Minn. Mold Coverage Regulation Challenged

The St. Paul-based IFM said that the March 15 issuance of the bulletin by the State Department of Commerce, which regulates insurance, deprived consumers and industry of the opportunity to comment publicly before the new policy was adopted.

The bulletin states that property insurers may not exclude coverage for loss or damage from mold unless an "unrestricted exception" is made for loss or damage directly ensuing from a covered loss.

Additionally, any caps or limits on the coverage amounts are not permitted, according to the bulletin. Further, if an insurer already has an exclusion for mold or a cap, the exclusion must be either withdrawn or revised to conform to the criteria in the bulletin.

Commerce Commissioner Jim Bernstein said his department is reviewing the bulletin based on the issues raised by the IFM, "but we haven't made any decision yet." He expects to meet later this week with his staff to decide what course of action to take. Under state law, the department must respond within 10 business days of the filing of the petition.

Property insurers around the country have been scrambling to cut their losses stemming from mold damage claims, which have soared since a Texas jury returned a $32 million verdict for a homeowner in a first-party bad faith coverage dispute against an insurer that allegedly mishandled a claim for toxic-mold exposure.

The IFM petition also said that by not having public hearings, the department did not have the benefit of "reviewing all the information on the rapidly changing marketplace."

The IFM is joined in its petition by the Alliance of American Insurers, Downers Grove, Ill., American Insurance Association, Washington, D.C., and the National Association of Independent Insurers, Des Plaines, Ill.

While the IFM has stressed that the focus of its challenge is the procedure used by the department "to make what amounts to a new law," its petition states that the "ultimate issue before the Office of Administrative Hearings" is whether the department "restricted insurers' ability to limit their exposure to the hazard of mold based on an unpromulgated rule."

Mr. Bernstein sees the petition not as a challenge to his authority to issue the bulletin, but rather as a suggestion that Bulletin 2002-3 in particular constitutes rulemaking without following the state's rulemaking procedures.

The commissioner said that he issued the bulletin in response to requests from several insurers in Minnesota to clarify the department's formal position on coverage for mold-related claims.

"We have had several insurance companies that have indicated ?that they would like to put caps on their coverage or to not have to cover mold at all," Mr. Bernstein said.

"The purpose of the bulletin was to remind them that the Department of Commerce is not going to allow caps and is not going to allow them to not cover mold claims arising from other covered events," he continued.

Mr. Bernstein stated that he is not concerned that Minnesota will have a mold-coverage crisis as exists in Texas, where many insurers no longer offer coverage for mold-related claims.

He said that insurers have not responded to his request for actuarial data on how many mold claims actually exist in Minnesota. "In fact, some companies have said there are not that many [mold claims] but then they say 'look at what is happening in Texas,'" the commissioner stated.

While acknowledging that there have been some problems in Texas, Mr. Bernstein said that "those are not problems that we have in Minnesota." He added that mold remediation experts in Minnesota have pointed out that Minnesota's climate is very different from that of Texas.

"While we do have some mold claims, it appears that there are not very many of them," Mr. Bernstein said.