Mold Battle Hits Home Buyers

Small insurance firms joining market leaders in halting policy sales

10/15/2001

By TERRENCE STUTZ / The Dallas Morning News

AUSTIN — Home buyers across Texas are scrambling to find insurance as more and more companies refuse to sell comprehensive policies because of worries over rising mold claims.

In recent weeks, dozens of smaller insurers have followed the lead of the "big three" companies by sharply reducing or cutting off sales in the state.

Independent insurance agents and real estate agents say Texans buying homes are finding it increasingly difficult to secure an insurance policy as the market gets tighter. Insurance is required to buy a house.

Some real estate agents also report that an increasing number of home sales are falling through because of the mold situation. And they say they must search harder to find insurance policies to close their sales.

"I've never seen anything like this in Texas," said Ernie Stromberger, executive director of the Independent Insurance Agents of Texas. "All but a few companies have restricted their sales in response to the mold situation."

The three leading insurers — Allstate, Farmers and State Farm — restricted their sales last month and are not selling comprehensive policies — including water and mold coverage — to new customers. State Farm, the largest property insurer, is not selling any kind of homeowners' policy.

This month, the restrictions are spreading to most other companies still selling homeowners' insurance even as state regulators prepare to adopt new rules limiting mold coverage.

Some companies are not accepting any new business, while others are refusing to insure any house that has had a water claim in the last three years, according to the Independent Insurance Agents. Mold damage is now covered under a homeowners' policy if it results from a water leak.

Consumer groups insist the boycott of the Texas market is partly intended to force state officials to eliminate water and mold coverage in the standard homeowners' policy.

"We can't have a system where every time insurers may have to pay out on claims, they shut down or threaten to move out of the state," said Dan Lambe of Texas Watch, a consumer organization that has closely followed the issue.

Rodney Davis, a real estate agent for Ebby Halliday Realtors in Plano, said he had trouble finding coverage for a house that just sold because it once had a water leak under the slab.

Even though the buyers had a relative who was an agent for Allstate, the company refused to sell them coverage, he said. A smaller company said it would provide coverage only if leak detection tests were conducted.

"There was never any mold in the house, but they still had to do the tests to show there was no possibility of a water leak," Mr. Davis said, adding he has heard of some buyers in the area who walked away from sales because of an inability to obtain insurance.

"Getting insurance has become a big obstacle in many sales," he said.

Karen Wilson, an agent with RE/MAX Realtors in Round Rock, said she has seen similar problems in Central Texas, although she and Mr. Davis both said coverage can still be found with smaller companies.

"I have seen some sales almost lost because buyers wanted insurance from one of the bigger companies and were told they couldn't get it," she said.

Another problem, she said, is companies trying to sell limited policies that include no coverage for water damage and have lower levels of protection for other perils.

The vast majority of homeowners in Texas have a HO-B policy, which provides comprehensive protection for most perils, including water and mold damage.

Limited policy

The other type of policy sold in the state — the HO-A policy — has no protection for water or slab damage, and it does not include replacement value coverage. For example, a roof destroyed by hail is depreciated depending on its age before the insurer pays on a claim for replacement.

Most mortgage lenders require the HO-B policy to secure their loans, although some will accept HO-A.

Although the limited policy is the only type now sold in Texas by Allstate and Farmers, Ms. Wilson said most homeowners don't want an HO-A policy once they find out how restrictive the coverage is.

The effect of the tightening insurance market on the housing market in Texas is hard to pinpoint because many companies are still adjusting their guidelines for selling policies. One official said only a half dozen of the 58 insurance groups licensed in Texas are still selling new, comprehensive policies. Some out-of-state "surplus lines" companies also are selling coverage.

To gauge the effect on home sales, the Texas Association of Realtors recently conducted an informal survey of its members. According to the survey, 18 percent of agents said they knew of buyers who backed out of a home purchase because of the mold insurance situation.

Another 29 percent said they believe it will soon start hurting home sales if the problem is not resolved.

Still available

"What we are hearing is that insurance is still available, but it may take a few extra days to find a policy," said John Gormley of the Texas Association of Realtors.

"It is a concern for Realtors and consumers alike. We'll have to see how big of an issue it becomes in the near future."

On Tuesday, state Insurance Commissioner Jose Montemayor will hold a public hearing in Austin on a proposal that would limit mold coverage for Texas homes in response to the soaring claims being reported by the industry.

The proposal by the staff of the Texas Department of Insurance would limit mold damage coverage to $5,000 per house. Currently, there is no limit for such claims except they cannot exceed the insured value of the home.

Homeowners could buy extra mold coverage for an additional premium under the proposal.

"I wouldn't expect the staff proposal to totally please everyone, but it seems to be a reasonable compromise," the commissioner said. "I am convinced that without some sort of compromise, the residential property insurance market could face a major crisis and consumers would suffer. I am determined not to let that happen."

The insurance industry, however, has been critical of the proposal and called on Mr. Montemayor to eliminate coverage for water and mold from the standard homeowners' policies required in Texas.

"Texas homeowners' rates are already the highest in the country, and the solutions proposed by Commissioner Montemayor are going to send rates through the roof in the near future," said Jerry Johns of Southwestern Insurance Information Service, an industry trade group.

"If homeowners' insurance becomes severely restricted, people are going to have a difficult time securing home loans or even beginning construction on a new dwelling," he said.

Home buyers must now go to an independent insurance agent for a comprehensive policy because the three largest insurers — who use agents that exclusively sell their products — are not offering such policies. Independent agents sell policies from an array of smaller companies.

A recent survey by the Independent Insurance Agents of Texas of its 1,500 members showed that 57 percent reported that restrictions on new policies were having a "very significant effect" on their business. Another 27 percent reported a "significant effect" on their business.

Among the sample of comments from agents in the survey was this plea: "We are out of the homeowners' market. Help, please!"