The fix appears to be in for sinkhole losses. The insurance industry and lobby worked hard to set the rhetoric in its favor. Florida’s Insurance Commissioner seems to now be more concerned about appeasing the insurance industry to keep his job rather than taking on an industry he used to battle. Many policyholders with property in sinkhole prone areas of Florida will financially be doomed given the scenario painted in the Florida Senate Committee on Banking and Insurance Interim Report, "Issues Relating to Sinkhole Insurance."

The financial statistics, if accurate, show the reason for my pessimism. Despite my belief that much of the report is propaganda without policyholder input, the statistics demonstrate that something has to be done because insuring this peril because it is not financially sustainable. For example, for Citizens Property Insurance Corporation during the years 2005 through 2009, the sinkhole peril had a premium earned of approximately $211 million. The reported indemnity paid for that period was approximately $442 million. That is a huge loss for a peril that happens on a repetitive basis.

The results are a little skewed because the Florida legislature, wrongly in my opinion and as demonstrated by the statistics, allowed Floridians to opt out of sinkhole coverage or purchase inferior coverage. There are fewer risks in the pool in the years the losses were incurred because many simply opted out. The population left is more prone to sinkhole loss and fewer premium dollars are earned before losses are incurred. Yet, this is trivial compared to the large underwriting loss for the sinkhole peril. If anybody else views the statistics in a light much more favorable to the policyholder, let me know because that is extraordinarily important.

One solution may be to require Citizens Property Insurance Corporation to write the sinkhole peril to an actuarially sound sinkhole rate—so it would have a chance to break even. This one change may allow other private insurers to compete with Citizens, if they desire, without having to worry about doing away with the rate regulation laws or other changes. There will be a huge uproar because the rates will go up a lot—but that might be a fair scenario for the risky population Citizens is forced to write because our regulators have allowed private insurers a form of geographic sinkhole redlining for the last decade. Citizens Property Insurance Corporation has the worst sinkhole prone structures because Florida allowed private insurers to leave those geographic markets.

The report explains that Citizens’ sinkhole operating loss will continue unless Florida law changes and that the losses are caused by Citizens having more policies in the worst sinkhole prone areas:

The actual premium that Citizens charges its policyholders, however, is only a small part of Citizens’ actual sinkhole costs. This deficiency in premiums is worsening 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. Thus, Citizens’ already deficient sinkhole premiums will fall even further behind its sinkhole losses. As a result, Citizens’ surplus continues to be eroded by the deficiency in sinkhole premiums. The deficiency in Citizens’ sinkhole premiums can be seen graphically on the following pages. Each of the four graphs displays the difference between the average pure premium (average loss per policyholder) for a defined geographic region and the actual premium that Citizens is allowed to collect in that region.

David Beasley, President of the Florida Association of Public Insurance Adjusters, also indicated the interim report was not hopeful or helpful to Florida’s policyholders in Adjusters: Legislative Proposals on Sinkhole Insurance Harm Homeowners:

Proposed legislative changes in sinkhole insurance regulations would undermine consumers and unfairly benefit the industry, an adjusters’ group charged Tuesday.

"While the recommendations for changes in the Florida Building Code have merit, the report as a whole lends great weight to insurance company interests at the expense of Florida homeowners," said David Beasley, president of the Florida Association of Public Insurance Adjusters.

Beasley said the call for a single-peril repair program includes "onerous conditions" that would force consumers who dispute a claim to do so with no representation by public adjusters or attorneys sworn to protect their interests.

"Further, the concept that insured consumers must put all claim payments toward repairs flies in the face of established precedent, and would require many homeowners to remain in homes that even after repairs would have drastically lower property values," Beasley contended.

"This new requirement, not found with water, fire or windstorm losses, would have a drastic impact on individual property rights," Beasley said of the staff recommendations by the Senate Committee on Banking and Insurance.

Beasley said the staff report "appears to be based heavily on unproven allegations by some insurers that the increase in sinkhole claims is somehow fraudulent."

But a November report by the Office of Insurance Regulation actually found a drastic decrease in claims reported for investigation, and the staff report acknowledged that neutral evaluators confirmed sinkhole losses in a majority of completed cases.

"It is our hope that the Florida Legislature puts consumer interests first when considering any future changes in sinkhole coverage. Putting the interests of insurance companies ahead of those of the Florida residents they are supposed to protect is unconscionable," Beasley said. (emphasis added)

In State Panel Makes Sinkhole Recommendations, the Miami Herald listed a good summary of the recommendations:

Among the committee’s proposals for lawmakers to consider this spring:

  • Create a state-run sinkhole repair program. Instead of homeowners getting checks based on their insurance claims, their houses would be fixed. Insurance companies have said many homeowners who file sinkhole claims do not use the money to fix their houses.

  • Define what kind of damage sinkholes could cause. Most of the claims homeowners have filed aren’t because a house was swallowed up by collapsing ground but for cracks in walls and other damage that is difficult to link directly to a sinkhole. The report also suggests limiting coverage to homes, leaving driveways, pools, decks and other structures without coverage.

  • Require sinkhole claims to be filed within two or three years after damage surfaces.

  • Allow insurance companies to not renew policies with sinkhole coverage or after paying a sinkhole claim.

  • Revise the Florida Building Code to require soil testing and foundation construction that would reduce sinkhole-related damage to buildings.

  • Cap fees for public adjusters who work with homeowners on insurance claims and make it an unfair and deceptive trade practice if public adjusters make misleading statements.

Many of these proposals are not new. Most of them were noted two years ago in Late Reported Claims, Public Adjuster Fee Caps, And Sinkhole Coverage, where I noted that legislation proposed the following:

1. Place a two year limitation to report a claim.
2. Cap public adjuster fees to 10% of paid amounts.
3. Eliminate mandated sinkhole coverage.

This is the same scenario today. Change is going to have to happen because the loss ratio cannot be sustained if Citizens Property Insurance Corporation or any entity is to keep most sinkhole prone policies. The insurance industry may be entitled to higher rates for this peril. My impression is that something has to give. The question is how draconian will the change be.

As I indicated in that two year old blog post, if you are a concerned person there is a suggested course of action:

The lesson is that people do make a difference in government. The system works best when people, and I mean folks, show up, write a letter, write an email, or send in a video. Even one person can make a point which can stop the "bad guys" from their agenda. I witnessed it first hand with this Task Force. Anybody who thinks that one person cannot make a difference is far too pessimistic about our democracy. The last thing the "sneaky bad guys" want is for their customers to participate in a process to show how very bad they are.

Members of our law firm will do what we can for policyholders. We will encourage and organize others to help our leaders be educated fairly about these important insurance issues. I suggest those interested in the sinkhole and other insurance related issues likely to be raised in the Florida legislature contact Sean Shaw in our Tampa office at 813-229-1000 or sshaw@merlinlawgroup.com.

  • Insurance Veteran

    To think that insurers should lose money insuring a peril which is almost certainly to occur in a specific geographic area is foolish. Create a pool to service those policyholders that choose to live in a sinkhole prone area. Let the policyholders share the risk much like a “sinkhole mutual”.

    If there is profit share it but the same goes for the losses.Then let’s see how many folks make the same decisions.

    When does society or business cease to be responsible for individuals poor choices??

  • Insurance Vet,

    What I have long advocated is that risks should be pooled. Many of the areas with sinkhole problems have less risk to windstorm than areas in Key West or Eastern Florida which have a much higher risk of loss to windstorm. Blending the risks so that there is a larger population to share all risks is what many previously advocated regarding rates.

    Florida regulators started allowing sophisticated “cherry picking” of risks which has progressively become even more sophisticated by insurers data mining into underwriting criteria. The result is that many insurers only want the best risks leaving poorer populations with muchh higher rates or no capacity at all. The entire concept of “group” medical insurance would not exist if this was the method of selection. Some social aspects of insurance fail as we become a “beggar thy neighbor” state.

    Yet, many feel exactly the way you do and this is one reason we are in the property insurance mess we are in. I think that insurers can and should make money. The methods by which they are allowed to do so is the issue.

    Thanks for sharing your views. There is no easy answer to the problem of achieving low rates, proper coverages and affordably spreading risks of loss.

  • Susan O’Connell

    Is there any hope for those of us who purchase homes with repaired sinkholes? My home had a sinkhole repaired in 2007 and I purchased in 2009 – there is little chance that I will have another issue but it appears that I’m going to be paying a ever increasing premium for all the other homes who are now having similar problems. At this rate my insurance will force me out of my home within another year or two. Are there any options for folks like me who have Citizens?

    Thank you!

    Susan O’Connell