Mold has been a part of our environment for millions of years, and there are more than 100,000 mold species naturally occurring on Earth.
While mold spores are tiny in size, they can mean big trouble for hotels and resorts. Mold has consistently been a loss leader for the hospitality industry insurers, but its impact has expanded over the last few years, with primary claim drivers including undetected HVAC or plumbing system issues, construction defects, and catastrophic hurricane and flooding activity that create an ideal environment for mold growth.5,6
Prior to the 1990’s mold claims were rare, but over the last 3 decades claim occurrence rates have skyrocketed along with claim costs. Inspections needed to uncover the type, cause, and extent of mold damage can cost more than $1M with large-scale remediation and restoration costs reaching $150 per square foot.3 Hotels and others in the hospitality industry are constantly evolving in order to provide world-class accommodations, amenities, and services.2 When organizations reflag or rebrand, hotels will often renovate or upgrade rooms, and it’s very common to find mold during the process. Hotel guests usually stay only a day or two and may not notice mold, or forget to mention it when leaving. Left unchecked, mold can cause significant damage, potentially adding $3M - $5M in abatement and build back/ restoration costs to a $7M renovation budget.6
In light of staggering restoration costs, many Hospitality Property Owners and Managers are now requiring that builders carry contractors’ pollution liability (CPL) insurance that would respond if an environmental issue is caused by a construction defect following construction.2 In the past, some mold claims fell under property policies as water losses. Today’s property insurance policies sometimes offer a level of coverage for Mold but it’s often on a named perils basis and may only offer a sub-limit of $1M or less.2 An appropriately structured general liability policy can address Mold but coverage only applies to Third-Party Bodily Injury or Property Damage and does not cover cleanup.
The increased frequency of high value mold claims, has inspired carriers to move away from traditional deductible and coverage structures. Many now offer non-standard deductibles (per-door, etc.), cap or exclude restoration cost coverage, include Force Majeure exclusions, or possibly apply co-insurance to restoration costs. Other insurers are either excluding mold coverage completely or imposing high deductibles of $250K to $1M for mold found during a renovation. Like all other insurance, the cost for mold coverage depends on the policy limit and the deductible amount. Typical limits in this line are $5M to $10M with a $5 to $15k per room deductible, while a traditional deductible ranges from $50K to $500K. As the market continues to harden, clients can expect premiums to increase significantly – anywhere from 25% to 75%.
A tighter market means agents and brokers should include as much pertinent information as possible in underwriting submissions. Underwriters are looking for detailed information regarding any renovations planned during the proposed policy term. They also want to see solid operations and maintenance (O&M) plans that enable insureds to find, mitigate, and abate mold as efficiently as possible. In addition, underwriters are interested in how frequently the property manager performs mold inspections and what kind of HVAC systems are in place because some systems, such as packaged terminal air conditioning (PTAC) units, seem to correlate with an increase in mold issues. And, because they are often a source of moisture or water leaks, underwriters want to know more about the kind of wallpaper applied in bathrooms as well as the bathroom ventilation system a hotel or resort relies on. In an increasingly tight market, underwriters that previously required a phase 1 environmental assessment and visual inspection for mold growth, now want to see a full mold investigation.
While the most likely scenario is an undetected HVAC problem or, a leaking pipe that goes unnoticed, water damage from natural disasters leading to mold growth is also a concern. Under ideal circumstances, mold growth takes off within 48 hours, growing quickly and easily.4 The triple punch of Hurricanes, Harvey, Irma, and Maria in 2017 brought historic flooding and water damage to many areas, causing more than $125 billion in damage, and creating favorable conditions for mold growth. Reinsurers are hitting annual caps earlier and premiums for reinsurance in coastal areas is rising up to 30%.8 A number of carriers now tend to avoid coastal exposures altogether or impose serious coverage restrictions such as a Force Majeure exclusion.
While litigation due to mold isn’t highly common within the hospitality industry, mold-related claims or construction defect lawsuits do have the potential to seriously impact hotel operations. Hilton closed their Kalia Tower in Hawaii on July 2002 and settled with almost 3,000 guests after mold investigators discovered evidence of Eurotium mold in the hotel’s rooms. Hilton then filed suit against several construction companies and inspection firms due to the mold problem, which cost millions to remediate and resulted in a 13-month closure of the Tower and the loss of millions of dollars in revenue.11
Mold is also a growing concern in a number of other industries, with a noticeable uptick in claim frequency in K-12 schools and hospitals.6 Earlier this year, Seattle Children's Hospital revealed that operating rooms had been intermittently infested by Aspergillus mold for approximately a year, likely due to deficiencies in the operating rooms' air handling and purification system. The discovery came after a patient died and five others were infected with Aspergillus mold, forcing the medical center to shut down most operating rooms.9 In 2017, a class action lawsuit alleging unsafe living conditions due to toxic mold, was filed against Morris College in Sumter, South Carolina.10
Taking claims like these to court can require the employment of expert witnesses such as industrial hygienists, epidemiologists, and engineers, racking up thousands of dollars in fees.3 Obtaining appropriate environmental insurance coverage helps the insured respond to a bodily injury or property damage claim while also assisting with remediation and restoration. This enables hotels, resorts, schools, and other institutions to quickly connect with highly-specialized engineers and contractors that can undertake mold remediation and get the insured back to business as usual, helping avoid expensive litigation or extended revenue loss due to business interruption on top of abatement and restoration costs.5
Increased coverage costs and a market short on traditional deductible structures is likely a long-term market correction rather than a temporary adjustment, and agents should work to educate insureds about the transition toward a harder market. While environmental risks come with owning any business, they can be especially devastating to the hospitality industry – resulting in reputational damage, loss of income, and costly claims.2 It’s vital that hospitality companies partner with brokers and carriers who have extensive expertise in environmental exposures and understand the detailed information required by underwriters.
In the past, hospitality entities were almost class underwritten, but now submissions are reviewed in detail, and the merits of each individual portfolio are scrutinized closely. Start the renewal process 90 days out, and include as much detail about O&M plans, scheduled renovations, and HVAC/ventilation systems as possible in your submissions. While there are fewer carriers with the appetite for hospitality mold risks, CRC’s environmental insurance brokers know what each carrier’s capacity is and are able to triage the marketplace efficiently, making the most of strong, nationwide market relationships. Contact your CRC Group producer to discuss how we can best help your clients when it comes to their environmental insurance needs.
- Jim Hamilton is the leader of CRC’s Environmental Practice Group and a Senior Broker in the Denver, Colorado office. He specializes in Environmental Insurance, managing a large portfolio of hospitality clients.
- Sean McLaughlin is an Associate Broker in the CRC Environmental Practice Group and is located in CRC’s Denver office.
- Insurance Companies Tighten Coverage for Mold-Related Damages, CCIM Institute, https://www.ccim.com/cire-magazine/articles/insurance-companies-tighten-coverage-mold-related-damages/?gmSsoPc=1
- What a Veteran Hospitality Risk Manager Has to Say About Hotel Environmental Coverage, Risk & Insurance, July 10, 2019. https://riskandinsurance.com/hotel-environmental-risk-management/
- Mold: The Newest Environmental Hazard, IRMI, September 2001. https://www.irmi.com/articles/expert-commentary/mold-the-newest-environmental-hazard
- Understanding the Spike in Mold Claims: Environmental Policies are More Important Than Ever, CLM, November 17, 2017. https://clmmag.theclm.org/home/article/Understanding-the-Spike-in-Mold-Claims
- Mold: A silent and rapidly growing environmental exposure, Ironshore, October 10, 2019. http://www.ironshore.com/blog/mold-a-silent-and-rapidly-growing-environmental-exposure
- 3 Lessons to Help Real Estate Companies Avoid Million-Dollar Mold Remediation, Risk & Insurance, March 1, 2019. https://riskandinsurance.com/mold-remediation-is-costing-hotels-and-hospitals-millions-these-3-critical-lessons-can-help-other-real-estate-companies-avoid-the-same-fate/
- Facts About Mold and Dampness, Center for Disease Control, September 5, 2017. https://www.cdc.gov/mold/dampness_facts.htm
- CRE Can Only Do So Much to Prepare For, Recover from Hurricanes, BISNOW, August 22, 2019. https://www.bisnow.com/national/news/sustainability/commercial-real-estate-hurricane-readiness-challenges-100486
- Seattle Children’s Hospital Mold Infections Leave One Dead, Force Closure of Most Operating Rooms, CBS News, July 3, 2019. https://www.cbsnews.com/news/seattle-childrens-hospital-mold-death-shutdown-most-operating-rooms-delaying-surgeries-2019-07-03/
- Morris College Stung with $55 Million Class Action Lawsuit for Mold, Fox 57, November 17, 2017. https://wach.com/news/local/morris-college-stung-with-55-million-class-action-lawsuit-for-mold
- Hilton Settles Tower Mold Class Action Suit, Davis, Levin, Livingston, March 23, 2013. https://www.davislevin.com/blog/2013/march/hilton-settles-tower-mold-class-action-suit/