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Culprit in costly homeowner policies: mold

Insurance claims and payouts related to fungus problems mushroom in some states.

It had to be a mistake, Kimberly Fowler told herself as she peered at her new homeowner's policy. Could her premium really being going up 120 percent, from $853 in 2001 to $1,888 in 2002?

After all, she had never filed a claim with Allstate in the four years she'd owned a three-bedroom home in northwest Houston. "I immediately called them on the phone and asked, 'Did you make a mistake? What happened?' " says Ms. Fowler. "They started giving me all this crazy talk about mold."

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Yes, mold is the latest problem facing homeowners and insurance companies alike. Water leaks, which can cause fungus to proliferate inside a house, have been linked to some health problems. In certain parts of the country where heat and humidity are a year-round nuisance, the resulting increases in insurance rates have been in the double and triple digits.

True, other factors are contributing to insurance costs jumping up a projected 12 percent across the country this year – the highest spike anyone can remember. A souring economy, along with the increasing costs of labor, building materials, and medical treatment, are all to blame as well.

But experts say that mold claims became a major issue last year, when a central Texas homeowner won a $32 million lawsuit against Farmers Insurance for mold-related damages.

In fact, both mold claims and mold payouts have mushroomed in some states. This is causing some insurance companies to stop accepting new applicants in certain regions of the country, as well as raising rates in areas they consider to be at high-risk for such claims.

"This has suddenly become a national issue, and it needs to be sorted through with science," says Robert Hunter, director of insurance at the Consumer Federation of America in Washington. "Insurance companies shouldn't run away from the problem. They should be the leaders in finding a solution."

The new asbestos

While virtually unknown just a few years ago, mold is the new asbestos for courtroom claims, critics say. Yet scientists say there is something to the increase in mold problems, and they point to modern construction methods as the culprit. New materials in drywall may contribute to the growth of spores, which become trapped in hermetically sealed homes.

"The insurance industry would like to dismiss it," says Dan Lambe, executive director of Texas Watch, a consumer-advocacy group in Austin. "But the homebuilders have a lot of explaining to do."

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Mr. Lambe points out that much more than mold may be behind the rise in insurance rates. "The reason that rates are going up for homeowners across the country is simple: Insurance companies aren't making the kind of money they once did in the stock market, and they are turning to the easiest place to make up that income."

Indeed, last year was the first year the industry as a whole lost money – some $8 billion in total. State Farm, the nation's largest home insurer, lost $5 billion alone. It recently announced plans to limit new customers in certain regions and has stopped writing new homeowner's policies altogether in others.

"We set goals for growth and, in many areas, we had reached those goals. And to continue to write new policies would have taxed the company's ability to follow through on the promises we'd made our current policyholders," says Kip Diggs, spokesman for the Bloomington, Ill.-based company.

To deal with the new financial landscape, many companies are petitioning states to allow them to exclude or limit mold coverage. Louisiana, for instance, has eliminated all mold coverage, while North Carolina has capped mold-related payouts at $5,000.

The changes are having reverberations in the real-estate business. Agents across Texas, for example, are telling the same story: Potential home-buyers can't get insurance that satisfies the lender, and therefore must back out of their bid. In two instances locally, the sellers finally gave up and put their homes up for lease, says Dovie Morgan, chair of the Houston Association of Realtors.

"We are at a real crossroads over how to handle this issue," she says. "The insurance industry has typically been our partner, but now we need to find new ways to work with them."

Limited options

For her part, Fowler says she tried to explain to Allstate that homes in her Houston neighborhood are not susceptible to weather-related water damage. When the company wouldn't listen, she tried to find another insurer – but was turned down.

Finally, Fowler began paying the $1,888 premium. "What else could I do? I have to have insurance," she says.

Texans have long paid the highest rates for homeowner's insurance in the country, but with 100 to 200 percent increases in the past year, the Attorney General's Office is now investigating. Preliminary reports show that insurers have been using unfair and predatory pricing schemes.

Insurance companies here are banding together and recently hired a lobbying firm to represent their interests in the Legislature, which will likely take up this issue when it meets in January.