AIA and NAII Oppose California’s SB 1763

California senators recently approved Senate Bill 1763, designed to restrict insurance companies from writing mold and liability restrictions into their policies.

The bill, which was introduced by Senator Deborah Ortiz (D-Sacramento) and vehemently opposed by both the American Insurance Association (AIA) and the National Association of Independent Insurers (NAII) would mandate new disclosures and would require policies being issued or renewed on or after Jan. 1, 2003 to provide mold coverage as an “ensuing loss.”

“What prompted this bill to be introduced was that Senator Ortiz heard that insurers were filing ‘exclusions’ with the Department of Insurance over mold,” said Nicole Mahrt, Public Affairs director for the western region of the AIA. “Basically, the very nature of mold has really changed in the last two years. And the premiums that were charged for homeowners insurance previously did not include the potential losses and the losses that we’re facing now from mold claims.

“The majority of those ‘exclusions’ that have been filed with the Department of Insurance are simply clarifications of what their policy does and does not cover. Some people are filing complete mold exclusions, whether or not that’s going to work remains to be seen.”

In a press release from the NAII, general counsel and senior vice president Sam Sorich commented, “It is a disappointment that the Senate would approve a bill which could worsen the already troubled marketplace for homeowners insurers.”

In the past, insurance companies have been paying claims on mold that was likely caused by fire or water damage. Due to the recent concern and crisis situation the homeowners market is currently facing, companies have been filing exclusions from covering mold in certain situations.

If the bill, which now awaits approval by the Assembly Insurance Committee, should go into effect, it would make it even more difficult for companies to stay in the market, as availability is already rapidly diminishing.

Mahrt explained that the bill has two sections—the first creates new disclosure requirements, which Mahrt said is “basically an attempt by the trial bar to set a trap to generate lawsuits. They’re using very broad and ambiguous language, that in some cases conflicts with existing law, and it’s their way of kind of setting more traps so that they can file more suits.” The second part of it “essentially prevents insurers from working with the Department of Insurance to clarify what their policies do and do not cover,” although Mahrt added that there is debate over the interpretation of what exactly the second part of the bill will do.

“The very nature of mold has changed,” said Mahrt. “The costs to remediate those claims has skyrocketed, the severity of the claims have grown exponentially and the number of claims have grown. The bottom line is these remediation costs and these losses were not factored into the rates. You’re seeing companies faced with dealing with paying claims for things that they did not build into their rates, and essentially mold has become uninsurable because you cannot predict what the losses are, the science is completely unsettled, there’s no consensus on what the health effects of mold are, and how it affects the average person. And there are no standards or for remediation of cleanup of mold. So it’s become a serious situation.”

Sorich added, “With no ability to limit the clean-up or investigation costs involving mold claims, insurance companies can’t predict their losses, which may make it more difficult for them to stay in the market.”

Mahrt suggests that it is the trial attorneys who are behind the bill, working with Senator Ortiz.

“The costs that we’re facing for mold has not been built into rates,” said Mahrt. “If an insurer wants to raise their rates to start collecting premiums so that they are collecting enough to cover these losses, they have to go to the Department of Insurance and get those rates approved, because we’re a prior approval state here in California. As part of Proposition 103, if an insurer wants a rate increase of over 7 percent or more, there has to be a public hearing. But when there’s a public hearing the trial lawyers kind of sponsor these interveners that go in and oppose the rate increases. And so insurers most often just have to apply for rate increases incrementally and show the data.”

Mahrt attributes the recent approval of rate increases for some companies to their data—the companies bring their figures to the Department of Insurance to show that their losses are going up, and their current rates do not reflect the true costs of the current market.

Insurers try to avoid trial attorney intervention by requesting rate hikes of 6.9 percent—just below the 7 percent threshold that would send them to a public hearing.

Mahrt notes the concern of independent agents in regards to the new bill. “They see carriers saying we’re not going to write any new business in California. State Farm just announced that they’re not going to write any new homeowners in Cali-fornia. And so, that has a dramatic effect on State Farm agents, because they’re not going to be able to offer that product to their clients. I think that they would support the company’s efforts to get control of the situation.”

The AIA would like to see an Ortiz bill that was passed last year go into effect—the bill called for a study to be conducted by the Department of Health Services to investigate the causes of mold and put standards into effect for the industry—both for the health effects and remediation.

However, as Mahrt explained, the state’s budget crisis prevents the study from being funded—to which she offers the solution of private entities footing the bill. “You’re putting the cart before the horse, quite frankly. You’re creating all these new laws, but you don’t even have a basic understanding of what the real problem is here, or how to fix the problem.”

“I think that whether you take this bill out of the equation or not, with or without this bill, it’s still an ongoing problem that the industry is facing and it’s not just going to go away. I think that some sound science really would help on a lot of fronts. [It] could bring some clarity into a lot of these lawsuits that are going on. I think insurers will continue to use whatever tools they have to manage their exposure. [Their] job is to remain solvent, and to control their book of business. We’re saying don’t pass laws that are going to prevent insurers from doing their job and managing their exposure.”

To comment on this story, send e-mail to cbeisiegel@insurancejournal.com.

Topics California Carriers Claims Homeowners