An eleven-person commission set up to study the emerging problem in Central Massachusetts of homes whose foundations are crumbling because of pyrrhotite contamination has recommended the state set up a captive insurer to deal with the estimated $350 million costs for affected homeowners to replace their failing foundations.
A special commission formed by 2018 law to survey pyrrhotite foundation problem
The creation of the commission resulted from major problems in Connecticut arising from concrete containing pyrrhotite having been quarried and delivered for residential and commercial foundations from the JJ Mottes Concrete Company in Connecticut. This company operated a quarry providing aggregate for pouring concrete foundations. The delivery area for this company encompassed many towns in Central Massachusetts. See Agency Checklists’ article of December 18, 2018, “Will Massachusetts Insurers Be Next To Deal With Crumbling Foundation Claims?
Over fifteen to twenty years, pyrrhotite can react with the seepage of water and oxygen by expanding. For house foundations with this concrete, cracks develop that eventually could lead to the failure of the foundation.
Once the pyrrhotite cracking begins, homeowners face the problem of replacing the foundation at costs that can average $250,000. One of the two homeowner members of the commission advised that he had paid $325,000 to replace his 4900 square foot home’s crumbling foundation. The other homeowner member of the commission stated that he had received a quote for the removal and replacement of the crumbling foundation in his 2,106 square foot home of $225,400.
The commission recommends a law to create a captive insurer to deal with pyrrhotite foundation remediation costs
The special commission’s major recommendation called for the Massachusetts Legislature to:
- Enable a Captive Insurance Company to conduct business in Massachusetts for the purpose of overseeing the evaluation, repair, replacement, and reimbursement of qualified residential crumbling foundations.
- Create a Crumbling Foundations Assistance Fund. Contributions to the Fund shall be used exclusively for the repair and replacement of qualified residential foundations. The Fund shall be administered by a Captive Insurance Company.
The commission also called for the Legislature to ban all concrete originating from quarries containing pyrrhotite and to require any the owner of any home in Massachusetts located within 30 miles of Becker’s Quarry in Wellington, Connecticut with a foundation poured between 1983 and 2015 to disclose to any buyer:
- Any testing, inspection, or repairs performed on the foundation; and
- before the sale, to mandated core testing of the foundation for pyrrhotite
Commission finds almost twenty-one thousand homes have the greatest risk
The zone that the commission proposes for mandatory foundation testing would encompass thirty-three Massachusetts cities and towns that either completely or partially lay within a thirty-mile radius from the quarry supplying the pyrrhotite laced aggregate.
These municipalities include Agawam, Belchertown, Brimfield, Brookfield, Charlton, Dudley, East Longmeadow, Granby, Hampden, Hardwick, Holland, Holyoke, Leicester, Longmeadow, Ludlow, Monson, New Braintree, North Brookfield, Oxford, Palmer, South Hadley, Southbridge, Southwick, Spencer, Springfield, Sturbridge, Wales, Ware, Warren, Webster, West Springfield, Westfield, and Wilbraham,
The commission determined that in these towns during the time the Connecticut quarry operated a total of just over thirty-six thousand homes were built. The commission identified that the almost twenty-one thousand homes built between 1982 and 2015, within the twenty-mile radius of the quarry, had the greatest risk of defective foundations.
The commission’s recommendation tracks Connecticut’s response to its massive pyrrhotite problem
The commission’s main recommendation is for the Legislature to authorize a captive insurer based on Connecticut’s model in dealing with that state’s more than thirty-five thousand home identified with pyrrhotite foundation problems.
Connecticut’s legislature established its foundation replacement and reimbursement program by establishing a non-profit captive insurance company, The Connecticut Foundation Solutions Indemnity Company, Inc., and a separate, non-lapsing fund known as the Crumbling Foundations Assistance Fund.
Under its enabling act, the captive has a reimbursement limit of $175,000 to homeowners for foundation remediation.
In Connecticut, the funding for the captive came from.
- $100 million in state bonding; and
- a $12 annual surcharge on homeowner’s insurance policies producing $9 million per year.
Except for the surcharge of homeowner policies, the so-called captive insurer collects no premiums. All the captives funding derives from state funding and homeowner policy surcharges, and these sources quickly proved inadequate.
The captive started accepting applications for foundation repairs in January 2019, and by July of 2019, it announced that it would stop accepting applications as it had committed all its present funding. In January 2019, the company again began accepting remedial applications but only until February 29, 2020.
Considering Connecticut has an estimated thirty-five thousand homes needing remedial foundation work at or above the captive’s $175,000 remediation limit, the captive’s ability to materially alleviate the pyrrhotite problem in any reasonable timeframe under its present funding scheme seems highly unlikely.
The commission’s recommendation may face tough sledding in the Legislature
Presently, Massachusetts, as opposed to Connecticut and thirty-five other states, does not have a captive insurance law.
This lack poses no problem since the Connecticut statute establishing the Foundation Solutions Indemnity Company offers a blueprint for Massachusetts legislators to follow if they so desire.
The question is whether Massachusetts will follow Connecticut in making a political decision to fund remediation on the scale that the commission suggests the solution needs to solve the problem some unfortunate homeowners have with their crumbling foundations.
Besides the estimate of a potential $350 million cost for foundation remediation, the commission does not suggest or discuss how the Legislature may fund a Massachusetts-style Foundation Solutions Indemnity Company.
What does seem clear from the report is that the commission assumed that there were likely two thousand homes in the affected areas of Massachusetts that will need foundation remediation. The commission reached the $350 million remediation number by multiplying the $175 thousand maximum allowed by the Connecticut captive insurer’s enabling act by these two thousand possibly affected Massachusetts homes.
Whether the Legislature will commit the necessary money to set up the recommended remediation program for this number of private homes under the present financial constraints of the commonwealth is a very open question.
The commission does also suggest that the state “engage with insurers with emphasis on (a) “Encouraging insurance companies to contribute to the [proposed] Crumbling Foundations Assistance Fund.” In Connecticut, insurers have responded to a similar appeal.
The Travelers created the Travelers Benefit Program to provide additional financial support for its customers affected by pyrrhotite. Current customers whose foundation repair costs exceed the benefit provided by the state captive could receive up to $25,000 and former customers up to $10,000, subject to program terms.
Likewise, The Hartford and Liberty Mutual agreed in a memorandum of understanding to provide supplemental financial assistance to current and former policyholders who filed claims and received awards to remediate their crumbling concrete foundations through the state’s captive insurance program. See Agency Checklists’ article of January 15, 2019, “LBLN: Middlesex DA Gets Insurance Funds & CT Crumbling Foundations Fund, NY Approves PRAC-MAPFRE Deal
Courts find homeowner insurers have no obligation to cover these foundation losses
The commission’s suggestion for requesting voluntary payments from insurers is sensible based on homeowners having almost universally failed in their attempts in Connecticut to have their insurers pay for the replacement cost for the foundations.
In October 2019, a major decision by the Connecticut Supreme Court deciding the state law for both federal and state cases found that there was no coverage. See Agency Checklists’ article of November 19, 2019, “CT Decision Against Crumbling Foundation Coverage—Bad News for Some Massachusetts Homeowners.”
While the Connecticut case is not binding on Massachusetts courts, a prior Massachusetts appellate decision had reached the same conclusion on the scope of a homeowner policy’s collapse coverage.
Agency Checklists will keep you posted if the Legislature acts on the proposed captive insurer
Agency Checklists will monitor whether the Legislature acts on the commission’s recommendation for a captive insurer, and keep its readers posted.
Frank Lombard CPCU says
Your article highlights “insurers have no obligation to cover these (crumbling) foundation losses” while failing to mention standard homeowners policies may exclude the damage to the foundation, these same policies appear to extend coverage to any “ensuing” or resulting structural damage to the rest of the structure. All these homes will have some resulting damage; bulging floors, cracked walls, doors and windows not opening and closing properly, etc… The cost to repair this “ensuing” damage should a covered expense.
Further, this “covered loss” should trigger the “reasonable steps” provision. The policy condition REQUIRING the homeowner to take reasonable steps to protect the home from further damage. The only way to do that is to raise the structure so the defective foundation can be replaced. A compelling argument can be raised that this cost, the major component of the $200,000+ repair cost, should be a covered expense. The policy’s “Loss of Use” or additional living expense coverage may also apply.
The mission of the Commission was to examine potential remedies for homeowners impacted by these crumbling foundations. Shouldn’t the question be raised “Why did the Commission totally ignore this significant potential remedy included in every Massachusetts home insurance policy”?
Wouldn’t your agent readers want to know that?