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With litigation over toxic mold triggering million-dollar verdicts and 9,000 suits filed nationally, insurance companies are attempting to pre-empt the court actions by withdrawing from the market. Among the most dramatic steps are those taken by State Farm Insurance Cos., the largest homeowner’s insurer in the country. It has stopped issuing new policies in at least 20 states. Farmer’s Insurance, which was hit with a $32 million jury verdict in Texas last year in Ballard v. Fire Ins. Exchange, No. 99-05252 (Travis Co., Texas, Dist. Ct.) has announced that it will not renew its 700,000 homeowner’s policies in that state. In more than 35 states, insurance companies have successfully lobbied state insurance boards to eliminate mold coverage in their policies even when an event that led to the mold is covered by a policy. Other insurance companies are capping payments for mold or offering it as a separate add-on protection area, according to both insurers and plaintiffs’ lawyers. The mold claims and mold-related suits have driven up costs to insurers to an untenable level, asserts Robert P. Hartwig, chief economist of the Insurance Information Institute. “The homeowner’s insurers lost an estimated $8.9 billion more in losses and associated expenses than they took in in 2001,” Hartwig says. Mark Wells, counsel in the corporate law department at State Farm, says the insurance carrier was motivated in part to stop offering new policies because it sought to reduce market share as a result of claims and litigation for mold. “When you have a lot of losses, you don’t have the ability to add more business because of statutory accounting,” Wells notes. “We don’t have the surplus to support it. It has eroded our surplus because of losses to the point we can’t write business.” Plaintiffs’ lawyers charge that the insurance company’s claim is a diversion from the real source of their financial woes. “I think they’re using mold litigation as a hook for the underperformance of their financial portfolios,” says Michael Childress of Chicago’s Childress & Zdeb and co-chairman of the Association of Trial Lawyers of America’s toxic mold group. Alexander Robertson IV of Calabassas, Calif.’s Robertson & Vick also thinks the claim that mold is driving the insurance companies’ losses is disingenuous. He notes that insurers made similar noises about leaving the market in California because of earthquake coverage. “They all came back,” he notes. “They just charged higher rates. Insurance companies are in the business of adjusting risk and evaluating risk. This risk is no different.” MOLD VS. TOXIC MOLD The mold litigation suits are twofold, involving both property damage and health claims. The battle between the two sides begins with its very name. In the United States, there are more than 1,000 types of common mold that exist naturally, in the air or on surfaces. Most insurance companies have never covered slow-growing mold, like that on a bathroom shower curtain. However, many insurance companies have covered mold when it resulted from a covered peril — like a pipe bursting. Whether mold was always covered or never covered remains the focus of much of the litigation currently in the courts. The issue has been interpreted differently among the courts. Plaintiffs’ lawyers distinguish regular mold from “toxic mold” when there is an infestation of the mold in a house and it causes illnesses like headaches, rashes, respiratory ailments, inhibition of the immune system, lung disease, cognitive memory loss or brain damage. Insurance companies call the term “toxic” a misnomer, and say that although some people have an individual allergy to some kinds of mold, most are unaffected by it. The science around mold-related illness is hotly disputed, with fights over whether it can pass the U.S. Supreme Court’s Daubert test still being battled over in the courts. Plaintiffs’ lawyers say new construction practices, building materials that make houses more airtight and a greater public awareness of mold problems are the reason that mold litigation has evolved recently. However, defense lawyers assert that the new tort, which blossomed in 2000, is driven by overblown media coverage. Both sides have scientific experts to back up their allegations. While it is generally accepted that some types of mold produce mycotoxins that could trigger health problems, the Centers for Disease Control and Prevention states that a causal link between the mold and these conditions has not been proven. Robertson says, however, that the insurers’ response to mold claims supports the plaintiffs’ lawyers position. “They want to tell people mold is not toxic and at the same time they’re saying they’re not going to cover it and write new policies — so it must be scary,” he asserts. Whether or not the science is accepted, juries are returning damages awards. In the most well-known case, Ballard v. Fire Ins. Exchange, which resulted in a $32 million jury verdict, the defendants, a Farmer’s subsidiary, successfully moved to exclude medical testimony from the trial. The award for property damage was a result of a bad-faith claim against the insurer. Fred Hagans of Houston’s Hagans, Bobb & Burdine was the attorney in the Ballard case. He asserts that mold litigation arises out of a decline in the quality of the insurance companies’ underwriting and claims-handling over the last 30 years. “Insurance companies have changed from insurance companies to an arm of a large financial company,” he says. “Insurance companies have been used for cash flow to be used in other parts of the company.” He says their slow response time to claims has exacerbated the expenses involved in mold claims because damages continue to mount if a claim is not promptly responded to. State Farm’s Wells notes that it is sometimes difficult to determine when the mold results from poor homeowner’s maintenance and when it’s a result of a catastrophic reason. “There’s no way to distinguish between mold that results from a covered loss and mold that was pre-existing.” AN END TO LITIGATION Plaintiffs’ lawyers say the insurance companies’ tactics to avoid coverage won’t stop their suits. “They may think they can contractually exclude mortgage coverage but we don’t believe they can exclude it in relation to a tort,” says Jim Roberts of Birmingham Ala.’s Townes, Woods & Roberts, which has at least 200 mold suits pending and has settled between 25 and 40 suits with a variety of insurers. Hagans says that if insurers permanently withdraw from the market, business might shrink somewhat, but he notes that bad-faith claims don’t depend on coverage. “It’s their duty to promptly investigate and accept or reject the claim,” Hagans says. “The insured doesn’t know whether to solve the problem at $20,000 or wait a year [for the insurer to decide its position] and then the damage is at $80,000.” Childress claims the insurance companies’ tactics have actually resulted in more litigation — at least of one kind. His firm has filed more motions for temporary restraining orders on behalf of families that are displaced while repair work is done on their house. Many of them are finding their insurers’ checks for rent are suddenly cut off. “They’ve adopted a starve-them-out position by cutting off their benefits,” Childress charges. John Odendahl, an in-house attorney who manages bad-faith litigation at Farmer’s Insurance, says the insurer has about 100 mold suits filed against it a month, and adds that in many cases the lawyers are more or less skipping protocol to file suits. “Many of those lawsuits are filed out of the blue,” he says. “Claim adjustment payment is made. No letter goes to the claims department and all we see is that a claim gets filed” as a suit. Insurance lawyers aren’t convinced that their measures will stop the plaintiffs’ lawyers either. However, Farmer’s Odendahl says he believes that media coverage could also stem the flow of mold claims and suits. “A big portion of the mold litigation will go away once the press coverage starts to subside as to the health effects of mold,” he predicts. But he doesn’t believe that will put an end to the tort. “It’s an area that’s better than asbestos,” Odendahl asserts. “They stopped making asbestos but they can’t stop mold. Creative lawyers will always find ways to argue around policy language.” Odendahl adds there’s not one case that he or other insurance executives are watching that will determine the future of the tort. Legislation in a number of states could affect how and whether homeowner’s insurers must cover mold. However, he says an important factor will be whether there is a standardization of what is an appropriate response to mold and what constitutes “fixing it.” Both the insurance lawyers and the plaintiffs’ lawyers blame the remediation business — a cottage industry that has sprung up to clean up and repair mold damage — for shoddy practices and inflated prices. “There is no national or even state level about what is a safe level for mold exposure,” says State Farm’s Wells. “A spot of mold on your wall, is that safe or not safe?” The plaintiffs’ lawyers also complain about the remediation companies. They say the companies — those hired by the insurance companies and those that are independent — are quick to profit financially without fully taking care of the problem. Odendahl says that if legislation requires the remediation companies to be standardized or licensed, that could be more important to ending the volume of claims and lawsuits than the outcome of suits now wending their way through the courts. “There’s no reason for a bunch of mold lawsuits. You don’t have a lot of fire-damage lawsuits. People understand what’s covered,” he says. Business could slow for plaintiffs’ lawyers because of the insurance companies’ efforts. If that happens, Childress notes, “I believe remediation malpractice is the next wave.”

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