SOCIETY OF ENVIRONMENTAL INSURANCE PROFESSIONALS
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serve the needs of their customers through education,
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Featured in this issue: Mold and Homeowners Insurance: Costs, Consequences
Mold and Homeowners
By: Robert Hartwig, Ph.D.
Insurance: Costs, Vice President and Chief Economist, Insurance Information Institute
Used by permission. The article has been shortened from the original version. A
Solutions companion presentation is available at www.iii.org.
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.
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
www.armr.net Potential rate increases needed to cover the cost of unprecedented mold claims threaten
email@example.com 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.
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 firstname.lastname@example.org.
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 www.armr.net.
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.
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 http://www.ecsinc.com/landreuse/.
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 environ@Kemperinsurance.com
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 email@example.com.
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 firstname.lastname@example.org.
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 email@example.com
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 www.armr.net, 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 Cindy@armr.net
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 firstname.lastname@example.org.