Bills have been introduced in the Tennessee House and Senatethat would make various changes concerning insurance coverage ofsinkhole losses and subsequent structural repair.

Under present Tennessee law, every insurer offering homeowner'sproperty insurance in the state must make available coverage forinsurable sinkhole losses on any dwelling, including contents ofpersonal property contained in the dwelling, to the extent providedin the policy to which the sinkhole coverage attaches.

The House bill, HB 1005, makes the offering of suchcoverage optional instead of mandatory and removes the provisionwhereby coverage is “to the extent provided in the policy to whichthe sinkhole coverage attaches.”

The bill adds that the insurer may require an inspection of theproperty before issuance of sinkhole loss coverage.

The bill would make a number of other related changes tohomeowner's policies.

For example, under present Tennessee law, upon receipt of aclaim for a sinkhole loss, an insurer must meet the followingminimum standards in investigating a claim:

(1) The insurer must make an inspection of the insured'spremises to determine if there has been physical damage to thestructure that might be the result of sinkhole activity;

(2) If, upon the investigation the insurer discovers damagesto a structure that are consistent with sinkhole activity, or ifthe structure is located in close proximity to a structure in whichsinkhole damage has been verified, then prior to denying a claim,the insurer must obtain a written certification from an engineer, aprofessional geologist, or other qualified individual stating thatthe cause of the claim is not sinkhole activity, and that theanalysis conducted was of sufficient scope to eliminate sinkholeactivity as the cause of damage within a reasonable professionalprobability; and

(3) If the insurer obtains written certification that thecause of the claim was not sinkhole activity, and if thepolicyholder has submitted the sinkhole claim without good faithgrounds for submitting the claim, the policyholder must reimbursethe insurer for 50 percent of the cost of the analysis; provided,however, that a policyholder is not required to reimburse aninsurer more than $2,500 with respect to any claim. A policyholderis required to pay reimbursement only if the insurer, prior toordering the analysis, informs the policyholder of thepolicyholder's potential liability for reimbursement and gives thepolicyholder the opportunity to withdraw the claim.

The bill revises the above provisions by referring to“structural damage” (see below for definition) instead of “physicaldamage”; declaring that damages have to be “confirmed” instead of“discovered”; removing the provision regarding a structure beinglocated in close proximity to a structure in which sinkhole damagewas verified; and specifying that the insurer may deny the claim ifthe insurer determines that there is no structural damage or nosinkhole loss.

Under the bill, if a sinkhole loss is verified then thefollowing provisions would apply:

(1) The insurer may limit its total claims payment to theactual cash value of the sinkhole loss to the covered property,which does not include underpinning or grouting or any other repairtechnique performed below the existing foundation of the building,until the policyholder enters into a contract for the performanceof building stabilization or foundation repairs in accordance withthe recommendations of the engineer retained or approved by theinsurer;

(2) To be eligible to receive payment for underpinning,grouting, any other repair technique performed below the existingfoundation of the building, or any other loss in excess of theactual cash value of the sinkhole loss to the covered property, theinsured must repair such damage or loss in accordance with therepair recommendations of the engineer or engineers retained orapproved by the insurer. The insurer may engage a professionalstructural engineer to make recommendations as to the repair of thestructure. The respective findings, opinions, and recommendationsof the insurer's engineer or professional geologist as to the causeof distress to the property and the findings, opinions, andrecommendations of the insurer's engineer as to land and buildingstabilization and foundation repair will be presumedcorrect;

(3) If the insurer's engineer determines that the repaircannot be completed within policy limits, the insurer must pay tocomplete the repairs recommended by the insurer's engineer ortender the policy limits to the policyholder;

(4) In order to prevent additional damage to the building orstructure, the policyholder must enter into a contract for theperformance of building stabilization and foundation repairs within90 days after the insurance company confirms coverage for thesinkhole loss and notifies the policyholder of suchconfirmation;

(5) After the policyholder enters into the contract for theperformance of building stabilization and foundation repairs andsubject to the terms and conditions of the policy, the insurer willpay the amounts necessary to begin and perform such repairs as thework is performed and the expenses are incurred. The insurer maynot require the policyholder to advance payment for such repairs.The insurer may make payment directly to the persons selected bythe policyholder to perform the land and building stabilization andfoundation repairs. The decision by the insurer to make payment tosuch persons does not hold the insurer liable for the workperformed;

(6) The policyholder may not accept a rebate from any personperforming the repairs specified in this section. If a policyholderdoes receive a rebate, coverage is void and the policyholder mustrefund the amount of the rebate to the insurer. Any person makingthe repairs specified in this section who offers a rebate commitsinsurance fraud punishable as a Class E felony;

(7) The stabilization and all other repairs to the structureand contents must be completed within 12 months after entering intothe contract for repairs unless: (A) There is a mutual agreementbetween the insurer and the policyholder; (B) The claim is inlitigation; or (C) The claim is under appraisal or mediation;and

(8) Upon completion of any building stabilization orfoundation repairs for a verified sinkhole loss, the engineerresponsible for monitoring the repairs shall issue a report to theproperty owner which specifies what repairs have been performed andcertifies within a reasonable degree of professional probabilitythat such repairs have been properly performed. The engineerissuing the report must file a copy of the report andcertification, which includes a legal description of the realproperty and the name of the property owner, with the county clerkof the court, who must record the report and certification. Thisprovision does not create liability for an insurer based on anyrepresentation or certification by an engineer related to thestabilization or foundation repairs for the verified sinkholeloss.

Under the bill, any claim, including, but not limited to,initial, supplemental, and reopened claims under an insurancepolicy that provides sinkhole coverage, would be barred unlessnotice of the claim was given to the insurer in accordance with theterms of the policy within one year after the policyholder knew orreasonably should have known about the sinkhole loss.

Another change would affect the present Tennessee law thatprovides that no insurer may fail to renew any policy of propertyinsurance on the basis of filing of claims for partial loss causedby sinkhole damage or clay shrinkage, as long as the total ofpayments does not exceed the current policy limits of coverage forproperty damage; provided, that the insured has repaired thestructure in accordance with the engineering recommendations uponwhich any payment or policy proceeds were based.

The bill would revise this provision to instead provide that noinsurer may fail to renew any policy of property insurance on thebasis of filing of claims for partial loss caused by sinkholedamage or clay shrinkage, as long as the total of payments does notequal or exceed the current policy limits of coverage for thepolicy in effect on the date of loss for property damage to thecovered building, or if the insured has repaired the structure inaccordance with the repair engineering recommendations of theengineer retained or approved by the insurer and upon which anypayment or policy proceeds were based. If the insurer pays suchlimits, it may elect not to renew the policy.

The bill defines “sinkhole loss” as structural damage to acovered building caused by sinkhole activity. The bill defines“structural damage” as a covered building that has experienced atleast one of the following:

(1) Interior floor displacement or deflection in excess ofacceptable variances that results in settlement related damage tothe interior such that the interior building structure or membersbecome unfit for service or represents a safety hazard; or

(2) Foundation displacement or deflection in excess ofacceptable variances that results in settlement related damage tothe primary structural members or primary structural systems thatprevents those members or systems from supporting the loads andforces they were designed to support.

One of the primary sponsors of the bill, which has been placedon the House calendar for February 20, 2014, is StateRepresentative Roger Kane (R-Knoxville), who also works as aninsurance agent.

On January 27, 2014, the Tennessee Senate passed a companionbill, SB 880, as amended.

The bill passed by the Senate made various changes to SB880 andwould make changes to present Tennessee law concerning insurancecoverage for sinkhole loss. Generally, the amendment retained thebill's requirements that consumers must contract for buildingstabilization and foundation repairs within a set amount of time ofan insurer approving a claim for sinkhole loss or the value of theclaim will be limited to the cash value of the sinkhole loss to theresidential building.

The amended bill passed by the Senate would restore the presentlaw requirement that property insurers must offer sinkhole losscoverage but specifies that sinkhole loss coverage is not amandatory provision in a property coverage policy.

The amended bill passed by the Senate would require insurers toobtain a written certification from an engineer or geologist thatclaimed damage was not caused by sinkhole activity before denying aclaim when the insurer concludes, after an initial inspection, thatdamage to a covered building is inconsistent with, rather thanconsistent with, sinkhole activity.

The amended bill passed by the Senate also would make varioustechnical changes to SB 880 such as adding to the defined termsthat apply to sinkhole loss coverage, changing the effective dateof the bill to July 1, 2014, removing the felony offense forpersons who offer rebates in conjunction with making repairs tostructures that are damages by sinkholes, and removing therequirement for filing an engineer's report with the county clerkat the conclusion of making repairs to structures for damage causedby sinkholes.

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