Could Sinkhole Claims Sink Florida Insurers?

December 5, 2010

A new state report confirms sinkhole insurance claims are rising in Florida, costing insurers millions of dollars in payouts and expenses, cropping up in counties where they have not been a problem in the past, and showing no signs of abating.

For the years 2006 through 2010, sinkhole claims have cost Florida property insurers $1.4 billion- and that figure could top $2 billion by the end of this year, according to a report from the Office of Insurance Regulation (OIR). For the years 2006 through 2010, the 211 insurers surveyed reported a statewide total of 24,671 claims, both open and closed.

Insurance Commissioner Kevin McCarty told a Florida Cabinet meeting last month that “the evidence is overwhelming” that sinkholes are an insurance problem.

“Our state has had many challenges over the years,” McCarty said. “Now we have a new set of challenges.”

The cost and number of these claims have been rising every year. Insurers paid $209 million in 2006, a number that was up to $406 million in 2009. The number of claims has tripled, going from 2,360 in 2006 to 3,842 in 2007, 4,531 in 2008, and 7,244 in 2009. Already in 2010, there have been 6,694 claims reported-which OIR estimates is only three-quarters of what will be filed by year’s end.

The claims are also spreading geographically, according to OIR. Not surprisingly, two-thirds can be traced to three counties: Hernando, Pasco and Hillsborough, often referred to as Sinkhole Alley. But now claims are coming in greater numbers from Miami-Dade and Broward counties. For 2006 to 2009, these two counties represented only 2.9 percent of total claims but thus far in 2010, they account for to 4.2 percent. Not only is the number of claims in these two counties on the rise, but the total losses and expenses are also up, a trend that the report describes as “statistically significant due to the fact that this area is generally not subject to sinkhole activity.”

More than 88 percent of the reported claims have occurred in the following counties: Hernando, Pasco, Hillsborough, Pinellas, Marion, Polk, Orange, Citrus, Alachua, Volusia, Broward, Seminole and Miami-Dade.

McCarty said only a small fraction or about one percent of the claims are catastrophic and render the homes uninhabitable. Many of the claims involve cracks in foundations and driveways, often related to houses settling. The majority are settled for between $30,000 and $40,000 but even ones that do not involve payouts affect insurance costs, McCarty noted, because insurers must still test and drill on the properties to verify there is no major sinkhole threat, and these tests can cost as much as $15,000 each.

McCarty said the OIR has been unable to determine how many of the claims are legitimate and how many have been drummed up by advertisements by public adjusters but he did say, “[T]here is a correlation with increased participation of public adjusters.”

McCarty cited sinkholes as one of the major cost drivers of insurance premiums in the state, along with the cost of reinsurance, the state’s replacement cost methodology, and fraud related to reopened claims and bogus discounts for storm mitigation efforts.

Attorney General Bill McCollum asked McCarty if there is anything that could be done other than raise premiums to cover the claims.

McCarty said his department is looking “on many fronts” including possibly changing policy language regarding the definition of structural damages. He also said some people have suggested the creation of a sinkhole insurance fund or a facility to do some of the engineering reports or repairs needed.

The state’s largest property insurer, Citizens Property Insurance, cited the cost of sinkhole claims in requesting a rate increase for next year. Citizens said it took in $19.6 million in premiums for sinkhole coverage in 2009 but has paid out $97 million in claims costs.

The OIR report noted that Citizens and one other large insurer have begun giving policyholders the option of dropping sinkhole coverage.

In other business, the Cabinet approved a change in the property insurance mitigation discount form to require that inspectors (other than licensed engineers) who sign an inspection form must personally inspect the property or face hefty penalties and possible criminal prosecution. The change was mandated by new legislation passed in 2010.

McCarty also reported on second quarter financial results of insurers writing property insurance in Florida. He said the picture remains consistent with the first quarter. For the two quarters, 125 of 199 carriers reported a net increase in surplus, while 74 reported losses. About 58 percent lost money on underwriting, while 42 percent managed an underwriting profit.

McCarty, whose OIR appointment is subject to approval by incoming Gov. Rick Scott, newly-elected CFO Jeff Atwater and the Cabinet, said he hoped he would still be in office come January but acknowledged that it could be his last Cabinet appearance and thanked the members for the opportunity to serve.

Outgoing Gov. Charlie Crist thanked McCarty for doing an “extraordinary” job.

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