When ‘house-eating fungus’ attacks! Couple sues Safeco over disputed home insurance claim
Mold mania swept the United States a decade ago after lawsuits filed by celebrities Ed McMahon, Erin Brockovich and Michael Jordan stoked fears about “killer mold.”
Now, a new threat has emerged – a “house-eating fungus” that can devour homes in months. But the devastating fungus known as poria incrassata pales in comparison to perhaps an even bigger danger – the fact that many home insurance policies now contain caps or other coverage limits on mold and fungus claims.
In a lawsuit that some experts say could have national ramifications, Los Angeles residents Walter and Judy Moore allege that their home insurer, Seattle-based Safeco Insurance Co., acted in bad faith and engaged in unfair competition. The Moores allege that the company initially said it would cover a poria claim, but then backed out after learning it would cost hundreds of thousands of dollars to fix their 1,500-square-foot home. The two-bedroom, two-bathroom Mission Revival home was built in 1924; it sits in a quaint, upper-class neighborhood.
The couple alleges that Safeco told them a $10,000 coverage limit applied only to fungus cleanup costs, not to subsequent repairs, but then told them the $10,000 limit applied to all losses, including repairs.
A ‘huge insurance scam’?
“This is essentially a huge insurance scam we’ve uncovered where people are not getting what they are paying for,” says Judy, who managed the couple’s rental property in the south of France until they were recently forced to sell it after the fungus invasion. “I know we are not an isolated couple who have somehow had the incredibly bad luck to find out our $1 million home is really only insured for $10,000.”
Walter, a corporate trial attorney and a former Los Angeles mayoral candidate, alleges in the lawsuit that Safeco failed to disclose on its home insurance declarations, or summary, page the policy limitations for mold or fungus damage. Safeco wrote on its declarations page that the policy would pay hundreds of thousands of dollars — enough to rebuild the home — but an “Additional Property Coverage” provision states the company will pay only up to $10,000 for fungus damage and cleanup, Walter alleges.
The lawsuit was filed in February 2011 in Los Angeles Superior Court.
When consumers buy or renew a policy, Safeco sends them a California Residential Property Insurance Disclosure form – showing policy limits valued at hundreds of thousands of dollars. No mention is made of a $10,000 limit for any covered losses, Walter alleges.
“There are much broader ramifications for all consumers,” says Walter, a Georgetown University graduate and former editor of the Georgetown Law Journal. “I think if most consumers saw something on their declarations page that the policy limit could be as low as $10,000, they would switch insurance companies. You couldn’t replace your car for $10,000, much less your home.”
Brenda Harrison, a spokeswoman for Safeco, declines to comment on the Moores’ suit. Safeco is a subsidiary of Liberty Mutual, a Fortune 100 company that’s the country’s fifth-largest property and casualty insurer.
|Judy Moore stands in the under-repair home she shares with husband Walter. Judy says they’re victims of a “huge insurance scam.”|
Jeffrey Crowe, an attorney for Safeco, explained in court documents that the company investigated this “unusual” case and learned water had entered the house through a vent pipe on the roof that was cut during an earlier remodeling project. This allowed rain to seep behind the walls, permitting the wood-decaying fungus to grow. Safeco later determined the loss wasn’t covered because of the policy’s exclusion for “continuous or repeated seepage or leakage of water.” Although the declarations page didn’t identify the policy’s “Special Provisions” regarding fungus, Crowe says the company covers only as much as $10,000 for fungus-related losses.
The case was scheduled to go to trial Jan. 17, 2012, but the judge dropped that trial date. A new trial date hasn’t been set. The Moores have asked the judge to issue an injunction prohibiting Safeco from selling or renewing any home insurance policies in California until it revises its declarations pages and discloses the $10,000 fungus limit.
“They know this could do severe damage to them,” Judy says. “If we get a permanent injunction against Safeco that requires them to start telling the truth about what they are selling then there could class-action lawsuits in every state. It would not be, ‘Do you owe people money, but how much do you owe every single one of your policyholders?’”
‘Hideous lack of transparency’
Daniel Schwarcz, an associate law professor at the University of Minnesota Law School who is an expert on home insurance policies, says the Moores’ lawsuit could lead to greater disclosure of exactly what home insurance policies cover.
“There is a hideous lack of transparency about policy coverage, about what companies pay out on and how the process works,” Schwarcz says. “All this information is really hidden from public scrutiny. It’s a real regulatory problem. It’s a problem our courts could fix by forcing insurers to pay claims unless they are really clear to policyholders beforehand about what is covered and what is not.”
The ‘mold rush’
Mold and fungus have been around for centuries and are found everywhere. In the United States, there are more than 100,000 species of fungus. Some species like poria can cause extensive property damage; poria is a soil-inhabiting fungus that has shown up recently in homes in Southern California, Northern California and states along the Gulf Coast.
Other types of fungus can cause health problems ranging from runny noses, coughs and sinusitis to more serious upper respiratory ailments such as asthma and bronchitis. Certain types of mold can produce toxins. The federal Centers for Disease Control and Prevention has found no conclusive evidence that inhalation of these toxins is associated with brain damage, memory loss or a lack of energy – as feared a decade ago during the “killer mold” scare.
Before 2000, the few mold-related claims insurers saw generally were settled for a few thousand dollars. But mold and fungus kicked up a furor a decade ago with multimillion-dollar lawsuits by McMahon and other celebrities, and with headlines like this one from Time magazine — “Beware: Toxic Mold.” In one highly publicized case, a Texas family abandoned their mansion and won a $32 million jury award in 2001 against Farmers Insurance. An appeals court later reduced the amount to $4 million.
Nationwide, mold-damage payouts soared, more than doubling from $1.3 billion in 2001 to nearly $3 billion in 2002, according to the Insurance Information Institute. From 1997 to 2002, mold-related claims rose from $229 million to $589 million in California alone. At the time, traditional home insurance policies did not exclude mold and fungus damage.
Attorneys held mold-damage seminars for homeowners in the early part of this century, says Pete Moraga, a spokesman for the Insurance Information Network of California, a nonprofit group supported by the insurance industry.
“They called it the ‘mold rush,’ ” Moraga says. “ ‘Mold is Gold’ was a name of a seminar showing attorneys how they could make a lot of money on this.”
Mold limits become the norm
After a spike in mold-related lawsuits, many state insurance regulators excluded or limited mold coverage on home insurance policies. Mold contamination is covered under these policies only if it is the result of a covered peril, according to the Insurance Information Institute. A covered peril is a type of risk that an insurance policy covers.
For example, the costs of cleaning up mold caused by water from a burst pipe are covered in most policies because water damage from a burst pipe is a covered peril. But mold caused by water from excessive humidity, condensation or flooding is a maintenance issue for the property owner and is not covered. Every state except Arkansas, New York, North Carolina and Virginia has adopted mold limits for home insurance policies.
“The insurance industry reacted en masse to the Texas verdict and put caps across the board into homeowner’s policies regarding mold,” says Amy Bach, executive director of United Policyholders, a nonprofit advocacy group for insurance consumers. “Then it became a big political issue, and some state legislators intervened when they thought the caps were too low. In some states, you’ll see a $5,000 max on mold. Other states have nothing on their books. But the insurance companies almost across the board have limited coverage for mold damage.”
Certain states allow insurers to establish sub-limits — either as a percentage of policy limits or as a fixed dollar amount — for mold cleanup. While some insurance companies prefer to create a total exclusion, others exclude mold but offer an attachment to the policy that makes coverage available at an additional cost.
|Walter and Judy Moore let their neighbors know what they think of their home insurance company with a handmade sign on a hedge in their front yard. The message, spelled out in large white letters, says “SAFECO SUCKS!”|
As a result of states letting insurers exclude mold as a covered peril, the Insurance Information Institute was unable to figure out how much insurers paid out in recent years for mold claims. However, the institute does track losses caused by freezing and water damage, which includes mold-related claims. From 2005 to 2009, those losses increased from 15 percent of all home insurance losses to 24 percent.
When comparing home insurance coverage, Patricia McConahay, a spokeswoman for the California Department of Insurance, says people should carefully read the policies to determine whether mold claims will be paid. If a consumer has a mold claim, McConahay says, he should submit it to his insurer. If the claim is denied, he should contact his state’s insurance department. The department will investigate to determine whether the claim was wrongly denied, McConahay says.
The Moores, the Los Angeles couple, filed a complaint in February 2011 with the California Department of Insurance against Safeco for undue delay and unfair denial of their claim. The complaint alleges that Safeco denied the couple’s claim twice before finally approving it, but only after a long delay that gave the fungus time to spread throughout the house.
“Before I allowed anyone to tear up our home, I double-checked with the claims adjuster, in writing, that the $10,000 amount was for only remediation, and the amount for the repair necessary was not part of this $10,000,” Judy says. “The adjuster responded in writing that, yes, the $10,000 limit only applied to the remediation part of the claim. He also asked me to get new bids for repair.”
The Moores’ lawsuit alleges Safeco then reversed its decision to avoid the increased repair costs resulting from the delay.
Contractors estimate it will cost $350,000 to $750,000 to fix the Moores’ home, which was valued at $950,000 before the fungus invasion, Walter says.
‘A big case for consumers’
The complaint also asks the California insurance commissioner to require Safeco to provide customers with copies of all insurance documents that “fairly and accurately disclose” what losses are covered. The department has informed the Moores that it will wait until the court case is over before taking any further action.
“I think it’s a big case for consumers,” Walter says. “I’m not a class-action lawyer, but I think some consumer lawyer should jump on this and sue them to recover the difference between the protection homeowners are paying for on the one hand and the protection they are actually getting on the other hand.”