McTexLaw McPherson and Associates Real Estate Asset Protection Law Firm Attorney

WHY INSURANCE PREMIUMS ARE RISING: MOLD PLUS 9-11 (posted 5-1-02)

In Texas, insurance companies have been at war with the Texas Department of Insurance for a few years now over mold coverage by insurance policies. Residential properties have gotten the most coverage, but make no mistake: any tenant in any commercial building can make a mold claim as well. So can apartment dwellers. In multi-tenant structures, the costs can be exponential.

Prior to 9-11, insurance companies had already begun raising rates because their stock market investment returns were, well, they weren't. Insurance companies also began to withdraw from some of their unprofitable and less profitable markets, reducing competition. The events of 9-11 further strained the capital structure of insurance companies, which are heavily regulated and required by the government to hold a certain ratio of assets to their policies. In order to be able to write more policies, they must obtain more assets.

This past February (2002), I attended the Advanced Construction Law seminar. One of the topics dealt exclusively with the effect of 9-11 on the insurance market. While I won't bore you with the incredibly intricate details, the speaker's opinion was that it would take the insurance industry about 4 years to recover from 9-11. The problem stems more from the reinsurance market than the retail insurance market. Reinsurance is used by insurance companies in that they basically insure themselves against the risk of paying claims on their policies. This has the effect of spreading risk throughout the industry. Without the availability of reinsurance, retail insurance policies cannot be written safely. And when reinsurance premiums go up, so do retail insurance premiums. 9-11 decimated the reinsurance market.

Separate from 9-11 are mold claims. A quick look at the trends shows the devastation to the insurance companies. From 1990-1999, paid losses were an average of 67% of written premium income. In other words, for every $100 in premiums collected, the companies paid $67 in claims. In 2000, this ratio increased to 82%, and in 2001 climbed to a staggering 91%. No insurance company can survive on $9 per every $100 of written premium.

As if this wasn't enough, on October 30, 2001, a jury awarded a $32 million verdict against Farmers Insurance Group for botching a mold claim, in Ballard v. Farmers Insurance Group. It is the nation's largest award in a mold-related case. But there seems to be a lot of misunderstanding about what this case is and is not. This was an insurance fraud case, not a mold damage case. The problem was the way in which Farmers handled the claim, not the claim itself. State law prohibits an insurance company from handling a claim, and refusing to settle a claim, in bad faith. This jury found that Farmers handled the claim in violation of this statute, and sent a message to the companies not to act in such a way.

Look at the components of the damages award. The jury awarded $6.2 million of actual damages, concluding that the house (a 22 room mansion) will have to be decontaminated, leveled, and rebuilt. Then the jury awarded $12 million in punitive damages as an example to other insurers, $5 million for mental anguish, and $8.9 million in attorneys fees. To put this in perspective, in December, 2001, the average of all mold claims cost $8,900, a record high.
The biggest problem with the Ballard case for insurers is the publicity of the case. It really energized plaintiffs lawyers (just as sharks smell blood in the water or, in this instance, mold that grows in the water), and motivated homeowners to contact them in the hopes of winning the courthouse lottery. Granted there may be some legitimate claims, but as a result of Ballard, mold claims will now clog the court system, adding litigation expenses to the tab. And of course, all of this will affect our insurance premiums for all insurance products.

Insurance companies didn't see this coming until it was too late, so they were not prepared for the significant impact. In order to maintain their capital strength as required by law, they were required to raise their premiums. Premiums will continue at higher levels for the next several years until insurance companies regain their financial strength. This will depend in large part on whether, and how, the Texas Department of Insurance allows insurance companies to limit or exclude mold damage claims from future policies (which may be added back into a particular policy for an increased premium on that policy), and whether the Department or the Texas legislature will impose some restraint on mold claims.

Increased premiums affect everyone, not just residential homeowners. For example, according to insurance broker Marsh, a unit of Marsh & McLennan Cos., in 1999 the cost of liability insurance for an apartment property averaged $20 per unit with no deductible required. Now, that cost is $45 to $50 per unit, and requires a minimum $5,000 deductible. And the average deductible is now closer to $25,000. So for a company with 5,000 units, its insurance premiums have gone from $100,000 per year to $250,000 or more per year.

And finally, for commercial real estate properties, there are those pesky plaintiff's lawyers, the ever-expanding definition of liability, and juror sympathy. The problems with juries are that they can more easily sympathize with the victim. There but for the grace of God go I. The effect of the sympathy is to award more money and to find new grounds for liability if necessary to support making any type of award. Jurors aren't commercial real estate property owners, so they do not identify with the defendants. The average jury award in a premises liability claim, grew from $350,947 in 1997 to $698,206 in 2000, the latest data available, according to Jury Verdict Research. That sympathy will continue to drive up insurance premiums for commercial property.