That Sinking Feeling

By Mark Goldwich

Image from failures.wikispaces.com

If you live in the state of Florida, you know what a sinkhole is. In fact, even if you live outside of the state of Florida, and just happen to watch the national news from time to time, you probably know what a sinkhole is. Most of your information about the subject probably comes from news reports centering on homeowners who live in the state of Florida, usually in the central part of the state, who are unlucky enough to have the earth open up and eat their homes, forming gaps wide enough to make the homes unlivable.

If you were to ask a geologist what a sinkhole is, he or she would tell you that a sinkhole is a depression in the earth's surface, occurring gradually or suddenly, typically caused by chemical reactions within underground rock formations, or by suffusion within underground minerals like Sandstone. The geologist might go on to tell you that a sinkhole can range in width from about 3 1/2 feet to 2000 feet. And the geologist might also mention that sinkholes, which are found all over the world, vary widely in form and structure.

You know what a sinkhole is. I know what a sinkhole is. An engineer or geologist knows what a sinkhole is. I suspect most kids in the state of Florida know what a sinkhole is.  But for some strange reason, the insurance industry in the state of Florida doesn't seem to know what a sinkhole is – or rather, they didn’t like what it used to be.

Don't misunderstand. The various insurance companies have written plenty of policies covering damage to Florida homes arising from sinkholes. The problem is though, that when Florida homeowners try to collect on those policies, they find that what the insurance company considers a sinkhole doesn't match up with what the homeowner thought he or she was buying insurance to protect the home against.

Here is what happened. The insurance companies took a look at all the money they were paying out

on valid claims for damages arising from sinkholes – you know, the kind you see on the news gobbling up houses or portions thereof, and causing tens of thousands of dollars in damage to homes? But more than that, they also had to pay on many more claims where the damage was not so horrific. The costs added up and the bean-counters didn’t like it.

Financial Sinkhole image from moneysavingmom.com

The insurance companies decided two things. First, they did not like paying out all that money to homeowners. And second, it didn't make sense to suddenly stop covering sinkhole damage – presumably because there would be legal and/or public relations problems with that course of action.

So the industry just lobbied for a law, which passed the Florida legislature (as many do, when backed by the full faith and credit of the insurance industry lobbyists). They created a much narrower, more restrictive definition of what constitutes a sinkhole.

This new definition affected countless policies and countless unsuspecting homeowners who had relied on the policies. If the sinkhole appeared, the homeowner found that what he or she thought was a sinkhole – what a qualified geologist thought was a sinkhole – was in fact something else under Florida law. What it was, besides a devastating financial loss to the homeowner, is hard to say. Because for all intents and purposes, a hole that opens up unexpectedly beneath your house, causing cracks and other damages, and costs tens of thousands of dollars to fix, would seem to be a sinkhole.

Insurance companies in Florida don't have to call it that, though, because their friends in the Legislature have decided they don't have to. Good thing for them, too, because calling these things sinkholes would mean the insurance companies had to pay homeowners for the damage. As it stands now, they only have to pay damage for "catastrophic ground collapse" incidences.

Image courtesy of moneyandmatters.com

The question arises: when the actual coverage provided against the risk of subterranean voids damaging their homes dropped through the floor (no pun intended), did the premiums the consumers have to pay drop dramatically too? If you have been paying attention to the examples of how insurance works thus far, you already know the answer. This is all part of a disturbing trend that has played out over the past couple of decades. Consumers in Florida find themselves carrying more and more of the financial risk for events they think they're covered against – but aren't.

The "sinkhole problem" I have just described for you is part of a much larger problem facing the insurance customer. The problem is this: having discovered it has substantial legislative power at its disposal, the industry has now committed itself to using that influence in support of the strategic goal of giving consumers less and less value over time for the same amount of money.  This trend is clear in a hundred little ways. One is the sinkhole maneuver I just described. Another variation has to do with the replacement of flooring, or other surfaces, for that matter.

Let's say you're hanging a ceiling fan in your home. You're up on a ladder, and you accidentally drop a tool. That tool hits and cracks one or more squares of ceramic tile on your floor. You survey the damage and ask yourself, "Hmm… Am I covered for that?" And you climb down from the ladder to check your original policy. It tells you that yes, you are covered for this kind of damage and that the insurance company is obliged not only to repair the damaged tile, but replace the entire tile floor if they can't locate a matching replacement tile. That, you tell yourself, is why you have been paying premiums all these months and years. You're in the clear, right?

Actually it turns out that you're not in the clear. When you go to your insurance company to file the claim, your company adjuster tells you that you've missed an important update that went out by mail.

“That's entirely possible,” you think to yourself. There are a lot of official looking notifications that come through from your insurance company. You don't scan each and every one of them word for word.

A cynical person might conclude that that's what the insurance companies are counting on, because one of those updates informed you of a change in your policy that puts you in a very bad position.

One such notice might say the total maximum damage you're covered for a loss such as this is $8,000. Because your specific tile is now out of stock, it's impossible to match the tile you broke when you dropped that tool. You now have  the choice of placing a piece of tile on your floor that doesn't match – which would drop the value of your home – or replacing the whole floor, which could cost you $30,000 (for example), less the $8000 the insurance company is now willing to pay.

You;re out $22,000 for something you thought was covered – something that actually was covered when you bought the policy. But then you got that notification in the mail. The one you did not read thoroughly enough. As it turns out, it doesn't really matter whether you read that notification not, because there was nothing you could have done to win that coverage back.

Image from en.wikipedia.org

You're paying about the same amount for the premium, but your coverage has declined in value. You have no options. How did that happen? The insurance company lost a high-profile lawsuit that held in such situations, both the policy and the law mandated that the company was obliged to replace the entire floor. This however, was a case of the consumer winning the battle but losing the war.

Specifically, ONE consumer won the battle. The rest of the consumers lost the war when the allies of the insurance industry decided that it was time to end that kind of lawsuit once and for all. They pushed through legislation that allowed the insurance company to declare that its liability in such circumstances was limited to a certain fixed amount: in this case, $8,000. Note: this is not to say everyone has a limit of $8,000 on tile flooring, or roofing, or screen enclosures, etc., just that you need to check your policy and be sure you know what your limits (and sub-limits) are.  As you can see, this is not really a sinkhole problem and it's not really a tile problem. The real problem is that either way, you're sunk.

It's a problem where the insurance industry continues to sell you something, month after month, that what you thought was worth X, is no longer worth that much.  Lately this trend has gotten worse – a court has since ruled that the damage described above is now considered “marring,” part of the standard insurance policy exclusion for “wear and tear.” Really? Accidentally dropping a heavy object on a tile floor is now “wear and tear?” And now that insurance companies are no longer paying millions of dollars each and every year on these claims as they have been for decades, do you know how much your premiums have gone down? You guessed it – ZERO!

The next time you are on that ladder, if you hope to avoid that sinking feeling, be EXTRA careful!

Mark Goldwich is president of Gold Star Adjusters, a group of public insurance adjusters dedicated to helping citizens get the maximum settlement for any insurance claim.