Faced with skyrocketing premiums, thousands of Florida homeowners have been dropping sinkhole coverage they get through Citizens Property Insurance Corp.
Their reward has been huge price reductions — hundreds, sometimes thousands of dollars saved.
But part of that savings has come from what Citizens, Florida’s government-run insurer of last resort, now acknowledges is a glitch that resulted in “lower-than-anticipated” premiums.
So far, at least 1,500 policyholders have benefited, costing Citizens at least $400,000.
Insurance agents saw the problem months ago and say the company failed to do anything even as some premiums plummeted to less than $200 a year.
“They are coming in ridiculously low,” said Don Whiting of Whiting Insurance in Spring Hill. “We have called Citizens about this on a number of occasions and said, ‘It can’t be right.’ “
The smaller premiums shift a bigger burden to other Citizens policyholders in the years-long drag to pay off claims from the 2005 hurricanes.
The rock-bottom premiums could also discourage homeowners from switching to private insurers as state-run Citizens tries to shed policies to reduce its exposure in future storms.
It’s another potential embarrassment for Florida’s largest insurer, which has come under fire for lavish spending by executives and big bonuses and salary increases.
Spring Hill insurance agent John Reddin said he first realized something was wrong in December when many policyholders dropped sinkhole coverage, which can cost several thousand dollars in Hernando County. When Reddin calculated the new premium using a Citizens computer program, the amount was much less than it logically should have been.
The premium on one Spring Hill home had been $2,977, of which $2,453 was for sinkhole coverage. When the owner dropped his coverage, the new premium should have been the difference between those two figures — $524. Instead, the premium came back as $246.
“We know there’s an error,” said Reddin, owner of Economy Insurance Mart.
To test his theory, his agents submitted data on the same houses but as if the policies were new, not existing. Rate quotes were several hundred dollars higher for the “new” policies and more in line with what the premiums should be.
Since December, Reddin’s agency has removed sinkhole coverage on about 400 of the 6,000 Citizens polices it services in the Tampa Bay area. Most of the remaining policyholders are expected to drop coverage within the next year, he said, with more losses to Citizens.
The bay area is prone to sinkholes, typically caused by the collapse of underground limestone formations. State law requires Citizens and other insurers to provide all policyholders, not just those in sinkhole areas, with coverage for “catastrophic ground collapse,” the type that occurred in February when a sinkhole opened below a man’s bedroom in Seffner and killed him.
Homeowners can also get optional coverage for sinkhole activity that is noncatastrophic but still can cause substantial damage. As premiums for that coverage soar, many homeowners have decided they can do without.
Five years ago, 76 percent of homeowners insured through Citizens had sinkhole loss coverage. By last year, it had dropped to 58 percent.
“People see that they still have catastrophic ground collapse (coverage) so they want to save money,” Whiting said.
All of Whiting’s clients who dropped the optional coverage have gotten what he calls the “ridiculously low” premiums.
Citizens says the premiums were determined by a mathematical formula that resulted in an “anomaly” when the sinkhole portion of coverage was removed on policies renewing this year.
“The formula worked as programmed but resulted in a rate that was lower than anticipated,” said Michael Peltier, a Citizens spokesman. About 1,500 to 1,600 homeowners already have gotten the break, and more are expected to as Citizens “tweaks” the formula, he said.
It is unclear whether homeowners will be able to keep the atypically low rates when their polices renew next year.
“Any solution would need to be worked out with the Office of Insurance Regulation, which must make sure rates are fair and not discriminatory,” Peltier said. “In the meantime, no Citizens policyholder will be overpaying on premiums.”
The lower premiums mean less money going into the 2005 Florida Hurricane Catastrophe Fund to pay off claims from Wilma and other storms.
On the Spring Hill policy where the premium fell to $246, the amount earmarked for the fund dropped from $37 a year to $3.
“Citizens is clamoring about developing premiums to handle losses, yet this glitch in their system is lowering premiums beyond what any other company would charge,” Whiting said. “That’s not what Citizens is supposed to be about. We’re lucky to have Citizens but it needs to get its ducks in a row.”