After 20 Years... Where is the industry?

What is ‘Mitigation’ in property claims settlements?

In recent years mitigation, remediation, and abatement have become add-ons that increase both the complexity and cost of property loss claims. The most seen example is the cost and abuse of ‘water mitigation’

Initially, this activity focused on drying wet structural elements and limiting the spread and impact of damage that could have occurred to these elements. For an example, carpeting was dried and cleaned, drywall was treated with heat and atmospheric pressure to facilitate drying, and any water or moisture was extracted as soon as possible. All of this being done with the intent that evaporation and dehumidification could save building components before they were permanently damaged.

Unfortunately, mitigation has rapidly increased in cost and scope so much that it has now exacerbated the cost of repair rather than mitigating it. Now we are told that what we are mitigating is about what ‘could’ happen rather than what ‘would actually’ happen. The ‘what if’ scenario has become so creative that water and moisture has become grouped in the same category as nuclear waste.

The rationale and justification behind mitigation expenses has become increasingly obscure as its costs have increased. The original justification given for its existence was that mitigation lessens the overall cost of repair because of the actions taken to prohibit additional damage from occurring. Now it has become a necessity to destroy structural elements whether they can be dried or not, or whether they had even become wet in the first place. More and more, instead of drying and saving, mitigation has become demolishing and treating building materials as if they are hazardous waste.

The very definition of mitigating something (in other words, making it smaller) has become a vehicle for expanding or enlarging a loss using justification that becomes increasingly harder to understand.

What had originated as a method of protecting property and lessening the cost of a water loss has ultimately accomplished the opposite where mitigation often increases the scope of repair.

HOW DID WE GET TO THIS POINT?

Most property insurance documents have a clause in the Coverage section entitled ‘Reasonable Repairs’. This may be listed as an ‘Extensions of Coverage’, as in the Texas Dwelling Forms, or as ‘Additional Coverages’ as in the ISO dwelling forms. In the ISO Businessowners Policy, the clause is included under ‘What Must Be Done In Case Of Loss’ section and is entitled ‘Protect Property’.

In all these forms the language is essentially the same. The dwelling forms use language like:

“…In the event that covered property is damaged by a Peril Insured Against, we will pay the reasonable cost incurred by you for necessary measures taken solely to protect against further damage…”

These dwelling forms usually go on to further explain the limitations of these coverages with disclaimers like:

“…If the measures taken involve repair to other damaged property, we will pay for those measures only if that property is covered under this policy and the damage to that property is caused by a Peril Insured Against. This coverage does not:

(1) Increase the limit of liability that applies to the covered property; or

(2) Relieve you of your duties, in case of a loss to covered property, as set forth in Condition D.2…”

The business forms will state something like”

"You" must take all reasonable steps to protect covered property at and after an insured loss to avoid further loss. "We" pay the reasonable costs incurred by "you" for necessary repairs or emergency measures performed solely to protect covered property from further damage by a covered peril if a covered peril has already caused a loss to covered property. This does not increase the "limit" for the covered property.”

All these policy versions seem to underscore the same intent. Mitigation should be used to minimize damage, not create damage that was not present at the loss. The key words and phrases are critically important:

Reasonable and Necessary

Just exactly what is reasonable and necessary? I believe that this is the most important question in this equation. ‘Reasonable and necessary’ is identified by the intent. If the intent is to minimize loss, reasonable and necessary means limiting actions to only those required solely to stop the spread of damage. In other words, if it is wet, dry it as soon as possible and determine damage after it is dry. If it is not wet, protect it from becoming wet by isolating it from the source of the inundation.

Simplicity is the foundation, cause wet things to become dry, and keep dry things from becoming wet. Damage should only be assessed once items are dry. This should be obvious to anyone that is reasonable. Not everything that gets wet is damaged, sometimes things can be dried. ‘Reasonable’ means in the most cost-effective manner and ‘necessary’ means only that which cannot be done without.

‘…taken solely to protect from further damage…’

Aggressive water extraction from wet areas is ‘action taken to protect from further damage’. Making a 12” flood cut throughout an entire home is done solely for the purpose of increasing the cost of the loss and not mitigating it.

After a lifetime spent building homes from the ground up, I have learned that building materials are very resilient. While framing a home, the roof deck gets rained on, the exterior sheathing gets exposed to weather before it is sided, and the cabinets are impacted by wet concrete and damp elevated humidity before the dwelling is completed. Yet despite it all, the ‘new’ home is received as gleaming and without blemish.

Where Will It End?

In 2000, as a rookie adjuster, I started my career during the scary birthing of the ‘mold remediation’ era. At that time, we discovered that what our parents and grandparent had always referred to as mildew and decay, was really the most dangerous substance known to man. We found out that where our uninformed forbearers used soap and bleach, we should have hired specialty remediators to cleanse our homes of history’s most toxic substance.

A phalanx of historical liability settlements determined that ‘Stachybotrys’ could kill, and our homes and businesses were under attack. I remember those days vividly. The fear of this new threat was sufficient to cause demands to literally gut a home down to the studs before it could again be deemed safe for habitation.

Every file I received carried with it a threat of imminent death from mold, and the certainty of debilitating health issues. The insurers were faced with historical losses and a new industry of remediation experts was born. Claims files gained a life of their own and traveled from adjuster to adjuster until somebody discovered that the policy limits had been completely consumed. Real estate salespeople were forced to reveal if a home had ever been ‘contaminated’ and real estate values plummeted even when they were allegedly restored to wholeness.

This season of insanity continued until it suddenly disappeared. People stopped dying and homes no longer were considered chemical dumps. How did this happen, you ask? The answer was simple, it was limits of liability.

Around 2004, as property insurance policies renewed, an endorsement was added to those policies which severely limited that portion of the policy that could be used to service damage resulting from mold. Usually about $5,000 to $10,000 per event, and in some cases per policy period. Other policies simply identified mold or bacterial infestation as excluded regardless of the source or cause. Suddenly an industry that was in a feeding frenzy over mold dried up and disappeared.

That industry, however, reinvented themselves as water mitigation companies. Now they manipulate the same fear by warning property owners that their excessive ‘mitigation’ is required to protect them from the threat of mold.

I believe that if this current excessive behavior is not curtailed, the solution that brought down remediation will be used to gain control of mitigation. Insurance policies will begin to either exclude water as a covered peril or limit the damage from water or the expense of mitigation.

Sanity Must Return

Just last week I attended an appraisal where the HVAC condensate pan had overflowed an upstairs ceiling located over a central staircase. The carrier had, in my opinion, overpaid the claim, which amounted to almost $600,000.00.

This included almost a quarter of a million dollars in structural mitigation and repair, of which 80K was for mitigation alone. It also included over 200K in personal property damage, and well over 100K in ALE. The total payments exceeded half a million dollars! This was for a condensate pan leak under an attic installed residential HVAC unit.

The conclusion of this story is even more bizarre, in that the demand from the public adjuster forcing the appraisal exceeds 800K. All this for a dwelling that has a limit of liability below $500,000.

Just as seen in other excesses, when egregious activity reaches these levels, we should expect significant policy revisions. Carriers have the responsibility to expeditiously pay for covered losses, however those loss demands must limit themselves to the actual cost of repair and not allow it to lose touch with reality. In the same way appraisers must practice their jobs with a commitment to fairness and reality.