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Fraudulent mold claims problem grows

Homeowners insurers are being bilked out of millions of dollars in bogus mold and water damage claims, and as a result you're paying the price through increased insurance costs.

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The mold fraud problem centers in Texas, but it's spreading to Tennessee and other states, disclosed Ed Sparkman, public affairs manager for the National Insurance Crime Bureau, in Palos Hills, Ill. "I expect it to be more of a problem in Southern states than in Northern states because of warmth and moisture conditions."

There has been an "escalation of mold claims" in recent years, confirms Kirk Hansen, director of claims for the Alliance of American Insurers, in Illinois. But that's only the half of it, according to New York insurance spokeswoman Loretta Worters, who then focused her remarks on ramifications of mold claims.

"In a climate where we are already facing rising rates because of water and mold-related claims, fraud simply exacerbates the problem," explains Worters, vice president, of the Insurance Information Institute. "Not only is fraud being committed by some homeowners but by illegitimate (mold remediation contractors) who are exaggerating the extend of the problem in the home."

Worters contends that "insurance fraud hurts all of us. The financial loss starts with the insurance companies but eventually it is paid out of the pockets of every homeowner."

The U.S. Environmental Protection agency reports that molds can be found virtually anywhere, and they can grow on just about any substance when moisture is present. Mold has been around for hundreds of years, but claims arising from such fungi infestations weren't that prevalent until recently in part because of fraudulent acts.

"High-dollar mold lawsuits have been a major contributor to the higher rates," confirms Tiffany O'Shea, director of public affairs for the Southwest regional office of the American Insurance Association.

Case in point: Many of the claims came in 2000 after New York heiress Melinda Ballard got a $32 million judgment against Farmers when that insurer failed to respond properly to water claims made on her Texas mansion in the Austin area.

It's been reported that mold claims cost homeowner insurers more than $1 billion in 2001, an amount that's five times more than the cost in 2000. O'Shea said that in 2001, Texas insurers paid more than $850 million in mold claims, representing an astounding 460% jump from the previous year's level.

O'Shea pointed out that "Texas has had more mold claims than the rest of the country combined. During 2000-01, she continued, more than 44,000 mold claims were filed in Texas, "making Texas the state with the highest number of mold claims and the highest number of mold-related lawsuits."

Given Texas's mold claims dynamics, it's not surprising that the Lone Star State was hit by the largest known case of its kind, involving seven people in a scheme that cost insurers some $5 million or so. Following a two-year investigation by authorities, the seven-member group last June was arrested in the Houston area in connection with a conspiracy to defraud insurers by deliberately flooding homes and filing false claims.

The fraud scheme reportedly victimized State Farm, Chubb, Farmers and more than a dozen other insurers over six years.

All seven subsequently either pleaded guilty or have been found guilty of fraud charges. Their sentencing has been scheduled for Dec. 12. Investigating agencies were the Texas Department of Insurance (TDI), the Federal Bureau of Investigation and the U.S. Postal Inspection Service.

TDI spokesman Lee Jones waxed enthusiastic about how technology provides insurers and regulators new tools to detect fraud and convict perpetrators. "Insurers now can scan claim records for the recurrence of the same names, addresses and contractors, which can be dead giveaways that fraud is taking place. The payoff is handcuffs, jail cells and a date with the district attorney for perpetrators," concluded Jones.

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