Mediator Named in Mold Case; Farmers Pulls Plugon HO-B Policies

A Travis County judge has named Austin lawyer and former Texas Supreme Court candidate Karl Bayer to mediate a settlement in a mold-related lawsuit in which the jury slapped Farmers Insurance Group with a $32 million award. State District Judge John Dietz appointed the mediator in lieu of entering a judgment on the June 1 jury award, an action that would likely have been appealed, according to the Austin American Statesman.

Bayer has 90 days to help both sides reach agreement on how much of the award Farmers will actually have to pay to the plaintiffs, Melinda Ballard and Ron Allison. If no compromise is reached during that period, Judge Dietz will decide the amount. The award stems from a suit against Farmers subsidiary Fire Insurance Exchange, in which Dripping Springs homeowners Ballard and Allison alleged the company mishandled their water damage claim.

According to Ballard and Allison, Farmers delayed in covering repairs for a water leak in the couple’s 22-room mansion and ignored contractors’ warnings that dangerous molds could grow under the house’s subflooring if the subflooring were not pulled up. In filing the lawsuit, the couple had requested $100 million in restitution.

Farmers to Stop Writing
In a related development, Farmers is telling its Texas agents in a series of meetings held around the state that come Aug. 15, it will write no new HO-B policies. The first meeting was held July 27 in Dallas and the final meeting is set for Aug. 9.

Farmers spokesman Bill Miller was quick to point out that the decision involves only new policies. “The key word here is ‘new.’ Renewals will not be affected by the decision,” said Miller, who is based in Austin.

The Independent Insurance Agents of Texas, in a written statement published on its website, comments that the action taken by Farmers could be the first of what the IIAT calls a series of marketplace restrictions.

“Because of its 17 percent share of the Texas homeowners market, Farmers’ actions on the mold issue will have a major impact on other carriers’ willingness to stay in the market,” writes the IIAT.

State Farm Reacts
In response to the current high visibility of mold coverage, State Farm Insurance in late July requested the Texas Department of Insurance to postpone a public hearing that had been scheduled July 24 regarding a State Farm policy form change proposal. State Farm spokesman David Wolfe said the direct writer has been working with TDI since 1997 on a proposal that is designed to allow State Farm to use essentially the same HO forms in Texas that it uses in all but three states now.

TDI had asked State Farm earlier this year to resubmit an updated proposal which it did. “But with the increased attention to issues involving mold coverage, State Farm late last month thought it best to postpone the hearing process until a later time,” said Wolfe. A new hearing date has not been set. The proposal included three new residential property policy forms and 33 new endorsement forms.

The national State Farm policy does not cover long-term water and foundation damage such as that from seepage or leakage. Customers can buy additional coverage, but even that would not include mold as a covered peril. Mold coverage would have to be the result of “sudden and accidental” damage, according to Wolfe.

Unlike the national policy, under the Texas standard form, all accidental water damage is covered.

TDI is still in the process of collecting data on mold infestation, thus State Farm recognized that the Texas insurance commissioner will not be able to rule on its requests until the extent of mold coverage can be determined. Wolfe said the company will likely submit an additional or amended filing.

Also in partial response to increased mold-related claims, Texas insurers requested an average 3.6 percent rate hike for residential policies in a state hearing on benchmark homeowners rates held by the Texas Department of Insurance. Insurers also cited losses from flooding in the Houston area.

Rick Gentry, executive director of the Insurance Council of Texas, testified during the first TDI public hearing on mold that the recent dramatic increase in mold-related claims is threatening to undermine basic consumer expectations while at the same time presenting a serious challenge to the financial integrity of Texas insurers.

Public Insurance Counsel Rod Bordelon, a consumer advocate, opposed insurers’ requests and recommended a 10 percent decrease in rates, according to the Austin American-Statesman. Bordelon said a decrease is warranted because Texas homeowners premiums are too high and the state has seen a decline insurance losses in recent years. TDI Commissioner Jose Montemayor gave no indication of when he would decide on the rate requests.

Bordelon also commented on the State Farm proposals, saying, “If State Farm’s national policy were approved, it could open the door for other insurance companies to push through similar forms.” Requiring insurance companies to provide certain types of coverage, he said, protects consumers who are not as informed about potential risks.

The next mold hearing is scheduled for Aug. 21 in Corpus Christi and the TDI has set a final hearing for Sept. 13 in Houston.

The first hearing June 26 held in Austin was prompted by a proposal by Farmers to exclude coverage for mold damage from standard homeowner policies—a request state Insurance Commissioner Jose Montemayor said his agency is “nowhere close” to approving.

Miller said Farmers’ decision to issue no new HO-B policies after Aug. 15 will remain in effect until TDI approves either a coverage exclusion, as proposed in an endorsement filed by Farmers with the department, or a combination of exclusion and coverage buy-back that Farmers is currently drafting. According to IIAT, Farmers has gained approval of the mold exclusion in 29 states, including California.

In its testimony June 26, Farmers said it had retained an independent expert to assess the factors associated with mold claims. According to IIAT, the expert estimated that for 2001 Texas mold damage claims will account for $128.5 million in additional costs to insurers. The expert also advised Farmers that a 41 percent increase in homeowners rates would be needed to pay for mold claims.

Miller confirmed that during the first six months of 2001, Farmers received more than 1,000 new mold claims in Texas.

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