That Sinking Feeling

From New Guinea to New York City, the earth is opening up underneath us. A sign of the Apocalypse? No, a sign of another sinkhole — which while scary and sometimes deadly — is a lesson in science more than a lesson in religion.

News surrounding sinkholes in Florida have served as an industry-wide wakeup call to a risk that has always been there and isn’t going away. The threat is easily overlooked, and that plays a big role in the losses being exacerbated. While sinkholes are not restricted to one area of the country, their presence or sudden appearance can be predicted, to some extent, by understanding what’s underfoot.

Sinkholes are naturally occurring events that are caused by a process that occurs underground every day in various parts of the world. Ranging from the minute (3 feet or under) to more than 2,000 feet in depth and diameter, sinkholes can occur over time without being noticed until the landscape is suddenly or drastically changed.

Blame it on Karst

Sinkholes occur in areas where rock under the surface is made up of limestone, carbonate rock, salt beds or rocks prone to dissolution by groundwater; also known as a karst process, according to the U.S. Geological Survey (USGS), part of the Department of the Interior. As water circulates through the rock or as the rock dissolves by other means, spaces develop. A sinkhole could be large, yet because the surface of the earth is intact, they go undetected — until the hole swallows up the ground above it.

While Florida is riddled with sinkhole activity, no area east of the Rockies seems immune. The USGS suggests that states prone to sinkhole activity include Florida, Texas, Alabama, Missouri, Kentucky, Tennessee and Pennsylvania.

The effects are dramatic. In 2006, a Manhattan street opened up and swallowed an SUV. The collapse was blamed on a water main break that eroded the ground under the street. In Allentown, Pa., in 2011, a suburban yard dropped out of sight, leaving a hole 100 feet wide and 40 feet deep. During a rainstorm in Utah in July 2011, the road opened up 40 feet wide and 30 feet deep, and a car fell in, killing a 15-year-old. Then there’s the sinkhole on Feb. 28 that killed a Florida man when the ground collapsed under his house, leaving a hole nearly 20 feet wide and 29 and a half feet deep.

Typical Claim Issues

States have different laws for sinkhole coverage, but in Florida, the laws have been refined to address not just coverage, but the definition of what constitutes sinkholes and structural damage. That’s because claims are outpacing premiums by up to four times the amount collected. For example, Citizens Property Insurance Corp., the state’s largest property insurer, paid more than $84 million in sinkhole losses; earned premiums for that coverage came in at just $19.6 million. Thanks to rate caps of 10 percent annually, Citizens and companies like it have no way of recouping the losses.

Hence the reason many insurers are limiting how much sinkhole liability they carry, and the reason why a few insurers in the state won’t cover it at all.

Maria Abate, shareholder with Colodny, Fass, Talenfeld, Karlinsky, Abate & Webb, P.A. in Ft. Lauderdale, said her state has sinkhole coverage, as well as catastrophic ground cover collapse, which is required coverage on every policy.

In 2005, Florida law also required structural damage to a building, including the foundation, as part of the definition of a sinkhole loss. That specific language, according to Abate, resulted from years of refining the definitions and regulatory language so that frivolous claims were reduced. Laws prior to 2005 simply stated that any physical damage to a building caused by sinkhole activity would be covered. This led to claims for cracks or damage that may not have been caused by a sinkhole. In 2005, due to the amount of claims made for minute cosmetic damage, the law changed to require structural damage.

However, Abate said structural damage definition was not specifically defined in the law until 2011, leading to divergent court rulings. That made the change in 2011 essential, which gave structural damage a technical clarification. “Today the sinkhole statutes require coverage for structural damage to a building as defined by law, which was caused by sinkhole activity.”

Even with the new definitions, Abate said most claim amounts are still at or near policy limits. “These are expensive claims due to the need to remediate the land and fill the sinkhole.”

Adjudicating Shifting Sands

When is a sinkhole really a sinkhole, and when is damage covered? That’s the question adjusters must sort out. It’s a question with no easy answer, depending on state laws. While states like Florida have done well to create legislation that curbs frivolous claims, the industry is still being pulled under by the volume and dollar amount of claims.

Jaime Wester, owner of Champion Foundation Repair in Tampa, said her company has seen the struggle to bring definition and fairness to the sinkhole issue. She sees insurers a bit behind the eight ball, thanks to the unpredictable nature of sinkholes. “When there are hurricanes and storms, it’s easier for insurance companies to track,” she said. “With sinkholes, the loss depends on the situation.”

Part of the problem, asserted Wester, rests within the building industry. “The building codes aren’t strong enough, so let’s just drain a swamp and put some houses up on three-inch slabs. Of course the houses are going to have problems.”

The sinkhole situation has created a trepidation that borders on overkill, as Wester illustrated. “You have to have a home inspection, and if they find one crack, you won’t get coverage. You can’t even have a crack in your driveway.”

Wester was at a conference on sinkholes attended by attorneys and structural engineers. The topic was the definition of structural damage. “I sat there for four hours — no one had an answer. If they can’t figure it out, how do you expect an adjuster to figure it out?” she asked.

Perhaps that’s why coverage in other states is not standard on homeowners policies. Loretta Worters, vice president of communications for the Insurance Information Institute in Manhattan, said Florida is the only state requiring sinkhole events to be covered by insurance. In other states, coverage is either required to be available or excluded from the general homeowners policy.

Melissa Fox, deputy press secretary for the Pennsylvania Insurance Department, backs Worters’ view. She said Pennsylvania is second only to Florida in the number of sinkhole events. Fox suggested that may be reflected in the state’s homeowners coverage. “Here in Pennsylvania, damage due to sinkholes/earth movement is not a standard coverage in your homeowner’s policy. To get this coverage, you would need to purchase it separately as an endorsement.”

Tennessee is also ripe for sinkhole activity. The USGS map shows a wide swath of karst from carbonate rock occurring throughout much of the state. Christopher Garrett, Tennessee’s Department of Commerce and Insurance director of communications, said his state mandates sinkhole coverage.

Worters said there are some steps adjusters and insurers can take before a sinkhole event occurs. She said no one can know when a sinkhole will hit, but there are ways to recognize a developing problem. Buildings with developing cracks, she said, and door jambs and windows that suddenly don’t work properly could be signs of an impending issue.

Worters suggested understanding the geology of the region as a basis for understanding the potential for sinkhole damage in the future. Also, adjusters and insurers should determine how often municipalities inspect their underground lines, particularly water lines. “Moving water is a major triggering mechanism.”

When adjudicating a claim, Abate said adjusters must make sure damage is consistent with sinkholes. Also, it’s key to establish when the damage was first observed. A common problem with claims, she said, is the backdating of dates of loss to fall under the more flexible regulations prior to 2011.

Also, she said adjusters should make sure damage falls within the policy period. Was damage reported by this owner or a previous one in the past? “A good investigation can uncover prior sinkhole claims,” she said. The inspection will also lead adjusters to their next step — calling in specialized help. If there is damage consistent with a sinkhole, Abate suggested adjusters can contact geologists and engineers.

Sinkholes are a phenomena that are difficult to prevent, but not impossible to predict. Adjusters will continue to try understanding the risk. “It will probably take a court case,” Wester said. “It will take a judge to define it and the decision be upheld to set a precedent.”