Insurance and Sinkholes

There are several non-insurance services that must be considered in order to effectively manage the Florida sinkhole exposure. The first relates to training, communication, and education for the public, engineers, the construction industry, insurance professionals, and others. Examples of the types of material and activities used for these purposes are provided in the analysis of the CEA, NFIP, and mine subsidence funds in Section IV. It is suggested that these functions be performed by a single organization in order to minimize duplication of efforts and inconsistencies in information. Further, it is likely that there will be economies of scale if the information is produced by a single organization.

One suggestion for these services would be the use of an entity such as the Florida Geological Survey. This entity has technical expertise in the area of sinkhole issues. Further, by housing the services independently from a potential sinkhole facility, services would not be interrupted in the event the financing mechanism for sinkholes is altered.

Another significant issue relates to the identification and adjustment process for sinkhole claims. Based on the findings of the “Sinkhole Summit II” and a subsequent meeting on remediation, both of which are discussed in Section IV, it appears that the creation of a uniform adjustment process may decrease the number of sinkhole claim disputes as well as the total costs associated with these claims.

The participants of the “Sinkhole Summit II” suggested that specific protocols be used in the identification of sinkholes. However, they also emphasized that good professional judgment will dictate testing in each case. Similarly, in a remediation seminar, several suggestions were made to aid in the development of uniform remediation standards. Key issues arising from that discussion include:

1. The need for remediation to be based on scientific determination by a 12 Executive Summary-Non-Insurance Sinkhole-Related Services
   qualified professional;
2. The need for further advances in remediation technology; and (3) the need to improve the quality of a sinkhole database.

One method to achieve the increases in uniformity of the identification and claims adjustment process is to centralize the sinkhole claims function. States such as Illinois have used this approach for mine subsidence. Illinois currently uses designated adjusters along with a team of geologists and engineers employed by the Illinois Mine Subsidence Fund for the adjustment of claims. This allows for increased assurance that the claims will be adjusted in a fair and consistent manner. If those involved in the process also effectively communicate with the insureds, this process also should reduce the number of claims disputes.

A final issue surfacing from the “Sinkhole Summit II” involves the need to clarify the definition of a sinkhole to more accurately describe the geological event occurring. Also of concern was the precise meaning of the phrase “sinkhole activity.” By tightening the definitions in the statutes and implementing uniform adjustment procedures, the hope is that the number of claims disputes can be reduced.

In addition to the issues cited above, there are certain consulting services that would assist Florida insurers in the coverage of sinkholes. One such service relates to the collection of sinkhole data. These data will aid insurers in the pricing of coverage. Further, it will assist those tasked with the identification and adjustment of claims in a timely and effective manner. There are two reasons for housing this service independently of a potential residual market mechanism. First, the services could continue uninterrupted even if the sinkhole financing mechanism changes. Second, by centering these services in an entity with added background in the geotechnical issues related to sinkholes, it would allow a potential residual market facility to focus solely on the insurance-related issues. This function was originally performed by the 13 Executive Summary-Non-Insurance Sinkhole-Related Services Florida Sinkhole Research Institute. Since its dissolution, there has been no centralized collection point for sinkhole activity. The FGS currently collects data on an ad hoc basis. The FGS database is likely to be incomplete based on the lack of required reporting as well as financial and personnel constraints at the

Insurance Companies and Sinkhole “Areas”

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 Your insurance company may increase the amount of your now additional sinkhole premium if you live in what the company designates a high-risk area.  Some areas of Florida are especially prone to sinkholes opening up during storms or during especially dry spells.  A state-sponsored and created database has put together maps of activity and found that some counties are especially prone to damage.  Your insurance company might even base your premium on the number of sinkholes that have opened up in a few mile radius of your location.  In short, it’s up to them.

 For instance, if even a single sinkhole opened up within a mile of your property, a significant increase in the cost of the (now additional) sinkhole premiums will increase dramatically.  As new sinkholes open up in the area, those extra premiums may continue to increase from year to year, too. 

 You could even be denied coverage.  The new insurance law that becomes effective after June 1, 2007, allows companies to deny coverage to those who’ve had sinkhole problems in the past or live near others with such claims.  The latter part is especially unfortunate since sinkholes are, themselves, isolated incidents that have only a similar soil profile in common.

 The statute requires the additional sinkhole coverage to be offered at “fair market value.”  However, it is good to remember that the insurance industry exists, first and foremost, to make money.  Covering sinkhole damage in a state beset by such activity is no exception.  If sinkhole damage is on the rise, along with other losses in the state, then you’d expect something to have to give.  The legislature is giving the insurance industry the ability to charge an extra premium on sinkhole coverage when the new law goes into effect on June 1, 2007.

 Of course, insurers base their rates on actuary tables, or lists of how much they’re likely to pay out based upon the history of your area or more generally, just about any trait you might share with someone who as ever had an insurance policy.  The State of Florida doesn’t tell the companies how to structure their premium charges -- only what coverage must be granted in a basic, bare-bones policy.

 Researchers have noted a significant increase in sinkhole activity over the last decade.  The causes of this are related, in part, to the dramatic increase in the population from the people who come from everywhere – young and old.  Population pressure causes more water to be pumped out of the aquifers.  Also, increasingly chaotic weather causes longer droughts, colder snaps and more severe weather events in general.  This stresses the rock below, causing it to cave in more easily.

 Not knowing precisely what was causing such a dramatic increase in this very expensive problem, the legislature voted to create a state database and map of sinkholes by legislating they be reported to a state office.  Florida has maintained a database of sinkhole activity since 2002 through the Florida Geological Survey of the Department of Environmental Protection. 

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 As sinkhole activity has increased in Florida, reporting and mapping have been part of the quest to understand why. 

The maps generated from this data have very quickly shown certain areas of the state to be especially prone to sinkholes.  While the entire state is capable of producing sinkholes, the west-central portion of the state has especially thin soils – with limestone coming up to the surface in some places -- causing many small sinkhole events that can cause structural damage to your home, even if it’s still on what seems to be firm ground.

This is supposed to be a matter of scientific inquiry and public good, but since this information is public record, insurance companies are privy to any and all confirmed and reported cases of sinkhole activity in the state.  They can use this information to extract much higher rates for coverage or even refuse to renew policies in the west-central counties.

Those who live in areas of high sinkhole activity will want to find out from their insurance agent whether they live in an area of high sinkhole risk.  Moreover, checking your home for sinkhole damage now may help you spot damage in time to claim it before the new rules take effect on June 1, 2007.  Acting quickly could save you tens of thousands of dollars or severe damage to your property.

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