The bill would make a number of other related changes to homeowner's policies.

For example, under present Tennessee law, upon receipt of a claim for a sinkhole loss, an insurer must meet the following minimum standards in investigating a claim:

(1) The insurer must make an inspection of the insured's premises to determine if there has been physical damage to the structure that might be the result of sinkhole activity;

(2) If, upon the investigation the insurer discovers damages to a structure that are consistent with sinkhole activity, or if the structure is located in close proximity to a structure in which sinkhole damage has been verified, then prior to denying a claim, the insurer must obtain a written certification from an engineer, a professional geologist, or other qualified individual stating that the cause of the claim is not sinkhole activity, and that the analysis conducted was of sufficient scope to eliminate sinkhole activity as the cause of damage within a reasonable professional probability; and

(3) If the insurer obtains written certification that the cause of the claim was not sinkhole activity, and if the policyholder has submitted the sinkhole claim without good faith grounds for submitting the claim, the policyholder must reimburse the insurer for 50 percent of the cost of the analysis; provided, however, that a policyholder is not required to reimburse an insurer more than $2,500 with respect to any claim. A policyholder is required to pay reimbursement only if the insurer, prior to ordering the analysis, informs the policyholder of the policyholder's potential liability for reimbursement and gives the policyholder the opportunity to withdraw the claim.

The bill revises the above provisions by referring to “structural damage” (see below for definition) instead of “physical damage”; declaring that damages have to be “confirmed” instead of “discovered”; removing the provision regarding a structure being located in close proximity to a structure in which sinkhole damage was verified; and specifying that the insurer may deny the claim if the insurer determines that there is no structural damage or no sinkhole loss.

Under the bill, if a sinkhole loss is verified then the following provisions would apply:

(1) The insurer may limit its total claims payment to the actual cash value of the sinkhole loss to the covered property, which does not include underpinning or grouting or any other repair technique performed below the existing foundation of the building, 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 by the insurer;

(2) To be eligible to receive payment for underpinning, grouting, any other repair technique performed below the existing foundation of the building, or any other loss in excess of the actual cash value of the sinkhole loss to the covered property, the insured must repair such damage or loss in accordance with the repair recommendations of the engineer or engineers retained or approved by the insurer. The insurer may engage a professional structural engineer to make recommendations as to the repair of the structure. The respective findings, opinions, and recommendations of the insurer's engineer or professional geologist as to the cause of distress to the property and the findings, opinions, and recommendations of the insurer's engineer as to land and building stabilization and foundation repair will be presumed correct;

(3) If the insurer's engineer determines that the repair cannot be completed within policy limits, the insurer must pay to complete the repairs recommended by the insurer's engineer or tender the policy limits to the policyholder;

(4) In order to prevent additional damage to the building or structure, the policyholder must enter into a contract for the performance of building stabilization and foundation repairs within 90 days after the insurance company confirms coverage for the sinkhole loss and notifies the policyholder of such confirmation;

(5) After the policyholder enters into the contract for the performance of building stabilization and foundation repairs and subject to the terms and conditions of the policy, the insurer will pay the amounts necessary to begin and perform such repairs as the work is performed and the expenses are incurred. The insurer may not require the policyholder to advance payment for such repairs. The insurer may make payment directly to the persons selected by the policyholder to perform the land and building stabilization and foundation repairs. The decision by the insurer to make payment to such persons does not hold the insurer liable for the work performed;

(6) The policyholder may not accept a rebate from any person performing the repairs specified in this section. If a policyholder does receive a rebate, coverage is void and the policyholder must refund the amount of the rebate to the insurer. Any person making the repairs specified in this section who offers a rebate commits insurance fraud punishable as a Class E felony;

(7) The stabilization and all other repairs to the structure and contents must be completed within 12 months after entering into the contract for repairs unless: (A) There is a mutual agreement between the insurer and the policyholder; (B) The claim is in litigation; or (C) The claim is under appraisal or mediation; and

(8) Upon completion of any building stabilization or foundation repairs for a verified sinkhole loss, the engineer responsible for monitoring the repairs shall issue a report to the property owner which specifies what repairs have been performed and certifies within a reasonable degree of professional probability that such repairs have been properly performed. The engineer issuing the report must file a copy of the report and certification, which includes a legal description of the real property and the name of the property owner, with the county clerk of the court, who must record the report and certification. This provision does not create liability for an insurer based on any representation or certification by an engineer related to the stabilization or foundation repairs for the verified sinkhole loss.

Under the bill, any claim, including, but not limited to, initial, supplemental, and reopened claims under an insurance policy that provides sinkhole coverage, would be barred unless notice of the claim was given to the insurer in accordance with the terms of the policy within one year after the policyholder knew or reasonably should have known about the sinkhole loss.

Another change would affect the present Tennessee law that provides that no insurer may fail to renew any policy of property insurance on the basis of filing of claims for partial loss caused by sinkhole damage or clay shrinkage, as long as the total of payments does not exceed the current policy limits of coverage for property damage; provided, that the insured has repaired the structure in accordance with the engineering recommendations upon which any payment or policy proceeds were based.

The bill would revise this provision to instead provide that no insurer may fail to renew any policy of property insurance on the basis of filing of claims for partial loss caused by sinkhole damage or clay shrinkage, as long as the total of payments does not equal or exceed the current policy limits of coverage for the policy in effect on the date of loss for property damage to the covered building, or if the insured has repaired the structure in accordance with the repair engineering recommendations of the engineer retained or approved by the insurer and upon which any payment or policy proceeds were based. If the insurer pays such limits, it may elect not to renew the policy.

The bill defines “sinkhole loss” as structural damage to a covered building caused by sinkhole activity. The bill defines “structural damage” as a covered building that has experienced at least one of the following:

(1) Interior floor displacement or deflection in excess of acceptable variances that results in settlement related damage to the interior such that the interior building structure or members become unfit for service or represents a safety hazard; or

(2) Foundation displacement or deflection in excess of acceptable variances that results in settlement related damage to the primary structural members or primary structural systems that prevents those members or systems from supporting the loads and forces they were designed to support.

One of the primary sponsors of the bill, which has been placed on the House calendar for February 20, 2014, is State Representative Roger Kane (R-Knoxville), who also works as an insurance agent.

On January 27, 2014, the Tennessee Senate passed a companion bill, SB 880, as amended.

The bill passed by the Senate made various changes to SB880 and would make changes to present Tennessee law concerning insurance coverage for sinkhole loss. Generally, the amendment retained the bill's requirements that consumers must contract for building stabilization and foundation repairs within a set amount of time of an insurer approving a claim for sinkhole loss or the value of the claim will be limited to the cash value of the sinkhole loss to the residential building.

The amended bill passed by the Senate would restore the present law requirement that property insurers must offer sinkhole loss coverage but specifies that sinkhole loss coverage is not a mandatory provision in a property coverage policy.

The amended bill passed by the Senate would require insurers to obtain a written certification from an engineer or geologist that claimed damage was not caused by sinkhole activity before denying a claim when the insurer concludes, after an initial inspection, that damage to a covered building is inconsistent with, rather than consistent with, sinkhole activity.

The amended bill passed by the Senate also would make various technical changes to SB 880 such as adding to the defined terms that apply to sinkhole loss coverage, changing the effective date of the bill to July 1, 2014, removing the felony offense for persons who offer rebates in conjunction with making repairs to structures that are damages by sinkholes, and removing the requirement for filing an engineer's report with the county clerk at the conclusion of making repairs to structures for damage caused by sinkholes.

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