Can Toxic Mold Spoil a Stock Offering?

The risk of homeowner lawsuits may hurt Citi's sale of Travelers

Having Ed McMahon knock on your door used to mean one's dreams had come true. Johnny Carson's former sidekick made a second career of handing out oversize checks to winners of the Publishers Clearing House sweepstakes. But this month McMahon handed something much less welcome to American Equity Insurance Co., a subsidiary of Travelers Property Casualty Corp.--a $20 million lawsuit.

It's not a pretty story. The suit alleges that a contractor hired by American Equity, which issued the homeowner's policy for McMahon's Beverly Hills mansion, didn't properly repair a leak. As a result, the suit claims, a toxic mold--stachybotrys chartarum--spread through his 8,000-square-foot house, making McMahon, 79, and his wife, Pamela, seriously ill and killing their dog. American Equity did pay for cleanup, but the McMahons claim it failed to make the house livable again. Travelers says it has already paid $500,000 to the McMahons, it will continue to pay covered expenses, and the suit is without merit.

Toxic mold could harm more than homeowners like McMahon. The creeping rot could taint Travelers--and possibly Sanford "Sandy" I. Weill's Citigroup (C ), its parent. That's because mold is fast becoming a chronic problem for the insurance industry as suits spring up around the country. Citigroup spun off 20% of Travelers in March--generating $4 billion--and plans to spin off all but 10% later this year. Adverse mold publicity could scare investors away during the secondary offering. Citi declined to comment.

Mold claims could be costly for insurers. Just how costly is the big question. Michael G. Paisan, an insurance analyst with investment bank Williams Capital Group thinks toxic-mold liabilities could range from $10 billion to the $60 billion paid out for asbestos. "Toxic-mold suits are the next big insurance industry problem," says Paisan.

Costs are hard to pin down because the exact nature of the mold problem is, too. Victims have claimed a wide range of symptoms, from relatively mild sore throats to asthma and even permanent memory loss. But definitive scientific research is slight. The Centers for Disease Control said in a 2001 study that there may be some link between mold and respiratory problems, but that more study is necessary. That has not been forthcoming. Instead, "a lot of the scientific study is being done in the courtroom," says Paisan.

Despite the lack of definitive evidence, some jurors have decided that the problem is for real. A Texas jury awarded $32 million to one homeowner, Melinda Ballard. Her insurer, Farmers Insurance, is appealing. Like McMahon, she claimed her family was being poisoned by mold, and alleged that the insurance company wasn't paying what it owed.

McMahon may not be able to persuade a jury to give him $20 million. But his high-profile suit could generate a wave of similar claims in California. And if analysts start to get the feeling that more moldy news is lurking, Citi may not get such a big lift from selling Traveler's stock the next time around.

Corrections and Clarifications "Can toxic mold spoil a stock offering?" (Finance, Apr. 29) stated wrongly that Citigroup plans a secondary offering of Travelers Property Casualty Corp. stock later this year. In fact, it plans to make a tax-free distribution to Citigroup shareholders of all but 9.9% of stock that it owns. Also, Ed McMahon did not work for Publishers Clearing House. He worked for American Family Publishers.

By Heather Timmons in New York

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