December 11, 2010
Tom Knox
Daytona Beach News Journal
ORMOND BEACH — The hurricanes that rolled through Florida five years ago left in their wake a pile of fallen houses and a chorus of angry homeowners. Millions of hurricane-related property insurance claims were filed, and there weren’t enough adjusters to handle the claims quickly.
Some roofers were demanding all of the money before starting repairs, but insurance companies only paid some costs before repairs were made. After work was completed, they paid the rest.
In 2005, legislation was changed to get help to homeowners quicker by switching the insurer payback method to replacement costs instead of depreciation. Instead of paying the depreciated value of insured property up front and the rest when it’s fixed, homeowners got money with no-strings attached.
That change, insurance executives say, helped turn what was previously a small sinkhole problem in a specific area of the state into what the Hernando County property appraiser called “an epidemic in the making.”
The sinkholes at issue aren’t the mammoth holes that suddenly open and swallow a house. Insurers are required to issue catastrophic ground cover collapse for those. In 2007 the definition of a sinkhole was changed and optional coverage, which is for more minor damages like foundation cracks, was added for an additional premium charge.
Homeowners eager to get tens of thousands of dollars for such cracks have used the change in payback method to file more sinkhole claims than ever.
Werner Kruck, senior vice president of Ormond Beach-based insurance company Security First, said homeowners in the area, who don’t have sinkhole coverage, still pay about $10 a month to cover the costs for everyone else.
Florida is more likely to have sinkhole problems than any other state because of underground limestone that dissolves here. They’re most prevalent in the west-central part of the state. About 68 percent of claims filed so far this year were from Hernando, Pasco and Hillsborough counties.
Volusia and Flagler counties did not have enough claims to be listed on a sinkhole-data review issued last month by the state Office of Insurance Regulation.
Citizens Property Insurance, the largest insurer of Florida homes, gets 210 sinkhole claims a month. Almost 21 percent of sinkhole claims at Citizens have entered into some sort of litigation since 2005.
Inspecting a sinkhole is costly.
When someone files a sinkhole claim, it costs the insurer about $8,000 to determine if the claim is actually a sinkhole, according to a state report, which measured claims since 2006. If a policyholder disputes an insurer’s ruling, they can hire a public adjuster or attorney to fight the claim, which costs much more.
People who file claims don’t need to prove they made the fixes, so they can spend the money as they see fit. In many cases confirmed sinkholes lay in disrepair because the homeowner spent the repair money on their mortgage, according to a letter written by Alvin Mazourek, the Hernando property appraiser.
Since 2006, the average optional sinkhole payout to the 9,000 Florida homeowners with already-settled claims is more than $140,000.
David Beasley, president of the Florida Association of Public Insurance Adjusters, said insurers don’t point out the financial catastrophe involved with a sinkhole.
“A lot of the time people try to make it sound like homeowners are profiting from that, but it’s not the case,” Beasley said.
If someone has a $300,00 home with a sinkhole, for example, the home “just became worth $100,000 to $150,000 at best,” he said. “If you’ve got a $300,000 mortgage, why would you put more money on it before you sell the property?”
A state law took effect in January that allows insurers to non-renew optional sinkhole policies in Hernando and Pasco. Tim Meenan, a lobbyist for the National Association of Insurance and Financial Advisors, said he’s trying to make that a statewide policy by summer 2011.
“Does everyone in Volusia County want to pay for those 10 out of 5,000 people that actually have a problem?” he said.
If insurers statewide aren’t required to offer optional sinkhole coverage, though, few if any insurers will offer it, meaning those 10 people with an actual problem could be stuck with a sinkhole. Meenan said he doesn’t know what to do about that.
Insurers often accuse public adjusters of encouraging fraudulent or embellished claims because it’s so expensive to fight the claims. But the state insurance-regulation report shows fewer than 1 percent of more than 24,000 total sinkhole claims were reported since 2006.
Public adjusters represented 25 percent of Citizens’ sinkhole claims in 2009, up from 3 percent in 2005.
It’s clear there is a problem, but what can be done about it? The state senate’s Banking and Insurance Committee plans to release a sinkhole study next month.
“The question is very simple,” said Locke Burt, president of Security First. “Who pays, and when?”
http://www.news-journalonline.com/business/real-estate/2010/12/11/sinkhole-changes-leave-insurers-feeling-sunk.html
