Sinkholes

A sinkhole is a depression caused by an erosion of the ground underneath it. Sinkholes occur most often in areas where carbonate rock, such as dolostone or limestone, rests underneath the soil. These stones dissolve in water and can lead to massive underground caves that may collapse and cause considerable damage to the ground above them. Drought conditions, or dry periods following rain, increases the likelihood of sinkhole activity.

According to the U.S. Geological Survey, about 35 - 40 percent of U.S. land is susceptible to sinkholes- areas most commonly referred to as “karst terrain.” The most damage from sinkholes tends to occur in Florida, Texas, Alabama, Missouri, Kentucky, Pennsylvania, and Tennessee, with Florida and Pennsylvania having the highest rates. Florida, Pennsylvania, and Tennessee have laws that guarantee sinkhole insurance and laws requiring home insurance providers to offer sinkhole coverage. But repairing a minor sinkhole can run anywhere from $30,000 to $200,000 and most insurance policies do not explicitly cover sinkhole damages. In this case, insurers may only accept a claim if it can be proven that the sinkhole was the result of a covered peril (e.g. flooding from a hurricane. Additionally, over the last 15 years, sinkholes have resulted in over 300 million dollars of damage.

Background

In 2012 a massive sinkhole emerged in Assumption Parish, Louisiana. The sinkhole was caused by a collapse on the wall of a salt dome owned and operated by the Texas Brine Company. Since then, the sinkhole has taken up over 37 acres of land and caused the evacuation of 350 residents. Multiple legal disputes have ensued, incurring over $75 million in insurance claims. The legal disputes and reinsurance implications of this disaster ongoing, with most focused on: “Whose fault was it?” and “Who is liable to pay the damages?”

Over the past few decades, the insurance market has experienced tremendous uncertainty regarding sinkhole coverage. After an extremely volatile hurricane season, multiple sinkholes developed in Central Florida, swallowing cars, yards, and entire homes. Florida is essentially built on a bed of limestone and the excess rain from Hurricane Irma most likely triggered the opening of these cavities.

Many homeowner insurance policies do not cover damages specifically caused by sinkholes. Instead, the insured must prove that the collapse was the result of a covered peril that is covered by the homeowner insurance policy. In the most recent cases, residents had to prove that a sinkhole affecting their property was the result of flooding caused by a hurricane.

Most insurance policies will cover the loss of a house but will not pay to have the plot of land filled with dirt or to have the foundation stabilized. So, the insured may have a home with nowhere to put it. After natural catastrophes, some homeowners are eligible to receive assistance from FEMA if it can be demonstrated that the disaster contributed to the opening of the cavity.

Sinkholes can be catastrophic and quite difficult to insure. Sinkhole coverage tends to get excluded in standard home insurance policies because it is difficult for insurers to predict sinkhole occurrence. In many cases, once land has collapsed due to a sinkhole, insurers can discontinue underwriting coverage for that property. Moreover, sinkhole coverage policies are extraordinarily expensive in most high-risk areas. Sinkholes are impossible to predict and that level of uncertainty is what makes it challenging for insurers to appropriately price coverage. The primary reason for this uncertainty is that there is no efficient method or device to measure where sinkholes are located or when they might occur.

Injuries and Damages

Sinkholes can lead to several types of economic liability for the owner of the affected property, as the Texas Brine Company case illustrates.

Case Study: Bayou Corne Sinkhole, Assumption Parish, Louisiana
The Texas Brine Company (TBC), the owner of a brine mine in Assumption Parish, Louisiana, operated on a mine that caused the steady opening of a massive sinkhole. In 2012, residents began to notice an unusual shaking and bubbling from the water of the bayou. The sinkhole was caused by the gradual collapse of an underground salt dome operated by Texas Brine LLC. Louisiana governor, Bobby Jindal, issued an evacuation order affecting 350 nearby residents. Since 2013, the sinkhole has spread to occupy over 37 acres.

TBC was responsible in paying evacuated residents of the Bayou weekly checks of $875. Texas Brine was also ordered by the governor to offer a buyout to the 350 evacuated residents, many of whom refused the offer. To date, Texas Brine is still responsible for managing the sinkhole and has burned off 25 million cubic feet of gas to deplete the escaping reserve.

Liability and Insurance

Due to the uncertainty and unpredictability of sinkholes, there is a limited selection of coverage that is offered. The most basic types of coverage include Sinkhole Loss Coverage and Catastrophic Ground Collapse.

Sinkhole Loss Coverage
Most major insurance companies offer policies with coverage that is limited to events caused by previous mining operations and exclude naturally occurring sinkholes. In a state that is prone to natural sinkholes, insureds will most likely need to obtain coverage from a local insurance company.

To get sinkhole coverage, an insurer will order a geological survey of the property to make sure that there is no obvious risk of collapse. Insurers will price premiums, which tend to be extremely expensive, based on the probability of sinkholes occurring in that area.

Catastrophic Ground Collapse
Florida and Tennessee are the only two states that require homeowners’ insurance policies to cover “catastrophic ground collapse.” For this coverage to apply to damages, the sinkhole must meet four criteria:
a. An abrupt collapse of the ground must occur
b. The depression must be visible to the naked eye
c. Structural damage must be done to the building that is insured, with clear damage to the foundation
d. The insured structure must be condemned and receive an order of evacuation from a government agency authorized to issue one

In the cases of Florida and Tennessee, catastrophic ground coverage will not be activated unless the structure is condemned.

Some states do require insurers to offer optional sinkhole coverage for an additional premium. Larger insurance companies such as Nationwide, Travelers, and USAA do offer sinkhole endorsements in high-risk areas.

Litigation

The uncertainty of insurance coverage of sinkholes has meant that often litigation surrounding this area involves cases where sinkholes were not covered by the policy prior to a major incident or knowledge of risks can play a factor. Other cases have centered around disputes of the definition of “structural damage” as defined in sinkhole coverage policies.

Florida Sinkhole Incident
Florida’s 4th District Court of Appeals reversed a decision that dismissed a lawsuit filed after a sinkhole damaged Susan Singari’s home. Cigari’s home in Boca Raton was damaged in 2015. The insurer argued the damage was not covered (claiming it was caused by a sinkhole) and said its payments were “gratuitous,” but the court found this could suggest the company failed to properly and timely investigate the claim.

Baltimore Settlement
After a sinkhole in Baltimore City destroyed several resident’s homes in 2022, one resident sued the city for negligence. Although the city debated whether they had notice of this potential collapse, ultimately a settlement of $250,000 was agreed after this 115-year-old storm drain collapsed.

Hagel v. First Liberty
In 2011, after the Hagels discovered damage to their home, they attempted to file a claim under their homeowner’s insurance policy, which covered “sinkhole loss,” defined as “structural damage to the building, including the foundation, caused by sinkhole activity.” The U.S. Court of Appeals for the Eleventh Circuit ultimately reversed the lower court’s decision, which had equated structural damage with “any damage to the structure,” and remanded the case, finding that the scope of coverage was narrower based on the policy’s language change from “actual physical damage” to “structural damage.”.

Future Outlook

As of now, insurance coverage of sinkholes is an uncertain terrain. When it comes to damage of a home, homeowners must go to great lengths to get coverage for repairs. When a sinkhole occurs at the same time as a natural disaster there is no guarantee that the damage will be covered. And in the case of sinkholes caused by human negligence, we are still waiting to find out if reinsurers are liable to pay for excess damages. Humans are increasingly siting developments on sinkhole prone land, meaning that the impact of sinkholes will be more acutely felt. Additionally, it has been found that drought conditions can exacerbate conditions that lead to sinkholes, meaning that as climate change results in changing water levels, sinkholes could increase. Therefore, the insurance industry will have to determine what, if any, coverage to provide.