Links: Insurance Information Institute: www.iii.org

HousingZone: The insurance situation for builders and remodelers was in a state of crisis last year, especially due to mold and construction defect litigation. Is the situation better than it was a year ago?

Soto: For insurers, the situation on the homeowners' side has sort of leveled off. That's because there was a big explosion of events and then things calmed down, but also because 40-some states up to now have mold exclusions. So it's really been taken care of.

The crisis in the builders' industry -- I wouldn't say that mold is entirely responsible for that, but it's definitely a big part of it. With the builders' industry, there's a lot of talk about construction defects or perhaps new materials or different materials used than were used in the past. That's one thing the insurance industry has looked at in trying to explain where all these problems with mold have come from. That's what we focus on: trying to understand whether in fact it is about construction defects or about different materials or whether it's also about home maintenance and issues with the homeowner not taking care of the property right away. How is it different? Again, with the insurance industry, it's leveled off a little bit because of the exclusions that are in most states. The second part to that is the builders' industry, which has not leveled off yet because they're part of the second group that is being attacked and looked at to be made responsible for the situation. I think it's calmed down a little bit, but I don't think we've seen the end of it at all yet.

HZ: You said about 40 states have mold exclusions for homeowners policies. Have a lot of those come within the last year, or have they existed for a while?

Soto: That can be a tricky question because many insurance policies did have -- though not in very clear language -- an exclusion for mold. I say not in very clear language because those exact words -- mold exclusion -- were not the way that it was written. It was written in the way many of these legal contracts are written that are not necessarily 100% clear to the average Joe walking down the street. That's just the nature of the business, unfortunately. So with many companies, it was sort of understood that they were not covering mold. But it was not the type of thing that an average customer, when they went to their agent or company representative, talked about. It wasn't one of the priority things anybody was discussing. So when mold claims did start surfacing in large quantities or in high numbers in terms of dollar amount, that's when the states and the companies started looking at their individual policies and saying, "I thought we did have a mold exclusion. Maybe we don't. Maybe it's not so clear. Maybe we really haven't discussed mold, but we've discussed water-related problems."

So what that means now is that the language is clear now in 40-plus states, saying specifically that mold is excluded. Except, of course, when it's something that's really impossible for the homeowner to have noticed or taken care of right away. A burst pipe within the walls, for example.

HZ: It seems like a couple of years ago was when the hype on the homeowners' side really hit its peak.

Soto: Exactly. 2002 was when most of these laws were passed and mold exclusions were passed. That's really when it started, at the end of 2002, where the problems with the insurance industry and mold started leveling off.

HZ: The white paper that the Insurance Information Institute had written on mold and insurance in August 2003 talks about how the media now is not focusing as much on the hype, but now it's more focusing on those who profit from mold fear and on better building science. Could you talk about that a little bit?

Soto: The media has turned a bit more skeptical toward the issue of mold. I'd like to think that part of it is due to groups like ours and others doing a good job of explaining very carefully and clearly what the issue is, why it's primarily a home maintenance issue and not a "blame your insurance company and sue them" type of issue. I think the fact that a couple of high-profile individuals got involved obviously helped peak the frenzy in the beginning. But I think the media has turned skeptical to them. Once they start talking about a $20 million lawsuit for mold that you could have cleaned up when you first saw it, it's just normal for the media to become a little skeptical about it.

I don't want to make light of those situations either. Obviously, mold could start growing on the inside part of your wall and you would not know that it's there. But in some of the pictures that we've all seen in different publications, we're talking about walls, top to bottom, completely covered in mold. Obviously, nobody woke up one morning and found that in their apartment. It started with a little corner, maybe where there was a leak that nobody fixed. It may not be your fault that it didn't get fixed properly. Maybe it was the landlord. Needless to say, you probably did see a little bit of mold somewhere and didn't take care of it, didn't think it was a big deal until it did become a big deal. I just want to explain that, because I don't want to make light of someone whose entire home really is infested with mold. But it is good to pause, step back and take a look at it and realize that the homeowner did not just wake up one day to find the home covered in mold. I think once people started seeing too many of those pictures and too many of these famous people suing left and right for millions and millions of dollars, it's shocking at first. But if you evaluate those situations carefully, you realize that it didn't need to escalate to that point had things been handled differently when mold first appeared.

HZ: We've talked a bit about homeowners' insurance and mold. What about builders' liability coverage?

Soto: Many of our companies sell builders' insurance and that type of coverage. On the commercial side, the crisis isn't over yet. And I'm talking about large corporations being sued by employees because there was mold in the office. Or even a building company that has insurance and they're getting sued because there are claims that they build homes incorrectly, allowing for humidity and then mold. Generally, that's where the crisis has moved -- from homeowners into the commercial side. And again, that's also the natural course of things, because it's easier to control and contain what happens in the homeowners' market because you are dealing literally with one individual at a time -- one individual home, one individual homeowner. When you're talking about any type of commercial situation, the potential for the issue becoming larger and for a lawsuit becoming larger is obviously much greater because you're going to be suing deeper pockets in the case of a corporation, or you're going to be suing an entire industry, say the builders' industry. So the crisis has moved there, and it's not contained yet. I would say it's going to take maybe about two more years or so for it to level off a little bit.

HZ: Besides time, what things need to be done in order for that to level off?

Soto: It's going to be difficult because the first thing that's going to take place in terms of insurance is that more exclusions are going to come into play. But once we start talking about lawsuits -- and even if the mold issue isn't the prevailing one -- there are secondary issues. Let's say for some reason you can no longer go after your employer if your building was contaminated with mold and you had health problems as a result. But then you're going to be able to sue them for negligence because they should have cleaned up the mold. Or maybe you're going to sue them for bodily injury. Or you're going to sue them for even battery. So there's a second layer of different types of suits that can come out of this. At some point, it's going to be almost impossible to find an answer for all of them, because then you would have to have exclusions for everything. "Well, you just can't sue me, period." That would be the answer, but obviously, it's impossible to come up with that type of answer. The groups that are becoming affected right now by lawsuits affiliated with mold are apartment buildings, condos, co-ops, commercial builders and commercial groups as well -- individual companies. The next group that will be involved, I think, is going to be schools, courthouses, public buildings, museums, etc. That's where we see it going. Hopefully we're wrong, but we think that is what is going to happen.

HZ: A number of states have "right-to-cure" laws. Now these builders have a chance to actually go in and make repairs before they're sued. Are more states going to follow, and how have the states that do have these laws responded?

Soto: We hope that more of these laws do get passed. I think 20 or more states have these laws in effect now or are in the works somewhere in their legislative process. But so far they haven't been that effective. The right-to-cure laws mean that at some point a homeowner can go to the builder -- and there's obviously a time period, 30 days, 60 days, whatever it is in that particular state. They have that much time, once they take possession of the home, to go back to the builder and say, "I found that this wasn't done properly. Come back and fix it." But to some degree, it still ignites that chain of litigation. The owner's going to blame the builder, the builder could blame the manufacturer, and so on and so forth. I think the intention of those types of laws is in the right place, meaning, "Hey, if I made a mistake, don't sue me. Give me a chance. I'll come back and fix it." That sounds great.

But perhaps I think there's going to be loopholes where a builder comes in to fix it, but the homeowner says, "But they didn't fix it right." Or again, the builder can say, "There's nothing I can fix. You're going to have to deal with the manufacturer." … There's potential for it to go back and forth and still not necessarily get resolved. And all of this is going on while you have some states -- and California is a perfect example -- where housing is becoming less and less affordable. So there's a whole bunch of different pieces to the puzzle, and we can't just only focus on, "OK, we've contained the homeowners' insurance problem. Let's now contain the builders'. Let's now contain this." We have to be ceasing these fires at the same time. I think up to now, we've been doing one at a time.

HZ: Builders are having difficulties getting liability coverage as insurers are pulling out of the industry, and builders are limited to a select few and are having to pay higher premiums as a result. Does that situation look to get any better?

Soto: I don't think it's going to get any better in the short term. Certainly, that's unfortunately one of the tangents that come out of this type of crisis. The insurance market in that respect became tighter, and so it is more difficult to get insurance for builders themselves. Generally, when you have fewer companies, that's not a good idea because you have less competition, so prices are going to go up. The thing not to forget is that the insurance companies are regulated by the states, so that will prevent a bigger crisis from coming up, meaning that will prevent a situation where only one single company will sell X type of insurance in X state, so that there will always be some sort of competition. But until the legislation helps the insurance industry be able to afford to insure certain risks, then companies aren't going to want to participate in that market. That's just good business sense. Why would you sell insurance to something that's obviously going to be a loss continuously? We've said it from the beginning: It's really an issue of legislation, where one can do good business both for the builders' industry and for the consumers. An insurance policy is a contract between two parties. So where both parties can do good business, you're going to do it. But until the legislation changes, it's not going to get better.

HZ: A lot of companies are excluding mold from their homeowners policies, and a number of insurers have also developed stand-alone policies for mold-related damage. Is that a growing industry?

Soto: That's a natural response to the situation. The way insurance is looked at in that regard is that we're going to exclude it from a standard policy. That way, for people who wouldn't have mold issues or are not in an area where mold could be prevalent, then there's really no point in offering it to everybody if it's not going to affect you because that would just increase the costs for everybody, and that's not necessary. So when something is excluded, there are always companies that step in and say, "We can afford to cover it, so we will." So they create these stand-alone policies just for that individual coverage. Not a lot of companies jump in on that. When I say not a lot, let's not forget that there are hundreds and hundreds of insurance companies out there. So maybe a hundred do, and that's plenty for the market. A couple of companies have done it so far. Maybe a couple more will. It's not going to be a product that every single company offers. But it is the kind of issue where people can have their standard homeowners insurance policy from one company and then buy stand-alone policies from another. If your individual homeowners company doesn't sell that type of product, it's OK. You can go to another one to get just that coverage if you need it.

HZ: Does the same thing apply to builders trying to get liability insurance? Are some policies excluding mold, and then they find themselves having to buy stand-alone policies?

Soto: With commercial insurance, it's a little bit different, only because there isn't a so-called standard policy, like there is a standard homeowners. People talk about it, but there isn't a truly standard business policy. It is most of the time tailored to the individual needs of that business, just because a builder company is going to be completely different from a mom-and-pop shop down the street. Having said that, liability is liability. Certainly, there are different types of liabilities. When you buy a business policy, it's more of a package of a couple of stand-alone policies that you pick and choose to custom-tailor it to your needs. Usually with liability insurance, the first thing that happens is not that it becomes unavailable. The first thing that happens is that it's more expensive. Then if the crisis really is truly, truly a crisis, it becomes unavailable. So I would imagine that the best answer is yes, it will be available. It will just be very expensive.

HZ: Do you have any final comments?

Soto: As far as the insurance industry knows, building techniques haven't really changed dramatically since the late '90s, when mold started becoming an issue. We, from the very beginning, have said the mold issue is a home maintenance issue. Yes, in some cases -- particularly in the case of apartment buildings -- it could be landlord negligence. Perhaps in some cases it is construction defects or materials inappropriately used. But we viewed those issues as really just being a handful, where the main problem is home maintenance. If you see mold, you have to clean it up. If you have any type of water damage, it's not just about fixing the leak. You have to fix everything around the leak. I think this is more of an issue of one or two cases where people just weren't aware of that and they became big, gigantic problems. Once the spotlight is on that and [people say], "We can file an insurance claim and sue X or Y industry for it," it allows for that to happen in mass numbers. Home builders aren't out of the deep end yet, because they're the next logical group to be attacked after the insurance industry. But I think once the research comes in to prove that buildings have been built this way for thousands of years and they're still being built the same way as they were 50 years ago and we didn't have mold problems then, that's when there will be some alleviation from this problem.

HZ: You had talked earlier about the building science aspect of this. It does seem like now there are a lot more companies and manufacturers creating products that are either mold-resistant or creating building systems that help to potentially ward off mold issues.

Soto: That's a natural response from those industries as well. It can be a double-edged sword. It can be seen as an admission that the materials being used before do attract mold, so that's why you're changing them now. We may hear a little bit of those types of claims as we go along. I think once the media is informed and, in effect, consumers are informed, it's just a natural reaction of, "OK, since this has become a problem, this is the way we can solve it." I would hope that with the right-to-cure laws and any situation where a builder or manufacturer has the opportunity to fix whatever problem, they could go in with these new materials and fix it that way, so as to fix the immediate problem and prevent future claims regarding that particular construction defect.

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