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Sinkhole payouts creating a crisis?

As millions in insurance claims are paid out, many involved in the process are cashing in.

By GARRETT THEROLF
Published May 28, 2006

Cracks appear in the walls, and your house suddenly makes strange noises.

Might be a sinkhole. Might not.

But either way, this might be good news.

You now have a ticket in what insurers often call the blue-collar lottery.

Karen and Chuck Schurecht bought a home in New Port Richey in 1986.

They found paradise in its airy, well-lit rooms and rock-lined swimming pool. About four years ago, the home started making loud cracking noises. Jagged lines veined the walls.

The Schurechts made a sinkhole claim with their insurance company.

The 142,080 insured homeowners in Pasco and Hernando counties face a rate crisis unrelated to hurricanes.

Rather, the insurance industry blames a sudden tide of sinkhole claims. It has driven private insurers from much of the market and pushed rates from the state-run Citizens Property Insurance Corp. to shocking levels. Example: Citizens rates on average will rise 86 percent in most of Hernando and 139 percent along Pasco’s Gulf Coast — compared to increases of 17 to 30 percent in Pinellas, Hillsborough and Citrus.

Sinkhole claims from Pasco account for two-thirds of the first $95-million Citizens paid in sinkhole claims statewide.

The explanation is complex. But the short version is this: As millions are paid out in sinkhole claims, the system offers incentives for everyone in the process — insurance companies, engineers, contractors, homeowners, homebuyers and homesellers — to cash in.

Just a few years ago, there was no sinkhole-related insurance problem. Insurance companies paid very few claims.

The companies’ apparent hard line led homeowners to turn to lawyers. The lawyers turned to engineers to buttress their cases — and made an interesting discovery.

Detecting sinkholes and determining whether they, or something else, cause house damage, is an inexact science. So engineers, even when they were almost certain that something other than a sinkhole caused damage, invariably covered themselves by noting that sinkhole activity “cannot be ruled out.’’

Lawyers leveraged that phrase and other evidence into millions of dollars worth of new payouts. In 2002, Citizens paid just nine claims totaling less than $300,000 in Pinellas, Hillsborough, Pasco and Hernando counties.

For 2005, claims totaled 582, payouts $63.4-million.

Cincinnati Insurance hired Central Florida Testing Laboratories to examine the Schurechts’ home.

It found that the damage was “not considered to be of structural significance.’’ But even if the problem was small, the Schurechts would have a valid claim if it was caused by a sinkhole. Determining a cause was complicated by the fact that their house, like many others in Florida, is built on wetlands. In such cases, the diagnosis becomes more difficult because improper building practices are not covered by insurance.The lab found that the “most likely’’ primary cause of damage was that builders never cleared native vegetation before the lot was poured. When vegetation decayed, the lab said, the ground gave way.

The lab also found that the thin concrete foundation made the home susceptible to settlement — another flaw not insured under the policy.

This was not good news for the Schurechts.

Are there really dramatically more sinkholes in Pasco and Hernando counties than the rest of Florida?

No one knows for sure. There is evidence that the limestone base beneath Pasco, Hernando and Hillsborough counties is thinner and closer to the surface than in other parts of the state. Development generally reduces the topsoil and increases sinkhole risk.

But, despite repeated recommendations, the Legislature has for more than a decade declined to pay for academic research of sinkholes.

Although the engineers did not think a sinkhole caused the Schurechts’ problem, they found symptoms of possible “sinkhole related activity’’ and their report concluded “sinkhole activity cannot be ruled out.’’

The insurance company figured repair costs at more than $200,000 and cut a check for the full value of the Schurechts’ policy: $209,000.
“Cincinnati paid us, and that allowed them to say goodbye,’’ Chuck Schurecht said.

To insurance companies, it’s important to be able to say goodbye.

By law they have the “right to repair’’ a damaged house by paying a contractor directly to fix the problem. But if insurance companies do that, they are liable if a repair costs more than the original estimate or if sinkhole problems recur.

When homeowners accept a direct payout, those risks fall on them. Still, direct payouts are by far the most common result of sinkhole claims. And everyone, it seems, benefits.

The insurance company gets off the hook. The lawyer gets his fee. The homeowner gets a check and wins what insurers derisively call the blue-collar lottery.

Since insurance payouts can equal the appreciated value of the house, the owner often gets enough cash to pay off his mortgage and buy another home free and clear. He still gets to sell his sinkhole home.

Often lost in the shuffle: adequately repairing the sinkhole that started it all.

Before May 2005, Citizens never once invoked its right to repair a sinkhole home.

Since then, it has directly paid for repairs 35 percent of the time.

“I was in tears throughout much of this whole process,’’ Karen Schurecht said. “It’s a very scary moment when they say your home is totaled.’’

But $209,000 — seven times what they paid for the house in 1986 — meant the Schurechts, both in their 50s and retired from GTE, could pay off their mortgage, make a big contribution to their nest egg and hire a company to repair the home.

Anyone with a state contractor’s license can do sinkhole repairs. The state requires no special expertise. The Schurechts accepted bids ranging from $26,700 to $300,000. They took the lowest, submitted by Pat White, owner of Bedrock Foundation Works.

The Schurechts said White persuaded them that just four or five truckloads of grout would be sufficient to stabilize their home. During the repair, they said, Bedrock used less than one truckload. By contrast, the insurance company engineers had called for 55.

Still, Bedrock’s contract promised an independent engineer would vouch for the work.

White explained to a reporter the importance of that pledge. “We have to engage an independent engineer,’’ White said, “to consult with us and certify the final product. That’s the assurance the customer has that someone absolutely objective is overseeing the work.’’

Was Janine Pardee the engineer who fulfilled that function in the Schurechts’ case?

“Yes.’’

Why then is she listed on state records as an officer/director of your company?

Extended silence. Finally: “She’s an investor in my company. I don’t know if I really want to go into this any further.’’

Why did Janine Pardee write that the repair met or exceeded the insurance company’s original plan for repair when that plan called for 55 truckloads of grout but less than one truckload was actually used?

“I don’t know.’’

The rules regulating Florida engineers prohibit them from presenting themselves as independent when they are not. (It is not known whether Pardee knew that White was presenting her as an independent engineer.)

“It’s against the law? This doesn’t sound like a very positive article for us.’’

Pardee did not return calls seeking comment. The Florida Board of Professional Engineers declined to comment on the case because it has not received a complaint.

The Schurechts plan to remain in their home, but when the home eventually changes hands, a future owner may never know it had a sinkhole.

Last year, the Legislature approved a law requiring that sinkhole engineering reports be recorded with the county property appraiser. That was supposed to ensure that buyers would be informed.

But a title search, which prospective buyers rely upon for a comprehensive history of a home, does not include property appraiser records. Title companies search records maintained by the county clerk of the court.

Pasco County Property Appraiser Mike Wells said that neither property appraisers nor county clerks wanted the responsibility for yet another record. The clerks’ lobbyists won.

A new bill to shift the records to the clerks was signed by Gov. Jeb Bush this month, but it would not affect old claims like the Schurechts’.
The law makes an attempt to reduce the cost of sinkhole claims. It creates a mediation process designed to cut lawyers out of the process and allows higher sinkhole deductibles in an effort to lower premiums.

Lawyers, however, argue that the mediation process will simply create another bureaucratic obstacle for homeowners seeking fair payment from insurers.

The New Port Richey law firm of Peter Napolitano and Craig LeValley has been vocal pressing that argument and is a statewide leader in sinkhole litigation. In Pasco, it sued Citizens 39 times last year.

Sinkholes represent 70 percent of the firm’s practice.

“The way to stop attorneys,’’ Napolitano said, “is for the insurance companies to do the right thing the first time.’’

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Meanwhile, another business, the trade in sinkhole homes, is booming.

Companies carpet-bomb neighborhoods with fliers urging homeowners to “turn this card into cash’’ by selling their sinkhole home. Critics say the goal is to buy low, perform an inexpensive repair to win an engineer’s report declaring a home fixed and sell at a much higher price.

Among the buyers and sellers is Randall Bluhm of Spring Hill, who over the past few years has bought and sold hundreds of sinkhole homes.

One was owned by Allen and Kelly Werkmeister of Spring Hill. They filed a claim with Citizens, received a cash payout and sold the house to Bluhm rather than repair the sinkhole. Bluhm hired Rock Solid Foundations of Holiday to do the repair.

Bluhm declined to reveal the cost of the repair. But he paid $78,000 for the home and sold it, seven months later, for $139,000 to Larry and Hope Boloyan. Larry Boloyan, a disabled Spring Hill man, was provided an engineer’s report certifying the repair. And Citizens, which paid the first claim on the home two years earlier, agreed to reinsure the home because of the repair report.

Two weeks after the Boloyans moved in, the drywall cracked and the walls separated slightly at the corners. They filed a claim with Citizens.
HSA Engineers and Scientists said the repair by Rock Solid was faulty, even though it had been certified by the engineers at Johnson Frey Turzak Group. Neither Rock Solid nor Johnson Frey Turzak returned repeated calls seeking comment.

HSA recommended the home be fixed again at a cost of $60,000 to $75,000. The Boloyans sued Citizens, seeking more money.
The cycle is poised to repeat itself.

Reporter Colleen Jenkins and researchers Caryn Baird and Carolyn Edds contributed to this report.

[Last modified May 28, 2006, 18:11:43]