Sinkhole Insurance

Bradenton, Aug. 11, 2011
By Jeanette Scutti

Sinkholes have become a major issue for both Florida property owners and insurance companies. While sinkhole related losses are a statewide issue, claims data shows they are more prevalent in Hillsborough, Pasco and Hernando counties.

Highlighting the financial problem, sinkhole losses for Citizens Property Insurance Corp., our state-run insurer, were $245 million in 2010, yet Citizens collected only $32 million in premiums for the coverage. These losses illustrate the magnitude of the problem and yet do not include our private insurance company losses. Consequently, in order to stem the losses and ensure the sustainability of insurance companies to pay future claims, the premiums for sinkhole loss coverage are rising rapidly and it is important to understand the coverage options available to property owners.

Let’s distinguish the difference in coverage for what we commonly refer to as sinkhole damage but can be categorized differently in the insurance policy. First, the standard Florida homeowner’s policy automatically includes coverage for “catastrophic ground collapse,” which means geological activity that results in abrupt collapse of ground cover, depression in the ground clearly visible by the naked eye, structural damage to the building including the foundation and condemned with order to vacate by a governmental agency authorized to issue such and order. Structural damage consisting of merely settling or cracking of the foundation or building does not constitute a loss by catastrophic ground collapse nor will this coverage pay to repair the depression, the hole or to stabilize the land on the insured premises.

If a hole was to open up and swallow all or a portion of your home and it is deemed unlivable, this would be considered catastrophic ground collapse.

Property owners can choose an endorsement for “sinkhole loss.” Sinkhole Loss is actual physical damage caused by “sinkhole activity,” which means settling or systematic weakening of the property which results from movement raveling of the soils, sediments or rock material into the subterranean void created by the effect of water on limestone or similar rock formations. Mere cracks in walls and/or foundations caused by sinkhole activity and verified by a professional engineer selected or approved by your insurance provider may be covered under the sinkhole loss coverage provision.

Sinkhole loss coverage relates more for cosmetic damage including coverage to stabilize the land. This coverage endorsement is where the hefty premium increases are going to come and where property owners are going to have to decide whether to buy this optional endorsement and, in some cases, may be compelled to purchase this coverage by their lender.

The question now is how will national mortgage lenders view these coverages when applying for a loan? Because this is a Florida issue, do the lenders understand that basic coverage is provided for catastrophic ground collapse? Will they require the sinkhole loss endorsement to be added to your homeowner’s policy?

Federally backed lenders Freddie Mac and Fannie Mae will most likely drive the market response and set the requirements as most lending institutions tend to follow one of these agencies and some lenders adopt their own guidelines from both. Currently, Fannie Mae does not require sinkhole coverage but Freddie Mac does require it. Educating lenders on the differences between catastrophic ground collapse and sinkhole loss coverage should assist them in making a determination on their requirements and we suspect this will be an evolving issue for the marketplace.

The proposed rate increases for Citizens Property Insurance Corp. for the sinkhole loss endorsement coverage option have not yet been submitted to the Office of Insurance Regulation for approval; however the OIR will have 45 days to approve these once a formal request has been received. If approved, these changes will not take effect until January or February of 2012. We are not sure if they will approve a “one shot” rate increase or if they will phase in the rate increases? Some private insurance companies have filed for a rate revision as well.

It is important to know the insurance coverage included in your policy along with the optional coverage endorsement available. Florida property owners will have to decide whether or not to purchase the optional sinkhole loss endorsement and that option will undoubtedly be influenced by their lender.

Jeanette Scutti, a family risk manager at BB&T Insurance Services, can be reached at (941) 748-1431.