If you’re a Tampa Bay homeowner, or considering buying a home in Tampa Bay, by now you’ve probably gotten an unexpected education on sinkholes and if you haven’t, you’re about to. Before I dive deep into this topic, I want say that I’m not a registered insurance agent, and you should always consult directly with your insurance agent for specific questions and concerns, but because we’re working with Buyers in Tampa Bay on a daily basis, this is continually a topic of conversation and one I follow with interest. Additionally, most of the data for this article was taken from Florida Office of Insurance Regulation’s report, “Report on Review of the 2010 Sinkhole Data Call”. If you ever have trouble falling asleep at night just pick a copy of this legal thriller and you’ll be fast asleep in minutes.
Sinkholes have become the latest hotly debated topic in the Florida insurance industry thanks to recent law changes, which are leading to reform in sinkhole coverage for homeowners. Citizens Insurance, the state run insurance company is set to raise sinkhole coverage rates by 50%, Citizen’s Board Approves Sinkhole Rate Increase, and looking for additional rate increases in the future.
First, all insurance companies offering homeowners insurance in Florida are legally required to provide
“Catastrophic ground cover collapse” means geological activity that results in ALL of the following:
1. The abrupt collapse of the ground cover;
2. A depression in the ground cover clearly visible to the naked eye;
3. Structural damage to the building, including the foundation; and
4. The insured structure being condemned and ordered to be vacated by the governmental agency authorized by law to issue such an order for that structure.
Note the “...that results in all of the following:”, so all of those conditions need to be met for your standard homeowners policy to cover the loss. So how is a “sinkhole” different than “catastrophic ground cover collapse”?
Well, the legal description of a sinkhole according to Florida Statutes is....
“Sinkhole” means a landform created by subsidence of soil, sediment, or rock as underlying strata are dissolved by groundwater. A sinkhole may form by collapse into subterranean voids created by dissolution of limestone or dolostone or by subsidence as these strata are dissolved.”
So now you’re thinking, great, two definitions I barely understand, what does that mean in terms of my homeowners insurance. Well, between 2006 and 2010 only 1.1% of closed sinkhole claims fell under “catasrophic ground cover collapse”, which means 98.9% of claims would not have been covered with your standard homeowners policy, they would have needed a specific sinkhole rider, addenda, or language to be covered.
Tampa Bay homeowners are especially sensitive to the topic because many homes in the Tampa area cannot obtain sinkhole coverage. Why is it so difficult in Tampa? According to the Florida Office of Insurance Regulation (FLOIR), 78.4% of all sinkhole claims in 2010 came from four Tampa area counties, Hernando, Pasco, Hillsborough, and Pinellas.
Source: Florida Department of Insurance 2010 Sinkhole Data Call
Here’s the kicker, all insurance companies licensed in Florida are required to offer sinkhole coverage, see Florida Department of Financial Services, yet in the Tampa area it’s difficult to attain coverage. How’s that possible? Well, I’m not a lawyer, but I think the keyword here is “offer”. Insurance companies are “offering” coverage, but if you want coverage, you’ll be required to have your home inspected for potential sinkhole risks, which will cost you about $70 to $100, and if the home fails the inspection, you’ll be denied coverage.
How does a home fail a sinkhole inspection in terms of qualifying for coverage? The underwriting guidelines are different for each insurance company, but Security First provides a list of common reasons a home might fail, including, be located on any body of water, and my favorite “Any cracking in any location - dwelling, foundation, garage, driveway, sidewalks, pool deck, etc.”, come on, really? Show me any home in Florida that does not have some sort of cracking. In fact show me any home anywhere that doesn’t have some sort of cracking. I don’t think there’s a home in the entire state that would pass this inspection. Here’s link to the complete list, Security First Sinkhole Loss Coverage Disclosure Form.
Citizens Insurance, the state run insurance company, automatically requires an inspection in 16 counties (Alachua, Citrus, Hamilton, Hernando, Hillsborough, Lake, Manatee, Marion, Pasco, Pinellas, Polk, Seminole, Sumter, Suwannee, Wakulla, and Washington). See page 7 in their Rules of Practice for Homeowners. I could not find any specific information on the criteria Citizens uses in its inspections to determine whether a home passes or fails an inspection, but I’ve heard one of the main criteria is that if there has been any sinkhole activity within a mile radius of the home, you’ll be denied sinkhole coverage. Citizens has a sinkhole FAQ page on their website that is helpful in answering some general questions, Citizens Sinkhole FAQs.
Why have sinkholes become some such a huge issue for the insurance industry? Well, from 2006 to 2009 sinkhole related insurance claims rose by over 300%, going from 2,360 claims in 2006 to 7,244 claims in 2009, that’s a huge increase in three years. According to FLOIR, the average cost to the insurance company for inspecting a sinkhole claim in 2009 was $8,004. So even if the claim is invalid, denied, or fraudulent, it cost the insurance company $8,004 just to determine its validity.
Why have claims risen by so much? Insurance companies believe it’s primarily due to fraudulent and frivolous claims. It was not until recently that homeowners were legally required to use the money received from a sinkhole claim to actually fix the home. In the past the homeowner could essentially take a big fat check and walk away from the home without fixing it. I’m sure it doesn’t help that from 2006 to 2010 Florida experienced probably its worst housing crisis in history.
The problem, at least in my opinion, is that insurance companies, instead of addressing the underlying problem of fraudulent and frivolous claims, have just stopped providing coverage for Tampa homeowners, which punishes the good and bad. If frivolous claims are truly the problem, why not provide the coverage but require a deductible, like we have with Hurricane riders? If a homeowner had a 10%, or $10,000 deductible, on a sinkhole claim, I’m guessing they would think twice about filing a frivolous claim. Then at least Tampa homeowners have at least some sort of protection against large sinkhole claim.
So, how can Tampa homeowners protect themselves against sinkhole? That’s a good question, start by first speaking to your insurance agent and exploring all possibilities. If you’re buying a home and want to make sure you’ll be able to attain sinkhole coverage on your home, speak with your real estate agent about using an Insurance Addendum on your purchase contract.
As end note, I’d like to send out a huge thank you to Nona Camposano with Towne Center Insurance Agency, she was fantastic in helping me research this topic, I could not have done it without her assistance. If you’re in the market for homeowners insurance I highly recommend giving her a call. Her direct line is (813) 775-4100 ext. 16.