Study urges creation of sinkhole reinsurance pool
The proposal earns little praise from lawmakers, who focus more on how to limit insurers' claims.
By JEFF HARRINGTON and JONI JAMES
Published April 6, 2005
A state-sponsored study recommends that Florida create a reinsurance pool to help insurers pay sinkhole claims, a burgeoning crisis in the Tampa Bay area in particular.
But the controversial proposal received a lukewarm reception among state lawmakers Tuesday, even as a Senate committee embraced other suggestions in the report, such as tightening the definition of a "sinkhole" to cut down on claims.
The long-anticipated report, commissioned by legislators last year, was released during the midway point of a nine-week session in Tallahassee in which lawmakers have keyed in on changing the state's hurricane-racked insurance market.
Florida Insurance Commissioner Kevin McCarty welcomed the sinkhole report as "a roadmap on how we can address this problem."
Others were less effusive.
"We have enough government funds," State Farm lobbyist Mark Delegal said in objection to a reinsurance pool. He blamed the crisis not on more sinkholes but on more litigation from homeowners falsely alleging sinkhole damage.
"If we bite the bullet and fix claiming behavior," we won't need a reinsurance fund, he said.
Sen. Rudy Garcia, R-Hialeah, chairman of the Senate Banking and Insurance Committee, said he isn't necessarily opposed to considering a reinsurance fund, but he needs more time to consider whether it's necessary.
"I want to verify that is the solution for sinkholes and to have consumers protected at the same time to avoid the problems that are occuring," Garcia said.
Meanwhile, Garcia said he hopes other changes passed by his panel Tuesday would go a long way toward fixing the problem.
As part of an omnibus property insurance bill, the committee approved language that would require a sinkhole claim to be verified by a geologist and an engineer.
The bill would change state law so such verification would be considered "correct, unless rebutted by clear and convincing evidence in a civil proceeding."
Plus, insurance companies would be required to notify the clerk of court of the claim so future purchasers of a property would know if there was a sinkhole there.
How the measure will fare in the House is unclear. The House has proposed creating a statewide sinkhole database in its legislation.
Sam Miller of the Florida Insurance Council applauded the changes, particularly making it tougher for a homeowner to allege sinkhole damage.
"We spend $15,000 showing that a crack in a foundation was covered by natural settling and then if we're taken to court, we lose anyway," Miller said.
Short of the reinsurance pool, Garcia's bill did mesh with other recommendations in the sinkhole study.
The study, for instance, recommended a uniform definition of sinkhole loss to address geologists' concerns and creation of a data warehouse for sinkhole claims information.
The study focused on data from 1999 to 2003. Over the five-year period, sinkhole claims grew from 349 to 1,018; sinkhole loss payments soared from just more than $22-million in 1999 to more than $65-million in 2003.
Nowhere has been hit harder by the sinkhole crisis than the Tampa Bay area. For proof, look at the policy count at Citizens Property Insurance, the state-run insurer for those who cannot find property coverage on the open market.
At the end of 2001, Citizens Property had 1,012 policies - or 1 percent of its personal lines' policies - in the Tampa Bay region of Hillsborough, Pinellas, Pasco and Hernando counties.
By November 2004, that four-county region accounted for 146,901 Citizens' policies, or 33 percent of Citizens' personal lines policies.
A large percentage of the increase appeared tied to insurers fleeing from sinkhole-prone areas, forcing their insureds to turn to Citizens.
"While the evidence is circumstantial and anecdotal, it appears that Citizens may have become the sinkhole insurer of last resort in the four-county Tampa Bay region," the report said.
In its 130-page study, researchers at Florida State University and other consultants offered three options to address the crisis:
Keep coverage for sinkholes in homeowners' policies and require insurers to develop a separate rate for the peril.
Create a state company acting as a direct insurer, providing sinkhole insurance and handling claims.
Require insurers to write sinkhole coverage as part of their policies but pass those sinkhole-related premiums on to a state-run reinsurance pool to cover sinkhole claims.
The third option, researchers concluded, was most cost-effective.
Indeed, the study estimated it would cost about $1.8-million to operate a small center handling claims as a reinsurer as opposed to $19.9-million if the state agency directly provided sinkhole coverage and was responsible for all adjuster fees and engineering reviews.
Those calculations were based on the assumption of 2,000 sinkhole losses per year at an average severity of $38,000.
Finding money to launch the program either way is another issue.
"The Florida Legislature must decide if it is willing to make a financial contribution" in startup funds for a sinkhole pool, the study said.
Researchers said the sinkhole fund would probably not suffer a shortfall in funds as long as rates are "conservatively" set.
It's not clear if the new pool would qualify for tax exemption. Florida's Hurricane Catastrophe Fund and Citizens Property Insurance were ruled exempt from paying federal income taxes because they are "integral parts of the state."
But a sinkhole fund would likely be much smaller and may have difficulty meeting that IRS standard.
The seven investigators and three consultants involved in the study left many of the tough decisions up to lawmakers as "public policy decisions."
For instance, the analysis makes no recommendations on whether sinkhole insurance should be mandatory in bay area counties prone to sinkhole problems and optional elsewhere. Perhaps, the report says, the state may want to impose mandatory coverage through the sinkhole pool only in counties "with meaningful sinkhole activity" and require insurers to provide sinkhole coverage themselves in all other counties.
PROPOSED CHANGESThe bill that included language on sinkhole issues was part of an omnibus property insurance bill written in response to last year's hurricanes. Among dozens of changes, Senate Bill 1488 would require insurance companies set their rates and mold their territories of coverage to a standard set of territories to be set by the state. It would require a public hearing when a rate increase request tops 15 percent. It would make some dramatic changes to the state-sponsored Citizens insurance firm, including limiting residential coverage to policies worth $1-million or less. It would make it easier for insurance companies to take advantage of the state's reinsurance catastrophe fund when the state is hit by more than two hurricanes in one season.
JONI JAMES, Times staff writer