Impact of sinkhole changes in Florida Senate Bill SB 408
The sinkhole issue is the most controversial component of a property insurance reform measure that lawmakers are trying to pass again this session. Since the last major hurricane, Wilma, hit Florida in 2005, sinkhole claims have skyrocketed. According to the Florida Office of Insurance Regulation (OIR) report published in November 2010, based on a data call from 211 insurers, the total cost of approximately 24,670 sinkhole claims from 2006 to 2010 was about $1.4 billion, and increase from $209 million in 2006 to $406 million in 2009.
Total reported claims increased from 2,360 in 2006 to 6,694 in 2010. 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. According to the Senate Sinkhole report published in December 2010, based on the opinions of licensed geologists in Florida, there is no geological explanation for such a significant increase in the number of claims reported to insurance carriers over the last several years.
Most homeowners who obtain payouts from their insurers do not use the funds to repair or remediate the claimed damage. A number of policyholders have used the funds to pay off their mortgage. A recent article at propertycasualty360.com discusses the impacts of the sinkhole changes included in Senate Bill SB 408 that was passed on February 22, 2011 by a 7-3 vote. The sinkhole provisions included in this Bill include:
- Providing an insurer with discretion to provide a policyholder with an opportunity to purchase an endorsement to sinkhole coverage;
- Placing a 2-year statute of repose on claims for sinkhole coverage;
- Revising provisions relating to the investigation of sinkholes by insurers;
- Providing a time limitation for demanding sinkhole testing by a policyholder and entering into a contract for repairs;
- Requiring all repairs to be completed within a certain time;
- Providing a criminal penalty on a policyholder for accepting rebates from persons performing repairs;
- Revise the neutral evaluation process for sinkhole disputes; and,
- Provide changes to the procedures pertaining to sinkhole reports by professional engineers or professional geologists.
Should insurers continue to offer sinkhole coverage? Would rates be significantly increased if insurers would offer sinkhole coverage? What impacts would these changes have on the Florida real estate market values? Let us know what you think.
Some increase in sinkhole activity is caused by the lowering of the water table by increases in groundwater consumption. Can not the water well users be brought into the equation since they are at least partly culpable. I think the burden of the investigation should be borne by the insurer as the costs of investigation would discourage lower income claimants with legitimate claims. Some reasonable provision requiring repair may be considered.
Note I am a Professional Geologist that has performed sinkhole investigations for insurance companies and public adjusters.
Many mortgages including FHA mortgages require sinkhole insurance.
Allowing Insurers to provide sinkhole insurance as an endorsement and charge additional premiums for it will put a burden on these homeowners.
This is the what was implemented in Hernando and Pasco counties a few years ago and it has resulted in additional premiums of $2,000 or more for most homeowners.
FHA mortgages are for lower income homes and represent a majority of loans on homes under $200,000 dollars.
The value of all homes will be driven down by the additional cost to own them.
The law also allows rate increases of basic homeowner policies of an average of 15% per year for 5 years.A 75% rate increase will lower home values too.
Lower home values will in turn lower the tax base for the state and counties.