Maryland Insurance Administration Findings and Decision Relating to Mold Limitations for Property and Casualty Insurance

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1 Maryland Insurance Administration Findings and Decision Relating to Mold Limitations for Property and Casualty Insurance Background During recent years, insurers have experienced unprecedented losses for property damage and bodily injury arising out of exposure to mold. Most of the losses are attributable, geographically, to Texas and south eastern states. However, insurers have filed policy forms and endorsements in every state, including Maryland, in an effort to limit or exclude risks related to mold exposure. The Maryland Insurance Administration (MIA) began to receive mold filings during calendar year These filings would change contracts currently in force, and would affect all new contracts sold in the State. Virtually every insurer selling property and casualty insurance in Maryland has submitted mold filings. There are approximately 300 mold filings awaiting approval. Under Maryland law, insurers must file for approval before sale, policy forms and endorsements for property and casualty insurance products sold in the State. Under (g) of the Insurance Article, a policy form or endorsement filed with the Commissioner is effective after 30 working days have elapsed, unless the Commissioner imposes a waiting period. On November 7, 2002, the MIA held an informational hearing on toxic mold coverage under property and liability insurance. Informational Hearing At the MIA hearing on November 7, the insurance industry presented data to show that mold is becoming a significant problem nationally. Some specific data indicate an upward trend in mold claims in Maryland, and an increase in the dollar value of each claim. Industry also presented testimony to describe the unique and difficult issues related to toxic mold and its potential to exacerbate the significant problems that currently exist in Maryland, related to availability and affordability of insurance coverage. Mold Data Testimony from insurers, trade associations and statistical agencies indicated that most insurers only recently began to capture loss and expense data specifically related to mold. State Farm was an exception, since it began collecting loss and expense data related to mold claims in November, Two statistical agencies, Insurance Services Offices, Inc., (ISO) and the National Association of Independent Insurers (NAII) testified at the hearing. ISO advised that it will begin collecting data specific to mold from its member insurers effective January 1, The NAII has not yet made a business decision to begin collecting data from its member insurers specific to mold.

2 The following specific information was presented at the hearing: ISO testified that its Maryland homeowners insurance data indicated that average claims payout for water damage claims from 1997 through 2001 increased by an average amount of 11.84% per year while claims payout as a result of other covered causes of loss under homeowners policies increased at an annual rate of only 3% per year during that same period of time. ISO suggested that these increases in average payout for water damage claims may indicate a developing mold problem in Maryland since a significant percentage of mold claims arise out of sudden and accidental discharge of water from plumbing, heating, or air conditioning units. One reinsurer reported to ISO that it has data indicating a substantial increase nationally in frequency of mold claims in which the insured claimant retained counsel as follows: 211 total claims received by the reinsurer for calendars years 1987 through 1998, 2,567 claims received in 1999, 5,821 claims received in 2000, and 7,143 claims received in State Farm has paid an aggregate amount, nationally, of $446 million from November 2001 through June 2002, in specific response to mold problems arising out of covered claims under homeowners policies. State Farm received a total of 12 Maryland mold claims from January 2002 through September 2002 in which it reported an average claim payout of approximately $15,500 specific to mold. Over recent months, State Farm contends that the average mold payment under such claims has increased to approximately $20,000 per claim. According to AIA, one of its member commercial property insurers reports that from 1993 through 2000 the insurer paid a total of six commercial property mold remediation claims in Maryland with an average payout of $9,800 per claim. In calendar year 2001, that same insurer paid 57 commercial property mold claims in Maryland with an average mold remediation payout of over $215,000. NAII reported that one of its member insurers reports that average indemnity and expense payments on water damage claims increased in Maryland from a total of $5,012 per claim in 2000, to $5,114 per claim in 2001 and to $5,909 per claim in The majority of the specific Maryland data presented at the hearing was anecdotal in nature. The availability of comprehensive Maryland statistical data appears to have been limited by the manner in which insurers and their statistical agents have historically captured such data. The specific Maryland data that was presented by ISO, State Farm, AIA and the NAII generally supports the contention that mold may be developing into a problem issue in Maryland. However, since ISO is just beginning to collect specific mold data from its member insurers, it will take considerable additional time to develop meaningful statistical data that better defines the extent of the mold problem in Maryland and that would specifically support the mold filings currently awaiting approval

3 Industry Testimony The insurance industry presented testimony that focused on: 1) the unique and difficult claim issues related to mold; 2) the current state of the insurance market in Maryland; 3) the potential for issues related to coverage for mold exposure to further erode availability and affordability; and 4) action taken by insurance regulators in other states with respect to policy forms and endorsements that limit or exclude losses arising from exposure to mold. Some of the key testimony was as follows: ISO testified that 37 states have approved its package of filings that limit mold coverage for property insurance for personal and commercial lines; limit liability for personal lines; and limit or exclude liability coverage for commercial lines. State Farm testified that 37 states have approved its total exclusion of mold coverage under homeowner s policies. The PIA testified that insurance agents are very concerned about the significant availability and affordability problems developing in both commercial and personal lines insurance. The PIA advised that insurers considering entrance into an insurance market, increase or reduction in the insurer s market share, or exit from a particular insurance market look closely at issues like mold since it has the potential to greatly increase the frequency and severity of insured losses. The PIA testified that certain classifications of commercial insurance business have become largely unavailable in the admitted market including building contractors, heating and air conditioning contractors, plumbers and condominium associations. The PIA testified that mold remediation issues have substantially delayed the claim adjustment process and subsequent repair of several buildings damaged in the LaPlata tornado despite the fact that no rain fell during the storm and no water was sprayed by local fire departments. Cincinnati Insurance Company testified that it began writing commercial lines insurance in Maryland in The insurer views the Maryland personal lines market as desirable but indicated that the inability to obtain approval of mold endorsements clouds the insurer s view of the future desirability of the Maryland market. Cincinnati Insurance Company likewise confirmed that commercial lines availability for building contractors and heating and air conditioning contractors has substantially diminished. Numerous parties including the AIA, the NAII and the Alliance testified regarding the general difficulties for insurers in responding to the mold issue. Those difficulties arise because mold is ubiquitous, current science cannot conclusively determine whether molds are toxic and no definitive standard for proper mold remediation exists. These issues combine to make it impossible for an insurer to determine when they have properly adjusted and settled a mold remediation claim

4 Industry witnesses also alleged that mold has become a cottage industry with trial lawyers presenting mold is gold seminars encouraging mold litigation, and that mold litigation is very expensive due to the necessity of expert testimony on issues relating to physical injury resulting from mold and the involvement of multiple parties in construction defect and other types of mold litigation cases. State Farm testified that the issue of mold was not involved in the insurer s decision to establish a moratorium on the writing of new homeowner s insurance policies. The insurer s managed growth plan was developed in response to an increased frequency and severity of claims aside from the issue of mold. State Farm advised, however, that the company would expect further increases in claim frequency and severity in Maryland if its mold exclusionary filing is disallowed by the MIA and that could influence future decisions by the company regarding the Maryland insurance market. Trial Bar and Consumer Testimony Two members of the trial bar testified with respect to their experiences in Maryland with mold litigation. The following is a brief summary of the testimony of these attorneys and one trade association representing multi-unit housing units: Joel Shugarman, Esquire, summarized a case before the Circuit Court of Baltimore County in which he represented a five-year-old child who resided with his family in a condominium unit. The vacant unit below the plaintiff dwelling unit developed a plumbing leak, which resulted in migration of condensation, humidity and mold into the plaintiff dwelling unit. Over a period of time, the child developed a number of physical maladies, ultimately resulting in three surgical procedures. The jury awarded the plaintiffs $50,000 for property damage to the dwelling unit and $175,000 for physical injuries to the child. The case was appealed, was ultimately settled, and now is final. The settlement appears to have involved contributions from liability insurance policies of both the adjacent property owner and the property manager of the condominium association. Raymond Burke, Esquire, described his experience in complex multiparty commercial business litigation relating to alleged construction defects with emphasis on cases involving water penetration into building units. Mr. Burke differentiated between two elements of the property damage settlement in a mold claims: (1) the removal of wallboard, carpet and flooring to properly repair the building and to prevent mold and (2) the remediation of any mold resulting from water damage to the physical components of the home. Mr. Burke made specific reference to a construction defect case in Baltimore County involving 19 building units that house elderly occupants in an affluent neighborhood. Water leakage in these 19 units caused property damage in an estimated amount of $4.5 million dollars. The buildings were tested and mold remediators identified a number of micotoxins throughout the various buildings and recommended that the elderly occupants be moved out of the building units. Mr. Burke stated his view that settlement of mold disputes is best facilitated when building owners, contractors, engineers, insurers and any other interested parties all participate in a plan of settlement before litigation is commenced. He expressed concern with the MIA s approval of forms and endorsements that limit or exclude mold coverage without some better showing by the industry that there is a significant problem relating to mold

5 The Maryland Multi-Housing Association, ( MMHA ) a trade organization representing approximately 93,000 residential property units in Maryland, suggested that there are some similarities between exposure to mold and exposure to lead and that the mold issue may ultimately require a similar legislative response. The MMHA urged the MIA not to approve blanket mold exclusions since its members would have no protection for what can be a huge exposure. If caps or limits to such coverage are approved, the MMHA suggested that the $15,000 cap suggested by ISO was unreasonably low. Other States and Insurance Services Offices Other states, New Jersey, Connecticut, and Rhode Island, as examples, have issued decisions requiring limited coverage for mold. New Jersey requires ISO member insurers to provide $10,000, on an aggregate basis, for property coverage, with optional increased limits of $25,000 and $50,000. Those members are required to provide $50,000 in coverage, on an aggregate basis, for liability coverage with an optional increased limit of $100,000. Non-ISO members who have more restrictive exclusions than ISO will be reviewed by the Department on a case by case basis. Connecticut has issued a bulletin that requires insurers to provide property coverage for mold or remediation if the proximate cause of loss is the peril of fire or lighting. If the proximate cause of loss is not the peril of fire or lighting insurers are required to provide an aggregate sub-limit of $10,000 for mold and remediation coverage. An insurer providing personal lines coverage can not exclude coverage for liability arising out of mold. A personal lines policy providing liability coverage may include a minimum aggregate sub-limit of $50,000 arising out of mold. Insurers providing commercial lines coverage may exclude or limit coverage for liability arising out of mold. Rhode Island has approved loss cost and related forms, rules and endorsements for Homeowners, Dwelling Property, Dwelling Liability, and Commercial Fire relating to mold. Those independent filings which contain limitations other than what ISO has provided for mold, will be reviewed based on certain guidelines. Personal lines insurers will provide coverage for mold at a limit of $10,000, on an aggregate basis, for property coverage and a limit of $50,000, on an aggregate basis, for liability coverage. Commercial lines insurers are required to provide to provide a $15,000 limit, on an aggregate basis, for property coverage. A commercial lines insurer providing liability coverage may exclude or limit coverage arising out of mold. Insurers shall not exclude or limit coverage for mold arising out of claims for the perils of fire or lighting. On behalf of hundreds of its member carriers in Maryland, ISO has filed contract amendments to limit mold coverage for certain lines of insurance. ISO s Homeowners and Dwelling Fire Programs provide $10,000, on an aggregate basis, for property coverage as well as increased limits. Those programs also provide $50,000 in coverage, on an aggregate basis, for liability coverage as well as increased limits. In addition, ISO s Commercial Programs provide $15,000, on an aggregate basis, for property coverage as well as increased limits for this coverage. ISO has filed various options for commercial liability coverage, which include an exclusion

6 Findings and Decision The Commissioner has the authority to approve or disapprove the policy forms at issue here under the express authority of of the Insurance Article, as well as the authority that is reasonably implied by those provisions. See 2-108(1). Section (a) of the Insurance Article requires each insurer to file with the Commissioner all... policy forms, and endorsements and all modifications of... policy forms, and endorsements that the insurer proposes to use. Such a filing must be supported by sufficient supporting information to justify that filing. See (b). The statute provides a list of the types of information that may be submitted to the Commissioner to support such a filing, including the judgment of the filer, the filer s interpretation of any statistical data relied on, the experience of other filers, and any other relevant factors (b)(2). Where the Commissioner determines that inadequate information is filed, the Commissioner may require an insurer to provide additional supporting information (b)(1)(i). Under (f), the Commissioner is given the express power to review each filing and to determine whether it meets the requirements of this subtitle. Section expressly confers upon the Commissioner the authority to approve or disapprove a policy form filing. As (g)(3) provides, a filing is deemed to be approved by the Commissioner unless disapproved by the Commissioner during the waiting period or any extension of the waiting period. Similarly, (g)(5) states that, after a filing is disapproved, the Commissioner must approve any withdrawal or amendment of the filing. The Commissioner s express authority to approve or disapprove policy forms and endorsements must be read broadly in accordance with the Commissioner s broad authority to enforce the purposes and intent of the Insurance Article. In addition to the powers and authority expressly conferred on the Commissioner by the Insurance Article, the Commissioner also has the powers and authority that are reasonably implied (1). Until the hearing on November 7, 2002, the Commissioner had received no documentation in support of filings to reduce or exclude coverage for mold. Since the first mold filings were submitted in Maryland in September 2001, there has been mounting evidence of financial strains on the insurance market: Eighteen insurers have withdrawn from the Maryland Insurance market Consumer complaints to MIA indicate that insurers are strictly applying underwriting standards to surcharge and non-renew insurance coverage, in accordance with accepted rating plans, for insureds who file claims There has been an upward trend in complaints about premium increases Some insurers have imposed moratoriums on new business in the State Losses in the financial markets have affected insurer reserve levels, forcing them to increase premiums While there is evidence in Maryland of an increase in claims related to exposure to mold, there is not sufficient specific documentation to support outright exclusions in any line of insurance. The Commissioner must balance the responsibility to encourage and maintain a viable insurance market against potential damage to consumers that would result from reduction or elimination of insurance coverage for mold

7 Therefore, it is ORDERED THAT: 1) MIA will approve certain policy forms and endorsements limiting coverage for mold as described in Attachment A of this decision. Insurers who already have filed policy forms and endorsements need not submit new filings, but may submit conforming amendments. 2) Annually for the next three calendar years, insurers who provide property or liability coverage shall submit data on mold claims in Maryland. The data shall be submitted annually beginning on March 15, 2004, on a mold data form issued by the MIA in accordance with of the Insurance Article. It is so ORDERED, this 18 day of March, Signature on file with original Steven B. Larsen Insurance Commissioner - 7 -

8 Attachment A. Minimum Coverage in Maryland PROPERTY COVERAGE - COMMERCIAL LINES & PERSONAL LINES 1. A policy may limit coverage for a loss arising out of mold or remediation in which the proximate cause of loss is a peril that is a covered loss. The minimum aggregate for mold and remediation coverage is $15,000. This limit may include Loss of Use or Business Income/Extra Expense coverage. 2. An additional deductible for mold loss is not permitted. 3. The policy may not unreasonably restrict the time period for reporting a mold claim. All policies include a provision for timely reporting of a loss. A policy may not require a mold claim to be reported within a specified number of days following a covered loss. Policy language may not require a loss due to mold to be reported during the policy period in which the original covered loss occurs. LIABILITY COVERAGE - PERSONAL LINES HOMEOWNERS, MOBILE HOMEOWNERS, DWELLING FIRE, PERSONAL LIABILITY A policy may not exclude coverage for liability arising out of mold. A policy may limit liability for a loss arising out of mold to an aggregate of $50,000. LIABILITY COVERAGE - COMMERCIAL LINES A policy may not exclude coverage for liability arising out of mold. A policy may limit liability for a loss arising out of mold to an aggregate of $50,