IAQ/Mold Professionals, Real Estate, Insurance and Financial Industries Reduces Risks from Mold and IAQ Exposure

Insurance Carriers and Lenders Back New Mold/IAQ Standards
Lack of Standards Now a “Non-Issue” as Industries Unite and Agree

No one likes to talk about mold, yet it has quickly become a multibillion-dollar problem for mortgage banking companies, insurance companies, environmental professionals and other business within the real estate sector. According to Environmental Protection Agency (EPA) research, the average American today spends 85% - 95% of their time indoors. All indoor environments, whether it be at home or at work, require an environment free of moisture and contaminates. Many people are allergic to mold and the airborne mycotoxins it produces, and as a result, have reported to building owners and managers that they have felt ill while at work or in their apartments. Increasingly more people have decided not to rent, lease or purchase if mold is detected. The problem is likely to get worse before it gets better. Insurance companies, for example, have limited their coverage of mold-related damage, raised the deductibles for mold claims, and taken other steps to reduce the record losses of the past few years. Mortgage lenders, brokers, and developers too are feeling mold's toxic effects – through the ever-increasing financial risks associated with it.

New legislation and tort reform may yield the only remedies, but they are not helping the mortgage banking companies. Indoor air quality and mold is receiving greater recognition from the financial markets. If lenders cannot siphon off mortgages -- and make money doing so -- they must suffer the consequences of keeping them. Insurance premiums and lending rates may go up to compensate.

The threat of a mold-related lawsuit has driven many investors, CFOs, and lenders to flex their fiduciary responsibility by requiring mold insurance. As a prerequisite for underwriting a mortgage, many mortgage lenders are now requiring mold insurance on commercial and multifamily dwellings, where the stakes are high. Mortgage lenders are reluctant to underwrite loans that have a risk of default due to environmental problems or that they cannot profitably sell to secondary markets. At the same time insurers are requiring building owners to have an indoor air quality plan that addresses water intrusion and mold management as an underwriting requirement before issuing a policy that covers mold.

Mold can also put real estate brokers in the compromised position of trying to sell a structure that is not fully insurable. If history repeats itself, it wouldn’t be surprising to someday see the FDIC requiring borrowers to obtain mold coverage before loan approval. The construction industry, too, must alter certain practices. For Example, according to the Building Industry Association of Washington, owners are suing construction companies, claiming that defective construction caused mold. What was once a boon -- tight buildings -- is now a bane.

Modern buildings are sealed tight against the external environment; air seepage is minimized or eliminated to save energy. Mold thrives in the presence of moisture in an airtight space and can spread like wildfire under the right conditions. Places hidden from view -- inner walls, ceilings, under the floors -- make early detection difficult and can provide ideal conditions for mold to flourish. Therefore, ventilation is a must. Though moisture concerns are less a factor in commercial buildings that see a lot of traffic and opening of doors, ventilation is fast becoming a critical concern in the residential market.

The 1990’s saw an enormous increase in mold detection -- in the lawsuits and the legislation proposed to deal with its consequences. There are an estimated 19,000 legal cases pending claiming property damage, personal injury, and related losses. In one highly publicized case, the insurance industry held its breath when a jury concluded that a home owner’s insurer acted in an unfair and fraudulent manner when evaluating mold damage, and awarded the home owner millions.

Today, plaintiffs in Florida, Delaware, Texas, and California have won huge mold verdicts with awards in the millions. These cases are seriously impacting not only insurance companies, but also commercial real estate owners, causing insurers to rewrite policies. In some cases (such as in Washington) they will only cover mold damage when it is caused by a problem already included in their existing policy.

Testing for mold has surged. Insurers are looking at remediation costs that in some states average more than $35,000 per home, according to the Insurance Information Institute, and remediators, until now, have been operating in an areas where standards and practices were not well established, if at all. In response to the need for expert detection and evaluation of mold, licensing is also gaining attention. Texas has taken the lead in mold-related professional licensing, requiring professionals’ active in mold assessment and remediation to obtain a state license to operate.

Environmental experts in the fields of Indoor Air Quality and remediation have paid attention to recent developments as well. Their job is to inspect, detect and remove mold and return the damaged area to its previously healthy condition. Many of the mold detection specialists are honest and capable practitioners. Some are not, and are taking unfair advantage of consumers and businesses alike. This has nurtured a Wild West environment surrounding mold and the businesses cropping up around it.
As a result of the issues abo
ve, the EPA has contracted the Environmental Education Foundation (EEF), to gain consensus on incorporating its indoor air quality guidance information into to EEF’s Mold & IAQ Management Plan, Training, and Membership. The EEF, a 15-year-old non-profit organization, has a proven track record of success dealing with other environmental problems in the past (including lead, asbestos, radon, etc.), and has established the Mold & IAQ Management Plan as a guideline for management and training of mold related issues. David Mudarri, of the Indoor Environments Division of EPA, says that 'this creates a great opportunity to encourage the use of good practice protocols both for mold prevention and remediation, and for other IAQ issues, that are provided in this EPA guidance'

As part of this effort, EEF has built a consortium of participants from many affected industries such as building design and construction, property management, and insurance and financial institutions. The new best practices they developed are cascading throughout the real estate lending and insurance communities and beyond, in order to promote what the consortium has agreed upon as the most effective tactics to pursue against poor IAQ management.

The EEF Indoor Air Quality training will be extended to all business in the real estate industry, and will focus initially on mold, but expand into other IAQ issues using EPA’s guidance. “The EPA is pleased thus far with the overwhelming support the EEF has gained and the adoption of their material,” said Troy Johnson, Executive Director of the Environmental Education Foundation, “and the EEF feels confident that EPA’s guidance is being effectively communicated and ultimately adopted by the various interests. This is critical.” EEF reports that many are already on board, agreeing with the principles of the consortium strategy as well as the details of the teaching.

Many lenders and the associations that represent the lending community are on board as well, including all regional groups of the FHA Mortgage Advisory Council and two of the country's leading multifamily lenders, ARCS Commercial Mortgage and PNC MultiFamily Capital. ARCS, one of America's leading multifamily lenders, is currently America's # 1 Fannie Mae DUS (Delegated Underwriter and Servicer) lender, as it has been for 8 of the past 9 years. They also offer a variety of other commercial capital sources, including HUD-insured multifamily and healthcare loans.

Thom Cooley, National Vice President & Chief, FHA Multifamily Underwriting for ARCS Commercial Mortgage Co. L.P. said “ Like EPA, HUD has made it a priority to reduce or eliminate health related hazards in the home caused by toxic agents such as molds and other allergens, carbon monoxide, and other hazardous agents and conditions. ARCS hopes that by volunteering to participate in EEF – EPA Advisory Committee for Indoor Air Quality we can help federal regulators create consensus standards for lenders and developers and at the same time promote healthy indoor environments for all of us.

PNC MultiFamily Capital is one of the top ten national FHA-insured, MAP (Multifamily Accelerated Processing) approved lenders, and one of four nationally designated targeted affordable Freddie Mac Program Plus® Seller/Servicers. PNC provides financing alternatives for market rate and affordable multifamily and senior housing projects, healthcare facilities and rural hospitals.

“The multifamily and senior housing finance sector stand to benefit from the ground breaking standards being developed to eliminate threats of health related hazards in the home,” said Todd Marans, Senior Vice President, Chief Underwriter at PNC MultiFamily Capital. “As government agencies such as HUD continue to research and make recommendations for developing sustainable, environmentally healthy communities, metro area housing is revitalized and preserved, and new developments are protected from potential hazardous health conditions,” he added. PNC MultiFamily Capital’s participation as a member of the EEF – EPA’s Advisory Committee, provides an opportunity from a lenders perspective, to help the EEF – EPA in their efforts to establish standards for housing that is safe, durable, and free of the toxic effects of indoor moisture.

The insurance industry is also among those that are most influenced by the convergence of mold damage and an uncertain standard of approach in dealing with IAQ issues. With literally billions of dollars at stake in protecting real estate owners, and with a lack of consensus on the scope of the issues and predictable costs, insurers have been hit hard and as a consequence, many have retreated from issuing policies that contain complete coverage. This has had either a slowing or even stymieing affect on many construction projects.

“This has been a worst-case scenario for the insurance industry,” emphasized Mark J. Richard, the environmental practice leader at Rutherfoord Insurance. “There have been too many cost unknowns and liability questions to deal with so the industry has turned very conservative in developing the language for policies. Having our insured take the EEF training and implement their plan has provided a way for us to write those policies and show a tangible risk reduction to the carriers. Now, through our EEF trained subsidiary, Faulkner & Flynn, we will use the expanded IAQ program that includes the EPA I-BEAM software to do the same. This is a very positive step.”

Gregg Shields, Vice President of Risk Control for XL Environmental, a division of XL Specialty Insurance Company, a leading provider of integrated environmental risk management® solutions to business and industry worldwide through insurance, risk control and claims management said, “XL Environmental is extremely pleased with our appointment to EEF;s Advisory Group for IAQ convened under the EPA’s Indoor Environment Division’s contract.” Mr. Shields’ team at XL Environmental, provides loss control and risk assessment services for XL clients such as chemical, manufacturing and petroleum facilities; healthcare and educational institutions; and real estate development and management firms.

Shields continued, “We have enjoyed working with the diverse and highly-qualified sponsors of this important initiative to develop guidelines, tools and training programs to comprehensively address indoor air quality issues that relate to property management and construction, particularly those related to water intrusion and mold prevention. This valuable work, should not only benefit the risk management programs of our insurance and real estate customers. but also help to more fully define best management practices for the industry.” Two insurance industry associations also occupy seats on the EEF - EPA advisory committee, the Environmental Risk Resource Association (ERRA) and the Urban Insurance Partners Institute (UIPI).
Dave Dybdahl, Director for the ERRA commented, “The insurance industry has been looking for an expansion of the EEF program to incorporate additional industry input and EPA guidance – this is what we know have”. EEF efforts are significant because, in addition to mortgage bankers and insurance carriers, all other major stakeholders in the management of air quality issues have been incorporated in this process, including architects, building & design professionals, and facility managers.

“Our program is recognized by major insurance carriers for meeting underwriter requirements for obtaining pollution insurance that includes mold coverage,” says Troy Johnson, EEF Executive Director. “The commercial building owners and property managers, who want to obtain mold insurance for their buildings, can now take a training class with both governmental and industry support. In addition, the course is also being used by lenders as a requirement for their borrowers to have in place, such as REITs – Real Estate Investment Trusts — for both risk reduction and to demonstrate the REIT managers’ fiduciary responsibility. Further, the course guides attorneys involved with the “Standards of Care” and the myriad of IAQ related professionals as the new guidelines in the industry.”

Other partners involved in this project include: A&WMA Air and Waste Management Association, ARCS Commercial Mortgage Co. L.P., the Association of School Business Officials International (ASBO), Cleaning Management Institute (CMI), EMSL Analytical, Environmental Risk Resources Association, Building Owners & Managers (BOMA), Environmental Hazards Management Institute (EHMI), Environmental Monitoring Systems (EMS), HUD-Healthy Home Division, The National Indoor Air Quality Institute, Partnership for Environmental Technology Education (PETE), PNC Multi-family Capital, The Air & Waste Management Association, Hixson Architectural, IQAir, Pest Management Institute, Hellmuth, Obata + Kassabaum, Inc. (HOK), The Naturalist Network, Pure Air Control Services and other organizations that support IAQ best practices.

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