HousingZone.com talks with J. Kevin Shane, vice president and environmental practice leader at Marsh Risk and Insurance Services, about risk-management strategies for builders and the current and future states of the insurance market. Marsh is a risk-management consulting and insurance brokerage firm based in New York.

HousingZone: What are some risk-management strategies for home builders?

Shane: Risk-management strategies really start from the very beginning of construction and go to the very end. They go from contracts, both with suppliers and contractors, to the contracts for a home sale. Whether or not any home builders have taken the initiative to build certain language into the purchase sale contract with the home buyer, I'm not sure. But it's certainly something that could be contemplated and used in an effort to protect the home builder from complaints that are brought by the homeowner simply because of the homeowner's poor housekeeping.

There's an adage that says if you take away the water, you can't have mold. Mold requires water or moisture to grow. If you take away the steaming pools of water in the bathroom, if you properly ventilate the bathroom using a fan or window, then you end up in a significantly better position for stopping mold growth. Putting in a fan that's tied to the light - so you turn on the light and the fan goes on - is a good way to ventilate the moisture from a bathroom. To the extent that the builder doesn't do that, or cannot do that for whatever reason, putting in a window is another good way to ventilate the moisture from a bathroom. But using a window requires that the homeowner use the window properly. Otherwise, you're inevitably going to end up with mold growth in the bathroom.

That's a long way of talking about the very first step of the mold risk-management process. Other steps would include, for example, should the homeowner ever complain of water intrusion, having an informed and prompt response acknowledging the fact that, if we're talking about water, there's a good chance we could be talking about mold, and what all that means. So a quick and proper response to complaints by the homeowner about water intrusion is a good step in the risk-management process.

Proper claim advocacy is another important step in the risk-management process. Should your quick and appropriate response to water intrusion prove to be inadequate, and you end up with mold growth, and now the homeowner is complaining about mold growth and whatever potential allegations would come along with that, how does the home builder properly put up a defense? First, manage that whole relationship between the home builder and the plaintiff. Second, heaven forbid it should go into litigation, how does that litigation matter get properly managed? Mold is a highly specialized area, and just using your typical counsel and not bringing in experts could be a significant problem to properly defending that situation. Ultimately you go through all of the possible scenarios with respect to mold risk management, and yet you can backstop the whole thing with a properly structured pollution liability policy.

HZ: Is obtaining a separate pollution policy a common thing for builders these days?

Shane: From my experience, a number of developers and a number of property owners maintain pollution policies that have been structured to provide mold coverage. I think it would be inaccurate to say that the majority of them do. I know of one very large home builder who said that they believe their risk-management processes are appropriate to manage that exposure, which is entirely valid and could very well be an appropriate response. They haven't had any claims, and they're not expecting to have any claims with respect to mold. They look at water-intrusion claims as a very important issue, and whenever they have a complaint, they jump on it very quickly. So far they haven't had a mold problem.

HZ: What are some of the best ways for builders to obtain liability insurance coverage?

Shane: I don't believe the market has changed, such that how it's been done in the past two or three years is going to be any different. Namely, the way to get coverage for mold is to obtain it via some type of pollution liability policy. Having said that, there are two different policies that might typically be used - pollution legal liability [PLL], a generic name, or a contractors pollution liability [CPL] policy. What usually happens is when an entity wants to get the coverage and it's decided that the PLL or the CPL is the appropriate way to go, then the underwriter will do one of two things.

One, he or she will add an endorsement to whichever policy either excluding coverage completely for mold or two, affirming in some way that coverage for mold is provided by that policy. Now, how do you get the latter endorsement, affirming that coverage for mold is provided? It naturally goes back to the underwriting process. Underwriters will look at least at a couple of broad areas to determine whether or not they want to provide the coverage. First, they're going to want to see that senior management knows that mold is a very significant exposure and they take it seriously. And two, and really this follows one very closely, they're going to want to see some sort of water-intrusion and mold-prevention plan. The rationale in putting them in that order is if senior management considers this a very important issue and takes it seriously, then naturally they're going to have a water-intrusion and mold-prevention plan in place. They may say they take it seriously, but without a plan in place, underwriters would take a look and say it's just lip service - they don't really mean what they say.

Ultimately, the underwriters will often review a water-intrusion and mold-prevention plan in conjunction with an interview with the CFO, general counsel or risk manager. If the underwriters have a good feeling that the builder takes this seriously and the plan will work in the event that water-intrusion problems come up, or if that fails, a plan that puts the builder in a good position to aggressively respond should mold problems come up, then the underwriters would likely be willing to provide coverage.

HZ: That seems like a promising sign because I got the impression last year that underwriters were rarely considering mold coverage at all. But at least now the underwriters are looking to see if quality-control measures are in place.

Shane: At Marsh for the past three years, we've been in and out of the market obtaining terms and conditions for consideration for our home builder clients. Now we can't always obtain coverage because everything ebbs and flows, and underwriters may look at one of my clients' overall risk-management program and not like what they see. But generally speaking, over the last three years, we've been able to obtain coverage. Now it's not a panacea by any means, but it's coverage that's broad enough so that a number of my property owners and developers have purchased the coverage anyway. But then again, no insurance policy is a panacea. They all have exclusions.

HZ: Do you ever work with small builders? It would seem that smaller builders might have a tougher time proving to the underwriters that they have these programs in place.

Shane: I don't think they would have a harder time proving that the programs were in place. It's not as though those are the only two pieces of information that an underwriter will consider, but certainly they're two of the most important. Small builders could - and I would imagine that most of them do - think that the mold issue is an important, problematic issue. I don't happen to buy the whole idea that mold is causing the world to stop on its axis. I think that we've co-existed with mold for millions of years, and only in the last two years has it supposedly become a huge problem. I can't square that. What I typically will say is, I don't buy the whole issue, generally speaking, and I think that the epidemiological studies are going to prove me right given enough time for the studies to be completed. But in the meantime, it's an absolutely monumental financial issue. So don't misunderstand - I don't think it's a real issue, but I think it's a terribly important financial issue. With a million going out here to the plaintiff and 10 million going to another plaintiff, there's not much that comes along that gets bigger.

So going back to your question about the small builder, certainly they can express an appropriate concern over the mold issue. Maybe they think it's a real issue, or maybe they don't, like I don't. But on top of that, it's certainly possible for them to engage a company like Marsh Risk Consulting or engage their own environmental consultant, assuming they have one they use on a semiregular basis, to put together a water-intrusion and mold-prevention plan. Again, those are the two principle criteria. Where the smaller builder has a very hard time is with respect to the premiums. The mold loss experience for various underwriters has been so bad, generally speaking, that obtaining pollution coverage with the coverage grant for mold included can get pretty pricey for a small builder.

HZ: Do you have any idea how much premiums have increased during the last three years?

Shane: I think it's safe to say that over the past year, the mold-related premiums have increased 50%. The way it usually works is along these lines: You would get initial terms for pollution legal liability coverage or contractors pollution liability coverage, whatever avenue you wanted to use that the underwriters thought made sense. Imagine that the premium was $100,000 for a total, one-time term premium. Then you decided you wanted the mold coverage added into that policy. Depending on the underwriter, that would add a 20% to 30% additional premium. So your total premium would be somewhere between $120,000 and $130,000 for pollution legal liability coverage, including mold.

What's happened of late is when we start off with that $100,000 initial premium, what I'm seeing nowadays is the additional premium being somewhere like 50% or 60%. So it's going to be $150,000 or $160,000 in total premium.

HZ: Do you see any end in sight to the 50% to 60% increases?

Shane: It seems that things are beginning to slow down a little bit right now. I can't speak for the underwriting world, but there are a lot of trends that I pointed out in my e-mail to you that are beginning to appear [include link to these trends]. I think the exposure to both the developer/builder and therefore to the underwriters, to the extent that there's insurance in place, is going to begin to decrease to the extent that the exposures begin to decrease either by way of frequency or by way of severity. Then the rates ought to begin to stabilize and then come down.

HZ: Do you have anything else to add?

Shane: I think that the signs are beginning to point in the right direction and that things are slowly getting better. But that's in light of a situation that has become very detrimental to both policyholders and the insurance companies, hence the significant rate increases. Things aren't just going to have to stop getting worse, they're going to have to get significantly better before rates are going to come down and underwriters are going to feel more comfortable providing the broader, more encompassing coverage that I would like to see for my clients. But again, the coverage particularly from a third-party liability perspective is, generally speaking, there. And for a builder, it's that liability component that they're probably most interested in obtaining.

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