Sinkholes – Florida Insurers’ Most Expensive Non-Hurricane Claims

Florida Insurance Council White Paper
Updated on September 1, 2010

Contact; Sam Miller, FIC Executive Vice President
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Commissioner Kevin McCarty has identified major “cost drivers” behind the failure of property insurers to build substantial new surplus during the years when Florida does not suffer a hurricane and questionable sinkhole claims may be the single most serious one. Most sinkhole claims involve minor cracks in a garage wall or other areas of the home and do not involve the traditional sinkhole which swallows up a home or vehicle in the front yard.  Sinkhole claims are the most costly of all claims filed in the current property insurance arena, except for devastation from hurricanes.

Citizens Property Insurance Corporation is the largest property insurer in Pasco and Hernando Counties, the center of the sinkhole insurance crisis. Many private insurers have left the region because of questionable sinkhole claims and this is the only area of Florida where Citizens has a significant presence for a factor other than hurricane exposure. Citizens reported that in 2009 it earned $19.6 million of homeowner’s premium dedicated to sinkhole risk, but incurred an estimated $97 million in sinkhole losses.  Sinkhole losses were a major factor in its recent rate increase filing and it has begun a program to inspect homes before issuing new coverage.

The ineffectiveness and inherent fraud surrounding the current sinkhole claims process is underscored by a recent review that indicates only 27 percent of policyholders with moneys paid as a result of sinkhole claims actually had repairs done to their property. This study was conducted by a private insurer with significant sinkhole exposure in Pasco and Hernando. The company examined 110 sinkhole claims where it had made payments covering the period of July 2008 through July 2009 and claims that had been closed at least six months. The homeowner must pull a building permit to make repairs. A permit for repairs had been pulled on property involved in only 31 claims out of the 110, or 27 percent. Other insurers are conducting similar studies as the insurance community prepares to confront this crisis during the 2011 legislative session.

OIR Data Call on Sinkhole Claims

The Office of Insurance Regulation earlier this fall issued a data call to commercial and residential property insurance writers to collect claims data related to sinkholes. Companies were to submit their information by September 21.

The data call encompasses sinkhole claims opened in Florida between 2006 and 2010 and will help the Office more clearly define the types of claims being filed, testing procedures to determine the legitimacy of claims, costs of inspections and geographic location of claims.  OIR also wants to gather information regarding legal fees and public adjuster fees associated with sinkhole claims as well as data dealing with the amount of structural loss. The OIR then plans to compile a report based on the results to help regulators determine potential regulatory actions, and whether additional authority is needed through legislative action.

Senate Banking and Insurance Committee Sinkhole Study

The Senate Banking & Insurance Committee is conducting a study due December 1, 2010 that will delve into the sinkhole insurance claims crisis.

“Insurance claims from Florida homeowners for damages resulting from sinkholes have increased dramatically both in number and costs over the past 10 years,” Banking & Insurance notes in a summary of the study on the Florida Senate Internet site. “Under current law, insurers must make available to policyholders, for an appropriate additional premium, sinkhole coverage for losses on any structure, including personal property contents. Property insurers must also provide coverage for a catastrophic ground cover collapse.

“The costs associated with insuring against sinkhole-related losses and the increasing costs to remedy damage caused to insured property have escalated. Sinkhole insurance claims have increased in recent years by 200 to 300 percent for some property insurers who in turn have paid millions of dollars annually to settle such claims. For example, the number of sinkhole claims made against Citizens Property Insurance Corporation has more than doubled between 2005 and 2009.

The Legislature has made multiple changes to the laws governing sinkhole insurance coverage in 2005, 2006, and 2007, but further issues need to be examined, including but not limited to, sinkhole investigations and reports; the burden of proof in sinkhole claim disputes; fraudulent practices pertaining to sinkhole claims; the procedures and time parameters for the stabilization and repair of damaged buildings and structures, including the payment by insurers of sinkhole claims; the accountability and liability of engineers and geologists involved in sinkhole claims; the neutral evaluation process, including the selection and qualifications of the sinkhole neutral evaluator; and the purpose and effectiveness of the sinkhole database which is the responsibility of the Department of Financial Services.”

"Sinkhole Alley" Counties

The majority of sinkhole related claims are generated in Pasco, Hernando, Pinellas, and Hillsborough counties near Tampa, often referred to as "Sinkhole Alley.”   However, sinkhole claims are being filed as recently as the first quarter of 2010 in Dade, Broward and Palm Beach counties.

Successfully Tackling Sinkhole Insurance Crisis is Essential

Under current law, when a claim is made for sinkhole loss, the insurer must inspect the premises in question and make a determination whether there has been physical damage to a structure that may be the result of sinkhole activity.  In almost every case, when a claim for “sinkhole” is filed with an insurer, the insurer MUST pay for the geologist or engineer’s inspection which ranges from $8,000 to $15,000; the most expensive initial claims cost among every other claim that is filed with an insurance company. Insurers are faced with an immediate multi-thousand dollar cost just because a sinkhole claim is filed. 

Florida Insurance Council members report that for every 10 sinkhole claims they experience, it affects their bottom line costs ranging from $1.5 million to $2 million, which is significant to many Florida insurers who have, on average, $25 to $50 million in the bank to pay all claims.

The insurance community negotiated with the trial bar and public adjusters and other parties during the 2010 session on balanced reforms which eliminate fraud but guarantee coverage when real sinkholes occur. The negotiations broke down. It is absolutely essential that the sinkhole insurance statutes be effectively reformed. One of the most important challenges is to establish a true definition of structural damage from a sinkhole that would constitute a sinkhole loss. The insurance community proposes that the definition be based on authoritative principles of professional engineering and that resultant damage to a building be tied to shifting in the foundation caused by sinkhole activity.

A complete sinkhole insurance crisis solution may require creation of a public facility to handle sinkhole loss claims. This has been recommended in two studies over the years by Florida State University.