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Property Insurance Coverage Insights

Florida Regulator’s Rejection of Sinkhole Endorsement Limiting Coverage To 25% of Overall Limit of Liability Upheld

Posted in Policy Conditions

Amid a rash of recent, high-profile sinkhole losses, last week Florida’s First DCA affirmed the Florida Office of Insurance Regulation’s interpretation of a state statute as requiring property insurers to offer an endorsement covering sinkhole losses for the full amount of the coverage limit. The decision resolves some lack of clarity over whether carriers had discretion over how much sinkhole coverage to offer.

Florida Statutes Section 627.706 “Sinkhole insurance; catastrophic ground cover collapse; definitions” provides:

(1)(a) Every insurer authorized to transact property insurance in this state must provide coverage for a catastrophic ground cover collapse.

(b) The insurer shall make available, for an appropriate additional premium, coverage for sinkhole losses on any structure, including the contents of personal property contained therein, to the extent provided in the form to which the coverage attaches. The insurer may require an inspection of the property before issuance of sinkhole loss coverage. A policy for residential property insurance may include a deductible amount applicable to sinkhole losses equal to 1 percent, 2 percent, 5 percent, or 10 percent of the policy dwelling limits, with appropriate premium discounts offered with each deductible amount.

(c) The insurer may restrict catastrophic ground cover collapse and sinkhole loss coverage to the principal building, as defined in the applicable policy.

. . .

(3) Insurers offering policies that exclude coverage for sinkhole losses must inform policyholders in bold type of not less than 14 points as follows: “YOUR POLICY PROVIDES COVERAGE FOR A CATASTROPHIC GROUND COVER COLLAPSE THAT RESULTS IN THE PROPERTY BEING CONDEMNED AND UNINHABITABLE. OTHERWISE, YOUR POLICY DOES NOT PROVIDE COVERAGE FOR SINKHOLE LOSSES. YOU MAY PURCHASE ADDITIONAL COVERAGE FOR SINKHOLE LOSSES FOR AN ADDITIONAL PREMIUM.”

In Farm Bureau Gen. Ins. Co. v. State Of Florida, Office of Insurance Regulation, No. 12-2265, 2013 Fla. App. LEXIS 3925 (Fla. 1st DCA Mar. 13, 2013), Farm Bureau sought approval as required by Florida Statutes § 627.410(1), of an amendment to its sinkhole endorsement that would have limited sinkhole loss coverage to twenty-five percent of the overall coverage amount. The regulator rejected the amendment, construing section 627.706(1) as “requir[ing] insurers to offer sinkhole loss coverage in an amount equal to the dwelling coverage limit.”

On appeal, the parties disputed the appropriate interpretation of the requirement that carriers offer sinkhole coverage “to the extent provided in the form to which the coverage attaches.” Farm Bureau argued that “the form to which the coverage attaches” referred to the sinkhole endorsement form, permitting Farm Bureau to reduce sinkhole coverage on the face of endorsement itself. The regulator argued “the form to which the coverage attaches” is the base property insurance policy, therefore requiring carriers to offer sinkhole coverage coextensive with the limits of the policy.

The court noted two separate bases for affirming the regulator’s decision. First, the regulator’s interpretation is adequate under the applicable standard looking to whether the interpretation “falls within the permissible range of interpretations.”

Second, the court noted that Farm Bureau’s position was not consistent with the purpose of the statute. The court concluded that § 627.706(1) guarantees Florida property owners access to protection against sinkhole losses by requiring carriers to offer a sinkhole endorsement. Farm Bureau’s interpretation would undo that guarantee by allowing carriers to limit the coverage on the face of the endorsement. The court concluded that it would not make sense for the legislature to conclude sinkhole losses are significant enough to require carriers to offer coverage and then simultaneously permit carriers to offer only 25% coverage. As the court noted, “the Office’s argument [is] that its interpretation ensures property owners have available to them meaningful sinkhole loss coverage, while Farm Bureau’s interpretation would permit insurers to offer so little sinkhole insurance as to make the optional coverage valueless.”