mold

Mold and Insurance:Truth and Consequences : Mold and Insurance: Truth and Consequences August 2002 Robert P. Hartwig, Ph.D., Senior Vice President andamp; Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org


Presentation Outline : Presentation Outline Mold, the Consumer andamp; the Insurance Industry Overview of Mold Issue Insurers andamp; The Great Pyramid of Mold Mold, Hype, Hysteria andamp; Trial Lawyers Texas: Ground Zero for Mold Is Florida the Next Texas? Let the Florida Insurance Consumer Beware! California: Mold’s Going Hollywood The Economics of Mold How did we get into this mess? Availability andamp; Affordability Why Homeowners andamp; Their Insurers Can’t Afford Mold Economic Repercussions Options andamp; Solutions


Overview of Mold Issue : Overview of Mold Issue Complex issue involving Homeowners—fear of mold; hysteria in some areas Businesses andamp; Workers—property, construction, WC andamp; liability issues Science—taking a back seat to fact; misinformation Astounding array of ailments attributed to mold Trial Lawyers—profiting from fear and hype over mold Remediators—profiteering? Media—media attention increases as mold claims increase Regulators—struggling with the issue; options limited


Great Pyramid of Mold : Great Pyramid of Mold Source: Insurance Information Institute


Great Pyramid of Mold : Great Pyramid of Mold Source: Insurance Information Institute The word 'mold' is derived from the old Old Norse word for 'fuzzy'


Mold: A Fact of Life : Mold: A Fact of Life ANCIENT ENEMY? Existed for at least 400 mil. yrs. Entire evolution of human species occurred in presence of mold 100,000+ species identified 1,000 found in U.S., e.g. Stachybotrys, Cladosporium, Penicillium and Aspergillus Minimal Growth Requirements Water (humidity/damp OK) Food (any organic substance) Appropriate Temp (wide range) Lack of ventilation Conclusion Darwin Would Reach: Mold didn’t cause the mold crisis Stachybotrys chartarum


The Accused: Stachybotrys : The Accused: Stachybotrys ALLEGED ILL-EFFECTS Burning eyes Headache Nausea Nose bleeds Allergic Reactions Asthma Exhaustion Sinus infections Cognitive disorders Pulmonary hemorrhage Liver damage Central nervous system damage Brain damage Cancer Death Stachybotrys chartarum


The Accused: Stachybotrys : The Accused: Stachybotrys List of Known Maladies 'There are very few case reports that toxic molds inside homes can cause unique or rare health conditions…' 'The common health concerns from molds include hay-fever like allergic symptoms.' Centers for Disease Control and Prevention Stachybotrys chartarum


The Accused: Stachybotrys : The Accused: Stachybotrys Recent CDC Testimony '..CDC reviewers and an external panel of experts determined there was insufficient evidence of any association between exposure to S. atra or other toxic fungi and idiopathic pulmonary hemosiderosis….' Flooding at Turtle Mountain (ND) Indian Reservation in July 2001 residents though mold contamination might be contributing to increase in illness: 'An interim report identified several existing hazards unrelated to mold and made recommendations to address those hazards.' Written statement of Stephen C. Redd, MD, Chief, Air Pollution and Respiratory Health Branch, Centers for Disease Control and Prevention, before the Subcommittees on Oversight and Investigations and Housing and Opportunity, US House of Representatives, July 18, 2002. Stachybotrys chartarum


HOW DID WE GET HERE?Texas: Mold’s Ground Zero : HOW DID WE GET HERE? Texas: Mold’s Ground Zero


HO Loss Ratio Trendin Texas* : HO Loss Ratio Trend in Texas* Source: NAIC, Insurance Information Institute * Excludes loss adjustment expenses Problems first observed in overall loss trends


Texas: Paid Losses for Water Damage Claims : Source: Texas Department of Insurance * 2001 (estimate based on Jan. - Mar. data) Texas: Paid Losses for Water Damage Claims Sharp increase in water losses were obviously part of the problem.


Texas: Average Water Damage Loss per Policy : Source: Texas Department of Insurance; Insurance Information Institute * 2001 (estimate based on Jan. - Mar. data) Texas: Average Water Damage Loss per Policy


TX: Estimated Total Number of Mold Claims : TX: Estimated Total Number of Mold Claims Source: Texas Department of Insurance; Insurance Information Institute estimates. The number of mold claims rose 1,306% between 2000:I and 2001:IV


TX: Mold Claim Frequency*(# claims per 1,000 policyholders) : TX: Mold Claim Frequency* (# claims per 1,000 policyholders) Source: Texas Department of Insurance; Insurance Information Institute estimates. The frequency of mold claims rose 1,286% between 2000:I and 2001:IV


TX : Average Cost per PolicyholderDue to Mold (per year) : TX : Average Cost per Policyholder Due to Mold (per year) Source: Texas Department of Insurance; Insurance Information Institute estimates. Texas 'Mold Tax': Up to $444 per Policyholder per Year The average cost per policyholder increased 1,805% between 2000:I and 2001:III


TX: Average Cost Per Mold Claim* : TX: Average Cost Per Mold Claim* *Includes loss and loss adjustment expenses. Source: Texas Department of Insurance; Insurance Information Institute estimates. The average cost of mold claims rose number of mold claims rose 152% between 2000:I and 2001:II


TX: Cumulative Total Losses from Mold Claims* : TX: Cumulative Total Losses from Mold Claims* *Includes loss and loss adjustment expenses. Source: Texas Department of Insurance; Insurance Information Institute estimates. Mold claim costs rose 560% in 2001 vs. 2000 $ Millions


Texas Accounted for the Vast Majority of New Mold Cases in 2001 : Texas Accounted for the Vast Majority of New Mold Cases in 2001 Source: Insurance Information Institute


Is Florida the Next Texas?A Market Already Under Stress : Is Florida the Next Texas? A Market Already Under Stress


Overview of Mold Issue - FL : Overview of Mold Issue - FL Complex issue, more complicated in FL FL’s unique hurricane exposure Peninsula in the middle of 'hurricane alley' Hurricane Andrew - nearly 200,000 water claims FL’s unique litigation environment One way attorney fee statute, no need to prove bad faith TX law requires proof of bad faith to award attorney fees Contingency risk multipliers Bad Faith statute does not provide for reasonable basis defense TX law provides 'legitimate dispute' defense Hurricanes + bad litigation environment + Mold Equals disaster for FL insurance consumers and the industry Equals decreased availability and decreased affordability FL property insurance rates already among highest


Why TX is Relevant to Florida : Why TX is Relevant to Florida We Can Learn From TX, Avoid a Crisis Coverage Differences TX policy covered 'seepage' type water losses In essence a home maintenance policy FL policy covers 'sudden andamp; accidental' losses Burst pipe, hurricane, windstorm TX Mold Claims and Costs Spike Since 2000 No Scientific Explanation Before 2000, mold claims and costs never a problem TX policy pricing did not envision such mold costs TX homeowner rates now include increased mold costs Up to $444.00 'mold tax' for TX homeowners TX now has highest homeowner prices in the nation!


Why TX is Relevant to Florida : Why TX is Relevant to Florida FL Water/Mold Claims andamp; Costs Increasing No Scientific or Meteorological Explanation No Recent hurricane or windstorm FL policy pricing does not envision such mold costs FL policy prices will rise if TX mold 'claiming behavior' finds its way to the southeast FL Homeowner Rates Already Under Stress Hurricanes Sinkholes Mold anyone? FL Homeowner Rates 3rd in the Nation 3rd highest rates do not include the mold 'stressor' Let’s learn from TX before there is a crisis


Average Annual Insured Wind Losses*(Top 10 States, $ Millions) : Average Annual Insured Wind Losses* (Top 10 States, $ Millions) *Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999. Source: Tillinghast-Towers Perrin Distribution of Annual Losses FL can’t afford mold—already stressed by hurricanes!


10 Costliest Disasters in U.S. History(by insured loss, 2001 $) : 10 Costliest Disasters in U.S. History (by insured loss, 2001 $) $ Billions *Estimate includes propertyand business interruption losses as well as liability, workers comp, life, aviation and other coverages. Source: Insurance Services Office, Insurance Information Institute.


Insured Losses in Florida ifHurricane Andrew Hit Today : Insured Losses in Florida if Hurricane Andrew Hit Today Source: Best’s Review, June 2002 (EQECAT) Insured losses, $ Billions Each 0.1 degree equals about 7 miles A path of 0.3 degrees north of Andrew’s original location would create a direct hit on Miami Estimates are losses in today’s dollars after application of deductibles.


Insured Losses in Florida ifHurricane Andrew Hit Today : Insured Losses in Florida if Hurricane Andrew Hit Today Source: Best’s Review, June 2002 (EQECAT) Insured losses, $ Billions Each 0.1 degree equals about 7 miles A path of 0.3 degrees north of Andrew’s original location would create a direct hit on Miami Estimates are losses in today’s dollars after application of deductibles.


Estimated New Construction in Miami-Dade County, 1992-2001 : Estimated New Construction in Miami-Dade County, 1992-2001 $3.4 Billion $16.1 Billion Source: Best’s Review, June 2002 (International Hurricane Center, Florida International University), Ins. Info. Institute Huge build-up in exposure in Florida since 1992 81% residential 19% commercial


Summary of FL Mold Problem : Summary of FL Mold Problem Unless solutions are put into place: FL property insurance rates will skyrocket FL property insurance will be far less available Liability insurance less available and affordable FL Mold losses Historically, not major factor in property insurance costs or rates Real mold claims not frequent or large Majority of mold never covered by insurance Rather, homeowner maintains home to prevent mold FL’s unique hurricane and litigation environment Combination may create mold crisis worse than TX FL must act now


California: Mold Problem is Shaking the State : California: Mold Problem is Shaking the State


California: Surging Water Claim Frequency and Costs: Symptom of Growing Mold Problem : California: Surging Water Claim Frequency and Costs: Symptom of Growing Mold Problem Source: Insurance Information Network of California; Insurance Information Institute Water losses paid rose 109% from 1997 to 2001 and 50% since 1999 Water claims accounted for less than 1/4 of all HO claims in 1997, now they account for nearly 1/3. California may be in a drought, but homeowners say they’re drowning


Sharply Rising Average Water Claim Cost: Mold Symptom : Sharply Rising Average Water Claim Cost: Mold Symptom Source: Insurance Information Institute based on data from the Insurance Information Network of California; The cost of the average water loss in CA surged 27% in 2001 and 80% since 1998


Great Pyramid of Mold : Great Pyramid of Mold Source: Insurance Information Institute For 399,999,998 out of the past 400 million years 'mold' was was not an issue for litigation.


U.S.: Documented Toxic Mold Suits : U.S.: Documented Toxic Mold Suits Source: www.toxlaw.com; Guy Carpenter 1,000 Cases 2,000 Cases 5,000 Cases 2,000 Cases


Average Jury Awards1994 vs. 2000 : Average Jury Awards 1994 vs. 2000 Source: Jury Verdict Research; Insurance Information Institute. General abuse of tort system has created ideal environment for growth of mold suits


Cost of U.S. Tort System($ Billions) : Cost of U.S. Tort System ($ Billions) Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast. Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005! Tort costs equaled $636 per person in 2000! Expected to rise to $1,000 by 2005


Slide37 : Source: The Austin Chronicle, August 10,2001


Slide38 : Source: The Austin Chronicle, August 10,2001


Some People Are Getting Rich Off Mold : Some People Are Getting Rich Off Mold ACTUAL ADVERTISEMENT


Mold Plaintiffs Want More than Rebuilding Cost of WTC! : Mold Plaintiffs Want More than Rebuilding Cost of WTC! Source: Insurance Information Institute


Great Pyramid of Mold : Great Pyramid of Mold Source: Insurance Information Institute based Nexis search. Since January 1, 2000, more than 8,000 articles have been published on the subject of 'toxic' mold


Increased Media Attention : Increased Media Attention Sources: Insurance Information Institute based on Nexis search. * 2002 figure is estimate based on data through May 17. More Than 8,000 'Toxic Mold' Articles Since 2000


Slide43 : Source: New York Daily News, September 10, 2001


Slide44 : Source: New York Times Magazine, August 12, 2001


Slide45 : Source: New York Times Magazine, August 12, 2001


Slide46 : Source: New York Daily News, September 10, 2001


Media & Trial Lawyers:Fanning the Flames of Fear : Media andamp; Trial Lawyers: Fanning the Flames of Fear Source: Corpus Christi Caller Times


Slide48 : Media andamp; Trial Lawyers: Fanning the Flames of Fear Source: Corpus Christi Caller Times


2001: Increased Media Attention : 2001: Increased Media Attention In the Papers a Year Ago: 'Haunted by Mold' New York Times Magazine, August 12, 2001 'Beware: Toxic Mold' Time Magazine, July 2, 2001 'Insurers, Builders Criticized Over Mold' Austin American Statesman, June 27, 2001 'Mold Problems Spur Hearings Across Texas' Corpus Christi Caller Times, June 17, 2001 'Insurers Blanch at Proliferation of Mold Claims' Wall Street Journal, June 3, 2001 'Insurer Must Pay Family $32 Million' San Antonio Express-News, June 11, 2001


2002: Financial & Market Consequences : 2002: Financial andamp; Market Consequences Look at What’s in the Papers Today: 'Mold Claims Soar' Miami Herald, July 29, 2002 'State Farm Halts New Policies [in FL]' Tampa Tribune, June 29, 2002 'Hit With Big Losses, Insurers Put Squeeze on Homeowners' Wall Street Journal, May 14, 2002 'Can Toxic Mold Spoil a Stock Offering?' Business Week, April 29, 2002 'Apartment Owners Face Growing Liability' Wall Street Journal, April 24, 2002 'State Farm Won’t Write New Homeowners Policies [in CA]' Los Angeles Times, April 23, 2002 'Allstate’s Net Income Drops 15 Percent' Wall Street Journal, April 18, 2002 'Oklahoma Home Insurers Limiting Fungus Coverage' The Oklahoman, April 2, 2002 'Prices for Auto and Home Insurance are Rising Sharply' New York Times, March 26, 2002 'Some Insurers Ending Coverage for Home Builders' Minneapolis Star Tribune, February 16, 2002


“Heeeeeeere’s Stachy…”Mold Goes Hollywood : 'Heeeeeeere’s Stachy…' Mold Goes Hollywood Ed McMahon filed $20 million suit against insurer andamp; mold remediation contractor Ed only gave away $10 million in sweepstakes Says mold sickened him, his wife and staff Says mold killed Muffin the family dog Alleges breach of contract, negligence and intentional infliction of emotional distress Nearly 100 articles between April 10 and May 17, 2002! 'Ed McMahon Sues Over Toxic Mold Invasion,' --USA Today, April 11, 2002


Mold:Gone Hollywood : Mold: Gone Hollywood Sources:Insurance Information Institute based on Nexis search. NUMBER OF ARTICLES CITING MOLD AND…


Trial Lawyers:Fanning the Flames of Fear : Trial Lawyers: Fanning the Flames of Fear Source: Corpus Christi Caller Times


Slide54 : Trial Lawyers: Fanning the Flames of Fear Source: Corpus Christi Caller Times


Fanning the Flames of Fear : Fanning the Flames of Fear Source: Corpus Christi Caller Times


This Still Works! : This Still Works!


Great Pyramid of Mold : Great Pyramid of Mold Source: Insurance Information Institute


THE ECONOMICS OF MOLD:WHAT WILL MOLD COST POLICYHOLDERS & THE INSURANCE INDUSTRY ? : THE ECONOMICS OF MOLD: WHAT WILL MOLD COST POLICYHOLDERS andamp; THE INSURANCE INDUSTRY ?


Mushrooming Costs Have Severe Consequences on Price, Availability : Mushrooming Costs Have Severe Consequences on Price, Availability Enormous ALAE component (up to 100% of claim) HO Frequency/severity up by 1,300% to 1,800+% TX Mold costs totaled $854 million in 2001 $444 ‘mold tax’ per homeowner in state Billions across all states, lines of insurance Implications for Affordability andamp; Availability 1% national claim frequency = $18 billion in costs Homebuilding (single-family andamp; multi-unit) affected Real estate sales have suffered


Possibilities for Abuse : Possibilities for Abuse Abusive practices by mold remediation services Unnecessary work, qualifications, improper removal Claim misrepresentation by policyholders Mold excluded; incentive to misrepresent nature of water damage Unscrupulous public adjusters Encourage policyholders to allow situation to deteriorate Testing services Over-testing; Gaming the results Sales tactics Use of fear and misinformation


Impacts on Affordability and AvailabilityReal Consequences for Homeowners & Housing Markets : Impacts on Affordability and Availability Real Consequences for Homeowners andamp; Housing Markets


Average Expenditures on Homeowners Insurance: FL vs. US : Average Expenditures on Homeowners Insurance: FL vs. US Average HO expenditures in Florida have risen relative to the US because of CAT risk—mold will create additional unnecessary stressor


States With Highest HO-3Insurance Premiums : States With Highest HO-3 Insurance Premiums Source: Insurance Information Institute from NAIC Data, 1999. 1 2 3 4 FL is 3rd without the mold 'stressor'


States with Highest Premium/Income Ratios* : States with Highest Premium/Income Ratios* *As a % of the median family of 4’s income, 1998. Source: NAIC, Insurance Information Institute HO insurance is very affordable, consuming less than 0.9% of the typical family’s income nationally, but 1.24% in FL and climbing! Can we afford another price stressor?


Mold-Induced Rate Increases Will Impact Affordability in FL* : Mold-Induced Rate Increases Will Impact Affordability in FL* *As a % of the median family of 4’s income. Source: NAIC, Insurance Information Institute Mold costs could push HO insurance costs to 2.5%+ of the typical family’s income in TX. What will happen in FL?


Mold-Induced Rate Increases Will Impact Affordability in FL* : Mold-Induced Rate Increases Will Impact Affordability in FL* *As a % of the median family of 4’s income. Source: NAIC, Insurance Information Institute Mold costs could push HO insurance costs to 2.5+% of the typical family’s income in FL


Consumers Can’t Afford Mold, Neither Can Insurers : Consumers Can’t Afford Mold, Neither Can Insurers


P/C Net Income After Taxes1993-2001 ($ Millions) : P/C Net Income After Taxes 1993-2001 ($ Millions) Sources: A.M. Best, ISO, Insurance Information Institute. 2001 was the first year ever with a full year net loss, mold was a factor.


Underwriting Loss in HO Insurance, 1991-2002F : Underwriting Loss in HO Insurance, 1991-2002F Source: Insurance Information Institute. A.M. Best $ Billions Underwriting losses in homeowners insurance from 2000 to 2002 alone are estimated at $19.0 billion, 14.5% above the $20.3 billion in 9/11 property losses. Mold was not the only factor in these losses.


HO Insurance Costs & Cost of Home Repairs : HO Insurance Costs andamp; Cost of Home Repairs Source: US Department of Commerce, Insurance Information Institute *HO insurance cost increase for 2001 is III estimate.


Economic Repercussions : Economic Repercussions


New Private Housing Starts(Millions of Units) : New Private Housing Starts (Millions of Units) Source: US Department of Commerce; Insurance Information Institute *Projections from Blue Chip Economic Indicators. New Private Housing Starts U.S. economy highly dependent on new home construction as business investment remains weak


States with Most New Homes Built*, 2000 : States with Most New Homes Built*, 2000 Source: National Association of Homebuilders, Insurance Information Institute * Single family units New Private Housing Starts States with biggest mold problems highly dependent on home construction sector


Homebuilding is an Important Part of the Economy in Most States : Homebuilding is an Important Part of the Economy in Most States Source: National Association of Homebuilders, Testimony before the House Subcommittees on Housing and Community Opportunity and Oversight and Investigations, July 18, 2002. *Construction and related industries. **Federal, state and local.


Number of People Employed in Construction of Single-Family Homes : Number of People Employed in Construction of Single-Family Homes Source: National Association of Homebuilders, Insurance Information Institute * Single family units, based on year 2000 construction figures Mold Puts Jobs at Risk Construction of single-family homes supports about one-quarter million jobs in states with the biggest mold problems


Billions in Wages Depend on Construction of Single-Family Homes : Billions in Wages Depend on Construction of Single-Family Homes Source: National Association of Homebuilders, Insurance Information Institute * Single family units, based on year 2000 construction figures Mold Puts Wages at Risk Construction of single-family homes supports $8 billion - $9 billion in wages in construction and related industries in states with biggest mold problems. $ Billions


Billions in Tax Revenue Depend on Construction of Single-Family Homes : Billions in Tax Revenue Depend on Construction of Single-Family Homes Source: National Association of Homebuilders, Insurance Information Institute * Single family units, based on year 2000 construction figures Mold Puts Tax Revs. at Risk Construction of single-family homes in states with biggest mold problems supports $4 billion - $5 billion in tax and fee revenue to local, state and federal government. $ Billions


Homeownership Rates,1985 to 2001 : Homeownership Rates, 1985 to 2001 * Third Quarter Source: U.S. Census Bureau Public Policy Question: Should mold claims filed by a tiny minority be allowed to dash the homeownership dreams of millions of low/moderate income Americans?


Options & Solutions : Options andamp; Solutions


Options are Limited, Time is Running Out : Options are Limited, Time is Running Out Include coverage and price it into policies Add sub-limits; endorsements could increase coverage (majority of mold claims may then be valued at sub-limit, increasing costs to consumers if sub-limits are too high) Exclude all coverage in standard policy, offer only as endorsement Tighten contract/underwriting (make 'sudden andamp; accidental' more explicit; prior water damage claims; Note: not a FL option - unique litigation environment) Absolute mold exclusion Price controls Federal Mold Pool (oh, the irony!) Walk away from business (can’t offer product at loss)


ISO Mold Exclusions : ISO Mold Exclusions Homeowners policy mold exclusions approved by insurance departments in more than 30 states + DC* *As of July 29, 2002. Source: Insurance Services Office MS


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