Crumbling foundations...

Sinkholes are appearing across the country as the consequences of decades of mining activity, and the over-use of ground water. FAnews investigated whether clients have cover against this emerging risk and what the implications are for the insurance industry.

In September this year, Khutsong in the North West province was been declared a national disaster area. The stability of 90% of the dwellings in the area was under threat from the high risk of sinkholes. The residents of the area will be relocated to safer areas at an estimated cost of R2.4-billion over a period of five years.

Widespread incidents

This follows reports in July this year that the land in Bapsfontein in Ekurhuleni is also caving in due to sinkholes. There are 16 sinkholes in the area, which are increasing in size every day, and the R25 road serving the area is visibly cracked as a result. According to experts the sinkholes are a result of the over-usage of underground water by boreholes serving the predominantly agricultural smallholdings in the area.

Also in Ekurhuleni, families living in Germiston were forcibly removed from their homes in areas that have been classified 'mining belts' to ensure their safety from the risk of sinkholes. By February, 100 families a day were being relocated by the metro council. This follows an incident in October last year in which a resident died after falling into a sinkhole.

Another infamous sinkhole can be found in Centurion, which is big enough to contain several passenger cars and is becoming bigger every day. A sinkhole also appeared on the Ben Schoeman freeway early last year.

Sinkholes are not a uniquely South African problem. In 1993 a 100 foot wide and 25 foot deep sinkhole formed under a hotel parking lot in Atlanta in the US. Two people died and numerous cars were destroyed.

International experience

In Pennsylvania, where mining has occurred for hundreds of years, sinkholes are so common that the State has created a sinkhole insurance fund.Private sinkhole insurance is also available in the US, particularly in the state of Florida where there is considerable sinkhole activity. However, as of September 2007, several insurers in two counties in the area decided to no longer include what is called Comprehensive Sinkhole Coverage in new policies or renewed policies. Clients will now have to select this cover as a special endorsement, and at an additional premium.

What is now automatically included is 'Catastrophic Ground Cover Collapse Coverage', which is defined as the dwelling being literally, suddenly and completely destroyed – something that has an estimated occurrence of less than one in a thousand legitimate sinkhole losses.

Local cover

The question then is whether this is covered by a client's insurance in South Africa and how this risk will impact the local industry.

WP Pienaar, Manager of Corporate and Commercial Underwriting at Santam, says that although subsidence and landslip cover is automatically included in most policies, it is provided on a limited cover basis. To obtain full cover, a geophysical report must be obtained and the policy must be endorsed to reflect the full cover.

Limited cover exclusions

Pienaar explains that on personal lines policies, the following additional exclusions apply to the limited cover:
* loss of or damage to drive*ways, paving, swimming pool borders and tennis courts
* loss or damage caused as a result of the contraction and/or expansion of soil due to the moisture or water content of such soil as experienced in clay and other similar soil types
* loss or damage caused as a result of, or aggravated by, insufficient compacting of filling
* loss or damage caused as a result of normal settlement, shrinkage or expansion of the buildings

On commercial policies, the following additional exclusions apply to the limited cover:
* loss of or damage to driveways, paving, swimming pool surrounds and tennis courts
* loss or damage caused by contraction/shrinkage and/or expansion of soil caused by the moistness and dampness or moisture content of such soil as experienced in clay and other similar soils
* existing damage at the inception of the extension
* loss or damage caused by, or attributable to, inadequate compaction of backfill
* loss caused by, or attributable to, consequential loss of any kind whatsoever except loss of rent when specifically insured

"It should also be noted that buildings exceeding three stories in height, industrial and commercial buildings require specific and specialised design and construction and do not qualify for the limited cover unless it has been referred, accompanied by a geo-technical report," says Pienaar.

Cover in place

As a general rule," explains Pienaar, "loss or damages caused by sinkholes would be covered. Each individual case will be investigated and the merits of the case in question determined. There are some instances in which the policy would not respond, for example, where the insured was aware of damages prior to inception of the policy or if the insured constructed or erected a building on a site that was declared as being unfit for construction by either the engineer or the local council."

He adds that insurers would not make a distinction between sinkholes caused by mining or by underground water and rock structure. A number of sinkholes occur naturally, mostly in areas where the substrate consists of dolomite. The formation of sinkholes may be caused by mining activities but may also be caused by individuals, farmers and or companies extracting water from boreholes resulting in the water table dropping to the extent that sinkholes develop. While it depends on the merits of the individual case, as a rule all mining activities would be covered, except in the instance where damage occurred prior to the inception of the policy. "

Indemnity is based on the total sum insured, which should represent the new replacement value for the buildings less any applicable excess, say Pienaar. "If the full subsidence and landslip cover is taken in terms of a commercial policy the applicable excess is 1% of the sum insured with a minimum of R500.

"Buildings with no existing damage and situated in high risk areas, such as Carltonville and Bapsfontein, would still qualify for the limited cover, subject to the underwriting criteria on commercial buildings."

The problem in context

"We are currently investigating high risk areas to ensure that we are not overexposed in certain areas,' says Pienaar, "but the small number of incidents should be viewed in the context of the large number of households, both insured or uninsured. It is almost impossible to apply any risk management as the problem is very complex in that the water table, substrate, mining activities and general geology all form an integral part."