September 21, 2010 18:24
One of the things that is so intriguing about climate change is the development of things that no one is anticipating. More sophisticated thinkers call this the "law of unexpected consequences." I simply defer to Heraclitus: "expect the unexpected." So here.
Today's Wall Street Journal has an intriguing article on the asymptotic rise of sinkhole claims against insurance companies. Florida's insurer of last resort, Citizens Property Insurance Corp., has seen sinkhole claim rates double since last year. Insurance industry spokesmen and some legislators blame a rapid increase in the number of public adjusters in Florida. The public adjusters respond that they are merely enforcing policyholders' contractual rights. They further assert that the source of the claims is too-rapid development that allowed building in areas sure to develop sinkholes.
Sinkhole coverage is mandated by Florida law. See F.S.A. 627.706. One insurer uses this language: "We cover sinkhole loss to your house and other permanent structures caused by sinkhole activity. We also cover the costs to: stabilize the land under and around your damaged house or other permanent structure; stabilize the house or other permanent structure; and repair the foundation, caused by sinkhole activity in accordance with the recommendations of a professional engineer approved by us and in consultation with you." You can see the room for conflict when this is juxtaposed with a typical exclusion for structural movement: "We do not cover any loss caused by the settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings except loss caused by sinkhole activity or catastrophic ground coverage collapse as provided under Extra Coverages ..." It is set up as a classic battle of the experts. If the policyholder's expert is credited, a cracked foundation is caused by a sinkhole. If the insurer's expert is accepted, the cracked foundation settled and is excluded.
So what do sinkholes have to do with hurricane insurance? We have previously discussed that Citizens does not charge enough premium to cover expected hurricane losses. See climatelawyers blog of Feb. 5, 2009. Now we learn that the carrier has not charged enough premium to cover sinkhole claims either. In fact, according to the Wall Street Journal, Citizens paid out last year over 5 times what it collected in sinkhole premiums. So just when Florida needs its property insurance the most (because climate change is going to bring more frequent and more severe storms), Florida's insurers are even less likely to be able to pay the claims because of the mushrooming sinkhole problem.
I also should comment on the attacks on public adjusters. The insurance contracts provide certain rights. A public adjuster earns no dollars for his/her client unless someone (judge, jury, arbitrator, claims handler) credits his/her argument that there is coverage. The flip side of this is that the decisionmaker is also deciding that the carrier's language does not exclude the claim. If these circumstances occur, it seems a little ostrich-like to blame the public adjusters for the fact that there are too many claims. The problem has to be in the policy language, with which public adjusters had nothing to do.
The so-called problem with adjusters should not have been unexpected. Legislators are not insurance policy draftsmen. The threat to Citizens and Florida's other home-grown property insurers may have been less apparent. Who would have thought that sinkholes would take away the insurance structure Florida labored mightily to build in the face of increasing storms?
Or who would have thought otherwise? Florida's insurance paradigm is broken, whether for hurricanes or sinkholes. Premium does not cover losses. Until that is fixed, one can expect more problems even if the exact contours of the problems are not now known.