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MOLD AND INSURANCE
Insurance Information Institute
110 William Street
New York, NY 10038
(212) 346-5500
www.iii.org
Robert P. Hartwig, Ph.D., CPCU
Senior Vice President & Chief Economist
Claire Wilkinson
Director, Global Insurance Issues
INSURANCE ISSUES SERIES
August 2003
Volume 1/Number 4
What is Mold?
Molds – a type of microscopic fungus – are found in virtually every ecosystem in every
climate on 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
the entirety of their evolution. Molds and other fungi are used in the production of
everything from foods to medicines.
There are more than 100,000 species of fungi of which at least 1,000 are common in the
United States. According to the Centers for Disease Control and Prevention (CDC), mold
can be found almost everywhere, and will grow indoors where there is moisture. Some of
the most commonly found species are Stachybotrys, Cladosporium, Penicillium and
Aspergillus.
While some mold species can damage property if unchecked and some can affect people
with allergies and immune deficiencies, exposure to mold only rarely results in health
problems. Common health concerns arising from exposure to mold include hay-fever-like
allergic symptoms, according to the CDC. Certain individuals with chronic respiratory
disease may experience difficulty breathing when exposed to some molds, and people
with immune suppression disorders or underlying lung disease are more susceptible to
fungal infections.
The CDC states that “there are very few case reports that toxic molds (those containing
certain mycotoxins) inside homes can cause unique or rare health conditions such as
pulmonary hemorrhage or memory loss. These case reports are rare, and a causal link
between the presence of the toxic mold and these conditions has not been proven”.
However, because some molds can be a problem for some people, the CDC along with
other agencies such as Environmental Protection Agency (EPA) and Federal Emergency
Management Agency (FEMA) advises homeowners to clean up mold growth as soon as it
appears.
Mold may have been around approximately 400 million years, but its entry onto the
litigation scene is relatively recent. According to reinsurance intermediary Guy
Carpenter, there were at least 10,000 “toxic” mold cases filed in the United States and
Canada in 2001, of which around half were filed against insurance companies for bad
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faith (Exhibit 1). A report published in the Environmental Claims Journal in the Summer
of 20021 described mold as a litigation “perfect storm” and attributed its escalation to a
number of factors including a few high-profile plaintiffs, the ingenuity of the plaintiffs
bar, intense media coverage and uncertain science.
The Economics of Mold
Before 2000, the few mold-related claims that insurers did see were generally handled for
a few thousand dollars. In only two years, claims costs have skyrocketed. Today,
homeowners claims can reach $100,000 or more and the cost of some commercial claims
can run well into the millions. The typical homeowners mold claim now costs $15,000 to
$30,000 to handle, compared with $3,000 to $4,000 for the average homeowners claim
not involving mold.
The national cost of mold is difficult to track because most insurers don’t separate mold
from water damage claims, but the latest estimates clearly show that mold is a
multibillion dollar problem for insurers and therefore for the policyholders. US insurers
paid out at least $3 billion in mold-related claims in 2002, more than double the $1.3
billion paid the previous year.
Texas, which is widely recognized as mold’s “ground zero,” accounted for the majority
of all mold claims. It is estimated that Texas insurance companies have paid out just
under $4 billion for mold claims in the past three years. According to the Insurance
Council of Texas, mold claims in the state grew from $420 million in 2000 to just over $1
billion in 2001 to $2.2 billion (for 227,000 claims) in 2002. A special study by the Texas
Department of Insurance found that the number of such claims increased by 1,300
percent between the beginning of 2000 and the end of 2001 (Exhibit 2 and 3). Water
damage losses as a percentage of total homeowners losses in the state also shot up
between 2000 and 2002, clearly reflecting the impact of mold. TDI figures show water
damage losses per policy increased by 320 percent from 2000 through 2002 (Exhibit 4).
Claims and payouts peaked in July 2002 because newly introduced policies either limit or
exclude mold as a covered cause of loss (Exhibit 5).
1
Randy J. Maniloff, “Mold: The Hysteria Among Us”, Environmental Claims Journal/Vol. 14, No.
3/Summer 2002.
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Mold Publicity
Perhaps the most significant mold case to-date involved an award in excess of $32
million by a Texas jury that found the insurer guilty of bad faith, fraud and failure to
disclose that mold had been found on the plaintiffs’ property. None of the $32 million
awarded to the homeowner was for bodily injury allegedly caused by the presence of
mold. A state appeals court in Texas later reduced the award to $4 million plus interest
and legal fees. Nonetheless the landmark case led to intense media coverage, which
increased public anxiety over an unproven link between mold and human health.
Another case that generated enormous publicity was the $20 million lawsuit filed by
television personality Ed McMahon against several companies in April 2002. The suit
alleged that the insurer and adjusters inadequately handled remediation of mold following
a burst pipe in McMahon’s Beverly Hills, California home. McMahon also alleged that
he and his wife suffered severe mold-related injuries as a result of the defendants’
negligence and that mold infestation was a contributing factor in the death of their pet
dog. The case has since been settled for $7.2 million.
Yet another high-profile case involved environmental activist Erin Brockovich who filed
a lawsuit against the builder and former owner of her million dollar California home,
alleging that construction defects led to the presence of high levels of mold which
resulted in huge repair costs as well as health problems for her and her daughter.
As publicity over the mold issue has intensified, more mold claims have been filed in
other states. In California, there has been a surge in water damage claims, both in terms
of frequency and costs, reflecting the state’s growing mold problem. Homeowners filed
more than 114,000 such claims in 2002, representing one-third of all homeowners claims
and payouts. According to the Insurance Information Network of California, water losses
paid have been on a steady upward trend since 1997, rising 151 percent to $562.4 million
in 2002 from $224.1 million in 1997 (Exhibit 6). The cost of the average water loss in
California has surged by 33 percent since 2001 and is up 156 percent since 1998 (Exhibit
7). The numbers are also growing rapidly in Arizona, Florida, Illinois, Pennsylvania and
Nevada.
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Fears Reduced
The first media reports on the mold issue in 2000 and 2001 were characterized to a large
degree by excitement bordering on hysteria. Vivid articles would frequently focus on
unsubstantiated ill-health effects which mold was alleged to have caused, in effect
warning every homeowner to fear for their families’ lives. Since then the media frenzy
has peaked, and there has been a marked shift in the content of media coverage.
By the end of 2002, press reports usually included recognition of the uncertain scientific
basis for many claims of permanent injury from household mold, and urged people not to
panic. The clear connection between the cost of mold claims and rising homeowners rates
is now a part of most stories on the subject. More media is focusing on those who are
profiting from mold fear, and there is more interest in better science. Seeking to avoid
becoming the next Texas, some 40 state insurance departments have now approved mold
exclusions and/or limitations on homeowners insurance policies. California passed the
Toxic Mold Protection Act of 2001 to define permissible exposure limits for indoor
molds and to develop new standards to assess, among other things, what health threat
may be posed by the presence of molds. Most important, individuals are less susceptible
to hysteria and more inclined to take action to clean up molds before they spread.
Commercial Lines & Mold
While the homeowners mold crisis may well have peaked in 2002, the migration of the
problem to areas of commercial insurance has the potential to affect many more lines of
business, such as commercial property, commercial liability, products liability, builders
risk/construction defects and even workers’ compensation (Exhibit 8). Insurers of
apartments/condos/co-ops, office structures, schools, and municipal buildings face the
prospect of rising claims, as building managers and owners, architects and engineers,
contractors and sub-contractors come under legal fire.
Recent lawsuits highlight the potential for increased liability in the commercial arena. For
example, several former employees of IBM recently filed suits, alleging that the company
failed to protect them from toxic mold and related health exposures at its Research
Triangle Park campus in North Carolina. Also in July 2003, employees of United Airlines
filed a lawsuit against the city and county of Denver claiming their recurring respiratory
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conditions and other health problems are the result of mold exposure at Denver
International Airport. This suit, filed in the Denver District Court, is seeking class-action
status and alleges that the city and county breached their “duty to maintain the airport in a
reasonably safe condition” by “failing to correct the airport’s poor environmental
conditions despite having knowledge of such problems”. Even though science is not yet
able to fully evaluate health claims associated with mold, these legal developments are of
increasing concern for owners of commercial buildings and their insurers.
Construction defect litigation related to mold is also on the rise. For example, in April
2003, Hilton Hotels Corporation filed a lawsuit against 18 companies and individuals
over alleged construction defects in its $95 million Kalia Tower in Hawaii. The hotel
opened in May 2001, but was forced to close in July 2002 because of mold infestation.
Claims arising from the September 11 terrorist attacks have referenced mold. A recent
lawsuit filed by the Manhattan U.S. Attorney’s Office accuses the insurer of refusing to
pay clean-up and damage costs for a post office located near the World Trade Center site.
The suit alleges that the building was hit by burning debris, causing fire and smoke
damage, shattered windows, and water damage from the building’s sprinkler system. The
water damage caused mold to grow in the post office’s walls, ceilings and air-
conditioning ducts, the suit alleges.
Impact on Availability and Affordability of Insurance
The rise in mold claims has had a direct effect on homeowners premiums in the state of
Texas and across the country. The price of the average homeowners insurance policy
today is estimated at $569 (less than one percent of the median family of four’s income
nationally) (Exhibit 9). Although the average cost of coverage rose by just 2.3 percent in
2002 according to federal statistics, prices are expected to rise by 7 percent in 2003 and 9
percent in 2004 (Exhibit 10).
While many factors affect the cost of homeowners insurance, growth in the frequency
and severity of mold claims has had a significant impact and this is threatening the terms
of homeowners coverage, the widespread availability and affordability of which has
helped propel homeownership rates to record highs in recent years. According to
Insurance Services Office Inc, the average amount paid for each homeowners claim rose
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to $4,168 in 2000, up 10.5 percent from $3,773 in 1999. The average amount paid for
each water damage claim, which includes damage caused by mold, rose by 10.5 percent
to $3,347 in 2000, up from $2,984 in 1999. As the loss situation has worsened, so the cost
of homeowners insurance as a percentage of income has climbed substantially in certain
states, and a further rise in mold claims will drive the price higher, making coverage less
affordable for consumers.
The explosion in mold claims in Texas has driven up insurance premiums for that state’s
3.3 million homeowners policyholders, who already pay the highest insurance premiums
in the country - $1,288 on average in 2002, due to the state’s exposure to a wide variety
of costly natural catastrophes including tornados, hail, hurricanes and tropical storms.
Even so, figures from the Texas Department of Insurance show that homeowners
premiums have not kept pace with the paid loss ratio which has increased sharply since
1999 (Exhibit 11).
In many states, availability of homeowners coverage has also become a problem, as
several insurers have announced new restrictions on the sale of homeowners insurance
due to the mold problem. For example, in Texas the number of insurers writing
homeowners coverage has been declining steadily and fell to 128 in 2001, down from
162 in 1997 and 276 in 1990 (Exhibit 12).
Construction Effect
Any lack of affordable homeowners insurance threatens to undermine one of the few
sectors of strength in the United States economy – construction. Despite economic
growth that slowed from 2.4 percent in 2002 to just 1.4 percent during the first three
months of this year, an estimated 1.68 million new homes will be built in 2003 (Exhibit
13). New home sales are forecast to surge by 3.1 percent to an unprecedented 1.0 million
in 2003, according to the National Association of Realtors (NAR). An additional 5.73
million existing homes will be sold - another record for the year.
However, the issue of mold has already delayed and even halted some home sales and
new constructions, particularly in problem states like Texas, Florida and California, and
this is putting jobs at risk. For example, construction of single-family homes supports
about 750,000 jobs in those three states alone (Exhibit 14) and some $8 billion to $9
7
billion in wages in construction and related industries (Exhibit 15). Furthermore, condo
construction in parts of California has come to a virtual stop because of a surge in
construction defect litigation, which in turn has triggered a sharp increase in insurance
costs for contractors (Exhibit 16). The problem is fast spreading to other mold hotspots
like Arizona, Texas and Florida. In response, “right to cure” laws, which would give
builders the right to repair defects before lawsuits get filed, have been passed in five
states and are under consideration in 16 others.
Exclusions and Limits
Insurance departments in 39 states have already approved mold exclusions in
homeowners insurance policies (Exhibit 17). Mold exclusions are also becoming
increasingly common in commercial property and liability policies. Certain states also
allow insurers to establish sub-limits (either as a percentage of the policy limits of as a
fixed dollar amount) for mold remediation coverage. While some companies prefer to
create an absolute exclusion, others exclude mold but offer an attachment to the policy,
called an endorsement, which makes coverage available for an additional premium. Most
companies have inserted clarifying language into their policies, providing a tighter
definition of what is and what is not covered under the terms of the policy. In the course
of the changes, a number of insurers have developed stand-alone policies to cover mold-
related damage. All these steps are part of the ongoing effort to avert a full-blown crisis
in availability and affordability of coverage and to ensure a stable and competitive market
exists for both homeowners and commercial policyholders in the future.
Following are 17 exhibits which illustrate the key issues surrounding mold and insurance.
For additional information, see:
• Insurance Information Institute, www.iii.org
• Center for Disease Control, www.cdc.gov
• Environmental Protection Agency, www.epa.gov
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• Federal Emergency Management Agency, www.fema.gov
• Conning & Co., www.conning.com
• Guy Carpenter, www.guycarp.com
• Insurance Council of Texas, www.insurancecouncil.org
• Texas Department of Insurance, www.tdi.state.tx.us
• Insurance Information Network of California, www.iinc.org
• National Association of Realtors, www.realtor.com
• Insurance Services Office Inc, www.iso.com
• National Association of Insurance Commissioners, www.naic.org
• A.M. Best, www.ambest.com
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Exhibit 1
Documented Toxic Mold Suits
Former
Owners of
Sold Homes Bad Faith
10% Against
Insurers
1,000
50%
Builder for Cases
Construction
Defects 2,000 5,000
20% Cases Cases
2,000
Cases
HO
Associations
for Improper
Maintenance
20% Source: www.toxlaw.com; Guy Carpenter
Exhibit 2
TX: Estimated Total Number
of Mold Claims
15,000
The number of mold claims rose 14,706
1,306% between 2000:I and 2001:IV
12,000 11,318
9,000 7,145
6,000
4,033
2,472
3,000 1,933
1,627
1,050
0
00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4
Source: Texas Department of Insurance.
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Exhibit 3
TX: Average Cost Per Mold Claim*
The average cost of mold
$40,000 claims rose number of mold $36,213 $34,538
$35,000 claims rose 152% between
2000:I and 2001:II $28,061
$30,000
$24,024
$25,000
$20,000 $15,402
$13,719
$15,000
$10,000
$5,000
$0
00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2
*Includes loss and loss adjustment expenses.
Source: Texas Department of Insurance; Insurance Information Institute estimates.
Exhibit 4
Texas HO: Per Policy Water
Losses Have Skyrocketed
$800 70%
All Water Damage per Policy $714
$700 61.3%
All Water Dam as % Total Losses
All Water Dam as % Total Losses 60%
Avg. Water Loss per Policy
$600
Water damage losses per 50%
43.4%
$500 policy are up 320%
between 2000 and 2002 40%
$379
$400 33.9%
30.8%
31.0%
30%
27.0%
$300 25.1% 24.3%
20.7% 18.0% 20.7%
$186 20%
$200 17.6% $170
12.4% $128 $127 $123 $125 $121
12.5% $114
$100 $69
$88 $86 $88 10%
$0 0%
89 90 91 92 93 94 95 96 97 98 99 00 01 02
Source: Texas Department of Insurance; Insurance Information Institute
11
Texas: Mold Losses/Claims Exhibit 5
Are Finally Moderating*
$250 30000
Water Damage Paid Losses* ($Millions)
Paid Losses
Claim Count 25000
$200
20000
Claim Count
$150
15000
$100
10000
$50
5000
$0 0
D -01
D -02
Ju 1
Ju 2
Ap 01
Ap 02
A -01
N 1
A 2
N 02
Se -01
Se -02
Fe -01
Fe 02
Ju 01
Ju 02
M 01
M 02
M -01
M 2
O 1
Ja 01
O 02
2
0
0
l-0
-0
0
r-0
-0
n-
n-
-
-
-
-
n-
-
b-
b-
p-
-
p-
ov
ov
ug
ug
n
ar
l
ar
ay
ay
ct
ct
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ec
ec
Ja
* Data are for TDI Cause 61: Discharge – Other Damage.
Not all claims in cause 61 are mold and mold claims may
Source: Texas Department of Insurance; Insurance Information Institute also arise from other (non-water) causes of loss.
California: Surging Water Claim Exhibit 6
Frequency and Costs:
Symptom of Growing Mold Problem
•Water losses paid rose 151%
from 1997 to 2002 and 77%
$600 38%
since 1999 $562.4
$550 36% •Water claims accounted for less 36%
than 1/4 of all HO claims in $496.3
$500 1997, now they account for 1/3. 34%
$441.6 33%
$450
32% 32%
$400 31%
30%
$350 $316.5
$298.9 28%
$300 27%
California may be 26%
$250 $224.1 in a drought, but
24% 24%
$200 homeowners say
$150 they’re drowning 22%
$100 20%
1997 1998 1999 2000 2001 2002
Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims
Source: Insurance Information Network of California; Insurance Information Institute
12
Sharply Rising Average Water
Exhibit 7
Claim Cost in CA: Mold Symptom
$5,000 The cost of the average water loss in CA is $4,925
up 156% since 1998 $4,597
$4,500
$4,000
$3,691
$3,500 $3,326
$3,000
$2,485
$2,500
$1,925
$2,000
$1,500
1997 1998 1999 2000 2001 2002
Source: Insurance Information Institute based on data from the Insurance Information Network of California;
Exhibit 8
Mold and Commercial Insurance: the
Next Battlefields?
• Homeowners issue probably crested in 2002
• Migration to commercial area affects many lines:
Commercial Property Commercial Liability
Products Liability Builders Risk/Construction Defects
Workers Comp…(very little)
• Hot Spots:
Apartments/Condos/Co-ops Office Structures
Schools Municipal Buildings
Cars? (GM case in NC)
• Trend toward class actions since science doesn’t
support massive individual non-economic damages
Much more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
13
Exhibit 9
States with Highest
Premium/Income Ratios*
HO insurance is very affordable,
2.5% consuming less than 0.9% of the
typical family’s income nationally,
but 1.24% in FL and climbing! Can
Premium as % of Income
2.0%
1.72% we afford another price stressor?
1.5% 1.41%
1.32%
1.25% 1.24%
1.0% 0.86%
0.5%
0.0%
TX LA MS OK FL US
*As a % of the median family of 4’s income, 1998.
Source: NAIC, Insurance Information Institute
Exhibit 10
Average Expenditures on
Homeowners Ins.: US
$650
Average HO expenditures are
3
expected to rise by 8-10% in 2003
60
$600
3
55
$550
2
51
0
50
8
$500
48
1
48
5
45
0
$450
44
8
41
$400
95
96
97
98
99
*
*
*
*
00
01
02
03
19
19
19
19
19
20
20
20
20
*III Estimates
Source: NAIC, Insurance Information Institute
14
Exhibit 11
Texas HO: Paid Loss Ratio Up
Sharply, Premiums Haven’t Kept Pace
$1,400 120%
$1,288
Written Premium per Policy
$1,200 99.4% 100.6% Paid Loss Ratio 100%
93.3% 89.6%
89.7% 90.3%
$1,000
Premium per Policy
80%
Paid Loss Ratio
77.5%
67.7%
70.5%
$800 65.0%
58.5% 60%
$600 44.7% 49.1%
43.7%
40%
$400 Paid loss ratio is up 83.9%
since 1999 while average 20%
$200 premium is up just 41.4%
$0 0%
89 90 91 92 93 94 95 96 97 98 99 00 01 02
Source: Texas Department of Insurance; Insurance Information Institute
Homeowners Insurance Exhibit 12
Companies in TX (1980-2001)
Chronic problems in TX
313
325
insurance market
299
290
287
300 discourage insurers from
280
277
276
273
doing business there.
272
271
263
275
258
240
250
220
225
204
194
200
181
162
175
151
138
150
128
127
125 59% decline in the number of HO
insurers between 1984 and 2001!
100
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
Sources: A.M. Best; TX Coalition for Affordable Insurance Solutions.
15
Exhibit 13
New Private Housing Starts
(Millions of Units)
New Private Housing Starts
2.0
•Housing market remain strong.
1.9
•Virtually no exposure impact for insurers
1.8
1.71 1.68
1.7 1.62 1.64 1.57
1.60 1.62
1.6
1.46 1.48 1.47
1.5
1.35
1.4
1.29
1.3
1.19 1.20
1.2
1.1 1.01
1.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03E 04F
Source: US Department of Commerce; Blue Chip Economic Indicators (5/03), Insurance Info. Institute
Number of People Employed in
Exhibit 14
Construction of Single-Family Homes
Mold Puts Jobs at Risk
Construction of single-family
homes supports about one-
265,118
quarter million jobs in states with
the biggest mold problems
256,795
244,555
Texas Florida California
Source: National Association of Homebuilders, Insurance Information Institute
* Single family units, based on year 2000 construction figures
16
Billions in Wages Depend on
Exhibit 15
Construction of Single-Family Homes
$ Billions Mold Puts Wages at Risk
Construction of single-
$8.6 family homes supports $8
billion - $9 billion in wages
$8.3 in construction and related
industries in states with
biggest mold problems.
$7.9
Texas Florida California
Source: National Association of Homebuilders, Insurance Information Institute
* Single family units, based on year 2000 construction figures
Construction Defect Litigation
Exhibit 16
Destroying CA Condo Market
Ratio of Losses Paid Out
$3.00 to Premiums Taken In $2.95
$2.75 Condo construction in parts of CA has
come to a virtual stop.
$2.50
Insurer costs rose 58% in just 2 years!
$2.25
$2.00 $1.87 “Right-to-Cure”
laws now in 5
$1.75
states: AZ, CA,
$1.50 NV, TX, WA
16 considering
$1.25
such laws.
$1.00
1998 2000
Source: ISO, Insurance Information Institute
17
Exhibit 17
ISO Mold Exclusions
Homeowners policy mold exclusions approved by
insurance departments in more than 30 states + DC*
AL
WA
ME
MT ND
VT
MN NH
OR MA
NY
WI CT
SD
ID MI RI
WY PA NJ
IA
NE OH DC
DE
NV IL IN MD
WV
UT VA
CO
KS MO KY
CA NC
TN
OK SC
AZ NM AR
MS
HI AL GA
MS
LA
TX
Exclusion Approved
FL
No Approved Exclusion
*As of July 29, 2002.
Source: Insurance Services Office
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