SINKHOLE RULES REVISION

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Milton Jefferson
5 years ago
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1 Florida Statutes restricts the action that any property insurance carrier may take on policies that have reported sinkhole claims. As a result, the insurance industry has taken a conservative approach to underwriting applications that have suffered a sinkhole loss. Standard practice has been to non-renew coverage or decline to insure new applications on properties when a sinkhole loss payment equaled or exceeded the total limits of liability on the policy. These properties are typically only able to find coverage in the Excess and Surplus market. Section , Florida Statutes govern what actions insurance carriers can take on properties having filed sinkhole claims. Non-renewal action on the basis of a sinkhole claim is prohibited unless: 1) The total payments equal or exceed the policy limits of coverage for the policy in effect on the date of loss; or 2) The damage to the covered building is not repaired in accordance with the engineering recommendations upon which any payment or policy proceeds were based. Citizens Rules address how Citizens will consider providing Sinkhole Loss Coverage and All Other Perils (AOP) Coverage to properties having filed a sinkhole claim. These rules state that properties with total limit sinkhole losses are not eligible for Citizens, regardless of the level of repairs completed on the property. These rules have been in place several years. Given the conservative approach in the market, and Citizens underwriting rules, an issue has surfaced concerning whether or not the current rule should apply to properties that have been fully remediated in accordance with the original engineering recommendations. Staff has taken on reviewing Citizens sinkhole eligibility rules related to this issue, as well as how Citizens handles partial sinkhole losses to ensure consistency overall and the appropriateness of our underwriting position for the Florida market. Current Personal Lines Rules The Personal Lines Manuals include two rules specific to the issue at hand: Rule 7. Uninsurable Properties: X. Excessive, Unusual or Extra-Hazardous Exposure 2. Properties with excessive, unusual or extra-hazardous property exposure, (e.g. excessive cracking in the foundation, walls or roof, slab cracks, out of level foundations, flooring, walls and/or roof, unexplained depressions, active sinkholes or depressions on the premises, or unrepaired sinkhole damage). Note: The property may be eligible for a CIT HO-3 policy that does not include coverage for sinkhole. The application must be submitted unbound for underwriting consideration. Z. Sinkhole 1. Any risk in which the insured location, including the residence premises, other structures, and grounds to be insured has ever experienced a Sinkhole loss or Catastrophic Ground Cover Collapse loss, and the loss payment or payments made by Citizens and/or and other insurer equals the policy limits for property damage provided under Coverage A. 1

2 ISSUES Our current rules do not differentiate between homes that have been repaired in accordance with original engineering recommendations and those that have not been repaired appropriately. Additionally, the interpretation of what is meant by unrepaired sinkhole damage has led to confusion. RESEARCH Staff continues to conduct research into this issue. Below is a summary of our findings to date: 1. Meetings were held with some of Citizens litigating defense attorneys, sinkhole engineers and an Origin and Cause expert. The result of these discussions indicated that once properties have been fully remediated in accordance with the original engineer s recommendations, future non-sinkhole losses that result from the original sinkhole loss are minimal. 2. Claims analysis of 10,328 sinkhole claims reported to Citizens (since 2002) indicated that 522 had filed a prior sinkhole claim (5%). 3. From January 2002 through November 2012: a. 16,585 Personal Lines sinkhole claims were reported to Citizens, b. 11,297 of those claims are in closed status, c. 2,009 (17.8%) of the closed claims paid out total limits of liability (Coverage A), d. Only six (6) policies have suffered Catastrophic Ground Cover Collapse claims. 4. Although Florida Statutes enables Citizens (and any other property insurance carrier in Florida) to non-renew or cancel coverage for total limits sinkhole losses, it does not require that such action occur. 5. While there is no current method to track applications where a prior total limits claim was declared, the Underwriting staff has indicated they have seen three (3) applications in the past several years for coverage that had total losses which were repaired in accordance with the original engineering recommendations. These applications are currently cancelled. ADDITIONAL CONSIDERATIONS Florida Real Estate Disclosure Laws A focus of SB 408 was to clarify that the insured must repair the sinkhole damage or loss in accordance with the insurer s professional engineers recommended repairs. This may not have been occurring in the marketplace, as we find some homeowners were repairing their homes by alternate, less expensive means and using the claims proceeds for other reasons. Some of these individuals then sold their homes to unsuspecting buyers, providing little or no documentation of what repairs, if any, had been completed. Additionally, because the disclosure is not part of the contract for sale, it is not necessarily binding. A review of the Florida Real Estate Disclosure laws (Appendix A) indicates there is potential for misinformation to be provided during the sale, with no punitive action associated with the misinformation. This is supported by the calls received in Underwriting indicating the new owners had no knowledge of a prior sinkhole claim and no documentation for the repairs that may have been completed. 2

3 STAFF RECOMMENDATION 1. Differentiate between the original owner who filed the sinkhole claim and the new subsequent owner in determining documentation requirements and what coverages may be offered. 2. Pursue the use of loss history reports for all new business homeowner and dwelling fire applications in the 4 primary sinkhole counties. These reports will assist in the verification of a property s prior loss experience as it relates to sinkhole claims. Staff will initiate a procurement and bring the results and cost estimates back to the A&U Committee for discussion and approval. 3. Include in Citizens Legislative agenda consideration to toughen the sinkhole disclosure laws requiring punitive action if misinformation is provided. PARTIAL SINKHOLE LOSSES While coverage eligibility for houses having suffered a total limits sinkhole loss spurred this discussion, these losses represent a small portion of all sinkhole claims in the marketplace (17.8% of the closed claims reported to Citizens). Partial losses (82.2% of Citizens closed claims) are the larger, more common issue and we need to consider how these are addressed. Similar to total limits losses, some partial losses have been repaired in accordance with the original engineering recommendations while many others have not. Citizens currently offers coverage to those properties which have been repaired in accordance with the original engineer s recommendation; most all of these come in without the Sinkhole Loss Coverage endorsement requested. However, those properties that use alternative methods are generally found to be uninsurable at Citizens. These properties are typically repaired using the lesser expensive underpinning to stabilize the home and this method does not address remediation or stabilization of the sinkhole itself. STAFF RECOMMENDATION Include properties that have suffered partial sinkhole losses in our final recommendation to ensure consistency. 3

4 PROPOSAL Staff proposes that the PRM Rules be amended to more appropriately provide specific coverage (reference chart below) for properties that have suffered a total limits and partial sinkhole losses, provided: Full documentation of the repairs is provided (specifics to be outlined in the Rules Manual). If a property has not been remediated in accordance with the original engineering recommendations, the applicant for coverage must participate in the shared-cost inspection process whether Sinkhole Loss Coverage is requested or not. The applicant must also provide a 4-Point Inspection for the home. (These reports will ensure that all cosmetic damages have been repaired and there are no unusual hazards or existing damage remaining.) The entire application is submitted to Underwriting unbound. Any offer of coverage would still be subject to meeting all other underwriting requirements. Properties that have not been repaired in accordance with the original engineer s recommendations (whether a total limits paid or a partial loss) should not receive the same level of coverage consideration as those that completed the appropriate repairs based upon which the claims proceeds were paid. We recognize that the Florida Statutes may have been different at the time of the claim. However, we know that underpinning does not stabilize or remediate the sinkhole itself. Our underwriting must reflect this additional exposure. Also, in light of the current Real Estate Disclosure Laws, we do feel it is appropriate to differentiate between the original owner (that filed the claim and received the claims proceeds) and a subsequent (new) owner. The following chart outlines recommended actions for new business applications on properties with prior sinkhole claims: Note: Our in force handling of Citizens sinkhole claims will continue to follow up to ensure that repairs are completed in accordance with original engineering recommendations. If our policyholders choose not to repair the home appropriately, their policies will be subject to these same actions. Total Limits Loss and Partial Loss: Complete documentation provided showing property repaired in accordance with original engineering recommendation Alternate repairs made differing from original engineering recommendation Consider Sinkhole Loss Coverage? Yes No* Consider AOP Coverage? Yes, for policy type requested. Yes, for Named Peril DP-1 only. Subject to our shared-cost inspection, a full 4- point inspection and Underwriting review. No repairs made or no documentation provided * Exception: See exception on the following page. 4 No* No, uninsurable by Citizens due to unrepaired existing damage.

5 *Exception: For subsequent owners who purchased the property after the sinkhole claim was filed or the loss was incurred, additional coverage options will be considered provided the real estate disclosure demonstrates the information related to the sinkhole claim/activity and the condition of the home was not disclosed at the time of purchase. Options for an HO-3 policy or a DP-3 policy without or without Sinkhole Loss Coverage, will be considered if additional testing reports are provided from a Florida-licensed professional engineer. Note: Applicants that meet the specific HO-8 eligibility requirements may apply for the HO-8 policy in place of the DP-1 noted above. NEXT STEPS The specific changes to the Rules Manuals, applications and systems impact will be developed by Underwriting and Product Development. Underwriting will pursue the use of loss history reports on all applications received in the 4 primary sinkhole counties to ensure all properties with prior sinkhole claims are subject to these requirements. Staff will initiate a procurement and bring the results and cost estimates back to the A&U Committee for discussion and approval. Underwriting and Claims will work together to develop and collect better data related to future loss experience after a sinkhole loss has occurred. An Information will be created for release to the agents once these changes are approved by the Board. We feel this approach addresses the issues raised regarding total losses that have been remediated as well as anticipating the larger issue of properties that have incurred a partial sinkhole loss. It will also both simplify and clarify our underwriting case handling. Just as importantly, this proposal is in keeping with Citizens' mission to offer coverage when it is not available in the private market. 5

Appendix A Florida Real Estate Disclosure Laws Florida Statute 475.

6 Appendix A Florida Real Estate Disclosure Laws Florida Statute : In Florida, a Seller is obligated to disclose to a Buyer all known facts that materially affect the value of the property being sold and that are not readily observable. The disclosure statement is designed to assist the Seller in complying with the disclosure requirements under Florida law and to assist the Buyer in evaluating the property being considered. It is not a warranty and is not a substitute for any inspections or warranties the Buyer may wish to obtain. It is based only upon the Seller s knowledge of the property condition. This disclosure is also not intended to be a part of any contract for sale and purchase. Florida Statute (2)(c): In effect since 2006, this portion of the sinkhole statute requires the Seller of the property that has reported a sinkhole claim and received a claim payment from an insurer, disclose to the Buyer that a claim has been paid and whether or not the full amount of the proceeds were used to repair sinkhole damage. However, proof of repairs in the form of documentation is not required of the Seller. Current Florida Real Estate Disclosure statement: 6

7 Appendix B 7

Coverage Worksheet. Named Peril with Extended Coverage Option. Replacement Cost. Named Peril with Extended Coverage Option

Coverage Worksheet. Named Peril with Extended Coverage Option. Replacement Cost. Named Peril with Extended Coverage Option DP-1 Coverage Worksheet Dwelling Fire Standard Coverages Coverage A: Dwelling (Primary Structure) Covered Causes of Loss Loss Settlement (Replacement Cost or Actual Cash Value) Named Peril with Extended