Statement by Rick Gentry Texas Department of Insurance Hearing on Mold Related Claims Houston, Texas September 13, 2001

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1 Sept. 26, 2001 Texas Insurance Commissioner Jose Montemayor has scheduled a hearing to consider TDI staff s proposal to amend the mold coverage in Texas residential policies for Oct. 16, 2001 at the LBJ Library Auditorium, 2313 Red River, Austin, Texas, beginning at 9:00 a.m. To view a copy of TDI s proposal visit their website at The following pages are Rick Gentry s testimony given at the Sept. 13 public hearing in Houston, Texas, where the Commissioner gathered information from interested parties regarding mold coverage. The mold-related testimony was nearly identical to the testimony given at the preceding hearing in Corpus Christi. Of note, the Houston testimony was amended to acknowledge that several insurance companies would be presenting detail financial testimony. There were also changes on page six which reflected updated premium and loss data.

2 Statement by Rick Gentry Texas Department of Insurance Hearing on Mold Related Claims Houston, Texas September 13, 2001 My name is Rick Gentry. I am the executive director of the Insurance Council of Texas. My testimony today will provide you with an overview of some of the issues facing Texas insurers regarding mold-related claims. I need to stress that due to the antitrust considerations, I will not comment on specific company practices, positions, or future plans. It is my understanding that several company representatives will present more detailed information today about their recent experiences in settling mold-related claims. We understand that you and your staff have the difficult task of balancing the needs of consumers with attempting to keep rates for homeowner s insurance affordable while ensuring that insurance companies remain solvent and financially sound. As was evident at the Austin and Corpus Christi hearings, the attention being given to mold by consumers, company representatives and the news media is unprecedented. Policyholders are concerned for their health and the well-being of their families. Companies are fearful of ever increasing losses and the media has identified a story that has the interest of just about everyone, including regulators and the state s elected officials.

3 Importantly, doctors, scientists, toxicologists and governmental health agencies such as the Environmental Protection Agency and the Center for Disease Control have not achieved consensus on the adverse health effects -- if any -- of mold. Because of this, those agencies also have not established sound science for what is considered a harmful level of exposure to mold. This lack of sound science has forced insurance companies to spend millions of dollars to test and remediate mold claims under the threat of multimillion dollar lawsuits and under the glare of intense media scrutiny, but without any definitive scientific information to guide their actions. Our high school science classes taught us that mold has been here longer than we have. Until recently most persons removed mold and other fungi by use of household bleach or other cleaning agents that seemingly worked well. It is also important to note that while there have been mold claims in states other than Texas, insurance company managers report the volume and severity of such claims, at the present time, are nowhere near what Texas is experiencing. Therefore, the question that everyone asks, but for which there is no clear answer, is -- why has mold now become such a major issue? As an observer of the industry, it is my opinion that the following factors all appear to be playing a role: (1) the media attention given to the issue; (2) the lack of consensus among the scientific community; (3) anecdotal stories of severe health effects which understandably create a great deal of fear; (4) questionable wording under the Texas HO-B policy; and (5) persons who are using the four preceding factors to their economic and entrepreneurial advantage, including public adjusters, testing and remediation firms, restoration firms, and plaintiff s attorneys. 2

4 We have seen an entirely new industry emerge to cash in on mold claims. We now routinely see television and half page newspaper advertising that play on people s fears, and encourages them to make a claim under their homeowners policy. Mold claims present the insurance industry with a unique set of circumstances. Every home already has mold present regardless of where it is or the level of home maintenance. However, mold is not an issue until it has a water source. With a water source and a food source such as sheetrock, wallpaper or carpet, mold becomes active. Therefore, while water is a catalyst for mold, it is not the genesis of mold, thus bringing into question whether mold damage is even an insurable risk. The business of insurance is founded upon the fortuity doctrine. Recently, a Texas Court of Appeals described that doctrine this way: the purpose of insurance is to protect insureds against unknown, or fortuitous risk, [This] doctrine precludes coverage for both a known loss or a loss in progress. In order for there to be coverage under the HO-B, a covered water peril must have occurred. Flooding is not a covered peril, but an accidental discharge is. Damage done by seeping water which enters the structure because of poor construction or materials is not a covered loss. But, damage caused by wind-driven rain which enters the structure through an opening made by a covered peril is covered. In the usual case, when there is a water damage claim, plumbers or air conditioning repair technicians are retained to determine whether and where an accidental leak has occurred. 3

5 Once the water source is found and determined to be a covered loss, how do we know if there is problematic mold inside the home? A description of one current testing practice will give you an idea of how inexact the science is on this issue. Because there are presently no standards, a technician perhaps a Certified Industrial Hygienist (CIH) -- takes a mold sample outside a home and then inside near the site of the discharge. If the mold levels inside the home are higher than those outside the home, then the home may be deemed to be damaged. However, the mold count outside the home is continually changing, a fact that is known to anyone watching the weather report on the local television news. In practice, insurance companies are determining possible damages based on a moving target. Furthermore, most mold is not visible. Certainly stachybotrys or black mold can be seen but most other types of mold are not visible. So, assuming your test has shown you have more mold inside your home than in your front yard, it is still impossible to say, this discharge caused that mold or that water entry caused this mold. Therefore, determining causation of damage becomes virtually impossible unlike a fire where you can see what has been burned, or hail where you can see where dents are present in a roof or on the hood of an automobile. While a claim is pending, companies are working with concerned and inconvenienced policyholders who may need to be moved from their residence into a hotel or apartment if they are experiencing health problems or have concerns regarding their health. Not surprisingly, additional living expense claims have also skyrocketed with the increase in mold claims. 4

6 It is also important to note that the remediation firms being retained to remove the mold from Texas homes suffer from a lack of recognizable certification and standardized training, a situation which often requires insurance companies to engage in additional, expensive remediation after the initial work has been performed. In summary, mold-related claims are expensive because: a) Plumbers or air conditioning repair technicians have to be retained to identify and repair a water source. b) When the water source is found, a Certified Industrial Hygienist (CIH) is typically hired to take mold samples, grow those mold samples, and provide the insurance company with a report. Where mold levels are higher inside the home than outside, the CIH develops a remediation plan to attempt to remove the mold from within the home. c) During this time, a policyholder and their family may be placed in a hotel or an apartment if necessary. d) Unlicensed and non-certified remediators tear out portions of the home in an attempt to remove what is perceived to be problematic mold. e) After remediation, the home is retested and if cleared, a contractor is retained to build back the remediated areas. If the CIH fails to clear the home, further remediation takes place prior to the reconstruction procedure. At best this process takes anywhere from 3 6 months, thus increasing the time claims remain open, which increases claims costs. 5

7 It is our considered judgment that Texas is facing a crisis with regard to the mold issue. The lack of sound science has everyone concerned and someone needs to determine: a) Is mold harmful to humans? b) If mold is harmful, what level of exposure results in harm? Is it only those persons that have a hypersensitivity to allergies or asthma that are affected or is everyone affected at a certain level? c) If a mold claim is covered, how do we as an industry ensure that what we are paying for adequately removes the mold from the home? Mr. Commissioner, until recently, mold was not a significant factor in water claims, and they were previously handled for approximately $3,000. Now, they can cost upwards of $90,000. The impact of these claims is dramatically underscored by the paid water damage losses Texas companies report to your department. If the trend for the first quarter of this year continues and frankly we think it will actually get a whole lot worse -- per policy losses will have increased by 125 percent in the last two years. In this same time frame, frequency of claims will rise by 54 percent and severity by 51.4 percent. If this trend continues for the remainder of the year, water damage claims could total as much as $830 million, which more than doubles losses paid in These kinds of losses are unacceptable. As Commissioner, you certainly understand that premiums have not been collected for this ever expanding, though unexpected exposure. Some carriers have and others may be forced to make difficult and unpopular business decisions should these trends continue. 6

8 These decisions are made even more difficult by court decisions such as the Texas Supreme Court opinion in Balandran v. Safeco which added to the chaos as to whether and when mold is a covered peril. If it is unconditionally covered and if the cost escalations we have seen continue, then premiums must rise just as sharply as the costs have. If mold damage is only covered as an ensuing loss, then the policy form must be revised to state more clearly that intent. At the Austin hearing, you were urged to consider a number of alternative courses of action. I reiterate them here. First, take the necessary steps to allow companies to offer consumers a policy which excludes mold-related coverage altogether. The advantage to the consumer is stability in premiums. Second, create within the policy a sub-limit for mold-related claims. This is another cost containment provision that will keep premiums predictable. Third, make a policy form revision which would clarify that coverage for mold and other fungi damage is linked to the accidental discharge of water or to the other contaminants which are believed to cause mold and do so in such a way that reasonable people could not disagree about whether coverage is provided. The industry knows that you are in the process of gathering data and attempting to make a decision regarding amending Texas homeowners forms to address mold coverage. We urge you to act quickly. 7

9 Finally, we ask you to consider whether mold is an insurable peril and if so, please change the policy language or adopt an endorsement that appropriately matches premium to anticipated expense. Again, we appreciate your attention to this issue and your willingness to seek our advice and counsel in your decision making process. 8

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