NAII Suggests Changes to Texas Mold Proposal for HO Policies
In conjunction with the fourth and final hearing held by the Texas Department of Insurance (TDI) on issues surrounding the surge of mold claims in the state, the National Association of Independent Insurers (NAII) suggested modifications that might make the TDI’s proposed plan to deal with mold in homeowners policies more palatable to insurers and consumers alike.
As it stands, almost no one likes the state’s plan, which among other things would place a $5,000 cap on mold coverage and require insurers to offer additional coverage as enhancements to the basic homeowner’s policy. At the Oct. 16 hearing, homeowners and consumer groups complained that the $5,000 limit is too low. According to the Dallas Morning News, at least two consumer groups, Consumers Union and Texas Watch, insisting that the average mold claim is about $17,000, advocated that the proposal allow at least $15,000 for damages.
Industry representatives have repeatedly said the TDI proposal would put them out of business and would not solve the looming affordability and availability crisis. Due to the rising numbers and escalating costs of mold claims, which according to industry estimates increased fivefold in the first half of 2001, three of Texas’ largest homeowners insurance providers, State Farm, Farmers and Allstate, have scaled back homeowners coverage. The companies have either stopped writing new policies in the state or have limited new policies to those that don’t cover mold and most water damage. Many smaller insurers have followed the lead of the larger companies and established limitations on homeowners policies as well.
The pull back by insurers has put the residential real estate market in a bind as homebuyers find it increasingly difficult to secure insurance policies on their houses. Buyers of homes with a history of water leaks or water damage of any kind may find it particularly hard to locate suitable coverage. But according to the Texas Association of Realtors, although coverage is getting more difficult to find it is still available. “What we are hearing is that insurance is still available, but it may take a few extra days to find a policy,” realtors association representative John Gormly said in a statement to the Austin American-Statesman.
The NAII gave a qualified endorsement to the Texas proposal, provided a series of changes are incorporated into the plan. “In the interest of finding the best solution for all Texans, NAII is urging Commissioner Montemayor to accept several important modifications to his proposal that will bring greater clarity regarding coverage, more effective cost containment measures and a variety of coverage options for consumers at affordable rates,” said NAII southwestern regional manager Donald Hanson, in a statement.
The association’s first recommendation would revise the current Texas standard homeowners insurance contract form to clearly exclude coverage for gradual leaks, unrepaired water damage, improper repair or lack of maintenance. These changes would mirror the wording used for “sudden and accidental water damage” coverage that is used in policies in all other states.
“This recommendation helps to restore greater predictability regarding claim costs and reduces the number of claims,” Hanson said. “Currently, Texas has the broadest coverage for mold-related damages in the country. Our members believe it is critical that the policy contract language is changed to bring it more in line with the rest of the country.”
In order to address consumer interests, the NAII would expand the range of coverage options available. Instead of capping coverage at $5,000, NAII recommended that consumers be provided with a broad range of coverage options. Under the plan, consumers would be able to purchase various levels of mold liability coverage as an endorsement for an additional premium. Insurers would be required to offer an endorsement with a $5,000 limit for mold coverage as the result of a covered loss on a one-time basis. After the initial offer, policyholders would have the ability to request the addition of this coverage at renewal, subject to normal company underwriting procedures.
NAII also recommends removing the 25, 50 and 100 percent coverage limit endorsements mandated in the TDI proposal in favor of allowing companies to offer additional coverage on a voluntary basis with the appropriate charge for whatever coverage amounts companies choose to make available. “Coverage for mold-related losses, if mandated, would significantly increase premiums. It would also force some consumers to purchase coverage they may not want or need,” Hanson said.
According to NAII, in 2000, homeowners insurance companies paid out approximately $113 for every $100 of premium collected. This indicates that premiums are already inadequate even before mold-related damages are incorporated into the equation. A study by Miller, Herbers, Lehmann and Associates, found that in order to address the problem, the statewide average base rate will need to increase at least 20 percent.
“Without these modifications, the costs associated with mold-related claims will continue to escalate and the market will be plagued by instability. Our recommendations address the concerns of all the interested parties,” Hanson said. “Consumers benefit from having a variety of options and coverage at affordable rates. At the same time, coverage for mold-related damage is more narrowly defined in the standard policy. These recommendations, along with increased attention on the abusive practices among mold remediation firms and increased consumer education on proper maintenance, will result in a truly comprehensive solution for Texas.”
Mounting evidence of a huge disparity in locale-specific mold-related claims and increasing instances of abusive mold cleanup practices around the state prompted Montemayor to call for an investigation into mold cleanup practices and proposed state regulation of mold cleanup businesses. He asked Texas Attorney General John Cornyn to investigate mold cleanup practices that may be abusive, including the possibility of excessive pricing, particularly in the Corpus Christi, Texas, area.
While focusing his attention on Corpus Christi and Nueces County, where the number of mold cleanup claims running above $5,000 is significantly higher than elsewhere in the state, Montemayor said the investigation could be widened to include other counties if circumstances warrant.
Data from the three largest home insurers, which cover two-thirds of the market in the state, indicate that mold-related claims of $5,000 or more cost an average of $520.66 per policyholder per year in Nueces County, compared to the statewide average of $81.71. Nueces County’s average for mold-related claims of $5,000 or more also was much larger than that of the area with the second highest average. That area, a coastal rating territory that includes Beaumont and Brownsville, had an average of $170.15.
Analysis of data received by Montemayor in early October showed that while Nueces County has only one percent of the state’s homeowners policies, it had eight percent of the large ($15,000 or more) mold-related claims during the period January 2000 to June 2001.
Another issue raised by the data is multiple claims for mold remediation of the same house. In Nueces County, 42 percent of the large claims involved multiple occurrences, compared with only 10 percent for the rest of the state. Mold testing and cleanup are covered by the most common homeowners policy, the HO-B, when mold results from a water discharge covered by the policy.
At the Oct. 16 hearing, Montemayor announced the formation of a task force to review how mold claims are adjusted and to develop standards for mold remediation companies. He has also indicated that he will recommend that the 2003 Legislature consider bills to establish standards for mold remediation and testing businesses.
Montemayor will accept written coments on the state’s mold proposal through Oct. 29, after which he expects to make his final decision on the plans.