Florida Lawmakers Seek Ways to Curb Sinkhole Losses

Florida lawmakers are trying to address the cost of sinkhole claims, which state officials and insurers say are driving up property insurance rates and could threaten the solvency of some domestic insurers if not brought under control.

The Senate Banking and Insurance Committee issued a report recently that reiterated the findings of the Office of Insurance Regulation and Insurance Commissioner Kevin McCarty that found that sinkhole claims have nearly quadrupled between 2006 and 2010 statewide—including in counties that have not in the past been know for having many.

The report recommends a statute of limitations on the filing of property claims, improvements in the state’s building code, a better definition of structural damage for a claim, limiting the scope of sinkhole coverage or making it optional, and putting some restrictions on the advertising and fees of public adjusters.

The report also recommends that the state consider creating a facility to help handle sinkhole claims and repairs.

The committee, chaired by Sen. Garrett Richter, R-Naples, held hearings this week on possible legislation.

The insurance industry is encouraged by lawmakers’ attention to the issue.

“The Senate report provides independent support for the alarm which has been raised by Insurance Commissioner Kevin McCarty before the Cabinet two months ago and by the insurance community over the last year. It is alarm about a crisis in which rates are going up, some insurers are going bankrupt and an already fragile market is facing erosion from claims which do not involve real sinkholes, but produce comparable large insurance settlements, sometimes policy limits,” said Sam Miller, executive director of the insurers’ Florida Insurance Council.

Some of the recommendations to address sinkhole claims were contained in broad property insurance legislation that passed the House and Senate last year but was vetoed by then-Gov. Charlie Crist.

But insurers believe that lawmakers are ready to try again to pass property insurance reforms under new Gov. Rick Scott.

A committee vote on some of statutory recommendations issues regarding sinkholes could come as early as Jan. 24, according to Sam Miller, executive director of the insurers’ Florida Insurance Council.

Miller said insurers thinks lawmakers will “guarantee quick help for a homeowner whose house is swallowed up by a sinkhole, but no longer allow public adjusters, attorneys specializing in sinkholes and uninformed or unscrupulous homeowners to get a windfall of tens or even hundreds of thousands of dollars over minor cracks in their driveway or a corner of their garage.”

However, it could take longer for another Senate report recommendation—to create a state facility to handle sinkhole claims and repairs— to be considered.

Insurers generally support the legal changes but some have qualms about the state facility idea.

Private insurers told OIR that the sinkhole claims increased from 2,360 in 2006 to 6,694 in 2010, totaling 24,671 claims throughout that period. Total sinkhole claim costs for these insurers amounted to approximately $1.4 billion for the same period.

Of the total sinkhole claims reported to the OIR, 66 percent of the claims were concentrated in the three sinkhole-alley counties, Hernando, Pasco, and Hillsborough. However, the OIR study found that sinkhole claims have also increased in areas generally not subject to sinkhole activity, like Miami-Dade and Broward counties.

The state-backed property insurer, Citizens Property Insurance, has also been hit hard. The sinkhole claims frequency ratio at Citizens more than doubled between 2006 and 2009. In 2009, Citizens reported incurring over $84 million in sinkhole losses and expenses, yet obtained only $19.6 million in earned premium to cover those costs. The losses represent almost four times the amount of premiums collected from the insurers’ policyholders for sinkhole coverage, yet the company’s rates are capped, and cannot be increased by more than approximately 10 percent per year for any policyholder.

Florida Insurance Commissioner Kevin McCarty has called sinkhole claims a major cost driver of insurance rates and, the Senate report notes, has expressed concern that such claims could threaten the solvency of domestic insurers and have a significant destabilizing effect on an already fragile market. McCarty has said he suspects that many sinkhole claims are questionable and that public adjusters and others are gaming the system.

In Florida, every insurer must make sinkhole coverage available, for an additional premium. The report found that the statewide average sinkhole premium charged by Citizens in 2009 was $73 but that figure varies a lot by location. For example, in 2009, the average sinkhole premium in Pasco County was $944; Hernando County, $775; Hillsborough County, $98. The average sinkhole premium for the remainder of the state (excluding Pasco, Hernando and Hillsborough) was only $22.

However, the Senate report notes, that actual premium that Citizens charges is only a “small part “of Citizens’ actual sinkhole costs because Florida law prohibits Citizens from increasing the rate of any policyholder by more than approximately 10 percent, even as losses continue to rise at a much faster pace.

Topics Florida Carriers Legislation Profit Loss Claims Property