New Florida law covers sinkholes: geological threat most prominent in Pasco, Hernando counties.

Asked recently to list some of the biggest factors behind rising insurance costs, Florida Insurance Commissioner Kevin McCarty named the usual suspects, including the rising price of reinsurance and the overall economic downturn. However, he also mentioned something that most residents rarely ever see or think about: Sinkholes.

In a report to the Florida Cabinet, McCarty said that in some respects sinkhole claims present an even greater problem for insurers than other claims, including hurricanes where the cause of the damage is readily apparent. The problem is not just the sinkhole claims, but also the cost on insurers to investigate homeowners' claims for possible sinkhole-related damage. Testing for sinkholes and repairing damage, even in non-catastrophic cases, can cost well over $100,000. McCarty noted that insurers' complaints over sinkhole claims are not over legitimate claims, but rather the price of investigating an increasing number of complaints that may have more to do with normal ground settlement than with sinkholes.

Sinkholes are geological depressions caused when water erodes underground caverns and the land above shifts or collapses damaging homes and other buildings. While sinkholes can happen anywhere, two Florida counties make up more than 80 percent of claims--Pasco and Hernando, both north of Tampa. Those two counties harbor geological conditions that 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.

However, insurance companies say there is another reason why so many sinkhole claims are being filed in Pasco and Hernando: Aggressive plaintiff attorneys and property appraisers who are too quick to blame sinkholes for any structural damage to a home.

Bruce Douglas, chairman of Citizens Property Insurance Corp., the state-run insurer that is the only major company writing policies in the two counties, said the region's rapid growth in new homes and increased pumping of groundwater could be creating more sinkholes. However, he also thinks that "vigorous attorney action" has more to do with claims in Pasco and Hernando than the area's geology.

Legislative Relief

To help entice more insurers back into the market and reduce the load on Citizens, the state legislature passed a law in June directed at homeowners in Pasco and Hernando. New homeowners' insurance policies in those two counties will no longer automatically include comprehensive sinkhole coverage. Rather, homeowners there will have to specifically request and pay for comprehensive coverage when they renew old policies or buy new ones. Otherwise, they will get what is called "catastrophic ground cover collapse coverage," which only pays after a house has been damaged so badly by a sinkhole that it has to be officially condemned, something that rarely happens.

Homeowners in the rest of the state will still automatically get the comprehensive coverage unless they decide they do not want to pay for it and opt out.

The bill, which becomes law January 1, also requires insurers to consider local ordinances relating to sinkhole mitigation when setting insurance rates. These ordinances will be subject to a Florida Building Commission review over a four-year period. The bill further requires the Florida Financial Services Commission to create a building code grading schedule that evaluates the effectiveness of sinkhole loss prevention ordinances in reducing the number of sinkholes and the severity of sinkhole losses.

"We think this is a positive development and a good move in dealing with sinkholes," said Sam Miller, executive vice president of the Florida Insurance Council. Miller said Citizens already has been selling property homeowners in Pasco and Hernando policies insurance riders that include sinkhole coverage, and the new law will allow private insurers to do the same. "This is a significant law because the sinkhole claims have become a big drain on insurers," Miller noted.

Allowing property homeowners to buy catastrophic ground cover collapse coverage should help keep costs down. The coverage was created during the 2007 legislative session as an alternative to sinkhole insurance. It does not provide reimbursement for losses due to the mere settling or cracking of a foundation, structure or building. Catastrophic ground cover collapse includes geological activity resulting in:

* The abrupt collapse of the ground cover that is clearly visible to the naked eye;

* Structural damage to the building and its foundation; and

* The insured structure being condemned and ordered vacated by the appropriate governmental agency.

Uncertain Outcomes

While the Florida Office of Insurance Regulation (OIR) supported the bill, it is unsure of its immediate effects. "We can't really forecast what the impact will be," said OIR Spokesman Tom Zutell. "There are several items in the legislation that are required to happen, but have not happened yet. We have no idea how many policyholders will buy back the sinkhole endorsement."

K.C. Williams III, an attorney who specializes in sinkhole disputes with insurers, said property owners should be careful with the new law. "When it comes to insurance policies, like many things in life, cheaper is not always better," said Williams, whose web site is www.sinkholelawyer. com. "Often less expensive coverage equates with less inclusive coverage. A new Florida sinkhole insurance law, created on the premise of reducing costs for the insured and insurer alike, will likely actually result in additional economic strain for already struggling property owners," Williams said.

"Ultimately, property owners are caught between a rock and a hard place--they either resign themselves to paying higher premiums for expanded coverage, or they get stuck paying for costly repairs when sinkholes damage their homes or businesses and their foundations."

Ted Corless, founder of Corless Zinober law firm in Tampa, has represented insurance companies and handled numerous sinkhole damage claims. He said the new law will have a dramatic negative effect on homeowners.

"The cost of sinkhole repair can be absolutely catastrophic, and if you don't have the coverage your house is almost worthless," Corless said. He worries that too many homeowners will drop sinkhole coverage on renewal, leaving them in a bad situation if their homes are damaged. "Sinkholes are to Florida what forest fires are to southern California," Corless said. He recommends annually using a video camera to track the progress of any cracks throughout a home, and requesting sinkhole protection when renewing insurance coverage.

The Tampa Tribune Editorial Board was even more brutal in its attacks on the new law. "Once again, property owners in sinkhole-prone Pasco and Hernando counties are getting shafted by the governor and Legislature," the paper wrote. "These residents have done nothing to deserve such shameful treatment. It is not their fault that many live atop shaky ground, which was often ignored by developers and local officials alike. Homeowners who trusted the permitting system to ensure their homes were built safely now see their investment jeopardized. They should not be punished when they file claims for standard sinkhole damage."

However, State Sen. Michael Fasano (R-New Port Richey), who helped write the bill, said it is modeled after the successful pilot program tested by Citizens and that it will benefit homeowners. "That program has worked very well," Fasano said, noting that Citizens' overall property insurance premiums decline by half when sinkhole coverage is dropped. Average insurance rates in non-coastal areas of Pasco County fell from $2,505 to $1,090 when policyholders dropped sinkhole coverage. In Hernando County, rates have fallen 44 percent, from $1,712 to $961. Statewide, Citizens' policyholders have seen an average 7.8 percent rate cut after dropping sinkhole coverage, company officials said.

Fasano said sinkhole coverage is often just bells and whistles and that catastrophic collapses, such as those that swallow homes, are covered under homeowners' policies even if there is no specific sinkhole coverage. "If you want to have the cracks in your driveway, cracks in your drywall-type coverage, that's what we call the bells and whistles. And you're going to have to pay extra for that," he said.