The Tennessee Legislature recently reformed the law of sinkhole coverage and sinkhole losses in the State of Tennessee with legislation which became effective July 1, 2014. Under the prior Tennessee law, every insurer offering homeowners’ property insurance in the State of Tennessee was required to make available coverage for insurable sinkhole losses on any dwelling, including contents of personal property contained in the dwelling, to the extent provided in the policy to which the sinkhole coverage attached. The interpretation of the term "make available" was subject to differing opinions. Some took the position that the insurers were required to offer sinkhole coverage to their insureds, while others took the position that the law required them to offer coverage if desired. The new legislation was intended to clarify any confusion.
The new legislation provides that every insurer offering homeowner property in the State of Tennessee shall make coverage available for insurable sinkhole losses, including contents of personal property contained in the dwelling. Julie Mix McPeak, Commissioner of the Tennessee Department of Commerce and Insurance, issued a June 12, 2014 Bulletin to clarify any concerns – "The purpose of this Bulletin is to clarify that the Department interprets the ‘make available’ provision in 56-7-130 to mean that companies may limit the availability of coverage for insurable sinkhole losses to the inception of a policy. . . . The Department interprets the statute to apply that availability to the initial purchase of a policy AND upon the request of a consumer thereafter." (Emphasis added). Clearly, sinkhole coverage is not a mandatory requirement of insurers.
One of the bill’s sponsors, Jim Tracy (R-Shelbyville) explained that the new legislation was designed to impose objective standards to verify the cause of the alleged loss due to the existence of fraudulent claims. The new legislation, however, received criticisms from representatives of homeowners, who questioned the extent of fraudulent claims, the impact of this legislation on the ability of homeowners to find affordable insurance coverage, and the need for this new legislation.
The bill sets forth specific investigation requirements upon receipt of a sinkhole claim. The new law requires an inspection of the insured’s premises to determine if there has been structural damage to the covered structure. If the insurer concludes that the structural damage to a covered building is not consistent with sinkhole activity, prior to denying the claim, the insurer must obtain a written certification from a professional engineer, a professional geologist or other qualified individual stating that the sinkhole activity did not cause the alleged structural damage.
Also, the insurer may limit its total claims payout for damages to the covered building. Under the new law, the insurer may limit payment to the actual cash value of the sinkhole loss to the covered building, excluding costs associated with building stabilization or foundation repair, until the policyholder enters into a contract for the performance of building stabilization or foundation repairs in accordance with the recommendations of the engineer retained or approved for the insurer.
Additionally, to be eligible to receive payment for building stabilization or foundation repairs, or any other loss to the covered building in excess of the actual cash value of the sinkhole loss to the covered building, the insured must repair such damage or loss in accordance with the plan of repair approved by the insurer. The new statute provides a detailed procedure for payment of claims.
Finally, the new law provides that an insurer may cancel, decline to renew or decline to issue any homeowner policy insurance on a structure that has been subject to a sinkhole loss claim if the structure:
Has not been repaired in accordance with a plan of repair approved by the insurer and within the time constraints set forth therein; or
Is subject to the risk of future sinkhole damage because of unstable land.
The new legislation is designed to impose objective standards to assist in the reporting and processing of sinkhole claims. It is a positive step toward accomplishing these goals.