FLOOD VICTIMS ARE AT THE MERCY OF THE ELEMENTS AND OF THEIR INSURERS: THE CASE FOR AN IMPROVED NATIONAL FLOOD INSURANCE PROGRAM.

• Author: Gardiner, Grant

Table of Contents INTRODUCTION 2 I. The National Flood Insurance Program 2 A. The National Flood Insurance Act of 1968 2 B. The Write Your Own Program 5 1. How Insurance Carriers Join the WYO Program 5 2. How WYO Carriers Pay Expenses and Receive Reimbursement 6 C. Evidence of Widespread Underpayment of NFIP Claims 8 D. The Standard Flood Insurance Policy 8 E. NFIP Claims Manual 9 F. Seeking Additional Payment for Repair Items 10 1. Ron's Story 13 G. Inadequately Trained Adjusters Flood the Market After a Major Catastrophe 14 1. John's Story 14 2. David's Story 16 H. Let's Boil It Down: What are the Prevailing Issues with the Current System? 16 II. Avenues for Creating a More Equitable Relationship Between the National Flood Insurance Program and Victims of a Covered Flood Loss 18 A. Pre-Suit: Adjusted Compensation Rates for Underwriting Flood Insurance Policies and Servicing Claims 18 B. Post-Suit: Add a Good Faith Clause to the Claims Manual to Shield WYO Carriers from Harsh Sanctions 19 CONCLUSION 20 INTRODUCTION

In my current role as a law clerk for a New Orleans-based plaintiff's firm, I assist the attorneys in handling hundreds of flood insurance claims. As one would expect, the firm's average client is a homeowner who is not an expert in insurance. Similar to the majority of American adults that have insurance in one form or another, the policyholders that the firm represents have been paying into their insurance policies for years--and even decades in some cases--with the expectation that they would be protected in the event of a catastrophic force majeure. (1) Following severe flooding, the firm's clients have become victims of two disasters--one that is an act of God and one that is a result of disputes in insurance coverage.

The National Flood Insurance Program ("NFIP") in its current form and under its current interpretation does not entirely meet its own goal of providing coverage "on reasonable terms and conditions." (2) The purpose of this paper is to analyze common problems that the firm's clients are facing under the NFIP. First, I will describe the NFIP in a historical context. Next, I will discuss the Standard Flood Insurance Policy ("SFIP"), its current interpretation, and the tangible effects of that interpretation. Lastly, I will attempt to provide a solution that is fair to both policyholders and insurance carriers by balancing the needs of homeowners with the need for integrity.

1. THE NATIONAL FLOOD INSURANCE PROGRAM

   1. The National Flood Insurance Act of 1968

      The National Flood Insurance Program was created due to the National Flood Insurance Act of 1968 ("the Act"). (3) The Act was initially proposed as a response to the lack of flood insurance coverage from private carriers. (4) Prior to the Act, the risks posed by floods were considered to be "uninsurable." (5) Although flooding is generally associated with low-lying coastal areas such as New Orleans, severe flooding along the upper Mississippi River truly illustrated the financial burden of lacking flood insurance coverage. (6) For example, in 1965 the Mississippi River overflowed and caused severe damage to several major cities in Minnesota, Wisconsin, and Iowa. (7) Since flood insurance coverage from private insurers was virtually nonexistent at the time, federal disaster assistance for floods continued to increase. (8) In response, the NFIP was designed as a federal program under the Federal Emergency Management Administration ("FEMA") to serve three purposes: (1) provide flood insurance, (2) improve floodplain management, and (3) map flood hazard zones. (9) In its reasoning for why the NFIP is necessary, Congress found that:

      (1) from time to time flood disasters have created personal hardships and economic distress which have required unforeseen disaster relief measures and have placed an increasing burden on the Nation's resources; (2) despite the installation of preventive and protective works and the adoption of other public programs designed to reduce losses caused by flood damage, these methods have not been sufficient to protect adequately against growing exposure to future flood losses; (3) as a matter of national policy, a reasonable method of sharing the risk of flood losses is through a program of flood insurance which can complement and encourage preventive and protective measures; and (4) if such a program is initiated and carried out gradually, it can be expanded as knowledge is gained and experience is appraised, thus eventually making flood insurance coverage available on reasonable terms and conditions to persons who have need for such protection. (10) (emphasis added). Since its inception, the NFIP was meant to be fluid in adjusting to the needs of policyholders on "reasonable terms." (11) And to some degree, the program has lived up to that fluidity. The NFIP has been amended no less than a dozen times, with most changes occurring to the financing provisions. (12)

      Additionally, FEMA has set initiatives to reexamine and update its flood hazard maps throughout the United States on a consistent basis. (13) These updates are crucial to the integrity of the flood program because they ensure that ratings are based on accurate data and provide fair rates to policyholders. (14) Therefore, FEMA also allows updates to the flood hazard maps through community-initiated revisions. Not only does FEMA allow community involvement, but it is actually encouraged: "FEMA relies heavily on communities to provide notification of changing flood hazard information and to submit the technical support data needed to reflect the updated flood hazards on the NFIP maps." (15)

      The National Flood Insurance Program has continued to face an existential crisis. The last long-term reauthorization of the NFIP occurred in 2012 under the Biggert-Waters Flood Insurance Reform Act. (16) The Act extended the flood program through September 2017. (17) Since 2017, the NFIP has undergone 16 short-term reauthorizations. (18) Currently, the NFIP is authorized to operate through September 2021.

   2. The Write Your Own Program

      In the Act, Congress stated its finding that "a program of flood insurance with large-scale participation of the Federal Government and carried out to the maximum extent practicable by the private insurance industry is feasible and can be initiated." (19) In other words, consumers would be interacting with private insurance carriers such as Allstate in most cases, rather than with FEMA directly. In 1983, the Write Your Own ("WYO") Program provided the mechanism through which the relationship between FEMA and private insurance carriers would operate. (20) These insurance carriers are often referred to as WYO carriers by courts and attorneys.

      1. How Insurance Carriers Join the WYO Program

         According to FEMA's "Financial Assistance/Subsidy Arrangement" ("Arrangement") for the fiscal year 2020, there are four pillars to an insurance company's eligibility to participate in the WYO program: policy administration, claims processing, reports, and an operations plan. (21) In regard to policy administration, a WYO carrier is responsible for: "Compliance with Community Eligibility/Rating Criteria, Making Policyholder Eligibility Determinations, Policy Issuances, Policy Endorsements, Policy Cancellations, Policy Correspondence, and Payment of Agents' Commissions." (22)

         Regarding claims processing, the WYO carrier must process flood claims consistent with the SFIP and any guidelines FEMA establishes, such as the NFIP Claims Manual. (23)

         To ensure financial accountability of the WYO carriers operating within the program, the carriers must also submit monthly financial reports. (24) Upon receipt of these reports, FEMA is responsible for validating and auditing them. These financial disclosures are a crucial part of the process because it facilitates integrity and accountability within the WYO program. (25)

         Within ninety days of joining the WYO program, FEMA requires an insurer is required to submit an operations plan to FEMA. (26) Essentially, this plan must include a marketing plan with forecasted growth, a description of the insurer's distribution network, a claims handling plan in the event of a catastrophic flood event, and a risk assessment. (27)

         Currently, 58 insurance companies are part of the WYO program. (28) This includes some of the largest insurance companies in the United States, such as Allstate, Liberty Mutual, and USAA. (29)

      2. How WYO Carriers Pay Expenses and Receive Reimbursement

         Loss payments to policyholders under the NFIP are paid out of designated bank accounts containing federal funds. (30) Loss payments include payments made after someone initiates a flood claim and litigation costs arising from flood claims, with certain exceptions. (31)

         The Arrangement allows insurance carriers to withhold a percentage of premiums for operating and administrative expenses, including agent and broker commissions. (32) FEMA uses data from five non-flood insurance carriers to determine the "Base WYO Expense Allowance Percentage." (33) To calculate this base allowance, FEMA analyzes three different expense categories: general expenses; other acquisition expenses; and taxes, licenses, and fees. (34) Next, FEMA adds 15 percentage points to compensate commission for insurance agents and brokers. (35) Between 2009 and 2019, WYO carriers were paid an average of 30.4% of their written premiums for expenses and commissions. (36)

         When a WYO carrier pays out on a covered loss to a policyholder, the carrier receives a fee in the amount of 1.5% of the incurred loss. For example, if the carrier pays out $10,000.00 to a policyholder after a loss, FEMA will pay the WYO carrier a $150.00 fee. In comparison to the percentage of the policy premium that the carrier retains for writing the policy, this number is significantly lower. The result is that while there is some motivation for a WYO carrier to payout higher amounts for flood claims, most of...