Magazine article Journal of Property Management

Under Coverage: With New Insurance Company Exclusions on Mold and Terrorism Insurance, Owners and Managers Need to Do Some Careful Planning to Find Appropriate Coverage

Magazine article Journal of Property Management

Under Coverage: With New Insurance Company Exclusions on Mold and Terrorism Insurance, Owners and Managers Need to Do Some Careful Planning to Find Appropriate Coverage

Article excerpt

Faced with rapidly increasing and unpredictable claims costs, he insurance industry has, over the past year, methodically excluded insurance coverage for mold and domestic terrorism losses on virtually all property and general liability insurance policies sold in the United States. A partial insurance solution for international terrorism losses was provided in the Terrorism Risk Insurance Act, but domestic acts of terrorism remain unaddressed in the law. The impact on the risk management community from either of these new exclusions individually would be significant. Together they leave a broad cross-section of insurance buyers, including property managers, property owners and lenders, with unprecedented levels of newly uninsured risks.

In light of the magnitude of these loss exposures, it is surprising how complacent insurance buyers, insurance agents and lenders have been in dealing with these newly uninsured loss exposures. One reason could be the inability of insurance consumers to nut these new sources of uninsured loss exposures into perspective. It is difficult to explain consumer complacency on these new exclusions when insurance exclusions for mold damages expose insurance buyers to almost the same degree of risk being uninsured for fire claims.

Protecting Against Terrorism Losses

Terrorism insurance is a property insurance policy that applies to acts of both domestic and international terrorism, covering damage to the property. Business interruption coverage is also available. Bio- and nuclear terrorism events are excluded in off-the-shelf policies. However, bio-terrorism can be added to the coverage. The market capacity for this coverage is $500 million, and minimum premiums are as low as $1,000. However, at the other end of the spectrum, some owners and managers could be faced with premiums in the range of $200,000 according to Roger Dwyer, president of GAP/Wade Financial.

Safeguarding Against Mold Damages

Filling the gap in insurance coverage for mold-related damages is more complex than terrorism, mostly because there are many more coverage options available in the environmental insurance industry. Environmental insurance policies have their roots in liability insurance, but they also provide coverage for restoration expenses and business interruption, which are traditionally written in property policies. Most environmental policies do not have terrorism exclusions and they can apply to nuclear damages.

An off-the-shelf environmental insurance policy needs to be modified to provide coverage for mold-related damages by adding mold, fungus and microbial matter to the definition of covered "pollutants." Property owners and managers can be covered under the same policy or either party could obtain its own environmental insurance policy. The market capacity for environmental insurance is about $400 million, with minimum premiums in the $8,000 range for a $1 million policy limit. Underwriters will usually demand some form of mold risk management protocol be in place before issuing a policy covering mold-related damages. There are no standards on these protocols, which are available from a number of different vendors and will usually contain a training element and a procedures manual.

Apples to Oranges?

Although the claims frequency, severity and aggregate loss statistics for mold damages under property insurance policies appear to mirror fire insurance claims in the United States, there is a big difference between insuring mold losses and fire losses. We know how to predict fire losses and how to charge premiums. We cannot predict mold-related losses because they are growing too fast to measure. Although historical loss data is still sketchy, mold claims, on average, cost about as much as a fire loss, close to $20,000 per claim without a liability loss component. There were about 350,000 mold-related losses and 500,000 fire claims in 2002 on commercial and personal lines insurance policies. …

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