Florida Looking for Ways to Curb Sinkhole Losses

Florida lawmakers are trying to address the cost of sinkhole claims, which state officials and insurers say are driving up property insurance rates and could threaten the solvency of some domestic insurers if not brought under control.

The Senate Banking and Insurance Committee issued a report recently that reiterated the findings of the Office of Insurance Regulation and Insurance Commissioner Kevin McCarty that found that sinkhole claims have nearly quadrupled between 2006 and 2010 statewide—including in counties that have not in the past been know for having many.

The report recommends a statute of limitations on the filing of property claims, improvements in the state’s building code, clarifying the definition if structural damage for a claim, limiting the scope of sinkhole coverage or making it optional, and putting some restrictions on the advertising and fees of public adjusters.

The report also recommends that the state consider creating a facility to help handle sinkhole claims and repairs.

The committee, chaired by Sen. Garrett Richter, R-Naples, has already held hearings on possible legislation.

The insurance industry is encouraged by lawmakers’ attention to the issue.

“The Senate report provides independent support for the alarm which has been raised by Insurance Commissioner Kevin McCarty before the Cabinet two months ago and by the insurance community over the last year. It is alarm about a crisis in which rates are going up, some insurers are going bankrupt and an already fragile market is facing erosion from claims which do not involve real sinkholes, but produce comparable large insurance settlements, sometimes policy limits,” said Sam Miller, executive director of the insurers’ Florida Insurance Council.

Some of the recommendations were contained in broad property insurance legislation that passed the House and Senate last year but was vetoed by then-Gov. Charlie Crist.

But insurers now believe that lawmakers are ready to try again to pass property insurance reforms under new Gov. Rick Scott.

A committee vote on some of statutory recommendations issues regarding sinkholes could come as early as Jan. 24, according to Sam Miller, executive director of the insurers’ Florida Insurance Council. The Legislature starts up again in March.

Miller said insurers think the Senate bill will “guarantee quick help for a homeowner whose house is swallowed up by a sinkhole, but no longer allow public adjusters, attorneys specializing in sinkholes and uninformed or unscrupulous homeowners to get a windfall of tens or even hundreds of thousands of dollars over minor cracks in their driveway or a corner of their garage.”

However, it could take longer for another Senate report recommendation—to create a state facility to handle sinkhole claims and repairs— to be considered.

Insurers generally support the legal changes but some have qualms about the state facility idea.

Private insurers told OIR that the sinkhole claims increased from 2,360 in 2006 to 6,694 in 2010, totaling 24,671 claims throughout that period. Total sinkhole claim costs for these insurers amounted to approximately $1.4 billion for the same period.

The state-backed property insurer, Citizens Property Insurance, has also been hit hard. The sinkhole claims frequency ratio at Citizens more than doubled between 2006 and 2009. In 2009, Citizens reported incurring over $84 million in sinkhole losses and expenses, yet obtained only $19.6 million in earned premium to cover those costs. The losses represent almost four times the amount of premiums collected from Citizens’ policyholders for sinkhole coverage, yet the company’s rates are capped, and cannot be increased by more than approximately 10 percent per year for any policyholder.

Florida Insurance Commissioner Kevin McCarty has called sinkhole claims a major cost driver of insurance rates and, the Senate report notes, has expressed concern that such claims could threaten the solvency of domestic insurers and have a significant destabilizing effect on an already fragile market. McCarty has said he suspects that many sinkhole claims are questionable and that public adjusters and others are gaming the system.

Available Coverage

In Florida, every insurer must make sinkhole coverage available, for an additional premium. The report found that the statewide average sinkhole premium charged by Citizens in 2009 was $73 but that figure varies a lot by location. For example, in 2009, the average sinkhole premium in Pasco County was $944; Hernando County, $775; Hillsborough County, $98. The average sinkhole premium for the remainder of the state (excluding Pasco, Hernando and Hillsborough) was only $22.

However, the Senate report notes, that actual premium that Citizens charges is only a “small part “of Citizens’ actual sinkhole costs because Florida law prohibits Citizens from increasing the rate of any policyholder by more than approximately 10 percent, even as losses continue to rise at a much faster pace.

As one possible major cause, the report says too many policyholders are encouraged to file the claims because they can keep the cash proceeds and not necessarily use the money to fix the sinkhole damage. This could be having a damaging effect on home values and harm local governments.

According to the report, the Hernando Property Appraiser has estimated that since 2005, the county has lost $173 million in total market value as a result of value adjustments to sinkhole homes.

One domestic insurer, HomeWise Preferred Insurance Co., said it conducted its own evaluation of 110 sinkhole claims. Only 27 percent of their policyholders who received funds for repair of the sinkhole and home actually performed the repairs.

The report— and insurers— also point a finger at public adjusters. Some insurers say public adjusters have engaged in aggressive advertising and solicitation campaigns. According to the state, the number of licensed public adjusters in Florida has increased substantially. Overall, the number of public adjusters increased 330 percent between 2003-04 and 2008-09, growing from 678 to 2,914.

Citizens told Senate investigators that in 2005, only three percent of all sinkhole claims had public adjuster involvement, but by 2009, 25 percent of its statewide sinkhole claimants were represented by public adjusters.

In 2010, lawmakers passed a bill that made a number of changes to the regulation of public adjusters, including restricting their advertising, setting a three-year claims filing deadline, and capping some of their fees. This bill was vetoed by then-Gov. Charlie Crist.

Insurers’ Reaction

Under current Florida law, there is no statute of limitations for making a property insurance claim. Also, for a sinkhole loss, there must be actual structural damage caused by sinkhole activity. In practice, however, claims are often paid without a demonstration that the structural damage is directly attributable to sinkhole activity.

Insurers told the Senate investigators they have been reluctant to litigate sinkhole issues because of two state laws, one that makes an insurer responsible for all attorneys’ fees if it loses a case and the other, the state’s bad faith law. Insurers say these two statutes can mean it’s more cost effective to just pay the claim rather than risk a judgment for attorneys’ fees and bad faith damages after already incurring large costs associated with adjusting these claims.

In response to the crisis, most private insurers and Citizens are now requiring some form of inspection to qualify for sinkhole coverage. As more companies adopt pre-coverage inspection requirements, sinkhole coverage will continue to become less available, according to the report.

In addition, a number of private insurers have ceased writing new business in the areas of greatest sinkhole claims activity. The report says this is borne out by the fact that in Hernando and Pasco counties, Citizens’ share of the market has increased substantially in each of the last two years.

The sinkhole issue is not new to Florida. Previous studies have raised the possibility of starting a state-run facility to help handle sinkhole claims and repairs as six states have done.

“Establishing a repair program addresses the penultimate question whether the sinkhole peril is actually insurable because the risk is not measurable or definable which are elements required to underwrite a risk for insurance purposes. Currently, in some geographic regions, it is impossible to charge an actuarially sound rate that is also cost-feasible for consumers. Nevertheless, public policy concerns involving the public’s health, safety and welfare dictate the state address this peril,” the report states.

Florida Statute Changes on Sinkholes

Among the Senate report’s recommendations in the area of statutory changes are:

• Impose restrictions on public adjusters similar to those contained in SB 2044 which passed the Legislature during the 2010 session but was vetoed by Gov. Crist. These provisions include prohibiting pubic adjusters from making certain statements in advertisements or solicitations and capping fees in supplemental or reopened claims.
• Create a statute of limitations of two or three years for sinkhole claims.
• Allow insurers the option to provide sinkhole coverage, but continue requiring catastrophic ground cover collapse.
• Consider limiting sinkhole coverage. This might include restricting coverage to a percentage of coverage A, which applies to the dwelling on the insured premises or a percentage of the principal commercial structure; restricting coverage to the principal structure, i.e., the insureds dwelling, as opposed to pool decks, outbuildings, driveways, etc., and for commercial structures, limit sinkhole coverage to the principal commercial structure; or restricting coverage to residential, as opposed to commercial, properties.
• Allow insurers to nonrenew policies with sinkhole coverage throughout the state; however, insureds must have the option to purchase an endorsement for sinkhole coverage, subject to an inspection of their property as provided under current law.
• Provide reasonable timeframes in which policyholders must enter into contracts for repairs.
• Consider amending the current provisions for bad faith claims and attorney fees for cases involving sinkhole claims.
• Consider having the policyholder bear some portion of the cost of testing.
• Remove the statutory cap on Citizens sinkhole rates.