The Mold Crisis (2000 - 2003)
Beginning in 1999-2000, Texas insurers began to see an increase in homeowners claims involving mold damage, particularly along the coast. Following a $32 million court settlement in 2001 over a mold claim against Farmers Insurance, the pace of mold claims increased further and spread beyond Texas to other states. The explosion of mold claims was most noticeable in Texas however, where homeowners policy forms were more generous in coverage provided than other states. The Texas HO-B "all peril" form included coverage for water damage resulting from both "sudden and accidental water discharge" as well as "continuous or repeated leakage or seepage", the latter of which was more conducive to mold damage. Policy forms in most other states only covered sudden and accidental discharge. Industry losses in Texas during these years exceeded those usually only seen in years with catastrophic weather events (see Exhibit 4).
Insurers nationwide responded by restricting mold coverage in standard policies. In Texas, which already had high rates due to an array of severe weather risks, many insurers stopped writing new homeowners business, wrote only the more restrictive cash-value HO-A "named peril" policies, moved new business to their unregulated Lloyds companies, raised rates, and one large insurer threatened withdrawing from the state entirely. By 2002, over 99% of Texas homeowners policies were written by the non-rate regulated Lloyds and reciprocal exchange companies, and rates were climbing rapidly. 3 Meanwhile the department received increasing numbers of complaints about consumers having a hard time obtaining homeowners coverage at all.
While many observers felt that the homeowners insurance market had been under priced in the late 1990s and in need of correction, the mold crisis drove an over-correction that resulted in Texas consumers being saddled with excessive rates from an industry almost completely exempt from rate regulation.
Policy Form Changes
In 2002, TDI made changes to the HO-B form that retained coverage for repair of mold damage resulting from a water claim, but moved mold testing and remediation (the most expensive parts of a mold claim) under a separate endorsement which consumers could elect to purchase separately. At the same, national forms were allowed in Texas that brought coverage in line with that in other states, i.e., only sudden and accidental water discharge claims were covered. A condition of approving national forms was that there would need to be rate reductions to reflect the reduction in coverage.
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