As many are aware, the Tennessee Legislature recently amended T.C.A. § 56-7-130, the statute requiring insurance carriers offering homeowner’s insurance in the state to “make available” sinkhole coverage to their insureds. The original statute was enacted in 2006, and its verbiage has created a few issues now going through the court systems. I wanted to comment further on this amendment as it relates to coverage litigation specifically.
The original statute imposed the following requirement upon homeowner property insurers in the state:
(b) Every insurer offering homeowner property insurance in this state shall 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 attaches.
Tenn. Code Ann. § 56-7-130. Some insureds took the position that the meaning of “make available” was that insurance companies had to affirmatively offer sinkhole coverage to their insureds, while insurance companies took the position the statute simply required them to have the coverage available for purchase if desired.
Many lawsuits were filed throughout the state over this specific issue with mixed results. Some trial courts granted summary judgment to insurers and determined insurance companies were not required to affirmatively offer the coverage to their insureds. Other courts found that a fact issue existed preventing the court’s ruling on the issue. Many of these cases are still pending – awaiting a ruling.
Not only does the new verbiage of the statute resolve the “problem” but it clarifies that sinkhole coverage is optional and available upon request by the insured. The statute now makes it clear sinkhole coverage is not mandated to be included in homeowner property insurance policies – only that such coverage be available for optional purchase on request by policyholders. Importantly, the legislative history of this amendment reveals that the legislature did not intend to change the requirements that previously existed – merely to clarify what the requirements were.
The new statute also adds several helpful definitions such as “building stabilization or foundation repairs”, “covered building”, “homeowner property insurance”, “land stabilization”, “primary structural member”, “primary structural system”, and “structural damage” helpful in interpreting the law. According to the new statute, “sinkhole loss” is further clarified to require coverage for “structural damage” and does not include land stabilization. Without “structural damage”, as defined by the statute, any other cracking, shrinking, and/or expansion damage would not be covered even if actually caused by a sinkhole unless otherwise covered under the terms of the policy.
The old statute seemed to required insurers to take certain investigative steps upon receipt of a sinkhole claim:
(d) Upon receipt of a claim for a sinkhole loss, an insurer shall meet the following minimum standards in investigating a claim:
It was not clear whether an insured had to actually have the sinkhole coverage before insurance companies had to follow the required investigative procedures. Now it is clear – insurers are required to follow the statute’s specific investigation standards only if the insured’s policy contained the sinkhole coverage.
Under the standards, if sinkhole coverage is provided, upon a claim for sinkhole loss, the carrier must inspect the property. If structural damage possibly caused by sinkhole activity is present, before a sinkhole claim may be denied, written certification must still be obtained from an engineer or other qualified professional that sinkhole activity did not cause the observed structural damage.
If a loss is covered and determined to be the result of sinkhole activity, the statute speaks directly to how the claim is to be paid. The carriers, through the terms of their policies, may limit recovery to the Actual Cash Value of the loss, excluding the costs for building stabilization or foundation repair, until the insured actually enters a contract for such building stabilization or foundation repair. To receive payment in excess of the aforementioned Actual Cash Value:
· The insured must actually repair the damage in accordance with a repair plan approved by the insurer; and
· The policyholder is required to enter into a contract for foundation and building stabilization repairs within ninety (90) days after the insurer confirms coverage for the loss.
The carrier is required to pay the amounts necessary to begin the repairs and may not require the insured to advance payment for the necessary repairs. Such repairs are required to be completed within twelve (12) months unless there is mutual agreement; the matter is in litigation, appraisal or litigation; or circumstances beyond the control of the insured.
The new law takes effect July 1, 2014. It is a substantial improvement over the previous statute as it provides much needed clarity as to the requirements of insurers in making the coverage available as well as the specific steps required in the event of a covered sinkhole loss.