Fraud adds to Florida's sinkhole debacle

Amy Higgins

Florida has more sinkholes than any other state in the country, according to the Florida Office of Insurance Regulation FLOIR). Sinkholes can cause substantial damage to a property, so acquiring sinkhole coverage under home insurance is vital to many Florida residents. However, sinkhole claims have risen significantly both in frequency and in total cost across the Sunshine State. And part of that increase may be blamed on fraud.

Opportunity for fraud

FLOIR found that total sinkhole costs jumped from $209 million in 2006 to $406 million in 2009. It also found that there was an increase in reported sinkholes in parts of South Florida, where sinkholes traditionally had not been an issue. Between 2006 and 2010, there were 24,671 open and closed sinkhole claims and $1.4 billion in total sinkhole costs, FLOIR found.

This vast increase in Florida sinkhole claims may smell fishy to some. Could home insurance policyholders be making fraudulent claims? Some policyholders do make claims about cracks in driveways and walls that are caused by sinkholes.

Regardless of their legitimacy, these issues must be investigated and sometimes require ground testing -- which costs thousands of dollars, according to Lynne McChristian, the Florida representative for the Insurance Information Institute. So, even if it is determined that the damage was not caused by a sinkhole, the insurance company already will have shelled out thousands to prove that.

Yet reports of excessive fraud appear to be unsupported. Less than 1 percent 203 out of 24,671) of the total claims reported from 2006 through 2010 were reported to the Department of Financial Services Division of Insurance Fraud, FLOIR points out.

However, policyholders may not be the problem. There is money to be made through testing for sinkholes and repairing them, according to McChristian. Geographical experts and repair professionals could be encouraging homeowners to make sinkhole insurance claims. This could account for the sudden increase in claims filed.

Consequences of sinkhole fraud

If sinkhole fraud is driving up claims, insurance companies' losses could trickle down to all property owners. FLOIR identifies increased sinkhole claims as one of the biggest factors affecting home insurance rates.

In April 2011, Florida insurance regulators approved State Farm Florida's request for rate hikes. The 18 percent rate hike which is less than the 28 percent that State Farm originally sought) will go into effect on July 1, 2011, according to the Miami Herald. The company claims that in the past five years, it lost $327 million on sinkhole claims. Also citing sinkhole losses, Citizens Property Insurance Corp., a government-backed entity that insures those who can't find coverage in the regular market, is awaiting approval of its latest rate increase request.

Increases in Florida home insurance premiums could be financially catastrophic to residents, as they already pay some of the highest home insurance premiums in the United States. According to the Insurance Information Institute, the average home insurance premium in Florida in 2008 was $1,390, nearly double the U.S. average of $791. But homeowners who decline sinkhole coverage could find themselves drowning in debt if their homes suffer major sinkhole damage.

Are changes coming?

As part of his platform in the 2010 gubernatorial election, Florida Gov. Rick Scott promised to fight sinkhole fraud, proposing reforms like a stricter definition of "structural damage" that must be covered by insurers and a statute of limitations on filing sinkhole claims. Pending legislation Senate Bill 408) introduced in early 2011 by state Sen. Garrett Richter would make it easier for insurance companies to refuse sinkhole coverage. The bill also seeks to crack down on sinkhole fraud by redefining the term "losses" and excluding certain damages.

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