MOLD DRIVES DEMAND FOR NEW INSURANCE COVERAGE

Rough Notes, Jan 2004 by Dybdahl, David J, Lemon, Steven J

Insurance agents could be the insurer of last resort for toxic mold and environmental damages

A rapid increase in fungus-and mold-related claims in the past two years has triggered new insurance exclusions that create new sources of demand for environmental insurance products and expertise. Innovative agents will be able to capitalize on this demand by offering appropriate coverage to their clients. These same agents will be able to completely avoid the downside of what is shaping up to be a professional liability problem for agents on an unprecedented scale.

In light of the magnitude of these loss exposures, it is surprising how complacent some insurance buyers, agents, and lenders have been in dealing with these newly uninsured loss exposures. One reason could be that it is very difficult for insurance consumers to put these new sources of uninsured loss exposures into perspective.

Although our historical loss data is still sketchy, what we think we know about mold claims is that, on average, they cost about as much as a fire loss, which is close to $20,000 per claim on a homeowners policy and $200,000 on a commercial property policy without a liability component (not that we want to downplay the liability component). In 2002 there were about 320,000 mold-related property insurance claims losses compared with 500,000 fire claims on commercial and personal lines policies. Like fires, mold can render an entire building valueless. As with fires, there are many mold-related remediation losses measured in the tens of millions of dollars. We know that fire losses cost insurers $12.6 billion in 2000. We believe that about $8 billion in mold-related damage claims were made under property polices in 2002. It is difficult to make an "apples to apples" comparison of these two sources of losses for the full 2002 calendar year because the new exclusions for mold-related losses seem to be working fairly well in deflecting most of the new mold-related losses back onto policyholders.

Toxic torts

Unlike fire losses, mold losses can give rise to an alarming phenomenon known as toxic torts. The loss costs mentioned above do not include losses from mold-related toxic torts. It is difficult to get a clear picture of how many liability claims are related to mold today because so few of them have actually been paid. Unlike fire insurance claims, toxic tort claims are the Energizer Bunny in the claims arena: They just keep going and going, looking for the ultimate deep pocket. Unfortunately, that ultimate deep pocket is most likely to be an insurance company. Sometimes a single toxic tort case on an apartment complex can reach $1 billion in alleged damages, although no plaintiff has ever been paid that amount.

It is difficult to explain some insurance buyers' complacency when exclusions for mold losses expose them to a greater degree of risk than does being uninsured for fire claims. In light of this exposure, it is also difficult to explain some agents' complacency when they are delivering these new exclusions. If agents were asked to deliver 50 million fire exclusions, their reaction would be, different from their anemic response to the introduction of mold exclusions.

Historically, many agents also have ignored their clients' need for environmental insurance. Now, for the first time, these two sources of unnecessarily uninsured losses are being excluded in the agent's own professional liability policy. The confluence of these macro trends hasby fact, history, and circumstancepositioned agents to be the insurer of last resort for their clients' costly uninsured environmental and toxic mold claims.

In this article we will discuss the trends that led to this conclusion and present a simple loss prevention protocol that risk advisors can follow to avoid errors and omissions claims in this area, provide better service to their clients, and make a profit in doing so.

Mold excluded from agents E&O

Damages from toxic mold have created unprecedented levels of professional errors and omissions loss exposure for agents. Toxic mold claims are much more frequent than either asbestos or environmental claims. Insurers have taken the lessons learned from their dismal experience with asbestos and environmental claims and moved in 2002 and 2003 to proactively exclude many mold claims from all property and liability policies. To completely shut the door on its exposure to uninsured environmental and toxic mold claims, even the professional liability market is adding new exclusions for mold and pollution "related" claims to agents E&O policies.

Insurance is available to cover environmental damages, including coverage for mold as a pollutant on commercial accounts and buybacks for mold damages from a small number of homeowners policies in many states. History shows, however, that the vast majority of agents will not advise their clients about the availability or importance of these coverages. As a result, insurance agents' professional liability underwriters this year have added fungus/mold and pollution "related" claims exclusions to avoid becoming the insurer of last resort on literally hundreds of thousands of newly uninsured fungus/mold and pollution claims. The new exclusions leave agents, not their E&O carriers, as the insurer of last resort for their clients' unintentionally uninsured environmental damages claims.