November 28, 2001
Commissioner Jose Montemayor today restructured the state's residential property policies to stress consumer choice on mold-related insurance coverage while helping Texas avoid a residential property insurance availability and affordability crisis.

"This decision is a common-sense, middle ground approach," Montemayor said. "It gives Texas homeowners basic protection plus the ability to purchase additional coverage if they so choose. This decision protects consumer choice and insurance availability, and addresses insurance! cost drivers to help keep policies affordable."

The order retains coverage for removal of mold related to certain water damage that is covered by residential property policies, including the most commonly purchased HO-B homeowners policy. But it eliminates coverage for high-priced procedures, such as testing, treating, containing or disposing of mold beyond that necessary to repair or replace property that is physically damaged by water. Such procedures have contributed to unexpected and dramatic premium increases.

Policyholders will have the option, however, to purchase additional coverage - in increments of 25 percent, 50 percent and 100 percent of policy limits -- that includes these procedures. Insurers must offer applicants all levels of coverage in addition to the coverage in the basic policy.

Montemayor said he believes most Texans want to get "back to basics" in handling mold claims, removing the problem without a lot of expensive procedures that, in some ! cases, are performed by contractors with little or no expertise in mold removal. These procedures can cause premiums to increase for everyone, he added. "By going back to basics," he said, "I would expect a return to the premium levels that we enjoyed prior to the explosion of mold-related claims."

"The absence of an established body of science, coupled with insurance carriers not adjusting claims properly, has contributed to the current situation," Montemayor said.

The order provides coverage in the basic policy for removal of mold that results from water discharge, leak or overflow that is sudden and accidental, including those that are hidden or concealed. If a policyholder continuously ignores indications of an obvious water problem, such as wet carpeting, the claim for mold removal could be denied.

Montemayor's order also eliminates "stacking" of claims within the same policy year. "Stacking" is a process that has allowed some homeowners to collect more than ! 100 percent of their policy limits by filing several separate mold-related claims. Montemayor said "stacking" can drive up rates paid by everyone.

Under the order, which still leaves Texas with more mold coverage than other states, insurers may offer the new coverage as early as January 1, 2002, but no later than January 1, 2003. After a company begins offering the new coverage, individual policyholders won't see the change until their policies come up for renewal. Homeowners who choose the new, less expensive HO-B policy prior to their renewal dates may be entitled to refunds from their insurance companies on the unused portion of their old policies.

"My goal is to preserve as much protection as possible for homeowners while coming to grips with the excesses that have driven Texas to the brink of a crisis in the residential property insurance market," Montemayor said.

The Commissioner will set benchmark rates for both the basic policy and the additional mold-relat! ed coverage in the next benchmark hearing cycle. Until then, rate-regulated insurers must file individual rates reflecting the changed coverage before using the new policies. Only about 5 percent of the homeowners insurance market is affected by benchmark rates. In recent years, insurers have moved most of their homeowners business into companies that are free to set their rates without state oversight.

Montemayor said that although he can't mandate the rate differential between basic and full mold coverage for most homeowners policies, the Texas Department of Insurance (TDI) will monitor all the rates carefully to make sure insurers treat their customers fairly.

Montemayor declined to approve that portion of a TDI staff proposal that would have capped basic mold coverage at $5,000 per year but he maintained the provision allowing policyholders to buy additional coverage. In an October 16 hearing and written comments, the $5,000 cap drew criticism from both consumers a! nd insurers. The restructured policy will not limit coverage based on a dollar limit.

Currently, HO-B policies in Texas cover mold removal only if the mold results from another covered event, such as a leaking water pipe. Until two years ago, few mold-related claims were filed, but since then claims costs have soared, causing insurers to seek elimination of this coverage. TDI data call information from the three largest homeowners insurers showed their cost of mold-related claims jumped from $9.1 million in the first quarter of 2000 to $79.5 million in the first quarter of 2001.

Montemayor said he also will consider individual companies' filings for alternative levels of mold coverage. A 1997 state law allows companies to file and the Commissioner to consider the companies' own policy forms and endorsements.

Montemayor held four public hearings related to mold coverage and received hundreds of comments, many of them conflicting. Many consumers urged him to leave th! e HO-B as it is, but others were willing to give up at least some mold-related coverage to reduce soaring premium costs. Insurers petitioned for complete removal of mold and certain water coverage, citing an unprecedented rise in mold-related claims.

"Despite my calls for restraint, several major insurers placed tight restrictions on HO-B sales in Texas, causing a potential crisis in the market," Montemayor said. "By addressing the major cost drivers, we intend to stabilize homeowners insurance availability and cost. If insurers cannot control insurance rates and losses, we may have to recommend increased state regulation to protect Texas consumers."

Montemayor said consumers will have to do their part to resolve the problem with good maintenance practices that keep mold from developing into a problem. TDI will conduct informational campaigns to help both consumers and insurers deal quickly and responsibly with mold problems, he added. Homeowners should take immediate ! action to stop the water discharge and begin drying the area. Insurers should quickly respond to claims where mold might become a problem.

Montemayor said he will appoint a task force to develop recommended procedures for handling mold claims. Also, the House Committee on Insurance will examine mold-related issues as an interim study prior to the 2003 legislative session.

A TDI study revealed that the surge in mold claims has been very acute in a few areas, particularly Corpus Christi. In October, Montemayor asked the Office of the Attorney General to investigate whether excessively high claims in the Corpus Christi area resulted from abusive mold-remediation practices and pricing.

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