Return to Virginia Business - May 2004

Related story:
- Insurance brokers in Virginia

by Brett Lieberman
Virginia Business
May 2004

Mold can wreak havoc in more places than the shower. Just ask homebuilder Ron Gwaltney. During his three years in business, he’s never filed a claim with his insurer. So he was stunned late last year to find out that his general-liability insurance premiums would double to $10,000 per year. A different underwriter offered a cheaper policy but still demanded a 50 percent rate hike.

Gwaltney isn’t alone. Builders and contractors across Virginia are learning that insurance companies either want hefty rate hikes or have stopped offering coverage. Zurich North America, for example, which used to write most homebuilders’ policies, now writes none.

The problem, say contractors and insurers, is a growing number of claims for construction defects, especially mold-related claims and lawsuits. While molds occur naturally in the environment, those microscopic spores — given the right conditions — can cause millions in property damage and in some cases pose a health risk. In 2002, U.S. insurers paid more than $3 billion in mold-related claims, up from $1.3 billion paid in 2001, according to the Insurance Information Institute.

Even builders like Gwaltney who haven’t made any insurance claims are finding that insurers don’t want to take the risk. Mold claims typically costs $15,000 to $30,000 but can reach $100,000 for residential repairs and into the millions on commercial projects.

So far, most mold cases have been in Texas. Nearly $4 billion has been paid there in the past three years. The number of claims and lawsuits is growing in other areas, too, including California and Florida. Just last month, Lou Ferrigno, the former bodybuilder and “Incredible Hulk” television star, settled a $250,000 suit in Los Angeles after an inspector allegedly failed to properly locate and repair a leak, which caused damage resulting in mold growth.

Generally, mold claims stem from conditions involving moisture, in which spores grow unchecked. Carlton Gill Jr., an independent insurance agent with W.T. Chapin in Newport News, says one of his underwriters paid $750,000 to settle a claim after ductwork — left outside a home in North Carolina prior to installation — spread mold spores and sickened two elderly women. The contractor ended up buying the home for about $1 million. “Even though these things aren’t happening all that frequently, when they do they are pretty dramatic in terms of the dollar pay-out the insurance companies are having to make,” says Gill.

Faced with rising insurance premiums and uncertainty over whether commercial carriers will remain in the market, the Tidewater Builders Association has started offering a self-insurance policy with rates up to 25 percent lower than commercial insurers. The group’s leaders think they might be the only local trade group in the country to do so. So far, 16 builders have signed up. Gwaltney was the first. “The reality is the insurance is necessary,” he says. “You’ve just got to have it.”

There might be a need, yet few commercial insurers want a share of what they view as a potentially risky market. “There was a big void that we were hearing from our members,” says John “Chip” Iuliano III, the association president. Iuliano is still insured through Nationwide Insurance, which continues to write policies in Virginia, although he’s bracing for bad news.

The Tidewater group is able to offer lower prices because it does not have the national exposure of other insurers, and it does not have shareholders expecting profits. In addition, it has minimized its risk by requiring builders to have written agreements with subcontractors to make them responsible for their work. Buyers must also agree to resolve disputes through binding arbitration. Local agents write the policies and receive a commission as they would from other underwriters.

The Tidewater builders’ program isn’t necessarily a cheaper option. While the rates are lower, builders are required to buy home warranties. Rates vary based on a builder’s sales, but typical premiums run from $2,500 to $25,000 and offer coverage up to $1 million per claim or a $2 million aggregate. While he’s not realizing any savings, Gwaltney says the warranty provides a value that he can pass along to homebuyers.

Another way the construction industry is trying to cope with the mold problem is through new products, such as sub-floors, that keep mold and mildew out. They’re costly, though, and homebuyers may not want to foot the bill. “Many of these things are not things you can turn a switch on and they work,” says Gwaltney. “The buying public will not see these things.”

The general liability program, which grew out of the builders association’s experience with its five-year-old workers’ compensation program, is still in its infancy. Only $200,000 in premiums has been paid so far. A planned marketing blitz aims at reaching $1 million in policies by year’s end.

The impact of mold claims is hitting certain trades especially hard, including heating and air conditioning contractors and plumbers, because they deal with ductwork and potentially leaky pipes that could lead to a mold outbreak. “Those guys and the plumbers are in the most hazardous category. They don’t stand a chance of getting a renewal,” says Gill. The policies they are able to find typically exclude claims from mold or fungal growth, which leaves them exposed to potentially costly out-of-pocket expenses. Another option is buying a pollution-insurance add-on, but premiums for a contractor with only three employees can start at $10,000 a year.

Much as in the debate over rising medical malpractice rates, there’s a lot of rhetoric and blame to go around about the costs and health effects of mold claims.

Fanning the fires of mold litigation, say insurers, are lawsuit-happy attorneys and publicity from high-profile cases, such as television personality Ed McMahon’s $20 million suit for faulty mold remediation. Insurers say some attorneys have a “mold is gold” mindset and see it as the new asbestos, and a source of big payouts.

“It’s been a big issue for a number of years and it’s certainly growing,” says California attorney Alexander Robertson IV, who might be dubbed the king of mold suits. He is currently handling about 700 mold-related lawsuits and helped McMahon reach a $7.2 million settlement. McMahon sued his insurer, insurance adjusters and cleanup contractors for $20 million, blaming them for painting over mold after a broken pipe flooded his den. McMahon and his wife said they became seriously ill and their sheepdog developed respiratory problems and died before the McMahons moved out.

Another Robertson client, Erin Brockovich, who was made famous by the movie bearing her name, has become a crusader on the mold problem since claiming that construction flaws and high mold levels were to blame for sickening her and her 9-year-old daughter.

The insurance industry maintains that most mold is a maintenance issue and rarely poses serious health issues, although many people are allergic to molds. In the United States, there are more than 100,000 species of mold and at least 1,000 variants are common. Caught early, the industry says, simple bleach and water can eliminate mold damage. “What’s happening is that mold is becoming such a highly charged emotional issue,” says Eric Goldberg, the assistant general counsel at the American Insurance Association. Homeowners’ fears of catching airborne illnesses are being fueled by flawed science, he says. “Because there’s no science, the science often gets made in the courtroom.”

Insurers are hoping an anticipated National Academy of Sciences study will find that mold is not a serious health threat and will provide ammunition to fight mold claims, but existing research so far has not supported industry claims. “Our hope is that if the National Academy of Sciences study comes out the right way, that will go a long way to reducing litigation costs,” says Goldberg, who predicts insurers would return to the market quickly.

If not, many builders are being squeezed by higher costs for materials and labor and may not be around when insurers come calling again. Richmond homebuilder John Nolde sums up the situation like this: “We’re getting to the point where it’s like the doctors and their liability … it’s getting prohibitive.”

Return to Virginia Business - May 2004