The handling of water- and mold-damage claims by insurance companies has translated into multimillion-dollar verdicts nationwide - sending insurers scrambling for an out. Industry representatives convened at a hearing in Baltimore this month to urge the Maryland Insurance Administration to support a push for mold exclusion.

Kimberly Bray, a charter property and casualty underwriter for State Farm Insurance and a Maryland lawyer, hopes the insurance administration will be swayed by events elsewhere. Last year, a Texas jury awarded $32 million to a couple after Fire Insurance Exchange, a member of Farmers Insurance Group, improperly handled a mold claim.

About the same time, 125 New York City families filed an $8 billion lawsuit against their landlord, alleging that toxic mold throughout the premises caused illness to residents and the death of a 7-year-old girl with asthma.

In California, a resident made a claim on his Allstate homeowner's policy after a pipe burst in his house. Allstate offered an amount below the policy limits. The homeowner refused the offer, and Allstate failed to act for over a year. Meanwhile, toxic mold began to grow and spread throughout the house. The homeowner sued for breach of contract and breach of the duty of good faith and fair dealing. In 2000, the jury awarded him $18 million in punitive damages, although the judge later reduced the award.

"Here's the crux," said Bray. "[People in] Texas didn't think they had a mold problem in 1999. Rapidly, they discovered they did. In the first quarter of 2000 they began to see a trend and this mold phenomenon take off. By the end of 2001, they had a full-blown crisis."

"Our State Farm Lloyd's affiliate in Texas, in order to stay in business, had to borrow money from State Farm Mutual Automobile Insurance Co. State Farm Lloyd's is a company that has over 1 million homeowners' policies. They found that, for each premium dollar they were collecting, they were paying out $1.67. They can't stay in business very long like that. And they've now borrowed money from State Farm Mutual. It would be a shame to have this information available to us here in Maryland and fail to act."

The Maryland Insurance Administration has received more than 220 form filings from 147 licensed property and casualty insurers looking to exclude or limit coverage for damage arising out of mold or related exposures.

The MIA disapproved prior personal line filings for mold exclusions from policy claims, citing "inadequate statistical justification or other pertinent data" to support those filings.

In the official notice of the Nov. 7 informational hearing, the MIA requested that insurers provide Maryland-specific claims data regarding exposure to mold, including losses paid, related loss costs, expenses incurred, and conflagration and catastrophe hazards.

Instead, insurers provided limited data, and said the current sorting method for claims makes it nearly impossible to chart an actual number of mold-specific claims.

Typically, said industry representatives, many mold-related claims are filed under water- or fire-damage claims, if they occurred as a result of such damage. Further, they explained, the potential and extent of the cost of those claims has yet to be determined.

"It's so soon right now to try and gather statistics because we're finding that these mold claims have very long tails on them, so to speak. So, there are claims now that are open in which payments are being calculated and those payments have not entered the statistics," Bray said.

According to industry sources, insurers are threatening to cut back services or even withdraw from Maryland's homeowners' market, should the commission rule against them.

Sustained losses in the New Jersey auto market led to State Farm's departure from that state's auto market in July 2000, with the approval of the New Jersey insurance commissioner. "We did that after years of attempts to work with the regulators there in New Jersey to get some favorable regulations and favorable rates filings," Bray said. "But that was to no avail, and therefore we had no choice."

As of now, the insurance company has no plans to withdraw from the Maryland homeowners' market, Bray said. Instead, it has adopted a marketing plan to limit policy sales in the open market and to persuade the powers that be that mold exclusion is necessary to the industry's well-being.

Bray testified on behalf of State Farm. "We've asked them to be responsible, be a responsible regulator and take action to preserve the markets here in Maryland from the absolute devastation and catastrophe that the Texas market suffered."

"We spoke to our great concerns about this mold phenomenon," she said. "This fact that the science behind it all is highly suspect. ... So, when you have something like that, and you know that these situations get out of hand and can become very costly - and have been very costly for, example, to our Texas affiliate - we and many of the other carriers have made decisions to file exclusions and limits of our mold coverage. And we're pleading with this administration to approve those forms, to keep this Maryland market intact."

The increasing cost and incidence of mold claims, combined with the aftermath of the $32 million verdict, already have affected homeowners' rates in Texas, according to Bray. By the end of 2001, $300 per policy was added to the cost of the average policy in the state to cover mold.

Maryland homeowners, she warned, could face rate increases similar to those in Texas should the MIA not allow for the exclusion.

"Traditionally, folks here in Maryland pay very high auto premiums, as a result of claim frequency and severity," she said. "It would be a big mistake to impose that kind of situation onto the homeowners' side. We're asking for regulatory action now, to preserve this market."

The risk of jeopardizing affordability and availability of homeowners' insurance has Associate Commissioner Robert Becker, who presided over the hearing, caught in a careful balancing act.

"We have to be very concerned with availability and affordability of both personal lines and commercial lines of insurance in Maryland," he said. "So, we have to balance our concerns with availability and affordability against what would be a reduction in coverage for many policyholders if we were to approve all these pending forms and endorsements."

The MIA expects to receive the transcript of the hearing in a few days and plans to render its recommendation to the commissioner as soon as possible.

In Texas, mold exclusions now are permitted, but insurers are required to offer buy-back policies that for an extra fee include coverage of mold and mold-related damage.

According to Bray, 6 percent of State Farm's policyholders in Texas have purchased the buy-backs. "So, there are very few people that feel they really need the coverage according to what we're seeing with our policyholders," she said.

State Farm and others see the slow reaction to embrace the buy-back option in Texas as a clue that homeowners would rather save money on their insurance policies than pay for extra services they might not need.

Using this as rationale for their resistance to offering buy-backs in Maryland, industry trade associations and insurers say that an all-out exclusion, without the buy-back requirement, is the way to go.

"To us in the industry it's a consumer-choice issue, and also it is a business-choice issue. Let the businesses decide, from the business standpoint, what they think is viable and put their products on the market. Let the consumers decide what they want and approach the businesses that they want to do business with and purchase the products that they need," Bray said.

The call for total and complete exclusion of mold coverage would run in conflict with what currently is covered under most policies.

"Mold that results from a covered cause of loss, such as from fire or a sudden bursting of a pipe, generally would be covered," Becker explained. "On the other hand, if mold results from what is considered a general maintenance problem, such as a slow leak from a pipe, then generally it would not be covered."

With the proposed exclusion, insurance companies would be allowed to deny coverage for all mold-related claims, regardless of whether damage resulted from covered water or fire loss.

If insurance companies succeed in excluding coverage, then responsibility for paying for and defending claims of mold damage will fall to the homeowners.

According to Bray, "It's a pure business economic choice. Let the people enter the free marketplace; let them search out the products they want; and let the businesses offer the products that are economically viable."