By Samantha Duke, Esq. and Chad A. Walters, Esq.
Sinkholes have become major news nationally in large part due to the dramatic occurrences in Florida over the past 12–18 months. In March 2013,a man was swallowed by a sinkhole which opened under his bed while he slept. In August 2013, a resort area in central Florida was literally collapsing into a sink hole on live television as people all over the country watched. Florida, and specifically central Florida is prone to sinkhole activity due to the geologic structure, which is essentially sand and decayed plant life over the top of a limestone or dolostone rock structure. Sinkholes have always been a potential occurrence in Florida, but their prevalence has become more noticeable as Florida’s real estate has become more and more developed. In fact many, if not most lakes in Florida, were the result of sinkhole activity in the past. The difference? Most of Florida 100 years ago was largely uninhabited and a sinkhole could form and fill up with water without many people becoming the wiser. Increasingly now, a sinkhole pens up and where was once nothing but a stand of timber is now a house, a car lot, or a resort. In Florida, litigation over sinkhole related damage is controlled largely by statute. After the most recent amendment to those statutes, almost every aspect of the claim and the claim process is controlled by statute. Only after going through this process can you file a claim. What constitutes a covered sinkhole loss is very narrowly defined by Florida statutory law. A “sinkhole loss” is “structural damage to the covered building, including the foundation, caused by sinkhole activity. Contents coverage and additional living expenses apply only if there is structural damage to the covered building caused by sinkhole activity.” Fla. Stat. §627.706(2)(j) (emphasis added).
Structual Damage is very narrowly defined by statute to include only (5) categories, including:(1) floor displacement (uneven floors)outside specific American Concrete Institute (ACI) or Florida Building Code(FBC) permissible variances result;(2) foundation displacement outside acceptable ACI and FBC variances;(3) listing, leaning, or buckling of primary vertical load bearing structures outsides specific tolerances;(4) danger of imminent collapse as determined by the FBC of the primary structural portions of the building do to round instability; and(5) for damage occurring after October15, 2005, any damage qualifying as “substantial structural damage” under the FBC. Fla. Stat.§ 627.706(k).
Sinkhole Activity means “settlement or systematic weakening of the earth supporting the covered building only if the settlement or systematic weakening results from contemporaneous movement or raveling of soils, sediments, or rock materials into subterranean voids created by the effect of water on a limestone or similar rock formation.”Fla. Stat. § 627.706(i).
The actual claims process itself is also heavily controlled by statute. Upon receipt of a claim, an insurer must perform an inspection to statutorily defined standards. Fla. Stat. § 627.707. The insurer must inspect for structural damage and, if damage consistent with a sinkhole loss is found, the insurer must employ a professional engineer or geologist to conduct testing. Id. The testing must be conducted sufficiently to allow the professional to determine the presence or absence of sinkhole loss or other cause of damage within reasonable professional probability in accordance with specific standards. Fla. Stat. §627.7072.
Step One: The engineer or geologist must issue a report to the insurer and the insured with his findings. Fla. Stat.§627.7073. This report must be recorded in the public records at the insurer’s expense. If the insured has a report done, then that report must be recorded in the public records at the expense of the insured. Upon completion of ground stabilization, the engineer must certify that the work was done properly, and this must be recorded in the public records by the engineer. Step Two: Upon receipt of the engineer’s report or a denial of the claim by the insurer, the insured or the insurer may request neutral evaluation, which is a nonbinding informal process, and the insurermust pay the reasonable costs of the neutralevaluator. Fla. Stat. 627.7074. Of course,this process is not binding, and the insuredmay still file suit against the insurer, butunless a judgment in excess of the amountprovided for by the neutral evaluator isobtained, then the insurer is not obligatedto pay attorney fees.This entire process can take manymonths, and often extends more than ayear. Of course, if litigation or neutralevaluation occurs, it can be even longer.It is important to control your client’sexpectations in this regard at the beginningof the case. The client needs to be madeaware that the statutory process must befollowed and that it will not be over in amonth or two.
Step Three: In addition, the initialinterviews with the clients should involve adetailed investigation of the damageand other evidence to support a claim forsinkhole. Pictures should be taken andwhere possible references should be identifiedso that changes in the structure maybe documented later. If any dispute overcoverage arises, then practically speakingan expert engineer or geologist willbe necessary for any plaintiff to establishthat a sinkhole loss has actually occurred.Although technically not required to invokethe neutral evaluation, without a counterpositionby a qualified professional, theneutral evaluator is probably going to beless likely to side heavily, without sufficientevidence, on the side of the insured. Thesame issue commonly arises over the properscope of repairs.Of course, the issue for an insured isthat the statute has now very clearly limiteda sinkhole loss to situations where damageto the structural elements of the buildinghas occurred. The legislature expressly stated its findings for the 2011 amendmentsto the sinkhole statutes that the purposewas to reduce the number and the costof sinkhole claims, by narrowly defining“structural damage” and what constitutes a“sinkhole loss”. The legislature found thata problem existed both in the number andcost of claims but also because insuredswere not repairing the property after receivinghuge insurance settlements, leavingFlorida property in a difficult situation.Thus, these amendments established thevery technical requirements for a sinkholeloss, and also, at least where the cost torepair is within the policy limits, affirmativelyrequires that the homeowner makethe repairs to the structure where a payoutis made. In fact, the insurer is not requiredto pay any money toward ground stabilizationuntil the insured enters a contractfor repairs.
Legislative Provision: The legislaturefirst attempted to limit sinkhole claims in2005, by including the phrase “structuraldamage” in the definition of “sinkholeloss”. Prior to this, a sinkhole loss wasdefined as “actual physical damage to theproperty”. In 2005, the legislature amendedthe definition of sinkhole loss to require“structural damage” but did not provideany more specific definition of “structuraldamage.” Several Florida federal courtsdetermined that structural damage meantany damage to the structure rather thandamage to the structural elements. In 2011,the legislature made clear that structuraldamage was more than just any damage tothe structure. Thus, even where “sinkholeactivity” is found under the structure, therestill may not a “sinkhole loss”, which is theonly time that the insurer is required to payfor ground stabilization.
Second Provision: Another provision ofthe recent amendments is that the insuredmust repair the structure when there is asinkhole loss. In the past, the insured would make claims and then take the payout to pay off their mortgage and just live in the property. However, the legislature found this to be a specific problem that it wanted to rectify, and it did so by including the requirement that the insured repair the building in accordance with the insurer’s professional’s report and recommendation for repair. All of this leaves the homeowner in quandary. Sinkhole deductibles are statutorily permitted to be as high as 10% of the policy limits—$25,000.00 for a $250,000insurance policy. So, even if the insured wants to repair the home, coming up with$25,000.00 to pay toward those repairs, especially in the current economic state may not be that easy. Moreover, when does the insured make a claim? What if you notice some issues that make you think something might be wrong, but you are not sure that there is structural damage. What happens in that situation where the insurance company’s engineer finds sinkhole activity but no structural damage? Does the insured have to repair the home at his expense, which can easily exceed$100,000.00, or wait until something serious happens and risk the insurer denying coverage because the insured did not give adequate notice? These are all issues that have yet to be resolved under this new statutory scheme.