Causes Of Homeowners Insurance Losses

(Rev. 10/05)

Homeowners insurance provides personal property and liability protection. A policy typically protects your home, garage and other structures on the property, and the contents of your home, against perils outlined in the policy. Liability protection covers accidental harm to others while on your property. The policy also provides reimbursement for living expenses if the damage caused by an insured peril such as a fire or tornado requires you to live elsewhere during repair or rebuilding (click here for more information on homeowners insurance).

Causes of homeowners insurance losses

According to the Insurance Information Institute, 2003 incurred homeowners losses from all perils totaled $25.7 billion, almost level with 2002’s losses of $25.6 billion. Homeowners losses in 2001 totaled $26.8 billion.

The Insurance Services Office, Inc. (ISO) collects data on the various types of insured losses that are filed by homeowners. Table 1 provides this information for 1999–2003 for Ohio and US. Percentage changes from one year to the next are partially influenced by large fluctuations in the number and severity of weather-related events such as hurricanes, tornadoes and winter storms.

Mold-related losses

Insurance claims associated with mold have been receiving attention in recent years. The cost of mold claims has been the focus in many states, especially in southern and western states where hot, humid and damp conditions provide ample opportunity for mold to spread quickly.

According to reinsurance intermediary Guy Carpenter, there were at least 10,000 “toxic” mold cases filed in the US and Canada in 2001, about half of which were filed against insurance companies for bad faith.

Because most insurers include mold claims under “water damage” losses, costs related to mold claims has been difficult to assess. According to the Insurance Information Institute (III), US insurers paid out at least $3 billion in mold-related claims in 2002, more than double the $1.3 billion in 2001.

Texas has been widely recognized as the state where mold coverage issues began. The Insurance Council of Texas reports that the state’s mold claims grew from $420 million in 2000 to $2.2 billion in 2002 (for 227,000 claims).

Click here. for the chart “Causes of Insured Homeowners Insurance Losses in US and Ohio 1999-2003.”

Mold coverage by insurers

Many insurance companies now include language in their homeowners policies to clarify mold coverage, its limits and exclusions. Coverage can vary by company. Some insurers may decide to cover all mold claims and price the policy accordingly. Others may exclude mold, but offer a policy endorsement that allows coverage to be added. Still other companies may provide a tighter definition of what is and what is not covered or may prefer to create an absolute exclusion. Most major insurers have announced some form of restriction on writing water damage policies

From the insurance perspective, damage from mold, like rust, rot and mildew is specifically excluded in standard homeowners and commercial property policies. If mold contamination is the result of a covered peril (i.e. water from a burst pipe), some insurers cover the damage up to a stated limit or up to the limits of homeowners insurance coverage purchased by the policyholder.

Mold caused by water from excessive humidity, leaks, condensation or flooding is a maintenance issue for the property owner (like termite or mildew prevention) and is not covered by the policy. Most property owners routinely clean up mold before it grows large enough to become a hazard. Caught early, mold usually can be removed by a thorough cleaning with bleach and water.

ISO filed and received approval of its mold coverage endorsement in most states. The endorsement provides limited coverage up to $10,000. Some companies also offer higher optional coverage limits of $25,000 and $50,000. ISO’s mold coverage endorsement for homeowners has been approved in 42 jurisdictions as of September 2003: AL, AK, AZ, CO, CT, DE, Washington DC, FL, Guam, ID, IL, IN, IA, KS, KY, ME, MA, MD, MI, MS, MO, MT, NE, NV, NH, NJ, NM, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, W.Va., WI and WY. The program in Texas is not identical to those adopted in other parts of the country.

Mold coverage in Ohio

20 insurance companies participated in a mold coverage survey conducted by the Ohio Insurance Institute in January 2003. The participants represent about 78% of state’s homeowners market share.
Results of the study show:

  • Companies representing over half of the Ohio homeowners market continue to offer coverage for mold-related claims. Coverage is typically in the $5,000–$10,000 range. 27% of the homeowners market excludes coverage for mold. Coverage by 23% of Ohio’s homeowners market share is unknown.
  • About 24% (based on market share) of those companies offering mold coverage also offer endorsements for higher limits of coverage.
  • Insurers representing 48% of the market adopted a mold endorsement in the past year or plan to this year (ISO/similar endorsements/company hybrid).

Frequency and severity of homeowners claims

Another way to view losses is by frequency and severity of claims. Table 2 shows the average number of claims filed per 100 homeowners insurance policies (frequency) and by average amount paid for each claim (severity) for water damage and freezing compared to total homeowners losses for 1998–2003.

The frequency data for water damage and freezing show the effect of catastrophic events such as blizzards and hurricanes, which in 2000 generated a high number of claims. Average loss data on water damage and freezing claims from 1998 to 2003 show a steady increase in the average amount paid for such claims. Average losses are affected by the extent of the damage and the cost of labor and materials needed to repair it.

(Portions excerpted from Insurance Information Institute Factbook 2005)

1 Data excludes tenants (renters) and condominium owners insurance
2 Includes vandalism and malicious mischief
3 Includes coverage for unauthorized use of fund transfer cards, and forgery and counterfeit currency
4 US loss data from Insurance Information Institute, Fact Book 2005
5 Ohio loss data as of March 2002
6 2001-02 Ohio loss data as of October 2003
7 2003 Ohio loss data as of March 2005
8 Less than 0.1%

Sources: Insurance Services Office, Inc. (ISO) and Insurance Information Institute

1 For homeowners multiple peril policies. Excludes tenants and condominium policies.
2 Claims per 100 house years (policies)
3 Accident year incurred losses, excluding loss adjustment expenses, i.e., indemnity costs per accident year incurred claims
4 Weighted average

Source: Insurance Services Office, Inc. (ISO), from Insurance Information Institute

27% of homeowners have made at least one claim on their home or condo policy in the past 10 years.
(Insurance Research Council 2003 study)