This fundamental change in the insurance needs of restoration contractors will force thousands of restoration firms to access the complex and highly specialized insurance products offered in the environmental insurance marketplace. Environmental liability insurance covering mold is readily available to qualified restoration contractors. However, qualifying for this insurance, finding assistance in procuring it, and affording the premiums will all be new challenges for most restoration contracting businesses.
Universal mold exclusions and limitations have permanently changed the business insurance and risk management needs of restoration contractors. When mold exploded onto the insurance scene as the "toxic pollutant" of the new millennium, the insurance industry responded with unprecedented vigor and purpose to cut its loss exposure by excluding or limiting insurance coverage for mold-related claims as quickly as possible. By 2004, the insurance companies had accomplished their goal to avoid paying for mold damages by issuing more than 100 million mold-related claims exclusions and limitations.
These exclusions have left property owners and contractors with a significant gap in their insurance coverage. The full effects of these changes are yet to be felt in the restoration contracting business. However, two changes are already being felt: first, in addition to excluding mold claims, some insurance companies are trying to purge their books of perceived high mold-risk accounts by refusing to renew existing accounts. Restoration firms in this situation will need to turn to the environmental insurance market for their General Liability and Contractor's Pollution Liability insurance coverage needs. Efficiently filling the insurance coverage gaps for restoration contractors created by mold exclusions and restrictive underwriting guidelines will require customized environmental insurance products from the environmental insurance market and the assistance of specialized environmental insurance brokers. Most off-the-shelf environmental insurance products are not well suited for restoration contractors.
Second, some customers and third-party administrators are coming to grips with mold exclusions and are demanding that restoration contractors procure environmental insurance programs that cover them for mold-related damages. These trends are perfectly rational on the part of insurers, customers and third-party administrators and are not the product of misinformation in the market place. Therefore, the movement of restoration contractors from their traditional insurance world into the environmental insurance market place is likely to be a permanent one.
A smooth transformation into the environmental insurance market will require specialized environmental insurance brokerage skill sets and planning in order to maximize the value of the insurance purchased while minimizing the premiums paid and professional exposures to all parties. Contractors can expect to pay more for insurance that covers them for mold related claims than what they would pay for a policy that does not cover mold claims. Without environmental insurance, restoration contractors are not covered for a source of loss (mold) that made professional risk takers (insurance companies) run for cover, refusing to insure mold risk at any price. Only a very small sector of the insurance business has the skill sets and appropriate insurance policy forms to properly insure the new liabilities of restoration contractors.
What Caused the Change?
Between 2001 and 2002, mold claims were growing so fast that some insurance companies feared that mold would soon eclipse asbestos and environmental losses as a leading cause of insurance company insolvency. In response to the explosion of mold claims, insurance companies added tens of millions of new exclusions and limitations for mold-related losses to virtually all personal lines of insurance (homeowners and auto liability), commercial lines (general liability and property) and professional liability policies (insurance agents and architects).
These new mold/fungus exclusions were rolled out faster and on a wider scale than terrorism exclusions, with virtually no advice being offered to insurance agents or insurance consumers as to the impact of the exclusion on the insurance coverage's being sold. No one knows for certain how many mold claims there were during this period; estimates range from 28,000 to 300,000 claims annually. On the high end of the range, mold claims would have mirrored the damages caused by fires in the United States, with both causes of loss costing the U.S. economy $12 billion per year. There is more evidence supporting the high end of the range than the low end. In a hearing on the need for new mold exclusions on Nov. 7, 2002 with the insurance commissioner in Maryland, State Farm Insurance Co. testified that they had paid $446 million in mold damage claims in just eight months between 2001 and 2002.
Considering State Farm is just one of more than 2,000 insurance companies doing business in the United States, it is a safe assumption that a significant source of losses are now uninsured in off-the-shelf insurance programs. If the high end of the range is accurate, insurance companies have artfully shifted a loss exposure equivalent to the losses caused by fires back onto insurance consumers without even a whimper of protest by consumer groups or insurance agents.
Recent mold claims research shows that insurance companies are paying many fewer mold claims than they were in 2002. Since the number of water-damage events is more or less constant if the impact of major water events like hurricanes and floods are taken into account, the loss data implies that the insurance companies have successfully been able to shift mold losses away from their policies and back onto insurance consumers. Most restoration contractors have felt the early signs of these changes in the insurance market, with less mold work being paid for under homeowner's insurance policies. The full effects of this change in the insurance market are yet to be felt by the restoration contracting industry.
Experience with pollution and asbestos claims proves that adding exclusions into insurance policies does not make all the losses disappear. Some uninsured property losses will certainly find their way back to restoration contractors in the form of liability claims. In the case of mold losses, specific mold exclusions may force the person who suffers a mold loss on their property to pursue other avenues of recovery for their damages, in some cases that will mean accessing the court system and bringing action against all responsible parties. In one famous mold-damage case in Hawaii, the electrical contractor, along with all the other contractors on the new construction of a Hilton Hotel, was sued for mold-related damages.
Anyone working with water in the built environment needs to be aware that without primary insurance in the cost recovery mix, the chances of being sued for mold-related damages increase dramatically. The domino effect of an uninsured mold claim illustrates how an uninsured mold claim on a homeowner's insurance policy transforms into a toxic tort claim against a restoration contractor and other potential responsible parties.
To avoid costly uninsured claims, all service providers working with water in the built environment must now implement a proactive water intrusion/mold risk management protocol including loss prevention and environmental insurance to deal with the fundamental change that mold exclusions have made to the business world.
The Effects of Mold Exclusions on Restoration Contactors
The introduction of universal mold exclusions will have eight major effects on the restoration industry:
1. Any water-damage claim in the built environment now has the potential to change into an uninsured toxic bodily injury claim. These claims are usually very expensive even to defend. Prior to mold becoming a health issue, restoration contractors did not have a measurable loss exposure to potential toxic tort claims. Also prior to universal mold exclusions most firms had liability insurance for such an event.
2. The standard insurance policies purchased by restoration contractors have the same mold exclusions that their customers have, leaving them all potentially uninsured for mold related damages. Commercial General Liability insurance alone is no longer adequate liability insurance for any firm dealing with water in the built environment. The purchase of customized Contractor's Environmental Liability Insurance covering mold related liability is now necessary to fill the gap in business insurance created by mold exclusions.
3. Without primary insurance for mold related damages on the building owner's insurance policies, there is an increased likelihood that the building owner will have to sue their vendors to recover mold damages.
4. Sophisticated clients, like insurance companies and third-party administrators, are coming to grips with the fact that restoration contractor's standard insurance packages now exclude mold -related damages. These customers are starting to ask restoration contractors to provide environmental insurance covering mold in addition to general liability insurance. With these major sources of referral business routinely requiring environmental insurance, all restoration contractors will soon be pushed by market forces to procure environmental insurance if they work with water-affected conditions.
5. Environmental insurance is available to qualified restoration contracting firms but it is not cheap (except in comparison to a toxic mold claim) and many restoration firms today cannot meet the rigorous underwriting requirements. As with all forms of contractor's pollution insurance, a cost advantage will go to the larger contractors because of the extreme economies of scale in the rating models the insurance companies use to charge premiums. Group insurance programs can help off set this advantage, but it is safe to predict that liability insurance cost considerations will force smaller-scale mold remediators out of the market.
6. For insurance purposes, when mold became a universally excluded or limited "pollutant" on insurance policies, restoration contractors moved into the insurance world of hazardous materials contractors. Hazardous material contractors have enjoyed a stable market for environmental insurance over the past 20 years; however, to obtain the appropriate insurance on their business, hazardous materials contractors must run a much more sophisticated business with more employee training and tighter financial management than many restoration firms are used to.
7. The cost of business insurance will increase if the restoration firm decides to fill the gap in insurance coverage created by the mold exclusions.
8. The degree of expertise necessary on the part of insurance agents to adequately service the insurance needs of a restoration contractor has shifted from the skill sets necessary to insure flower shops, grocery stores and restoration contractors on standardized business owners package policies, into the insurance world of hazardous waste clean up contractors with highly specialized General Liability and Environmental Insurance policies. Although restoration contractors are not hazardous materials contractors per se, the liability insurance policies they will be purchasing to address mold will be the same policy forms used by asbestos abatement contractors and the contractors that clean up nuclear bomb plants. The vast majority of insurance agents have never worked with these complex insurance products. Therefore, an additional level of insurance brokerage expertise will need to be added to the contractor's insurance agent team.
The insurance equation may seem daunting, but it is not impossible to solve. Next month, we'll look at some of the steps you can take to protect yourself and your business in the new-reality marketplace.