There’s a rising tide of media reports covering the sinkhole threat facing Florida’s homeowners. Don’t believe the rhetoric that we have a sinkhole crisis in Florida, because we don’t. The more accurate assessment is we have a sinkhole claims crisis that has created a cottage industry that now threatens Florida consumers.
The Office of Insurance Regulation, recently reported to the Senate Banking & Insurance Committee that annual sinkhole claims increased from 2,360 in 2006 to 7,245 in 2009, totaling 24,671 claims throughout that period.
What’s more troubling is OIR discovered sinkhole claims have surfaced in areas not historically wrought with sinkholes, like Miami-Dade and Broward counties. The number of claims from these two counties in 2009 was seven times what it was in 2006.
There is no geological cause behind these significant increases in claims, especially in areas that are not generally subject to sinkhole activity like South Florida. Yet, more than $1.4 billion in sinkhole losses were incurred over this four-year period beginning in 2006.
OIR has estimated that when the remaining sinkhole claims still pending are settled, losses will reach the realm of $2.4 billion. This reaches the financial impact of a hurricane.
The reason why there’s a huge increase in sinkhole claims is not the sudden swallowing up of thousands of homes by giant sinkholes, but trial lawyers and public adjusters who are “gaming” the system. When a sinkhole claim is paid, about 20 percent of the settlement goes to the trial lawyer or public adjuster. That’s a huge financial incentive.
OIR reported that fees paid to trial lawyers and public adjusters exceeded $21 million between 2006 and 2009. This cottage industry is driving the costs of insurance higher and higher. And it’s only going to get worse. The number of licensed public adjusters in Florida increased 330 percent, growing from 678 to 2,914 from 2003 to 2009.
The state-run insurer, Citizens Property Insurance Corp., reports that for every dollar it collected in sinkhole premiums, it has paid out approximately $6.30 in sinkhole claims. Evidence suggests that these claims usually covered minor cracks and damage to the appearance of a home, with an extremely low percentage covering catastrophic collapse. In fact, catastrophic collapses accounted for only 1 percent of sinkhole claims.
We haven’t had a hurricane in over five years, so trial lawyers and public adjusters have latched onto a new cash cow. We must curb this unsustainable cycle before the system completely collapses, which is teetering on the brink.
The 2011 Legislature is addressing the sinkhole claims crisis with SB 408. It begins the process of breaking this cottage industry and restoring longer-term stability to the property insurance market.
Don Brown is a former chairman of the Florida House Insurance Committee, a Senior Fellow with The Heartland Institute and a transition adviser to Gov. Rick Scott on insurance and legal matters.