On May 17, 2011, Governor Rick Scott signed Senate Bill 408 (the “Bill”) and significantly changed the landscape of sinkhole claims. Although prior versions of the Bill sinkhole carriers to offer sinkhole coverage, the final version requires homeowners’ insurers to provide coverage for sinkhole loss. Fla. Stat. § 627.706(1)(b). Therefore, insurers cannot ignore the vast amount of amendments by simply nonrenewing sinkhole coverage. However, insurers can restrict sinkhole loss coverage to the principal building as defined in the policy. Fla. Stat. § 627.706(1)(c). The Bill specifically attempts to address insurers’ concerns regarding insuring sinkhole loss in Florida, including the issues associated with defining the minimal nature of the damage required for coverage, and partially amending some of the Neutral Evaluation procedures. This article analyzes pertinent portions of the Bill and assesses its impact on the current landscape of sinkhole litigation.
The “Structural Damage” Definition
In the Bill, sinkhole loss is only verified if a professional engineer or geologist issues a written report and certification stating that, among other things, “structural damage to the covered building has been identified within a reasonable professional probability,” and “the cause of the structural damage is sinkhole activity within a reasonable professional probability.” Fla. Stat. § 627.7073(1)(a)(1-2) (emphasis added). The following provisions of Fla. Stat. § 627.7076(1), in pertinent part, clarify the terms “structural damage”:
(2) As used in ss. 627.706-627.7074, and as used in connection with any policy providing coverage for a catastrophic ground cover collapse or for sinkhole losses, the term:
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(d) “Primary structural member” means a structural element designed to provide support and stability for the vertical or lateral loads of the overall structure.
(e) “Primary structural system” means an assemblage of primary structural members.
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(k) “Structural damage” means a covered building, regardless of the date of its construction, has experienced the following:
1. Interior floor displacement or deflection in excess of acceptable variances as defined in ACI 117-90 of the Florida Building Code, which results in settlement related damage to the interior such that the interior building structure or members become unfit for service or represents a safety hazard as defined within the Florida Building Code;
2. Foundation displacement or deflection in excess of acceptable variances as defined in ACI 318-95 or the Florida Building Code, which results in settlement related damage to the primary structural members or systems from supporting the loads and forces they were designed to support to the extent that stresses in those primary structural members or primary structural systems exceeds one and one-third the nominal strength allowed under the Florida Building Code for new buildings of similar structure, purpose, or location;
3. Damage that results in listing, leaning, or buckling of the exterior load bearing walls or other vertical primary structural members to such an extent that a plumb line passing through the center of gravity does not fall inside the middle one-third of the base as defined within the Florida Building Code;
4. Damage that results in the building, or any portion of the building containing primary structural members or primary structural systems, being significantly likely to imminently collapse because of the movement or instability of the ground within the influence zone of the supporting ground within the sheer plane necessary for the purpose of supporting such building as defined with the Florida Building Code; or
5. Damage occurring on or after October 15, 2005, that qualifies for “substantial structural damage” as defined in the Florida Building Code. (emphasis added).
As discussed below, this definition provides the foundation for some of the more significant changes in how Florida requires insurers to investigate sinkhole claims. Ultimately, the applicability of this provision will hinge on insurers’ particular policy language and the outcome of insureds’ potential arguments related to waiver, ambiguity, and retrospective application of the statute. By using language such as “physical damage” rather than structural damage, many insurers’ sinkhole provisions provide greater coverage than the Bill requires. Accordingly, until insurers revise their policies to mirror the Bill, Plaintiffs’ attorneys will argue the “structural damage” portions of the Bill are irrelevant to these policies. With time, however, the Bill’s clarification of “structural damage” should provide insurers relief against the previously unsettled definition.
Neutral Evaluation
The Bill includes substantial changes and clarifications to the Neutral Evaluation procedure. Prior to the Bill, when the parties initiated the process, they each had three strikes to attempt to obtain the neutral evaluator of their preference. In addition, the Neutral Evaluation process was limited to determining causation and the subsurface stabilization repair protocol. As noted below, the Bill attempts to expedite Neutral Evaluation as well as provide the process with a more comprehensive reach.
Regarding the timing issue, Fla. Stat. § 627.7074(7)(b) provides that, if the parties cannot agree to a neutral evaluator in 14 days, the department will appoint a neutral evaluator. In addition, (7)(b) limits the parties’ strikes “without cause” to 2. Furthermore, rather than the prior language arguably requiring the neutral evaluation to occur within 45 days of the request, Fla. Stat. § 627.7074(7)(c) provides “[t]he neutral evaluator shall make reasonable efforts to hold the conference within 90 days after the receipt of the request by the department.” Further, “[f]ailure of the neutral evaluator to hold the conference within 90 days does not invalidate either party’s right to neutral evaluation or to a neutral evaluation conference held outside this timeframe.” “Regardless of when noticed,” any court proceeding is stayed until 5 days after the filing of the neutral evaluator’s report with the court. Fla. Stat. § 627.7074(10). Ultimately, the legislature appears to be clarifying the scheduling issues associated with Neutral Evaluation to avoid insureds’ attempts to avoid later submissions based solely on timing technicalities.
The Bill also allows Neutral Evaluation to stretch across all repair components of a sinkhole loss claim. Fla. Stat. § 627.7074(2) adds above ground repairs as a component the neutral evaluator must determine. In addition, the neutral evaluator must determine whether sinkhole activity caused “structural damage” under the clarified definition discussed below. Fla. Stat. § 627.7074(12). The legislature also provided the neutral evaluator’s report and testimony shall be admitted in any subsequent action, including litigation. Overall, it appears the Legislature has added a more comprehensive approach to neutral evaluation and clarified how it should be applied in litigation.
Investigating and Providing
Coverage For Sinkhole Claims
The Bill provides a new time limitation for filing sinkhole claims. Pursuant to Fla. Stat. § 627.706, insureds must report sinkhole claims “within 2 years after the policyholder knew or reasonably should have known about the sinkhole loss.” Fla. Stat. § 627.706(5). For existing claims, insurers can anticipate that insureds and their representatives will argue this limitation is not consistent with the policy’s requirement for “prompt notice.” Accordingly, until policies have been renewed to mirror this language, this provision might not have much significance as it could be construed as providing a different standard than the policy. In addition, the “reasonably should have known” language will be difficult to define considering most reported sinkhole claims result in engineers finding multiple causes of damage. Nevertheless, to some extent, the ultimate aim of this provision is to allow insurers to restrict insureds from backdating their sinkhole claims.
Under Fla. Stat. § 627.707, the legislature altered insurers’ minimum obligations with respect to handling sinkhole claims.1 Unlike under the previous version of the statute, when appropriate the insurer can deny a claim without conducting full sinkhole testing. Fla. Stat. § 627.707(1) requires insurers to inspect the property to determine if there is structural damage that “may be the result of sinkhole activity.” If not, the insurer may be able to deny the claim. However, if the insurer confirms structural damage exists but cannot identify a cause of the damage other than potential sinkhole activity, the insurer must conduct the full sinkhole testing previously provided for in Fla. Stat. § 627.707. See Fla. Stat. § 627.707(2).
If the insured has sinkhole coverage and the insurer denies the claim without performing the full sinkhole testing, then the insured can demand full sinkhole testing. Fla. Stat. § 627.707(4)(b). The insured must make this demand in writing less than 61 days after he or she received the denial. Fla. Stat. § 627.707(4)(b)(1). Contrary to the statute prior to the Bill, the insured may be held liable for the lesser of 50 percent of the actual costs of the analysis or $2,500.00. If the engineer or geologist finds sinkhole loss, then the insurer must reimburse the insured for these costs. Fla. Stat. § 627.707(4)(b)(3).
There are also several changes to the payment requirements indicating the payment and repairs might be required to be based on the insurer’s expert’s report; however, the Bill might need further clarification. If sinkhole loss is verified, then the insurer “shall pay to stabilize the land and building and repair the foundation in accordance with the recommendations of the professional engineer retained pursuant to subsection (2) … .” Fla. Stat. § 627.707(5). This provision now requires this payment to be “with notice to the policyholder,” rather than “in consultation with the policyholder,” as previously provided. If the property suffers sinkhole loss, the insured “must repair such damage or loss in accordance with the insurer’s professional engineer’s recommended repairs.” The insurer may withhold its total claims payment, not including any subsurface repairs, until the policyholder enters into a contract for the repairs “in accordance with the recommendations set forth in the insurer’s report issued pursuant to s. 627.7073.” Fla. Stat. § 627.707(5) (a). The insured must enter into a contract for stabilization repairs within 90 days after the insurer notifies the insured there is coverage. Fla. Stat. § 627.707(5)(b). This time period can be tolled by the neutral evaluation process. The insured must complete all repairs within 12 months after entering into the contract, unless there is mutual agreement; or the claim is in the process of litigation, neutral evaluation, appraisal, or mediation. Fla. Stat. § 627.707(5)(d).
Despite all of the text related to repairing the property in accordance with the insurer’s expert’s recommendations, Fla. Stat. § 627.707(5)(c) does not contain any change to the language that, once the contract is executed, “the insurer shall pay the amounts necessary to begin and perform such repairs as the work is performed and the expenses are incurred.” Accordingly, once payment is required, the limitations on repairing in accordance with the insurer’s expert appear to have vanished.
Other Property Insurance Amendments
In addition, the Bill included the following amendments, in pertinent part:
Clarifying that the statute of limitations under Fla. Stat. § 95.11 begins to run from the date of loss, rather than the date of the alleged denial or underpayment;
Fla. Stat. § 626.854:
limiting public adjuster’s compensation to 20 percent of the additional payment for reopened or supplemental claims on residential policies;
limiting compensation to 10 percent for claims during the first 12 months of a declared emergency;
defining misleading public adjuster advertising and requiring specific disclaimers in advertisements;
requiring insurers to provide 48 hours notice of inspection to insured or public adjuster before scheduling meetings for the inspections;
requiring the public adjuster to provide prompt notice and documentation to the insurer;
prohibiting insurers from excluding public adjusters from meetings for inspection with the insured;
defining limits on public adjusters’ delay obstruction by requiring them to allow reasonable access;
Fla. Stat. § 626.70132: limiting the time for filing a windstorm or hurricane claim to three years from the date of landfall or date the windstorm caused damage; and
Fla. Stat. § 627.43141: allowing insurers, with proper notice, to change policy terms at renewal without having to non-renew and reissue a new policy.
Conclusion
Overall, the Bill shows the legislature’s agreement with insurers that sinkhole claims are a serious threat to the stability of the Florida homeowners’ insurance market. Although the Bill makes several strides towards that end, there remain many issues that will need to be litigated to determine the Bill’s ultimate impact. The changes to Neutral Evaluation should strengthen the overall impact; however, the limit to two strikes might trouble some insurers. In addition, the statute of limitations for sinkhole claims requires litigating when the insured “should have known” of potential sinkhole activity, thereby placing a difficult burden on insurers to show the insured could comprehend such a science-based determination. As a broader matter, insurers will have to make significant changes to their policy language to ensure they are afforded the protections provided in the Bill. This is especially important considering the wave of counterarguments insureds will raise against insurers’ attempts to apply the new standards to existing and future claims.
Our firm has dozens of attorneys handling thousands of sinkhole claims, and a strong property department handling all aspects of first party property claims. Our attorneys understand the potential impact of the Bill and the necessary tasks required to effectively represent insurers at this extremely important time. Whether an insurer needs to revise its policy language, issue a coverage determination, or defend a lawsuit, our experienced trial and coverage attorneys can help. Should you have any questions regarding the Bill or any other first party property issues, do not hesitate to contact us.
1 Although insurers are still required to offer sinkhole loss coverage, they can require an inspection of the property prior to issuing sinkhole coverage. Fla. Stat. § 627.706(1)(b).
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