Senate Committee Releases Sinkhole Report
The Senate Committee on Banking and Insurance has issued Interim Report 2011-104, Issues Relating to Sinkhole Insurance, discussing concerns with sinkhole coverage in Florida’s property insurance market. The report summarizes the increased frequency and severity of property insurance claims for sinkhole losses over the years. The report cites the high costs of investigating claims and insurers’ incentives to settle claims in light of Florida’s bad faith law and attorneys’ fee provisions as reasons for the significant insured losses in the sinkhole arena.
The report mentions that sinkhole losses are causing an erosion of Citizens Property Insurance Corporation’s surplus because losses are significantly outpacing sinkhole-related premiums. In addition, the private insurance market continues to reduce its presence in sinkhole prone areas, meaning that Citizens’ market share in these areas is increasing.
The report provides a summary of other states’ mine subsidence funds, which might provide analogous mechanisms for dealing with sinkhole losses. However, Florida has a larger number of sinkhole claims than are typically seen in the mine subsidence funds and the magnitude of losses is greater.
A majority of policyholders receiving sinkhole settlements do not repair their properties, which has adverse consequences for neighborhoods and for municipal tax bases. In addition, existing law does not facilitate effective resolution of sinkhole claims because of certain statutory uncertainties, including the meaning of a statutory presumption of correctness, a requirement for a plan of repair to be made “in consultation with” the policyholder, and the definition of structural damage.
The report mentions that the Legislature has two fundamental directions in which it might proceed. It could create a state-run facility to increase the consistency of sinkhole determinations and reduce the costs associated with sinkhole claims through a tax-exempt entity, or it could overhaul existing laws in an effort to reduce some of the uncertainties in the statutes and throughout the claims process that are leading to unsustainable losses. In either case, it is clear that the issue of sinkhole insurance coverage on property insurance policies will be part of the 2011 legislative session.