Watching the mold debate unfolding at the Texas Department of Insurance, Texas homeowners might be inclined to think their neighbors have gone stark raving mad, that they're overcome by "public hysteria" fueled by the media, not to mention greedy plaintiffs attorneys, and have begun filing so many mold-related claims that they're pushing insurers to the brink of financial "crisis."
At least that's the spin some representatives of the nation's insurance industry, most notably Farmers Insurance Group, are selling as part of their effort to convince Texas Insurance Commissioner Jose Montemayor to rewrite rules governing homeowners policies and exclude mold from coverage under the policy most Texas homeowners buy.
For an industry that sells peace of mind, the decision to launch an attack on its own customer base is rather unusual. To Melinda Ballard, the unofficial leader of a new grassroots consumer movement that Austin political insiders call the "moldies," it's an act of war.
"What they have tried to do is pit Texan against Texan, neighbor against neighbor, by saying those that have had mold claims are causing huge spiraling increases for everybody," Ballard says. "If you can't sell your house because you had a kitchen sink leak three years ago, you shouldn't blame your neighbor who has a toxic mold claim. You should blame the insurance industry."
Blame. That's a good name for the game that is now being played out in Austin, where in October Montemayor is expected to announce a decision on the insurance industry's request, which, if granted, would effectively reduce protection for most Texas homeowners--regardless of whether they have a mold problem.
In Texas, mold itself is already excluded from the most commonly purchased home insurance policy, known as the HO-B. (A small percentage of Texans purchase the HO-A policy, which is less expensive because it offers less coverage.) The problem is, insurance companies must pay to clean up mold infestations if they occur as the result of damage caused by covered perils. Those include common problems such as burst pipes, backed-up toilets and leaky roofs.
In effect, insurers are asking Montemayor to rewrite Texas Department of Insurance rules so that companies will no longer have to pay for damage caused by everyday perils, and that request has opened up the largest consumer battle in recent Texas memory.
This summer, hundreds of mold-plagued Texans, led by Ballard, have turned out to express concern about the proposed changes at a series of public hearings Montemayor has called. In turn, the insurance industry is deploying its own resources, says Dan Lambe, the executive director of the Austin-based consumer lobby Texas Watch.
"The insurance companies are engaged in a full-court press in lobbying Montemayor," Lambe says. "They've got full-blown, high-priced lobbyists working the Texas Department of Insurance. On top of that, they've hired public relations teams to help spin the issue in the media and to help generate positive coverage for their side of the issue. All of that is resulting in some serious pressure on the commissioner."
On the surface, it is difficult to locate many good reasons why Montemayor should feel especially sympathetic for the insurance industry--particularly given the timing of its request and the hardball tactics it has employed to push its agenda.
For one thing, the industry's often-repeated claim that "public hysteria" is to blame for their financial woes is simply not true based on the turnout at the public hearings, says Rod Borderlon, the director of the Office of Public Insurance Counsel, the consumers' liaison within the state insurance department.
"Certainly there is a greater awareness [about mold], but it hasn't escalated to public hysteria," says Borderlon, who adds that many people he's heard from are "amazingly" rational given that many of them have been forced to live in hotel rooms and apartments while their mold-infested homes are repaired.
For another thing, the industry's request came after a Travis County jury ordered Farmers Insurance Group to pay an unprecedented $32 million as part of a lawsuit Melinda Ballard filed against the California-based carrier. In awarding its verdict, which is still being mediated, the jury determined that Farmers was guilty of engaging in "unfair and deceptive" acts in handling the insurance claim Ballard filed when her Austin-area mansion became infested with toxic molds.
So bad was Farmers' behavior, the jury ordered the company to pay a hair-raising $12 million in punitive damages, not including an additional $5 million for causing the family mental anguish and $8.9 million in legal fees. (The actual damage to the property was set at $6.2 million.) The closely watched case sent shock waves through the insurance industry because of the unmistakable implication of the verdict: Mold is a problem that must be taken seriously, and U.S. jurors will make insurance companies that fail to properly handle mold claims pay dearly for their mistakes.
Following its request, the insurance industry turned up the pressure with two suspiciously timed announcements: Farmers and Progressive Insurance announced they could no longer afford to write any new HO-B policies in Texas. Shortly thereafter, All State said it would no longer issue new HO-B policies on any homes that have suffered water damage within the previous three years. The announcements sent ripples of fear across the state because, in effect, they threatened to halt home sales and send the state's weakening economy spiraling further down.
Given her personal experience, it's little wonder why Ballard accuses the insurance industry of acting like a "bully."
"They want us, the people of Texas, to bail out the perpetrator," says Ballard, who is now planning to run for state representative. "You and I are responsible for our actions, and if we do something wrong, we have to pay the price. We don't have our neighbor pay for it."
If Ballard's characterization of the insurers is right, the good news is that Montemayor doesn't appear to be crumbling beneath the political pressure. In an August 29 letter, Montemayor effectively asked the insurers to back off.
"While I fully appreciate insurers' concern about the increasing frequency and severity of mold claims, I also believe these actions are disruptive to the market in the short term while I am working toward a long-term solution," Montemayor wrote. "You have my assurance that I will move expeditiously to address this matter. Until then, I'm counting on you to maintain full access to the market without the necessity of Texas Department of Insurance intervention."
Farmers has remained silent in response to the letter, but All State spokesman Justin Schmitt says his company promptly rescinded its earlier action "out of respect" to Montemayor. At the same time, he rejects the accusation that All State's initial announcement was political. Rather, he says, the company was simply trying to "limit our growth in a volatile market."
"We're fighting hard to stay in this market, and our track record has shown that," Schmitt says. "Something is wrong if you make restrictions on offering your product. That's not a decision a business makes lightly."
Like all good finger-pointing debates, at this point there is no way to tell which side is right. Whatever the tactics or intentions of the political lobbies in Texas, however, there is no question that the nation's complexly structured insurance companies are taking a serious financial hit.
Citing, in part, a spike in claims, Standard & Poor's lowered Farmers all-important bond rating in August and continues to maintain a "negative outlook" for the nation's property and casualty insurers as a whole. The losses are particularly severe in Texas, a big state that's prone to a multitude of natural catastrophes, such as the recent Tropical Storm Allison, which single-handedly caused insurers to pay out $2.5 billion in losses, says Robert Hartwig, chief economist for the New York-based Insurance Information Institute.
"Insurers are losing money hand over fist," Hartwig says. "Already in Texas you have the highest average insurance premiums in the country. Also, relative to a median family of four's income, you have the most expensive homeowners insurance by far."
To industry advocates like Hartwig, a big reason why Texas homeowners insurance is more costly is because Texas insurance rules are comparatively more liberal in requiring coverage of water damage caused by slow or undetected leaks, a common cause of mold infestations. In most states, Hartwig notes, most insurance policies typically only pay for water damage of a "sudden and accidental" nature.
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Eliminating, or at least scaling back that type of coverage, is just one possible compromise solution being bandied about in Austin. Despite the nasty politicking, there may be good cause for a compromise: In 2000, the state of Texas saw a 21.4 percent increase in the number of water-damage claims filed. More important, it saw a whopping 52 percent increase in the amount of money spent on repairing those claims, according to state figures.
A big question remaining is how much is mold responsible for those increases as well as other questions about why those repair costs are rising so fast. At Montemayor's request, the state's top five insurers, including Farmers and All State, late last month turned over thousands of mold-related claims that the department's bean counters are reviewing. Within the next two weeks, they will turn the results of their analysis over to Montemayor.
While it is clear that increasing claims have given the insurance industry legitimate cause for financial concern, Borderlon says the worst thing that could happen for everybody concerned at this point is hasty decision making.
"They [Farmers] lost a major case there, and now they have to deal with those consequences," Borderlon says. "What I'm trying to do is make sure everybody understands that we deal with these issues on a long-term basis. We can't react on a knee-jerk basis and give the insurance companies what they're asking for, especially if they may have contributed to the problem."