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Last year, the building industry’s uproar over mold lawsuits helped revolutionize construction defects litigation. Now, attention has turned to insurers’ attempts to limit homeowners’ claims, and mold is again flavoring the debate. Any reform battle is likely to engulf lawmakers and state Insurance Commissioner John Garamendi, who face offending two well-heeled constituencies — insurers and the plaintiffs bar. Insurers say the high cost of mold litigation, among other factors, is forcing them to raise rates and refuse coverage. In reaction to the dramatic increase in mold-related claims, insurers for the past year and a half have requested and been granted exclusions by the Department of Insurance. Those exclusions range from caps on the amount an insurance company will pay out for mold to requests for “total” exclusions, where the insurer would refuse any mold claim even if it results from an incident that would otherwise be covered. Plaintiffs attorneys want to stop the exclusions and are looking to Garamendi’s office or the Legislature for a fix. The plaintiffs bar says insurers are using mold as a distraction for the real motivation behind rate increases — to make up for investment income lost in the recession. So far, it’s not clear how Sacramento is going to handle the fight. Last week, the Assembly Insurance Committee, led by Democrat Juan Vargas, held a hearing to look into rising premiums. Garamendi told committee members that California was near a “crisis” and proposed crafting a homeowner’s bill of rights that includes health standards for mold. “We need to get our arms around what is real and what is hype with regard to mold,” Garamendi said. According to Garamendi, the insurance commissioner does not have the “clear authority to disapprove mold exclusions.” Insurers, health experts and consumer advocates also testified at the hearing. Insurers have long argued that lawyers are overzealous with claims that mold growing in houses after water damage is toxic. Dan Dunmoyer, president of the Personal Insurance Federation of California, said the plaintiffs bar has created “unfounded hysteria” over possible health problems. Dunmoyer said a good first step to quell the hysteria would be to go ahead with a study on the health effects of mold, which was approved by the Legislature in 2001. The legislation requires the state Department of Health Services to conduct the study and develop standards for cleaning up mold. But the study has been in limbo because of lack of money. Now, insurers are so eager to have some ammunition against plaintiffs’ courtroom claims that they’ve offered to pay for the study themselves. Lawyer Brian Kabateck, who testified at the Vargas hearing on behalf of Consumer Attorneys of California, said he sees no problem in going ahead with the study, as long as insurers aren’t allowed to stack the panel with their own experts. More importantly, though, Garamendi’s office needs the power to deny the exclusions in order to make sure people can get coverage, said Kabateck, a partner at a small Los Angeles firm. Kabateck believes Garamendi has the power to come up with such a regulation right now that would allow him to deny exclusions. Short of that, the Legislature could do something. “We would certainly like to see some legislation clarifying that mold is covered under a homeowner’s policy if it results from another covered loss,” Kabateck said after the hearing. So far, no bill directly addressing mold coverage has appeared in the Legislature. But at least two proposals deal with the details that insurers use to determine coverage. Insurers say mold suits have skewed the coverage equation in California and are making homeowners’ insurance a losing business. Plaintiffs counter that insurers unfairly use mere inquiries about water damage and other losses to deny coverage. Democrat Sen. Jackie Speier of Burlingame would change that with SB 64, which would tighten up regulation by prohibiting companies from refusing to offer or renew insurance except under certain conditions. And then there’s AB 81, by Republican Assemblyman Mark Wyland, which would prohibit an adverse underwriting decision based on inquiries about coverage. In recent years, the home-building industry also sounded an alarm about mold, saying out-of-control litigation threatened affordable housing in California. Developers said lawsuits — especially those based on water damage and mold — made it hard for builders to get insurance to cover construction defects claims. They said reforming defects was the only way they would be able to keep up with the housing boom. To fashion a fix, builders entered into negotiations with Consumer Attorneys. The result, SB 800, took effect Jan. 1. Is there a similar coalition in the works to look at homeowners’ insurance and mold? “In a word, no,” Kabateck said. “I think we’re too diametrically opposed. They want it out of the policy, and all we want is the status quo.”

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