Retired veteran could have lost everything after discovering a sinkhole under her Tennessee home — but one smart insurance decision saved her $400K

Sinkhole insurance

Tennessee sits on what is known as a karst corridor, which stretches from eastern Mississippi all the way to New England. Karst is made up of soluble rock types like limestone, marble and gypsum, which can dissolve or collapse over time, creating sinkholes, sinking streams, caves, springs, and other characteristic features.

In developed areas — like Bount’s home city of Clarksville in northern Tennessee — a catastrophic sinkhole collapse can cause significant damage and loss of life. To protect homeowners in the Volunteer State from this rare but catastrophic risk, insurance companies are required by state law to offer sinkhole insurance. Sinkholes are not covered by earthquake or flood insurance policies.

Tennessee Code section 56-7-129(a) mandates: “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 therein, to the extent provided in the policy to which the sinkhole coverage attaches.”

This optional sinkhole insurance typically costs between $2,000 and $4,000 a year. It’s not cheap — but before tossing this coverage aside, remember that sinkhole losses can be substantial. According to the U.S. Geological Survey, total sinkhole losses on average exceed $300 million each year.

Blount said her sinkhole remediation project has cost between $300,000 and $400,000 — well beyond her financial capacity for out-of-pocket repairs. The insurance, in her case, has been a real life (and money) saver.

“They always say your house, home, land is your biggest investment... I'm constantly looking for ways to protect myself, and one of those ways was extra sinkhole insurance,” she said.

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Make sure you have the right coverage

If you live in a state prone to sinkholes — like Tennessee or Florida — you have to consider how you would cope with the total loss of your home. According to WTVF, Blount recommends homeowners buy an insurance policy with replacement cost value coverage, which will pay for the repair or replacement of damaged property with materials of a similar kind and quality. Insurers won’t deduct money for depreciation with this type of policy.

This is different from an actual cash value (ACV) policy, which grants compensation for damaged or destroyed property based on its current market value, less depreciation for age, condition, life expectancy and so on.

ACV policies are often cheaper but they have their disadvantages. If, for example, you purchase new items to replace the ones that were damaged or destroyed, you’ll be on the hook for the difference between the insurance payout and the cost of a brand new item.

Given the current challenges in the economy — with inflation, elevated interest rates and ongoing supply chain issues — you may also want to consider an extended replacement cost policy that will pay a certain percentage (often around 20%) over the limit to rebuild your home, or a guaranteed replacement cost policy that will pay whatever it costs to rebuild your home.

Both of these policies can protect homeowners from being underinsured if building costs soar unexpectedly because of a shortage of building materials or construction workers.

Blount also recommends adding a building code upgrade endorsement to your homeowners insurance policy. Also known as ordinance or law coverage, this extra insurance reimburses additional costs incurred during the construction, demolition or repair of a damaged covered structure due to changes in laws and regulations.