Lenders Still Face Threat From Mold Claims

In the last three years, the insurance industry has moved quickly to protect itself from mold damage claims by adding "mold exclusions" to policies for residential and commercial real estate.

And one environmental consultant thinks lenders should do the same.

The mold exclusions were prompted by high-profile lawsuits where insurance companies were ordered to pay multimillion-dollar sums to tenants and homeowners.

"Mold contamination is certainly not as catastrophic as a terrorist attack, but the reaction from the insurance industry was similar, which underlines how serious the mold issue has become," said Charles Perry, principal of Environmental Assurance Group, in a recent news release.

"Insurers anticipated the rising wave of mold cases across the country, and they exited the scene. What I find amazing is that the other parties bound to be affected by the financial fallout of moldy properties - lenders, developers and rating agencies - have not taken the hint from insurers and moved equally fast to reduce their risks."

Mr. Perry also told MSN that insurance actuaries are "pretty smart people." If they don't want to cover mold risk, mortgage lenders should wonder whether they want to be left holding the bag.

Without insurance industry coverage for the fallout from mold, lenders and builders are now looking for new prevention techniques, including mold-specific inspection protocols, new detection devices, and the use of mold-resistant building materials.

With a typical 20% downpayment, lenders have four times as much risk exposure as the homeowner if a mold problem does devalue the property.

"Among the lenders that I work with, there is a lot of disagreement about which mold prevention techniques will truly mitigate risk," Mr. Perry said. "It's been quite frustrating for a lot of lenders that I know because they understand that, unlike a terrorist attack, you have a great chance of preventing mold contamination if you take the right steps."

He believes lenders and the building industry ought to be developing appropriate protocols for how to deal with mold in different kinds of buildings. For instance, the standards might be different for multifamily, single-family, health care and office facilities, not to mention single-family housing. In general, those protocols would most likely require the use of mold resistant building materials in new construction, he said.

And for both new and existing structures, the protocols would promote the use of "best practices" rather than "stupid practices" to minimize mold risk.

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