Why Mold Losses Aren't Covered (And What to do About It)
August 23, 2007
By now, everyone providing water-damage restoration has surely faced the uninsured mold loss. The old joke, “No insurance? No mold!” isn’t funny anymore. The lack of coverage for mold losses has become commonplace. What happened?
More than 8,000 articles warning of the dangers of toxic mold hit the mainstream media several years ago. A “48 Hours” program featuring Melinda Ballard, a lawsuit filed by Erin Brockovich over mold in her home and Ed McMahon’s dog supposedly dying after being sickened by mold all helped fuel public concern. Claims for mold contamination rose dramatically during this same period. As the public’s awareness of the dangers of mold heated up, insurers cooled on extending coverage. Insurers in every state reduced or eliminated coverage that paid for mold cleanup – even that resulting from certain water-damage losses.
According to the Insurance Information Institute, mold claims were $10 million for the first quarter of 2000. One year later, first quarter mold losses shot up to $80 million. During 2002, mold loss payouts exceeded $1 billion, and the following year they approached $12 billion! To combat this, insurers mailed out universal exclusions or claim limit caps to nearly every policyholder in the country.
While the media’s focus on health-related issues was the primary cause of public hysteria, there were other reasons for the dramatic increase in mold claims, including:
- More energy efficient buildings with less fresh air infiltration
- Changes in building materials such as particle board, OSB, and “synthetic stucco” or Exterior Insulation Finish Systems (EIFS)
- Lawyers’ awareness of billions won in bad faith or personal injury litigation
- Mold exposure scientifically linked to adverse health effects
The Centers for Disease Control (CDC) agrees that individuals with chronic respiratory disease may experience difficulty breathing. But they dispute certain medical studies, alleging flawed or inconclusive data. OSHA and the EPA agree that mold is an allergen and can irritate some people, but they don’t go as far as to say that mold will make you sick. However, most doctors believe those people with suppressed immune systems have an increased risk of infection from molds. To date, there have not been adequate clinical studies confirming a positive link between toxic mold and serious health effects. Further, because mold affects people differently, there are no government or industry standards setting exposure limits.
While there are still no guidelines for how much and what type of mold you can safely be exposed to, the restoration industry has responded to the crisis with the IICRC S520 Standard and Reference Guide for Professional Mold Remediation, which provides recommended best practices for handling such losses.
Mold is a fungus. It grows by generating microscopic reproductive “seeds” or spores that need moisture to grow. Mold can grow almost anywhere there is water, high humidity or dampness, and an organic food source such as building materials.
Some species are beneficial to us and most are considered benign presenting no threat to humans. There are over 100,000 identified species, with only a handful commonly found in the United States. Of the roughly two-dozen ubiquitous molds in the U.S., only a few are toxic or infectious and have the potential to pose a serious health threat.
Mold spores and microscopic mold fragments are always present at low levels in the air both indoors and out. At these levels, mold isn’t a problem for most people, but it is an allergen, which can cause health issues for some. At high levels indoors, mold contamination will adversely affect most people exposed to it, and some may even suffer life-threatening illnesses.
Because of the potential health risks, cleaning up mold can be expensive. With the threat of personal injury claims and the cost of remediation, it is no wonder insurers have a problem extending coverage.
An insurance claim for a mold loss usually occurs when a property owner finds mold around a long-term water leak that went unnoticed. Another cause of mold is an improperly restored flood from a toilet overflow or a burst water line. The first 24 to 48 hours after a water intrusion can be critical in preventing or containing mold growth. Neglected water damage nearly always results in mold contamination.
Clean up of the majority of mold losses costs only a few thousand dollars. The real problem, though, is not the cost of remediation but the huge payouts resulting from lawsuits. Mold litigation has already bankrupted more builders than any other form of casualty loss in history. The Insurance Information Institute reports that there are thousands of lawsuits working their way through the court system at more than $10 million per suit.
Owners sue builders for construction defects because of damage caused by water or moisture coming into the building. These suits often include claims for personal injury resulting from mold resulting from that water infiltration. Property managers and their insurance carriers are also being sued for negligence. It appears there will always be plenty of fodder for litigation. At some point, one wonders if policyholders will start suing agents for failing to protect them?
Whose Side Are You On?In the past, adjusters quietly settled the few mold claims that were related to water damage, even if the losses weren’t “sudden and accidental.” It was often felt that keeping the policyholder happy was more important than taking a hard line on coverage issues.
Today, insurers have geared up to combat soaring claims costs. Some claims adjusters are being trained to explain why there is no coverage rather than trying to obtain it for the client. Some make deals to repair the water damage, but not to remove the mold. Others are instructed to flatly deny coverage, saying mold is a pollutant and falls under the pollution exclusion clause.
Understanding what motivates the parties will help us to better appreciate the problem. Insurers. Insurance companies are still in unfamiliar territory. Unprecedented losses have forced them to exclude mold coverage from existing policies and to stop writing new ones. They are concerned about the costs of litigation and policyholder’s complaints. Insurers are in business for profit and they have no choice but to make up their losses the only way they can, by raising premiums, dropping coverage, denying claims and limiting loss costs.
Policyholders. Those suffering the loss are concerned about their family’s health, continuing property damage, and whether they can sell their home without professional remediation and/or disclosure. They’ve heard horror stories about unscrupulous contractors and are uncertain about the facts. If the claim is denied, they have few places to turn for repair funds.
Remediation contractors. Five years ago, there were no mold-removal companies. We were simply water-damage restorers who occasionally encountered mold contamination and took care of it. The Indoor Air Quality Association estimates that today there are as many as 20,000 mold-removal companies in the U.S. alone. These service companies are in business to make money. Limited or no insurance coverage for cleanup of mold contamination cuts into their profits. Business owners want to do the right thing and help their clients, but the fear of litigation and non-payment for services motivates them to demand heavy down payments and charge higher fees to help them pay for more-expensive environmental insurance coverage.
So what’s the answer? Mold is a complex issue. Coverage matters can be equally complicated. Should your client file a claim for water damage with a little mold? If the loss is not going to cost much more than their deductible, the client may consider not filing a claim because of the downside of having it on the property’s record. For substantial losses, the first thing to do when a customer tells you they are not covered is to encourage them to verify this. Just because the insurer tells a client their loss is not covered doesn’t mean it is not. It could be a tactic to get the customer to back off. Some people will simply accept what they are first told. Others may resort to hiring an attorney.
One of my clients recently called her carrier in another state and a young woman informed her she had no coverage. Based on this telephone call, the client gave up. I advised her to call again and ask for an adjuster to come out. She did and the loss was covered.
Never try to interpret the customer’s insurance policy for them. This has always been the restorer’s “golden rule.” However, it’s difficult to bite your tongue when you know the insured may be getting taken. Encourage them to read their policy. Advise them to talk to a claims supervisor and invite them to actually visit the loss.
It is no secret mold coverage is a serious issue to property owners. Discussing the basics of insurance coverage doesn’t have to be off limits between you and your client. Use the word “typically” to explain what you’ve experienced and, of course, always defer to the adjuster when it comes to coverage issues.
Here’s what to tell your customer: “As a rule, most insurers won’t cover mold contamination caused by long-term leaks or water intrusion from a construction defect, wear and tear or poor maintenance. However, many carriers will cover mold losses resulting from a plumbing leak…but check with your adjuster.”
Accept the facts. If there really is no coverage, both you and your customer need to accept this and move on to a solution. Yes, they are victims of a loss. Groundwater leaks, accidents, poor maintenance…these things happen. The problem is frequently due to the customer’s neglect and, unfortunately, they will have to pay the consequences. Be compassionate and understanding, but it’s not your fault.
Does an uninsured loss mean you must lower your price? Not necessarily. It’s your business and you can do what you want. Let’s examine some of the ways you can take care of your customer, save them some money and still make a profit.
Advise. Knowledge is still power. You’re the expert and your customer looks to you for guidance. Inform them, give them advice and reference recognized industry standards and guidelines. You may wish to develop literature to give them good information about mold.
Talk their language. Don’t scare or try to impress them with lots of big words. Be straight with them. A professional is both reasonable and responsible in the client’s best interest. I always encourage customers to do their own research on the Internet. Although some of the information is questionable, the majority is fairly accurate. This limits your liability, and what they discover will probably substantiate your advice.
Another way to validate your methods is to involve a third party to confirm your scope. This will discourage your customer from thinking you are trying to do more than is really necessary.
You’ve got options:
Do the job. Do it right and do what you do best. Take care of your client and don’t be afraid to ask for what you deserve for your highly technical services.
Do less for less. Often, you can make more profit in less time by only doing part of the work. For example, if you remediate and the client rebuilds, you can save them up to half of the cost. You perform the technical part to remove the mold and make the property safe and they reconstruct at their convenience. Let’s say you take this option. In addition to providing a higher-profit-margin service, you can finish your portion more quickly and move on to more profitable work avoiding the protracted reconstruction phase.
Do it for free. There is a certain amount of satisfaction to be gained from humanitarian work: giving back, so to speak. If work is slow coming in, the job doesn’t have to be the most profitable thing you’ve got going. You can donate labor through a company-wide effort, or contribute equipment and supplies. Discounted or free work could result in good-will marketing and help promote company teamwork. Only you can make the decision between profits, recouping only your hard costs or taking a donation deduction.
Don’t do it at all. You have the right to refuse the job. Sometimes that may be the best thing to do. You have a business to run and can withhold service if you don’t think you will be paid.
Getting PaidIf you decide to take the job, help your customer figure out how to pay you for it. Here are some ways your client could pay for your services:
- Paying with a credit card.
- Taking a second mortgage against their home equity.
- Borrowing from life insurance, bank or credit union.
- Selling an investment asset, a boat or an RV.
- Borrowing funds from relatives.
Of course, extending credit depends on your financial condition. You’re not a bank, so if you choose this method, make sure you file a lien on the property and include these fees and other service charges in the balance due. Be sure to advise them of their income tax deduction for non-reimbursed casualty losses. It can mean a substantial reduction in their tax bill.
What Does the Future Hold?The industry has changed and there is no going back. Property owners, lenders, litigators and builders have all been affected, and pressure from insurers and government regulators is changing the face of the industry. Because of the tremendous losses experienced since 2001, you can expect continued reluctance by insurers to step up and cover most mold losses.
The immediate and extreme response by the insurance industry to exclude all mold losses will begin to soften with recent introductions of insurance reform bills. Many states are legislating laws dealing with everything from setting standards, quantifying health risks and regulating remediation contractors and insurance carriers.
Will there be coverage? Not all insurers are alike, and their policies vary considerably. But for enough premium dollars, nearly anything can be covered. Some are providing expensive riders to cover potential mold damage. Here are some of their options:
- Cover all mold claims and raise premiums to pay for these losses
- Exclude mold, but offer an expensive endorsement to add this coverage
- Provide a more restrictive explanation of coverage and provide partial exclusions for subsequent damage caused by mold
- Completely exclude any form of mold coverage
Insurers will demand faster response and more effective restoration of water losses by contractors, while remediators will find new markets in providing mold prevention information and shifting to commercial and institutional losses. Homeowners, maintenance staff and building managers will focus on proactive mold prevention and finding and eliminating contamination early. Building contractors will develop new construction methods and materials that will reduce the risk of water damage and inhibit mold growth.
The best advice today is to limit your exposure. Obtain pollution (environmental) insurance coverage for doing this type of work, and provide the best service you can by investing in education and equipment. Read and adhere to current industry guidelines and standards. Stay alert to the shifting insurance situation and new information about mold. Expand into commercial markets and seek out clients that have the need and the funds to have the work done properly.