On August 11, 2013, a gaping sinkhole swallowed a three-story building at the Summer Bay Resort in Orlando, Florida, near Disney World.1 The sinkhole was estimated to be as great as 60 feet across and 15 feet deep.2 This is just one example of how sinkholes can unexpectedly cause devastating physical damage and lead to significant economic losses.
According to the Florida Department of Environmental Protection, the state of Florida is experiencing more sinkholes than any other state in the nation. However, sinkholes are not a new phenomenon and can certainly occur at any time, in many different locations. Here are some examples:
In August 2013, a sinkhole near McGill University consumed a backhoe in the middle of a busy downtown Montreal Street.3
In March 2013, a sinkhole swallowed a golfer, dislocating his shoulder, while he was playing at the Annbriar Golf Course in Waterloo, Illinois.4
In March 2013, a 37-year-old man was swallowed up by a sinkhole while sleeping in his bedroom in his home near Tampa.5
In 1981, a sinkhole with a width of 350 feet and a depth of 75 feet—nearly 30 times the size of the Summer Bay sinkhole—struck Winter Park, Florida, causing significant damage.6
Some geological experts attribute the increase to urban expansion, including developers pumping more water out of the ground for new projects or for agricultural use. States are responding by enacting statutes requiring every insurer authorized to sell property insurance in the state to also provide coverage for catastrophic ground cover collapse. See Florida Statute 627.706. Additionally, all insurers licensed to do business in Florida must offer sinkhole coverage, usually as an endorsement to an existing policy, often for an additional premium charge.
Scope of Sinkhole Losses and Coverage
In the event of a sinkhole, it is critical that policyholders assess as quickly as possible the extent of their losses and the scope of coverage available to cover those losses. Insurers will request detailed proof of the loss claimed under the policy and documented evidence of the expenses incurred in responding to that loss. Policyholders must fully understand the scope of coverage afforded by their policies to maximize the potential for recovering all covered losses.
Businesses and home owners may consider purchasing sinkhole coverage because Florida law, for example, defines sinkhole damage differently from catastrophic ground cover collapse. Florida law defines a sinkhole as "a landform created by subsidence of soil, sediment, or rock as underlying strata are dissolved by groundwater. A sinkhole may form by collapse into subterranean voids created by dissolution of limestone or dolostone or by subsidence as these strata are dissolved." See Florida Statute 627.706. Florida law defines "catastrophic ground cover collapse" as geological activity that results in all the following:
The abrupt collapse of the ground cover;
A depression in the ground cover clearly visible to the naked eye;
Structural damage to the building, including the foundation; and
The insured structure being condemned and ordered to be vacated by the governmental agency authorized by law to issue such an order for that structure.
See Florida Statute 627.706. Chapter 627 of the Florida Statutes also states: "Contents coverage applies if there is a loss resulting from a catastrophic ground cover collapse. Structural damage consisting merely of the settling or cracking of a foundation, structure, or building does not constitute a loss resulting from a catastrophic ground cover collapse." See Florida Statute 627.706.
Businesses are well advised to carefully review their property policy to determine if, and to what extent, insurance will protect against sinkhole losses. Property policies frequently contain sublimits and deductibles that apply differently depending on the covered peril causing the policyholder's losses. Just last month, the Florida First District Court of Appeal upheld a decision by state insurance regulators rejecting Farm Bureau Financial Services' attempt to amend its sinkhole coverage endorsement that would limit sinkhole loss coverage to 25 percent of the overall coverage amount.7
Policy Conditions and Requirements
Policyholders should be wary of their policies' potential time traps. For example, a policy may obligate the policyholder to provide the insurer with notice of a loss "as soon as possible" or "as soon as practicable" after a loss or other insured event. Some policies require that notice be given in as little as 30 or 60 days. Failure to give prompt notice has different consequences for the policyholder, depending on the type of policy and the jurisdiction, and may even completely bar a policyholder's claim.
Additional Coverages, Including Business Interruption and Extra Expense
In addition to covering property damage, many property policies also provide some or all of the following coverages designed to recover non-property sinkhole-related losses.
This coverage frequently reimburses the policyholder for the loss in profits that the policyholder would have earned but for the interruption to its business. Business interruption coverage sometimes, but not always, requires that "interruption" result from damage to covered real or personal property. Policyholders, for example, have obtained reimbursement under such coverage when widespread disasters such as Hurricane Katrina and the September 11 terrorist attacks caused business interruption. Business interruption coverage provisions typically apply even when a policyholder is forced to relocate in order to maintain business operations or to minimize its overall loss. Most business interruption policies limit business interruption losses to the time required to complete repairs with "due diligence and dispatch." Determining the time to complete repairs after a significant sinkhole loss could be challenging.
This provides coverage for losses that the policyholder incurs from interruption of utility services that result from physical damage to the property that supplies the utility. Property policies frequently provide this coverage, although they may require that the interruption of service last a minimum amount of time. The coverage may be subject to separate and lower limits of insurance than other business interruption coverages. Service interruption coverage can vary widely with regard to what types of utilities are covered. Depending on the specific service interruption coverage purchased, it may apply to several services, including water, communications, and power supply. With no electricity, for example, there may be—like many in New York, New Jersey, and Connecticut experienced after Superstorm Sandy—a massive gas shortage (even if stations had gas, with no power they could not pump it), meaning that goods and services cannot get delivered and employees cannot get to work.
This coverage protects the policyholder from losses caused by the inability to access its premises when a civil authority denies such access because of covered damage to, or destruction of, property belonging to third parties. Some civil authority coverages require physical damage to the policyholder's own premises; others do not. A "civil authority" for purposes of this coverage may extend beyond federal and state governments. For example, after the September 11 terrorist attacks, some policyholders successfully argued that the baseball commissioner's cancellation of games constituted an order of a civil authority.
Similar to civil authority coverage, ingress/egress coverage may be available when access to ("ingress") or from ("egress") an insured's premises has been prevented or made more difficult because of sinkholes. Unlike civil authority coverage, no governmental act is required to trigger this coverage. Many policies cover losses when "ingress" to or "egress" from insured premises is "prevented" because of a covered peril. In the aftermath of sinkholes, many businesses may be unable to operate because employees cannot get to work if roads are closed or otherwise blocked. The availability of ingress/egress coverage varies greatly from policy to policy. Frequently, a policy will cover the loss sustained by an insured "due to the necessary interruption of the Insured's business due to prevention of ingress to or egress from the Insured's property, whether or not the premises or property of the Insured shall have been damaged" if the interruption resulted from damage of a type insured against by the policy.
Contingent Business Interruption
Typically, this covers two types of business interruption. First, it protects against economic losses caused by a "direct" supplier's inability to get its goods to the insured due to damage to, or destruction of, the supplier's property by an insured peril. Second, it protects against economic losses caused by damage to or destruction of a customer's property that prevents the customer from accepting the insured's products. Accordingly, businesses located nowhere near a sinkhole may still suffer insured losses.
This coverage indemnifies the insured for reasonable and necessary extra or increased costs of business operations above the norm because of a peril insured against. It may include coverage for, among other things, costs incurred for the insured to temporarily continue business operations "as normal as practicable," such as the temporary use of the property or facilities of others.
Maximizing Insurance Recovery
Pursuing an insurance claim following a sinkhole loss may be a complex and challenging process. Even sophisticated businesses unknowingly commit errors in assessing, documenting, and quantifying their losses or interpreting their insurance policies that later limit or even bar potential insurance recovery. Policyholders should carefully review their coverages, comply with all policy conditions, and strategically approach their insurance claims to maximize coverage and avoid pitfalls.
Christopher M. Brophy is a managing director with FTI Consulting in the Business Insurance Claims Practice of FTI's Forensic and Litigation Consulting business segment. He writes the catastrophe risk management column for www.IRMI.com. For background and contact information for Mr. Brophy, see his full biography.
Jared Zola is the northeast regional leader for Dickstein Shapiro's Insurance Coverage Group and is based in the firm's New York and Stamford offices. He also leads the group's Property & Business Interruption Practice. Mr. Zola's work in cutting edge and complex insurance coverage cases across the country earned him recent praise. The 2013 edition of Chambers USA: America's Leading Lawyers for Business ranked him in the "Policyholder: New York" category, and commentators have credited Mr. Zola as accomplished and responsive and said that he "provided clarity throughout the legal process—he was unequivocal in his commitment to the legal resolution." The 2012 edition of Legal 500 recognized Mr. Zola as "outstanding." He was also recognized as a "Rising Star" in 2011 and 2012 by New York Super Lawyers.
His practice focuses on representing corporate policyholders in insurance coverage litigation, as well as negotiating settlements with prominent property and casualty insurers. Since joining the firm, Mr. Zola has participated in the trials of several major coverage matters and dealt with a variety of significant and complex insurance coverage disputes, including professional liability, sex abuse, first-party disputes, asbestos, environmental, toxic torts, construction defects, directors and officers, and bad faith. His work has secured more than $700 million in insurance recoveries for clients.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
1 "'I have a bad feeling': Resort guests barely escape as 40 foot sinkhole opens up near Disney World," NBCNEWS.com (August 12, 2013).
2 John Schwartz, "Sinkhole Swallows Part of a Building at a Resort in Florida," New York Times (August 12, 2013).
4 "Golfer swallowed by Sinkhole," ABCNEWS.go.com (March 12, 2013).
5 "Florida Resort hit by sinkhole invites guests to 'come on down,'" Chicago Tribune (August 13, 2013).
6 "Florida's Most Famous Sinkhole," TheGuardian.com (August 14, 2013).
7 "Florida Upholds Florida Sinkhole Insurance Loss Rule," Insurance Journal.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI.
Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion.
If such advice is needed, consult with your attorney, accountant, or other qualified adviser.