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Flood Insurance

FEMA/Property Insurance Nexus

FEMA publicly states its National Flood Insurance Program (NFIP )is the largest single line insurer in the world (see Unique Challenges, first sentence).

In fact, FEMA’s NFIP is a cooperative effort between the federal government and many of the largest property insurance companies in the United States. Private insurance companies participating in the program are referred to as Write Your Own (WYO) carriers. This is because they are writing the policies as though they are there own policies. At this time the policies remain underwritten by the federal government.

Federal regulations further illustrate the connection. CFR Title 44 § 62.23 (h) (1) states the following:

“To expedite business growth, the WYO Company will encourage its present property insurance policyholders to purchase flood insurance through the NFIP WYO Program.”

The premiums however are collected by the private insurance companies. They take approximately 1/3 off the top and forward the rest to FEMA. In the event of a loss, federal regulations specify the carrier will receive 3.3% of the incurred loss. In addition, the private insurance companies receive an additional x – x % for meeting their marketing goals. In other words, the private carriers take xx of the top, have no underwriting risk, and receive a percentage of the claim in the event of a loss.

Many industry spokespersons have stated it’s in their best interest to pay as large a claim as possible. After all, they are receiving a percentage of it. However, documents, industry insiders and victims tell a different story.

In 2004 it was discovered that procedures had been written whereby private insurance companies were subject to penalties, including but not limited to non-renewal of their agreement (page 1-5 q.) in the event they paid losses in excess of guidelines. In April 2004, the NFIP Claims Director publicly stated the price guidelines were just that – guides. Nevertheless, a large number of carriers have taken the position, and in some cases continue to take the position, the guides may not be exceeded.

Industry insiders provide a simple explanation. They tell us, in order for third party adjusting firms to successfully compete, some agree to attempt to keep carrier’s loss payouts to a minimum. And in the case of a major catastrophe such as a hurricane, multiple perils such as wind and flood are adjusted by the same person.

To illustrate the point, let’s say the going rate for sheet rock is $2.00 per foot. If the adjuster paid the going rate on the first floor flood damage, and paid a reduced rate, say $1.46 on the second floor where a tree fell through the roof, the disparity would likely be obvious to the homeowner and the contractor.

On the other hand, if the adjuster confidently states that the going rate is $1.46, all is well … for the adjuster, the third party adjusting firm and the carrier. The problems only start much later as repairs get underway. By that time the adjuster is miles away. The adjuster gets paid for his or her work, the insurance company gets a percentage of the claim from the NFIP for its work handling the claim, and the policyholder is shortchanged.

The single adjuster program is intended to help victims. The thinking is with one adjuster, regardless of the proximate cause of damage, the victims won’t be left with the wind adjuster believing the loss was from flood, and the flood adjuster believing the loss was from wind.

Unfortunately, we have such cases where even with a single adjuster, such cross claims are made. Notwithstanding a single adjuster represented both the wind and flood carriers, each carrier blames the loss on the other’s covered peril. In one case both policies were even written through the same carrier, each with different claims managers.

More than two years after the loss, the victim remains without the compensation he is entitled to receive.

Refer to the Investigations link on the left side of the Home page for additional information.

Last Modified: 060706 2359

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