In the hills east of Los Angeles, a wildfire scorched a neighborhood in 2021, and the insurer paid the homeowner's fire claim. Months later, the same property settled several inches, and the insurer paid again, this time under a sinkhole clause. The policyholder collected more than the actual loss, and the insurer ate the difference. This is not a one-off clerical error. It is a structural flaw in how property insurance treats cascading perils, and it is getting worse as parametric triggers and AI underwriting enter the picture.

The Same Loss, Twice Billed

The double payment scenario begins with contract language. A standard homeowners policy covers fire and, in some states, includes a sinkhole endorsement. Sinkhole coverage typically pays when the ground collapses due to underground voids, often limestone dissolution. Wildfire, by contrast, is a fire peril. The two seem unrelated, but they are not. A wildfire that burns deep into the soil can destabilize the ground, especially in areas with karst topography or old mine workings. When the ground later settles, the policyholder can file a claim under the sinkhole clause, arguing the loss is distinct from the fire damage.

Insurers often resist, arguing the sinkhole is a consequence of the fire and should be covered under the fire claim, if at all. But in several documented cases, arbitrators and courts have sided with the policyholder, ruling that the sinkhole is a separate peril with its own trigger. The result is a double payment: one for the fire damage, one for the ground movement. The policyholder recovers more than the actual loss, and the insurer pays twice for the same underlying event.

Case studies from California and Texas illustrate the pattern. In one instance, a wildfire burned through a hillside community, and the insurer paid the fire claim, including soil remediation. Eighteen months later, a rainstorm triggered a small landslide, and the policyholder filed a sinkhole claim. The insurer argued the landslide was a flood or earth movement exclusion, but the policy's sinkhole endorsement had no such exclusion. The claim was paid. In another case, a homeowner in Florida, where sinkholes are common, had both fire and sinkhole coverage. A wildfire near the property caused minor smoke damage, and the policyholder filed a fire claim. A month later, a sinkhole opened in the yard, and the policyholder filed a second claim. The insurer paid both, without questioning the correlation.

The coverage gap is not just in the policy language. It is in the claims process. Adjusters are trained to handle one peril at a time. When a fire claim is closed, the file is archived. When a sinkhole claim comes in months later, a new adjuster opens a new file, with no automatic link to the prior claim. The system is designed for single-peril losses, not cascading events. The result is that duplicate payments slip through, and insurers only catch them after the fact, if at all.

How Parametric Triggers Muddy the Water

Parametric insurance pays out based on an index, not on actual damage. For wildfire, a parametric trigger might pay when a satellite detects a certain level of smoke or heat in a defined area. For sinkhole, a parametric trigger might pay when ground movement exceeds a threshold, measured by GPS or InSAR. These triggers are designed to be fast and objective, but they do not care about other policies. If a homeowner has both a parametric wildfire policy and a traditional indemnity policy that includes sinkhole coverage, a single event can trigger both.

The overlap is not hypothetical. In 2023, a wildfire in Northern California triggered a parametric payout based on satellite data, while the same fire also caused ground settlement that later triggered a sinkhole claim under the indemnity policy. The policyholder received two payments for what was, in effect, one loss. The parametric insurer argued it was not liable for the sinkhole, and the indemnity insurer argued the sinkhole was a consequence of the fire, which was excluded under the earth movement clause. But the policy language was ambiguous, and both paid.

Parametric triggers are attractive because they pay quickly, without the friction of claims adjustment. But they also create a moral hazard: policyholders can collect on the index and then pursue an indemnity claim for the same event, stacking recoveries. Insurers that sell both types of coverage are essentially underwriting the same risk twice, without a mechanism to offset the payments.

The problem is compounded by embedded coverage. Many parametric products are now sold as add-ons to standard policies, or through platforms that bundle them with homeowners insurance. The consumer may not even realize they have two policies covering the same peril. When a wildfire morphs into a sinkhole, the policyholder files claims under both, and the insurers, each operating in their own silo, pay.

Documented Incidents: Wildfire-Sinkhole Duos

One case that drew regulatory scrutiny involved a 2019 wildfire in Sonoma County. The fire burned through a residential area, and the insurer paid the fire claim, including structural damage and debris removal. Two years later, the ground beneath the same property collapsed, and the policyholder filed a sinkhole claim. The insurer initially denied it, citing the earth movement exclusion, but the policy had a sinkhole endorsement that did not exclude fire-related settlement. The claim went to appraisal, and the policyholder was awarded a second payment.

Regulators in California took note. The state's insurance department began asking why the insurer did not offset the second payment against the first, and whether the policyholder had been overcompensated. The insurer argued that the sinkhole was a separate peril, and the policy language required payment. The department did not issue a formal ruling, but the case highlighted the gap.

Another incident, in Texas, involved a wildfire that burned near a community built on limestone. The fire caused minimal structural damage, but the heat fractured the limestone, and months later, a sinkhole opened under a driveway. The policyholder filed a claim under the sinkhole endorsement, and the insurer paid, even though the fire claim had already been settled. The total payout exceeded the replacement cost of the property, and the insurer wrote it off as a loss.

These cases are not isolated. Insurance claims data is not public in a way that allows easy tracking of duplicate payments, but adjusters and public adjusters report seeing similar patterns. The common thread is that policy language treats perils as independent, while the physical world does not. Wildfire can cause ground instability, and ground instability can trigger a sinkhole clause. The insurer pays twice because the contract does not anticipate the correlation.

The Tech Disruption Angle: AI Underwriting Blind Spots

AI underwriting models are trained on historical data, and they typically treat wildfire and sinkhole as distinct perils. The models have separate risk scores for fire and for ground movement, and they rarely consider how one might trigger the other. A property in a wildfire zone might get a high fire risk score, but a low sinkhole risk score, because the geological data does not include the effects of fire on soil stability. The result is that policies are priced as if the perils are independent, when in fact they are correlated.

Insurtech companies, which rely heavily on AI and automated underwriting, are particularly vulnerable. They often issue policies in minutes, using data from public records and satellite imagery, but they do not have the deep underwriting expertise of traditional carriers. A model might flag a property as low-risk for sinkhole because there is no known sinkhole history, but it does not account for the fact that a wildfire could create the conditions for a sinkhole. The policy is written, and the double-payment risk is embedded in the contract.

Embedded coverage exacerbates the problem. When a parametric wildfire product is bundled with a standard homeowners policy, the AI underwriter may not even know about the other policy. The two products are priced independently, and the correlation risk is not aggregated. In one case, an insurtech sold a parametric wildfire policy to a homeowner who also had a traditional policy with sinkhole coverage. When the fire triggered the parametric payout and the ground later settled, the homeowner collected from both, and the insurtech, along with the traditional carrier, paid more than the loss.

The blind spot is not just in underwriting. It is in claims. AI-based claims systems are designed to detect fraud, but they are not designed to detect duplicate payments across policies. A claim for a sinkhole might be flagged as suspicious if it comes soon after a fire claim, but the system does not have access to the parametric policy data. The two claims are processed in separate systems, and the overlap is never caught.

What Insurers Can Learn from the Double Payout

The first lesson is to audit policy triggers for correlation. Insurers should review their policy language to identify perils that can cascade, such as wildfire and sinkhole, and add exclusions or sub-limits that address the overlap. For example, a policy could include a provision that any loss caused by ground movement is covered only if it is not a consequence of a fire, or vice versa. This would prevent the double payment, but it would also shift the risk to the policyholder, who might not have coverage for a cascading event.

A better approach is to use geospatial data to flag sinkhole zones. Insurers can overlay wildfire risk maps with geological data on karst topography, mine workings, and soil stability. If a property is in an area where wildfire could trigger ground movement, the underwriter can adjust the premium or add a specific exclusion. This is not a perfect solution, because the data is not always precise, but it would reduce the frequency of double payments.

Coordination between parametric and indemnity payouts is another key. Insurers that sell both types of coverage should have a system to track parametric triggers and compare them to indemnity claims. If a parametric payout is made for a wildfire, and a sinkhole claim comes in for the same property, the insurer should investigate the correlation before paying. This requires data sharing between different business units, which is often lacking.

Real-time claims monitoring can also help. By using AI to flag claims that are filed soon after a parametric trigger, insurers can identify potential duplicates and investigate before paying. This is not about denying legitimate claims; it is about ensuring that the policyholder does not recover more than the actual loss. The challenge is that the actual loss is often difficult to determine, especially when the damage is not visible until months later.

Practical Takeaways for Policyholders

For policyholders, the first step is to read the policy for overlapping triggers. If you live in an area prone to wildfire and sinkholes, ask your insurer whether the sinkhole coverage excludes losses caused by fire. If it does not, you could be in a position to collect twice, but you could also face a battle with the insurer if they try to deny the second claim.

Ask about parametric add-ons and exclusions. If you are considering a parametric wildfire policy, find out how it interacts with your traditional policy. Some parametric products include a clause that requires the policyholder to subtract any indemnity payments from the parametric payout, but not all do. Read the fine print.

Document all damage from each peril. If a wildfire damages your property and the ground later settles, take photos and notes that distinguish the fire damage from the ground movement. This will help if you need to file a claim under both policies, and it will also help the insurer understand the correlation.

Check if multiple policies cover the same loss. If you have a homeowners policy and a separate flood or earthquake policy, review the exclusions to see if there is overlap. In some cases, you may be able to collect from both, but you should be aware of the risk of over-insurance, which can lead to disputes.

Finally, consider consulting a public adjuster for complex claims. A public adjuster can help you navigate the claims process and ensure that you are not underpaid, but they can also help you avoid overpayment, which could be seen as fraud. The goal is to recover your actual loss, not to profit from a loophole.

This article is for informational purposes only and does not constitute professional advice. Consult a licensed insurance professional for guidance on your specific situation.