The price of the average homeowners insurance
         This paper provides an analysis of the impact of      policy today is approximately $500, less than one
         mold claims on homeowners insurance, explains         percent of the median family of four’s annual
         when damage from mold is covered and when it          income, and provides $100,000 to $125,000 of
         is not and identifies proposed solutions to prevent   protection against a broad range of calamities for
         a crisis in insurance costs and availability that     the typical family’s most valuable asset—their
         could harm the housing market and the nation’s        home. The price of homeowners insurance has
         economy                                               actually become even more affordable in recent
                                                               years relative to income and the cost of homes.
         Scope and Potential Costs of the Problem              The widespread availability and eminent
         There are thousands of active mold claims today       affordability of homeowners insurance have
         and the number is growing rapidly. Recent court       helped to propel homeownership rates to record
         decisions, such as the verdict of a Texas jury in     highs in recent years, particularly among low-
         June 2001 ordering an insurance company to pay        income buyers.
         $32 million in actual and extra-contractual
         damages to a Dripping Springs, Texas,                 This could change. Huge growth in the frequency
         homeowner for mold damage to her 11,000               and severity of mold claims, combined with
         square foot mansion, have made mold a media           trends toward radically altering the terms of
         favorite.                                             coverage potentially threatens all homeowners in
                                                               the U.S. The extraordinary cost of mold claims
         In Texas alone, homeowners insurers could pay         could make homeowners insurance unaffordable
         out as much as $450 million in mold-related           for some and completely unavailable for others. It
         claims this year. This amounts to $150 on             could slow construction, one of the vital engines
         average for each and every one of the state’s 3.2     of economic growth, and affect employment.
         million homeowners insurance policyholders,
         which will ultimately result in higher insurance      In Texas, the cost of homeowners insurance is
         premiums. The amount could easily rise to a half      already nearly two percent of the median family
         billion dollars or more as insurers receive more      of four’s income, compared to less than one
         claims in the wake of Tropical Storm Allison,         percent in most other states. Mold could
         which caused $2.5 billion in insured property         ultimately force many Texas homeowners to
         losses, much of it associated with water-related      spend three percent—or more than $1,200—of
         damage conducive to mold growth. Between              their annual income on homeowners insurance.
         early 2000 and mid-2001, insurers saw the             Moreover, several insurers have announced new
         number of mold claims in Texas increase by a          restrictions on the sale of homeowners insurance
         mind-boggling 548 percent while the losses and        as a direct consequence of the explosion in mold
         expenses associated with handling those claims        claims, ranging from a complete cessation of new
         rose 755 percent!                                     sales, to eliminating coverage for water damage,
                                                               and refusing to sell policies to people who have
         As publicity over the mold issue increases, more      recently filed water damage claims, to halting
         mold claims are being filed in other states where     new sales entirely. A history of past mold or
         few were filed just two years ago. California and     water claims can make it difficult to sell a house
         Arizona are now seeing large numbers of mold          or obtain financing and insurance. These actions
         claims and the number of claims is growing            have affected policyholders not only in Texas, but
         rapidly in Florida, Illinois, Pennsylvania and        in other states as well.
         Nevada. Insurers report a sharp increase in mold-
         related inquiries generally and at least some The cost of homeowners insurance nationally is
         claims virtually everywhere, sometimes expected to rise six percent this year, even
         immediately following stories in the media.       without the mold factor, but some states are
                                                           seeing increases far in excess of that amount,
         The mold crisis has also spread beyond single- driven in part by the surge in mold claims. A
         family homes. Condominium associations and number of insurers are implementing or seeking
         landlords, schools and courthouses, private rate increases of 25 percent or more in Texas and
         businesses and charitable organizations have all California, the two states that account for most
         been slapped with suits. In the sections that mold claims today. Rate increases in the 10 to 15
         follow, some of the key coverage issues percent range are common elsewhere.
         associated with mold in residential and non-
         residential structures are discussed.

page 2
Homes, Homeowners Insurance Policies and               2. We do not insure, however, for loss:
Mold Coverage                                              c. Caused by:                                              SEiP
Do homeowners insurance policies provide                       (5) Mold, fungus or wet rot. However,                Supporters
coverage for mold-related damage? The answer                   we do insure for loss caused by mold,
depends critically on whether the development of               fungus or wet rot that is hidden within
mold and resulting mold damage were the result                 the walls or ceilings or beneath the floors        SEiP acknowledges and
of a covered peril. A peril is a cause of loss, such           or above the ceilings of a structure if            thanks the following
as a burst pipe, windstorm or flood. If mold                   such loss results from the accidental              organizations for their
damage is the result of a covered peril, then a                discharge or overflow of water or steam            support.
standard homeowners insurance policy will                      from within:
respond. If the mold damage is the result of                        a. A plumbing, heating, air
anything other than a covered peril, then there is                  conditioning or automatic fire                AIG Environmental
no coverage. For example, if the roof of an                         protective sprinkler system, or a             ECS, Inc.
insured home is damaged in a hurricane (a type of                   household appliance, on the
windstorm and therefore a covered peril),                           “residence premises”; or                      Zurich North America
admitting water and leading to the development of                   b. A storm drain, or water, steam or          Freberg Environmental
mold, then the costs of removing that mold are                      sewer pipes, off the “residence               Insurance, Inc.
likely to be covered by the homeowners insurance                    premises”.
policy. On the other hand, if the introduction of                                                                 Investors Underwriting
water into the home was instead due to a flood, a      While language may vary slightly across states,            Managers
type of peril that is explicitly excluded from all     the exclusion remains unambiguous, even in                 Gulf Insurance Group
homeowners insurance policies, then the costs          Texas, where the exclusion in the Texas HO-B
associated with mold damage are not covered. In        policy (the type of policy which accounts for 95           Kemper Environmental
Texas, where coverage for water damage is              percent of all homeowners insurance policies               American Risk
broader than in other states, the same principal       written in Texas) reads as follows:                        Management
applies. In short, mold damage is not covered                                                                     Resources Network
under a standard homeowners insurance policy           MOLD EXCLUSION: TEXAS HO-B FORM
unless the proximate cause of the mold damage is
a covered peril under the terms of the             (1) The following exclusions apply to loss to
homeowners policy.                                 property described under Coverage A (Dwelling)
                                                   and Coverage B (Personal Property)
Mold Exclusions in Homeowners Insurance:               f. We do not cover loss caused by:
Nothing New                                                 (2) rust, rot, mold or other fungi.
Mold damage exclusions in homeowners
insurance policies are not new. The 1991 As in the 1991 HO-3 policy and the HO2000 HO-
Insurance Services Office (ISO) HO-3 form, 3 policy, the Texas HO-B policy contains
variations of which were in use in most states for language that relates to the possibility of coverage
most of the 1990s has for many years excluded if the underlying cause of the mold damage is a
mold-related losses:                               covered peril:

MOLD EXCLUSION: ISO HO-3 FORM                          “We do cover ensuing loss caused by...water
                                                       damage...if the loss would otherwise be covered
2. Caused by:                                          under this policy.”
     e. Any of the following:
         (3) Smog, rust or other corrosion, mold, The language in the Texas homeowners insurance                    Newsletter
         wet or dry rot;                              policy purchased by the vast majority of Texas                 Notice
                                                      homeowners appears to be little different from the
The exclusion is clear. The intention and forms used in most other states.
interpretation of Exclusion 2. e. (3), however, is to                                                            SEiP has discontinued
exclude coverage for mold that arises from non- The surge in molds claims in Texas is not due to                 printing and mailing of
covered perils (such as a flood) while preserving any substantive differences in the mold exclusion              our quarterly
coverage in situations where the proximate cause found in homeowners insurance policies. Instead,                newsletter. To receive
of the mold damage was a covered peril.               it is the fact that Texas homeowners policies have         the newsletter via
                                                      historically covered damage arising from the               email, visit our
This intent was made more explicit in the HO2000 continuous and repeated seepage of water. In                    website at www.armr.
HO-3 form.                                            virtually all other states, water damage—the most          net or send your email
                                                      common cause of insured loss in homes—is                   address to
MOLD EXCLUSION: ISO HO2000 HO-3 covered only if it is of a sudden and accidental                       
FORM                                                  nature. Because mold cannot grow without

                                                                                       (Continued on page 4)   page 3
         (Continued from page 3)                                their policyholders are left with a limited number
         moisture, the liberal water damage protection of options to resolve the current situation. The
         features in the Texas policy create an opportunity available options are:
         for excessive and abusive filing of mold claims as
         “add-ons” to water damage claims.                      1. Allow insurers to pass the entire cost of mold
                                                                   claims and associated expenses through to
         Every company has the desire, intention and legal         policyholders;
         obligation to pay claims for covered losses in a 2. Allow insurers to exclude mold coverage under
         prompt and efficient manner. Unfortunately, in            all circumstances;
         today’s legal environment, the correct application 3. Allow insurers to establish sub-limits (either as
         of this language has turned familiar terrain into a a percentage of the policy limits or as a fixed
         claims handling minefield. Decisions by claims            dollar amount) for coverage available to
         adjusters and industrial hygienis ts can lead to remediate mold claims;
         extra-contractual damages or class action 4. Allow insurers to include coverage for mold as
         litigation and could ultimately give rise to a crisis an endorsement (coverage available in
         in availability and affordability.                        consideration of additional premium)
                                                                5. Allow insurers to insert clarifying language into
         What’s Behind Mold Mania?                                 homeowners insurance policy contract language
         Insurers today find themselves at the epicenter of        that clarifies under what circumstances a policy
         the mold controversy. Homeowners, threatened              will respond to a mold claim;
         with the loss of what for many is their most 6. Ignore the problem and force insurers to
         valuable asset, are looking for someone—                  deplete their assets in the course of paying mold
         anyone—to pick up the tab. Many have turned to            claims.
         their homeowners insurance even though damage
         arising from mold in most cases is clearly The status quo cannot is clearly not a viable
         excluded from their policies. Homebuilders, sued option. Homeowners insurance is already
         for shoddy construction and accused of using poor becoming more difficult and more expensive to
         quality construction materials, seek protection obtain because of mold. Moreover, insurer assets
         from their insurers in order to stave-off in states like Texas are being depleted at a rapid
         bankruptcy in the face of staggering legal bills pace, threatening the solvency of some.
         and adverse judgments—again even in cases
         where policy exclusions clearly eliminate the The current battle over who will foot the bill over
         possibility of coverage. Businesses and mold-related damage will continue to be waged
         government institutions, including schoolhouses until the true economic reality of the issue s ets in.
         and courthouses, have been sued and even
         shuttered in the face of lawsuits from employees There exists only a limited pool of funds available
         and concerned parents. Workers compensation for paying mold claims. Mold claims must be paid
         claims are also becoming increasingly common.          from the same limited pool of funds that protects
                                                                policyholders from all other covered perils. When
         The mold problem, like the surge in claim activity a policyholder’s home is destroyed by fire,
         itself, defies a simple solution. Part of the surge in tornado or hurricane, struck by lightning or is
         mold claims may have to do less with biology and burglarized or vandalized, for example, insurers
         more on abuse of the tort system and the 24-hour tap into this same pool of funds to help families
         newscycle. How the problem is ultimately get back on their feet as quickly as possible.
         resolved will have a profound impact on the Drawing down this pool of funds for the benefit
         availability and affordability of insurance.           of a relatively small number of claimants, some of
                                                                whom are seeking tens of millions of dollars in
         How will the Mold Issue be Resolved?                   damages, is unfair to millions of other
         The consequences of failing to deal with the issue policyholders.
         are potentially severe. It is in the best interest of
         all parties involved—policyholders, insurers and Conclusion
         regulators—to come to a quick and equitable Mold is fast becoming the defining issue in
         solution that ensures a stable and competitive homeowners insurance coverage today. Its
         market. There is presently a narrow window of impacts on availability and affordability are as
         opportunity to craft a solution that will avoid a much discussed as some of the largest natural
         full-blown crisis in availability and affordability disasters of the 1990s. Since keeping homeowners
         of coverage, the telltale signs of which have insurance available and affordable is in
         already begun to emerge in some areas.                 everyone’s best interest, it is in the public interest
                                                                to restore balance and seek rational outcomes to
         The virtual immortality and ubiquitous nature of the concern over mold.
page 4   mold means that state regulators, insurers and
Why All Risks Have A Pollution Exposure

By: Chris Holmes                                      Property Owners / Leaseholders: Any firm
National Environmental Coverage Corp.                 that owns or rents property has a pollution
                                                      exposure. This can arise from the “midnight
As environmental specialists, we have on many         dumping” risk or simply as the result of
occasions witnessed insurance producers               corrosion, a fire, explosion or other accident.
confidently proclaim their accounts to be free        To deal with this ex   posure your insured can
of any pollution or environmental exposure.           apply for Site Specific Pollution Liability
The sad reality is, however, that this kind of        (SSPL). SSPL can cover both first party
thinking can needlessly jeopardize your               cleanup costs as well as third party BI, PD and
agencies financial health by creating a serious       Cleanup costs. It is a very complicated
and easily avoided E&O exposure. Even more            coverage that defies simple explanation, but in
important, it also results in a lost opportunity to   short, SSPL provides coverage for
generate additional commission income from            unintentional pollution arising from a
exis ting accounts, create new opportunities for      designated premise that is owned or occupied
growth and generally improve the professional         by the policyholder. Most types of entities can
standing of your firm. If you write any of the        purchase SSPL. However, depending on
following types of accounts and are not               exposures, first party cleanup costs may not be
offering pollution coverage, you are missing a        available for certain risks. SSPL coverage is
terrific opportunity:                                 always written on claims made basis and
                                                      coverage can have either a retroactive date of
Contractors: All contractors have a pollution         inception or if qualified, can be offered with
exposure, and some of the largest pollution           full retroactive coverage (sometimes called
losses can come from risks that are not               “historical coverage”). Site Specific Pollution
classified as environmental contractors. Serious      Liability is often referred to as Pollution Legal
pollution losses can arise while digging,             Liability (PLL) or Environmental Impairment
moving or operating equipment, performing             Liability (EIL).
any construction activity or can arise as a result
of a fire, explosion, storm, vandalism etc. Most      Vehicle Owners: Any trucker, manufacturer,
CPL losses result from unforeseen and                 distributor or contractor who carries even small
unpredictable circumstances arising out of a          quantities of ordinary cargo can be faced with a
variety of contracting activities. To answer this     serious pollution loss after a collision or
exposure you should be letting all of your            overturn. It is a common misconception that
contractors know that they can apply for              only vehicles carrying materials labeled as
Contractors Pollution Liability (CPL). CPL can        hazardous run the risk of being involved in a
provide third party Bodily Injury, Property           pollution loss. In fact, cargo as ordinary as
Damage and Cleanup coverage for                       milk, animal feed, asphalt, dirt and most
unintentional pollution caused by covered             common chemicals can cause a pollution loss
operations while the named insured is working         in the event of a spill. Vehicle owners can
at sites that are not owned or occupied by the        apply for Motor Vehicle Pollution Liability
named insured. CPL coverage usually ends              (MVPL). MVPL provides coverage for
once materials are moved beyond the                   accidental pollution emanating from cargo
boundaries of the job site. As the name implies,      carried on a scheduled vehicle. It does not
contractors of all types purchase this coverage.      cover Bodily Injury or Property Damage
CPL may be written on either claims made or           resulting from automobiles other than the
occurrence form, depending on exposures. CPL          pollution aspect and does not include an MCS-
policies can be written either on a job specific      90 endorsement. MVPL is usually written on
or annual basis.                                      an occurrence form. MVPL is also sometimes
                                                      called Transportation Pollution Liability (TPL).

SEiP’s Featured Resource: Mold Resources
New to the SEiP website is a mold resources page designed specifically for the risk management
professional. The new web page has links to recent news articles, insurance and legal information
and other mold resources. Visit the SEiP website at

                                                                                                          page 5
         Environmental MarketPlace
         Zurich Introduces Health Care                       ECS Offers Land Reuse Report
         Pollution Liability Product                         Don't let the opportunities presented by
         Zurich North America Environmental has just         brownfield redevelopment pass you by.
         introduced a new pollution liability program for    ECS, Inc. and the International Economic
         the health care industry. This program provides     Development Council (IEDC) have teamed up
         coverage for health care professionals and          for the second consecutive year to produce the
         facilities for pollution events emanating from      ECS Land Reuse Report 2001.
         medical waste.
                                                             The report is a review of media coverage of
         In addition to pollution clean-up, this product     brownfield redevelopment across the United
         covers injuries and related damages as a result     States, and helps to pinpoint a variety of trends
         of non-employees coming into contact with           regarding these activities. With the products and
         medical waste. These occurrences are excluded       expertise to support land reuse initiatives, ECS
         from coverage by most liability and professional    is poised to be the authority in advocating the
         liability policies. While great care and            redevelopment of previously used land.
         preventative measures are usually taken to
         prevent injuries f om medical waste, a single
                            r                                To obtain a free copy of the report, access a
         accident can cost the health care professional      variety of articles, tips, case studies and
         hundreds of thousands of dollars in an uninsured    additional resources regarding brownfields
         event. This policy also provides insureds with      redevelopment and learn more about how ECS'
         contingent coverage in the event of a loss          customized environmental insurance programs
         occurrence during the transportation of the         are facilitating land reuse across the country,
         medical waste and at the waste disposal facility.   visit
         This description is subject to the actual terms
         and conditions of the policy.                       Contact Bob Hallenbeck at 800-327-1414 for
                                                             more information about the use of
         Please contact Julie White at (718) 948-2720 for    environmental insurance in land reuse activities.
         additional information or questions regarding
         this health care product.                           Kemper Environmental's Coverage
                                                             for Environmental Services
         AIG Environmental - Mergers and                     Kemper Environmental will write business for
         Acquisitions                                        environmental service industries specifically
         Uncertainties about the extent of environmental     waste & recycling, remediation contractors,
         contamination, undocumented operations or           enviro -hazard control contractors and
         sketchy historical property records and their       environmental consultants. Coverages offered
         negative impact on a balance sheet can stall or     by Kemper will write include pollution liability,
         halt a transaction. Even when confidence is high    professional liability, general liability, umbrella
         that all known exposures have been dealt with,      and automobile liability. Kemper will write EIL
         unknown environmental contamination could           coverage for industrial & commercial facilities,
         surface and negatively impact a company's           fuel dis tribution (tank risks) and non-
         earnings once the transaction has closed. Neither   environmental contracting risks. We are
         a buyer nor a seller wants to incur risks for       environmental industry and enviro risk
         unknown future liabilities and rarely do they       specialists with field & home office
         agree on the amount of that liability.              underwriters to support our producers.

         The M&A underwriters at AIG Environmental®          For more information contact Kemper
         are posed to deal with indemnity obligations in                                    a
                                                             Environmental at 800-679-0025, f x 609-936-
         asset purchase agreements with a variety of         3058 or
         insurance products which include; Pollution
         Legal Liability, Cleanup Cost Cap,                  IUM Provides Emergency Response
         Environmental Protection Program,                   Service
         Representations and Warranty Coverage and           The success of any environmental underwriting
         Loss Mitigation Insurance. For additional           program is directly proportional to its ability to
         information on Mergers & Acquisition                control the magnitude of the environmental
         insurance products please contact AIG               losses incurred by its insureds. Investors
         Environmental® at

page 6                                                                                       (Continued on page 7)
(Continued from page 6)                                         environmental losses.
Underwriting Managers, Inc. (IUM) is aggressive
in its attempts to do the same by providing 24-                 For mo re information, contact an IUM
hour, 7-days per week, 365-days per year,                       representative at 757-363-2468 or fax 757-363-
emergency response services to all of its                       8486 or
policyholders. A single call to 1-800-ADJUST4
links an IUM insured to an on-call Spill Response               Citibank Distributes Travelers Stock
Coordinator. Through the use of this Spill                      Gulf Insurance Group Companies, a wholly
Response Coordinator, IUM insures that an                       owned subsidiary of Travelers Property Casualty,
experienced environmenta l consultant is                        is now rated A++ XV by A.M. Best Company. In
supervising the emergency response operations;                  addition, Citigroup has announced plans to sell
including management of the contractors,                        about 20 percent of Travelers Property Casualty
coordinating contact with the appropriate                       to the public in a stock offering by the end of
regulatory agencies, and verifying that cost-                   March. The rest of the company would be
effective remedial technologies and disposal                    distributed to Citigroup shareholders by the end
options are being implemented.                                  of 2002. Citigroup will remain a strong financial
                                                                advisor to Travelers and, conversely, Travelers
With every bound policy, a spill response kit, loss             will remain a leading risk manager for Citigroup.
notice forms and adhesive stickers are distributed              Travelers Property Casualty is the nation's sixth-
to IUM policyholders, complete with the 1-800-                  largest property-casualty insurer. For more
ADJUST4 number and the procedures to follow                     information email Gulf Insurance Group at
in the event of a loss. Through this innovative       
program, IUM participates to the greatest extent
possible in the response actions associated with

 About the Society of Environmental Insurance Professionals
 What is SEiP?
 The Society of Environmental Insurance Professionals is a independent nonprofit association
 dedicated to helping risk management professionals utilize environmental insurance products to better
 server the needs of their customers.

 What are the benefits of membership?
 Through a knowledge managed website, focused environmental forums, quarterly newsletters, and
 access to specialized risk management resources, SEiP members have a valuable resource at their

 How do I join SEiP?
 From the SEiP website at, click on the Become a Member button to find a membership
 registration form. The form can be completed online on our secure server or printed and mailed back
 to us. A small membership fee of $225 per person or an office membership (6 people) of $1,000 can
 be paid by check or credit card.

 How do I get more information?
 Contact SEiP at 877-735-0800 or email

 The SEiP Newsletter is published quarterly.
 Anne Simmons, Editor

 Comments, suggestions and articles are welcomed. Potential guest columnists are encouraged to submit a brief topic outline
 and biographical summary to Anne Simmons at
                                                                                                                              page 7

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