Understanding and Analyzing Sinkhole Claims in Florida

Amended Fla. Stat. §627.706 (effective June 1, 2007)

Catastrophic Ground Cover Collapse

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Pursuant to Fla. Stat. §627.706, the State of Florida now requires every insurer authorized to transact property insurance in the State to provide coverage for “catastrophic ground cover collapse” to a structure and contents, and to make available, for an appropriate premium, optional coverage for sinkhole losses to the insured structure and contents, to the extent provided in the policy to which the underlying coverage applies.

On or before June 1, 2007, every insurer authorized to transact property insurance in the State must make a filing with the Department of Financial Services for the purpose of obtaining approval for the appropriate policy forms and rates for including coverage for catastrophic ground cover collapse and for offering optional sinkhole coverage. The catastrophic ground cover collapse and optional sinkhole coverage may not go into effect until the effective date provided for in the filing approved by the Office of Insurance Regulation of DFS.

As used in ss. 627.706-627.7074, and as used in connection with any policy providing coverage for a catastrophic ground cover collapse and/or sinkhole loss, the term catastrophic ground cover collapse is defined as follows:

1. “Catastrophic ground cover collapse” means geological activity that results in all of the following:

1. The abrupt collapse of the ground cover;

2. A depression in the ground cover clearly visible to the naked eye;

3. Structural damage to the building, including the foundation; and

4. The insured structure being condemned and ordered to be vacated by the governmental agency authorized by law to issue such an order for that structure.

In light of the revised statute, an insurer must first determine whether the loss is a “catastrophic ground cover collapse”. If it is determined that geological activity caused an abrupt collapse of the ground cover, with a depression in the ground clearly visible, resulting in structural damage to the building and foundation, and the insured structure has been condemned, then the insurer must accept coverage for the loss.

If it is determined that any one (or more) of the four criteria is not present as the result of geological activity, then the loss will not be considered a “catastrophic ground cover collapse.” If the insured purchased an endorsement for optional sinkhole coverage, the insurer must then determine if the loss is actually the result of sinkhole activity. To do so, the insurer must strictly follow the standards set forth in the sinkhole statute for investigating and adjusting a sinkhole loss.

Pursuant to the newly revised statute, insurers no longer are required to automatically provide coverage for sinkhole losses; however, sinkhole coverage must be offered as an optional coverage for an additional and appropriate premium (i.e., by endorsement). Insurers writing policies that do not include an endorsement containing the optional coverage for sinkhole losses must have a statement on the face of the policy in bold type (not less than 14 point font size) with these words:

YOUR POLICY PROVIDES COVERAGE FOR A CATASTROPHIC GROUND COVER COLLAPSE THAT RESULTS IN THE PROPERTY BEING CONDEMNED AND UNINHABITABLE. OTHERWISE, YOUR POLICY DOES NOT PROVIDE COVERAGE FOR SINKHOLE LOSSES. YOU MAY PURCHASE ADDITIONAL COVERAGE FOR SINKHOLE LOSSES FOR AN ADDITIONAL PREMIUM.

Under the new policy forms mandated by the statute, contents coverage only applies if there is a structural loss resulting from a catastrophic ground cover collapse. Structural damage caused by the ordinary settling or cracking of a foundation, structure, or building and/or which does not result in the condemnation of the structure does not constitute a loss resulting from a catastrophic ground cover collapse. Similarly, contents losses alleged to be the result of sinkhole activity will be covered only when a sinkhole has been confirmed on the property.

This new statutory provision will significantly alter the handling of property damage claims involving geological activity in Florida. It represents the latest in a series of legislative enactments directed to the problem of sinkholes in this State. It no longer mandates sinkhole coverage and provides insurers with the authority to write sinkhole coverage as an optional endorsement, priced according to the risk associated with the coverage. At the same time, it mandates coverage for “catastrophic” collapse claims from any geological source, including sinkholes, lowered water tables, hydrostatic pressure differential or any other type of geological event. Once again, “the Legislature giveth and the Legislature taketh away.”

With the deadline for submitting the new filings only a few days away, insurers should be positioned to implement these new coverages as soon as those filings are approved. The effect upon claims in Florida, particularly in the “Sinkhole Zone” of West Central Florida, remains to be seen, but things will be decidedly different from now on.