Insurance Companies Take New Approach to Denying Sinkhole Claims

As far too many Florida homeowners know, sinkholes can develop when rock below the surface is dissolved by rain or circulating groundwater. As the rock dissolves, spaces and cavities develop underground. Eventually these cavities can cause significant damage to structures above the ground, even if the surface land remains largely intact.

Sinkholes typically occur where the underground rock is made of limestone, carbonate rock, salt beds or easily dissolved rocks and are particularly common in Florida.

Prior to 2010, Florida law required property insurers to make coverage for sinkhole losses available. Effective January 1, 2010, insurance companies may non-renew policies for sinkhole coverage in Pasco and Hernando counties, provided that the insurer offers coverage for catastrophic ground cover collapse – which has left many homeowners without any recourse upon discovering sinkhole damage. Even for policyholders carrying sinkhole coverage though, insurance companies often attempt to deny coverage.

Historically, insurance companies sought to avoid paying sinkhole claims by denying evidence of sinkhole activity. For example, to avoid paying a claim, insurance companies might attribute damage to earth movement or material shrinkage, rather than sinkhole activity.

Recently, though, insurance companies are trying a new approach. Increasingly, insurance companies are focused on the definition of the term structural damage, claiming that they do not have to provide compensation for damage because it is not “structural” in nature. Instead, they claim the damage is “cosmetic” in nature, and that such damage does not rise to the level of what they would deem “structural,” and therefore not covered under the insurance policy.

The insurer may dispatch one of its experts to the property to perform a quick visual inspection and make a finding that there is no structural damage. Instead of testing for damage, the inspector simply asserts that any damage is not structural based on appearances.

Alternatively, some companies authorize comprehensive testing of the property and then, based on this testing, go as far as to issue a report finding that the home has been damaged by sinkhole activity – only to then deny the claim based on the assertion that the damage caused by the sinkhole activity is not “structural” in nature, but merely “cosmetic.”

This is the worst result as the insured’s home has now been tainted as a “sinkhole home,” but the insurance company has refused to offer any funds to repair the damage. This leaves the homeowner in the untenable position of having confirmed damage to their home which (if left unrepaired) will have a negative effect on their property value and no funds with which to repair this damage.

Neither the Florida statutes nor the regulations define structural damage as it applies to sinkhole damage. However, insurers have long-accepted the plain meaning of the term structural damage – namely, that it refers to damage to the structure of a building.

This denial poses multiple problems for homeowners. Not only are they facing property damage and an insurance company that refuses to provide fair compensation – but the insurance company tests leave a permanent mark on the property. Once sinkhole activity is verified, the property is marked. This can make it nearly impossible for property owners to sell a home without first undertaking costly repairs.

Report of Sinkhole Activity

While there is no state agency responsible for sinkhole inspections, many homeowners call the Florida Geological Survey (FGS) in an attempt to have sinkhole activity verified. The FGS maintains a database of reported sinkholes but does not take action against insurers to make them pay on a claim. The end result is that the homeowner may have his or her property marked as a sinkhole location while still not recovering compensation from the insurance company.

Homeowners who have been denied coverage for damage related to sinkhole activity or who have questions about sinkhole coverage, should contact an attorney with experience handling sinkhole claims. An informed lawyer can provide homeowners with knowledgeable representation and advice regarding the most effective way to proceed.