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Copyright 2003 American Banker, Inc.
The American Banker...01/30/2003
By Troy E. Johnson
No one likes to talk about mold, yet it is quickly becoming a multibillion-dollar problem for banks and other industries that serve the real estate sector.
The problem is likely to get worse before it gets better. In 2001
alone, mold cost insurance underwriters more than $1.3 billion, and that
is predicted to go up in coming years. Bankers too are feeling mold's
toxic effects -- in ever-increasing dollar amounts. Testing for mold has surged. Insurers are looking at remediation
costs that in some states average more than $35,000 per cleanup,
according to the Insurance Information Institute, and they are operating
in an area where standards and practices are not well established, if at
all.
As a prerequisite for underwriting a mortgage, many banks are now
requiring mold insurance on multifamily dwellings, where the stakes are
high. But many insurers are moving away from providing mold coverage or
are limiting it.
New legislation and tort reform may yield the only remedies, but they
are not helping the banks.
I have been amazed by the recognition mold has received from the
financial markets. The threat of a mold-related lawsuit has driven many
investors, CFOs, and lenders to flex their fiduciary responsibility and
require mold insurance. I would be surprised if we do not someday see
the FDIC requiring borrowers to obtain mold coverage before loan
approval.
Mold can put real estate brokers in the compromised position of
trying to sell a structure that is not fully insurable. Mortgage
lenders, equally at risk, are reluctant to underwrite loans that they
cannot profitably sell to the likes of Freddie Mac or Fannie Mae.
If lenders cannot siphon off mortgages -- and make money doing so --
they must suffer the consequences of keeping them. Insurance premiums
and lending rates may go up to compensate.
The construction industry, too, is altering certain practices. Modern
buildings are sealed tight against the external environment; air seepage
is minimized or eliminated to save energy. These conditions encourage
mold; just add water and do not stir the air.
Ventilation is a must, therefore. Though less of a factor in
commercial buildings that see a lot of traffic and opening of doors,
ventilation is fast becoming a critical concern in the residential
market.
According to the Building Industry Association of Washington,
homeowners are suing construction companies, claiming that defective
construction caused mold. What was once a boon -- tight buildings -- is
now a bane.
Mold thrives in the presence of moisture in an airless space and can
spread like wildfire under the right conditions. Places hidden from view
-- inner walls, ceilings, under the floors -- make early detection
difficult and can provide ideal conditions for mold to flourish.
The 1990s saw an enormous increase in mold detection -- and in the
lawsuits and proposed legislation meant to deal with its consequences.
There are an estimated 9,000 legal cases pending claiming property
damage, personal injury, and related losses. Awards for such claims are
running between $200,000 and $400,000.
States such as California and Texas have taken the lead in
mold-related claims. In Texas, for example, Farmers Insurance Group had
virtually none in 1999 by more than 10,000 by 2001, and the industry
nationwide took note. California is actively seeking legislative
solutions.
The insurance industry held its breath when a Texas jury recently
awarded $33 million to a homeowner; on appeal that was reduced to $21
million. The jury concluded that the homeowner's insurer acted in an
unfair and fraudulent manner when evaluating mold damage.
Since this highly publicized decision, others, such as in Florida and
West Virginia, also have exceeded $30 million.
The plaintiff's bar has taken notice, and insurers are rewriting
policies to protect themselves, stating in some cases (such as in
Washington) that they will cover mold damage only when it is caused by a
covered problem.
"Experts" who call themselves remediators have paid
attention to recent developments as well. Their job is to remove mold
and return the damaged area to its previously healthy condition.
Many are honest and capable practitioners. Some are not, and are
taking unfair advantage of consumers and businesses alike. And this has
nurtured a Wild West environment surrounding mold and the businesses
cropping up around it.
Mr. Johnson is the executive director of the 10-year-old nonprofit
Environmental Education Foundation in St. Paul, which offers training,
registration, and information on environmental hazards. He is also a
consultant to and a former executive of Environmental Support Solutions
Inc. in Tempe, Ariz., which sells environmental compliance software.
The advent of enclosed structures occupied by
humans has made mold an issue. Many people are allergic to it and will
not purchase a home if it is detected.
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