One of the toughest places in the Sunshine State to buy homeowners' insurance is South Florida where three hurricanes made landfall in the past two years while two other storms sideswiped the coast. The same goes true for Southwest Florida that was likewise rocked by two hurricanes in the 2004 and 2005 hurricane seasons. But with all the rhetoric in the recently concluded legislative session it largely went unnoticed that the area where homeowners find it most difficult to find private insurance is roughly 50 miles north of Tampa in Pasco and Hernando counties. Here, residents have been spared the damage from Hurricanes Wilma, Charley, and Frances. But while having avoided the damage from hurricanes, the two counties have encountered their own storm, namely a hurricane of sinkhole claims.
A Bane for Insurers
In a way, sinkhole claims present an even greater problem for insurers than other claims including hurricanes where the cause of the damage is readily apparent. Sinkholes are geological depressions caused when water erodes underground caverns and the land above shifts or collapses damaging homes and other buildings. The reason Pasco and Hernando counties have the highest number of claims is that the geological conditions are most favorable for the development of a sinkhole. The land surface and the supporting sand and clay layers are thin, leaving the limestone base close to the surface. Due to the composition of the soil, if the water table drops or water erodes the limestone layer, a depression can quickly form resulting in the total destruction of a home within days. Geologists have a good idea where sinkholes are likely to form, but it's much more difficult to accurately predict where sinkholes will occur.
In a 2005 study requested by lawmakers, Florida State University researchers chronicled the meteoric rise in sinkhole claims. In 1992, sinkhole claims were responsible for 0.05 percent of a homeowner's premium. A decade later the portion of a homeowner's premium attributable to the sinkhole risk increased to 3.7 percent. Although sinkholes represent a small number of insurance claims, each sinkhole can cost thousands of dollars to investigate and repair. That is not to mention the legal cost if the claim is disputed in court, where the burden is always on insurers to prove a claim is not caused by a sinkhole, which can be a formidable challenge.
At issue is whether the damage is caused by a sinkhole that is required to be covered under a homeowners' policy as opposed to the settling of a home, which is not covered. For homeowners, understanding the distinction between these two types of damage is confusing and often results in homeowners concluding that insurers are just splitting hairs to avoid paying a claim. Finding an equitable way to resolve this dispute became a top priority of the legislature this year.
A Legislative Solution
The sinkhole issue was not a new one to lawmakers. For several years it has been a serious topic, but somehow it was always overshadowed by other more high-profiled issues. Among other things, lawmakers considered creating some kind of quasi-state facility to pool sinkhole risks, which would either directly insure homeowners' potential sinkhole exposure or operate as a reinsurer. Lawmakers shied away from such ideas, however, since they likely would have had to include a policyholder assessment component. Given the assessments needed for Citizens and the Florida Hurricane Catastrophe Fund, the last thing lawmakers wanted to do is create another possible burden on homeowners.
Enter Fasano and Rep. John Legg (R-Port Richey) who took advantage of the property debate to push through a comprehensive sinkhole reform bill. Awaiting Gov. Jeb Bush's signature, the legislation contains a number of provisions, the most important of which establishes an alternative dispute resolution process that is designed to reduce the amount of litigation.
The process employs the use of a "neutral evaluator," which may be a professional engineer or professional geologist. Lawmakers appropriated $300,000 so that the Office of Insurance Regulation could create a panel of evaluators that must complete a course on the process and are deemed to be fair and impartial. Under the process, if an insurer or policyholder elects to use an evaluator the process is mandatory, but non-binding. The two parties must agree on the evaluator or the OIR will designate one after 10 days. The insurer is required to pay the cost of the evaluator and the conference must be held within 45 days of being formally requested.
The hope is that the neutral evaluation process will create the conditions for resolving a claim without relying on a civil suit. However, since the evaluator's findings are non-binding, either the policyholder or insurer may file suit in court if they disagree with the evaluator's findings. Significantly though, the evaluator's report is admissible in the court's proceedings. The report is required to include whether the damage to a home was or was not caused by a sinkhole, and the estimated cost of stabilizing the land and repairing any damage to the home.
Fasano said the legislation would not penalize homeowners with legitimate sinkhole claims. However, he predicts it will reduce lawsuits in questionable cases. In recent years, the few insurers that still provide homeowners' coverage in the affected areas have paid settlements in sinkhole cases merely because it is cheaper than going to court. Anecdotally, there are stories of homeowners who received tens of thousands of dollars in damages from sinkhole settlements only to turn around and sell the house instead of using the money to make repairs. "I think this law will have a great impact in helping insurers avoid going to court and help consumers get better rates," he said.
Per usual, the bill caused a predictable battle between the industry and attorneys. In Pasco and Hernando counties, attorneys have created a cottage industry that focuses heavily on sinkhole claims. In fact, on U.S. 19, which runs through the area, attorney billboards have sprung up advertising for sinkhole claims. Other attorneys are using more traditional means with some lawyers relying on online marketing campaigns. Predictably, attorneys blasted the bill, saying it represented another major victory for the industry that will come at the expense of homeowners.
Legg said attorneys objected to the bill from the beginning. What Legg wanted was to eliminate insurer paid attorney fees. However, as a compromise, the final bill included a provision included several attorney fee provisions. The provision makes insurers liable for up to $2,500 in attorneys' fees for participating in the neutral evaluation process if the evaluator finds the repair costs will exceed the amount an insurer has offered a policyholder to settle a claim. Attorneys can also collect fees in civil cases where a judge rules a policyholder should receive a greater award than offered by an insurer.
Even so, Legg said that hopefully the bill would be a major step forward to relieving the sinkhole crisis. "We hope the bill gives insurers more comfort to start writing policies here again," he said.
Rate Decreases Promised
While insurers embrace the concept of reducing litigation and creating a more stringent scientific method to help answer that troublesome question of whether a damaged home was the result of a sinkhole or the normal settling of the property, the bill does require a quid pro quo from the industry. Under the legislation, the OIR is required to commission an actuarial study by Sept. 1, which will determine a rate factor to reflect the estimate savings anticipated by the implementation of the bill. Insurers would then have to file new rates by Oct. 1, which would reflect the OIR's findings. Legg said the provision is only fair since insurers should benefit from the reforms. "We don't want to be sitting here two years down the road with insurers still evaluating the impact of the law," he said.
The bill also includes a provision where policyholders can choose deductibles of one percent, two percent, five percent, and 10 percent, which would be applicable to sinkhole damages. Through premium credits, the deductibles allow policyholders some control over their premiums. Even with the passage of the bill, however, it may be sometime before insurers are motivated to start writing policies in Pasco and Hernando counties. And if the insurers are so inclined that still leaves the question of how much the potential hurricane losses may influence their decision. "Most insurers don't want to take any more wind risks," said Florida Insurance Council Vice President Sam Miller.
Also hanging in the balance are the recent rate increases be sought by Citizens. The residual insurer has requested a proposed 65 percent rate increase in Pasco County and an 86 percent increase in Hernando County. It is just another reminder that hurricanes aren't the only natural event causing distress in Florida's depressing property insurance market.
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