National Flood Insurance Program
Greater Transparency and Oversight of Wind and Flood Damage Determinations Are Needed Gao ID: GAO-08-28 December 28, 2007Disputes between policyholders and insurers after the 2005 hurricane season highlight the challenges in understanding the cause and extent of damages when properties are subjected to both high winds and flooding. Questions remain over the adequacy of steps taken by the Federal Emergency Management Agency (FEMA) to ensure that claims paid by the National Flood Insurance Program (NFIP) cover only those damages caused by flooding. GAO was asked to evaluate (1) issues that arise when multiple insurance policies provide coverage for losses from a single event, (2) state regulators' oversight of loss adjusters, and (3) information that NFIP collects to assess the accuracy of damage determinations and payments. GAO collected data from FEMA, reviewed reinspection reports and relevant policies and procedures, and interviewed state regulatory officials and others about adjuster oversight and NFIP.
Insurance coverage gaps and claims uncertainties can arise when coverage for hurricane damage is divided among multiple insurance policies. Coverage for hurricanes generally requires more than one policy because private homeowners policies generally exclude flood damage. But the extent of coverage under each policy depends on the cause of the damages, as determined through the claims adjustment process and the policy terms that cover a particular type of damage. This process is further complicated when the damaged property is subjected to a combination of high winds and flooding and evidence at the damage scene is limited. Other claims concerns can arise on such properties when the same insurer serves as both NFIP's write-your-own (WYO) insurer and the property-casualty (wind) insurer. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating an inherent conflict of interest. Differences in licensing and training requirements for insurance claims adjusters among states also create uncertainties about adjusters' qualifications. Prior to the 2005 hurricane season, some coastal states had few or no requirements, while others had requirements for most types of adjusters. Further, states can waive their normal oversight requirements after a catastrophic event to help address demand, as they did after Hurricane Katrina. As a result, significant variations can exist in the qualifications of claims adjusters available after a catastrophic event. Strengthened and more uniform state requirements for adjusters could enhance the qualifications of the adjuster force in future catastrophes and improve the quality and consistency of claims adjustments. NFIP does not systematically collect and analyze both wind and flood damage claims data, limiting FEMA's ability to assess the accuracy of flood payments on hurricane-damaged properties. The claims data collected by NFIP through the WYO insurers--including those that sell and service both wind and flood policies on a property--do not include information on whether wind contributed to total damages or the extent of wind damage as determined by the WYO insurer. The lack of this data also limits the usefulness of FEMA's quality assurance reinspection program to reevaluate the accuracy of payments. In addition, the aggregate claims data that state insurance regulators collectively gathered after Hurricanes Katrina and Rita were not intended to be used to assess wind and flood damage claims together on a property- or community-level basis. Further, FEMA program contractors do not have access to WYO insurers' policies, procedures, and instructions that describe to adjusters how wind and flood damages are to be determined when properties are subjected to both perils. FEMA officials stated that they did not have the authority to collect wind damage claims data from insurers. But without the ability to examine claims adjustment information for both the wind and flood damages, NFIP cannot always determine the extent to which each peril contributed to total property damages and the accuracy of the claims paid for losses caused by flooding.
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United States Government Accountability Office: GAO:
Report to the Ranking Member, Committee on Financial Services, House of
Representatives:
December 2007:
National Flood Insurance Program:
Greater Transparency and Oversight of Wind and Flood Damage
Determinations Are Needed:
GAO-08-28:
GAO Highlights:
Highlights of GAO-08-28, a report to Ranking Member, Committee on
Financial Services, House of Representatives.
Why GAO Did This Study:
Disputes between policyholders and insurers after the 2005 hurricane
season highlight the challenges in understanding the cause and extent
of damages when properties are subjected to both high winds and
flooding. Questions remain over the adequacy of steps taken by the
Federal Emergency Management Agency (FEMA) to ensure that claims paid
by the National Flood Insurance Program (NFIP) cover only those damages
caused by flooding. GAO was asked to evaluate (1) issues that arise
when multiple insurance policies provide coverage for losses from a
single event, (2) state regulators‘ oversight of loss adjusters, and
(3) information that NFIP collects to assess the accuracy of damage
determinations and payments. GAO collected data from FEMA, reviewed
reinspection reports and relevant policies and procedures, and
interviewed state regulatory officials and others about adjuster
oversight and NFIP.
What GAO Found:
Insurance coverage gaps and claims uncertainties can arise when
coverage for hurricane damage is divided among multiple insurance
policies. Coverage for hurricanes generally requires more than one
policy because private homeowners policies generally exclude flood
damage. But the extent of coverage under each policy depends on the
cause of the damages, as determined through the claims adjustment
process and the policy terms that cover a particular type of damage.
This process is further complicated when the damaged property is
subjected to a combination of high winds and flooding and evidence at
the damage scene is limited. Other claims concerns can arise on such
properties when the same insurer serves as both NFIP‘s write-your-own
(WYO) insurer and the property-casualty (wind) insurer. In such cases,
the same company is responsible for determining damages and losses to
itself and to NFIP, creating an inherent conflict of interest.
Differences in licensing and training requirements for insurance claims
adjusters among states also create uncertainties about adjusters‘
qualifications. Prior to the 2005 hurricane season, some coastal states
had few or no requirements, while others had requirements for most
types of adjusters. Further, states can waive their normal oversight
requirements after a catastrophic event to help address demand, as they
did after Hurricane Katrina. As a result, significant variations can
exist in the qualifications of claims adjusters available after a
catastrophic event. Strengthened and more uniform state requirements
for adjusters could enhance the qualifications of the adjuster force in
future catastrophes and improve the quality and consistency of claims
adjustments.
NFIP does not systematically collect and analyze both wind and flood
damage claims data, limiting FEMA‘s ability to assess the accuracy of
flood payments on hurricane-damaged properties. The claims data
collected by NFIP through the WYO insurers”including those that sell
and service both wind and flood policies on a property”do not include
information on whether wind contributed to total damages or the extent
of wind damage as determined by the WYO insurer. The lack of this data
also limits the usefulness of FEMA‘s quality assurance reinspection
program to reevaluate the accuracy of payments. In addition, the
aggregate claims data that state insurance regulators collectively
gathered after Hurricanes Katrina and Rita were not intended to be used
to assess wind and flood damage claims together on a property- or
community-level basis. Further, FEMA program contractors do not have
access to WYO insurers‘ policies, procedures, and instructions that
describe to adjusters how wind and flood damages are to be determined
when properties are subjected to both perils. FEMA officials stated
that they did not have the authority to collect wind damage claims data
from insurers. But without the ability to examine claims adjustment
information for both the wind and flood damages, NFIP cannot always
determine the extent to which each peril contributed to total property
damages and the accuracy of the claims paid for losses caused by
flooding.
What GAO Recommends:
GAO recommends granting FEMA authority to obtain available WYO insurer
wind damage claims data for properties subjected to both high winds and
flooding and WYO insurers‘ guidance to adjusters for making such damage
determinations. Further, GAO recommends that states enhance the quality
and consistency of adjuster oversight. FEMA agreed with GAO‘s
recommendation to enhance adjuster oversight but did not agree that
Congress should grant it enhanced authority to access WYO insurers‘
wind claims data and adjuster guidance.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-28]. For more information, contact Orice
M. Williams at (202) 512-8678 or williamso@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Potential Coverage Gaps and Claims Uncertainties Can Arise When
Homeowners Have Multiple Policies That Cover Different Perils:
Lack of Uniformity in Licensing and Training Requirements among States
Creates Uncertainties about Some Adjusters' Qualifications:
Lack of Relevant Claims Data Limits FEMA's Ability to Oversee Hurricane
Damage Assessments:
Conclusions:
Matters for Congressional Consideration:
Recommendation for Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Department of Homeland Security:
Appendix III: GAO Contact and Staff Acknowledgments:
Figures:
Figure 1: Key Flood Insurance Claims Processing Steps on Flood-Damaged
Properties:
Figure 2: Licensing and Training Requirements for Adjusters in Selected
Coastal States as of 2007:
Abbreviations:
FEMA: Federal Emergency Management Agency:
NAIC: National Association of Insurance Commissioners:
NFIP: National Flood Insurance Program:
TRRP: Transaction Record Reporting and Processing:
WYO: write-your-own:
[End of section]
United States Government Accountability Office: Washington, DC 20548:
December 28, 2007:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
Dear Mr. Bachus:
Hurricanes pose unique challenges for insurers and property owners
because damages caused by these storms can result from multiple perils.
Among these are high winds and flooding, the combination of which
caused unprecedented damage during Hurricane Katrina. After such an
event, a necessary and challenging task is determining the extent of
the damage caused by each peril, as wind and flood damages are
generally covered under different types of insurance policies. Private
property-casualty insurance policies generally exclude flood damage,
which is covered by federally backed flood insurance under the National
Flood Insurance Program (NFIP). Since 1968, the federal government has
offered flood insurance policies through NFIP, a program now
administered by the Federal Emergency Management Agency (FEMA), U.S.
Department of Homeland Security.[Footnote 1] However, private property-
casualty insurers may sell both types of policies--their own property-
casualty insurance and flood insurance on behalf of NFIP--and thus be
responsible for determining whether property damages were caused by
wind or flooding after hurricanes. Since the devastating 2005 hurricane
season, questions have been raised about how damage determinations are
made, the oversight of such activities, and the accuracy of the
resulting claims payments.
The unprecedented scope of the damage from Hurricane Katrina created
special challenges for insurers and their insurance claims adjusters,
who were responsible for determining the cause and extent of damages.
The scope of the damages meant that many more adjusters were needed
than were available, creating delays in the adjustment process. At the
same time, adjusters had difficulty reaching properties because of the
extent of the devastation. Evidence at the damage scenes was often
limited or compromised, making assessments and apportionments of
damages more difficult. These challenges further contributed to the
concerns, controversies, and disputes over the damage determinations
made by insurance adjusters.
In response to these issues and other concerns, you asked us to
evaluate (1) the issues that can arise for homeowners when multiple
insurance policies provide coverage for losses from a single event, (2)
state insurance regulators' oversight of the licensing and performance
of loss adjusters, and (3) the information that NFIP collects and
analyzes in order to determine whether damage determinations and flood
claims payments accurately reflect the actual distribution of losses
between wind and flooding.
To accomplish our work, we discussed information and issues associated
with insurance coverage and claims processing activities with FEMA,
NFIP program contractors, state insurance regulators, the National
Association of Insurance Commissioners (NAIC), property-casualty
insurers, state-sponsored wind insurers, insurance agents, claims
adjusters, industry associations, and mediators. We also obtained
licensing and training requirements for claims adjusters from state
insurance regulators and industry representatives. Further, we
identified and reviewed the specific data elements and level of
geographic detail available to NFIP on hurricane claims payments. In
addition, we reviewed a statistically valid sample of files (740) of
reinspections that NFIP conducted for selected properties. Appendix I
provides additional information concerning the scope and methodology of
our work. We conducted our work between May 2006 and November 2007 in
Florida, Illinois, Louisiana, Mississippi, North Carolina,
Pennsylvania, South Carolina, and Texas in accordance with generally
accepted government auditing standards.
Results in Brief:
With coverage divided among multiple insurance policies, potential gaps
in coverage and difficulties in settling claims can arise from
hurricane events. Insurance coverage for hurricane damage generally
requires the purchase of multiple insurance policies because property-
casualty policies for buildings and their contents generally exclude
coverage for damage caused by flooding. However, the limits and extent
of coverage offered by NFIP's flood insurance policies differ from
those of private property-casualty policies. For example, a property
owner cannot purchase flood insurance coverage through NFIP for
building damages over $250,000 or for additional living expenses. Such
coverage for other types of damages--for instance, those caused by
wind--may be available under a homeowners policy. Therefore, prior to a
hurricane event, a property owner cannot be certain of the damages or
the expenses that will be covered because the extent of coverage
depends on the cause of the damages, as determined during the claims
adjustment process, and how the damages will be covered by the various
policies. As a result, homeowners whose properties incur what is
determined to be flood rather than wind damage may find themselves
without the funds they need to repair or replace their homes if they
lack sufficient flood insurance. The claims adjustment process can
become more difficult when the damaged or destroyed property is
subjected to a combination of high winds and flooding. Finally, an
inherent conflict of interest exists when the same insurance company is
responsible for determining the extent of the flood damage that NFIP
must pay and the extent of the wind damage that is the responsibility
of the company itself. Disputes between property-casualty insurers and
policyholders continue over the damage determinations made after
Hurricane Katrina and the interpretation of policy language concerning
coverage on properties subjected to a combination of high winds and
flooding.
Although the role of insurance claims adjusters is crucial after a
major catastrophe, licensing and training requirements for adjusters
vary considerably among states, creating uncertainties about adjusters'
qualifications. Some states have no requirements for insurance claims
adjusters, while others have licensing and training requirements for
most types of adjusters operating in the state. Many states have
licensing and training requirements for some types of adjusters, but
not for other claims adjusters that may also be called upon after a
catastrophe. Further, licensing and training requirements may be
temporarily relaxed after a catastrophe, meaning that adjusters
entering a state may not have met the normal requirements needed to
work there. As a result, the qualifications and training of adjusters
who assess damages following a catastrophic event may vary
significantly. State insurance regulators told us that they generally
relied on the insurance companies to ensure the quality of their
adjusters and adjustment processes, though states may also choose to
conduct reviews of claims already processed through market conduct
examinations.[Footnote 2] In order to adjust flood insurance claims,
adjusters are to be trained and certified by NFIP, in addition to the
state requirements. Following Hurricane Katrina, some states that
lacked licensing requirements for adjusters passed laws to raise the
level of oversight for adjusters. Several states affected by recent
hurricanes have also initiated market conduct examinations to evaluate
insurers' claims adjustment processes, in part because of consumer
complaints about the handling of hurricane-related claims.
We found that the claims information NFIP collects may not always allow
FEMA to effectively oversee damage determinations and apportionments
after hurricane events in order to ensure the accuracy of NFIP claims.
NFIP, the repository for flood claims information, has collected and
analyzed data on flood insurance claims submitted by insurance
companies that service NFIP policies. However, the data do not include
information on total damages caused by all perils, including wind,
which could be useful in some cases. Rather, the data are focused on
the damage deemed to have been caused by flooding, even when the write-
your-own (WYO) insurer making the flood damage determination is also
the wind insurer on the same property. This lack of data also adversely
affects the ability of FEMA's reinspection program to assess the
accuracy of certain NFIP claims adjustments and payments.[Footnote 3]
FEMA officials and NFIP program contractors state that they do not have
the authority to access data or information from WYO insurers on wind
claims associated with properties for which a flood claim has been
received or the policies, procedures, or instructions developed by the
WYO insurer that instruct adjusters how to discern wind versus flood
damage when properties may have been subjected to both perils.[Footnote
4] Consequently, for a given property, FEMA's ability to assess the
accuracy of payments for damage caused only by flooding is limited
because NFIP does not know what portion of the total damages was caused
by wind and what portion was caused by flooding. Without the ability to
obtain this information in a systematic fashion for certain properties,
FEMA is limited in its ability to monitor or reevaluate the accuracy of
payments made for hurricane-damaged properties that are severely
damaged and subjected to a combination of high winds and flooding.
Following the 2005 hurricane season, state insurance regulators
collected, analyzed, and aggregated data on hurricane damage claims for
wind-related losses reported by property-casualty insurers. We
attempted to use this information to supplement FEMA's data, but
because it was collected to monitor the claims processing activities of
insurers related to the timeliness of claims payments and their impact
on insurer solvency, and was not intended to assess wind versus flood
damage determinations, it did not provide sufficient geographic detail
to match with corresponding flood claims data for a particular
community or property.
This report includes two matters for congressional consideration aimed
at improving FEMA's oversight of flood claims when properties are
subjected to both high winds and flooding and a recommendation for
state insurance regulators to improve the oversight of claims
adjustment activities. Congress should consider providing FEMA clear
authority to obtain 1) wind damage claims information from WYO
insurers, as appropriate, and 2) the policies, procedures, and
instructions used by WYO insurers for determining wind damage versus
flood damage when properties are subjected to both perils. Such
authority would enhance FEMA's ability to monitor and reevaluate the
accuracy of NFIP flood damage payments that result from the wind and
flood damage apportionments and its controls over the inherent conflict
of interest involving WYO insurers that sell and service both wind and
flood policies. For state insurance regulators, in conjunction with
NAIC, we recommend taking action to enhance the quality and consistency
of standards and oversight for all types of claims adjusters.
We requested comments on a draft of this report from FEMA and NAIC. The
Department of Homeland Security provided written comments on a draft of
this report that are reprinted in appendix II. It concurred with our
recommendation to strengthen licensing requirements for adjusters but
disagreed with the matters for congressional consideration regarding
expanding FEMA's statutory authority to obtain available wind damage
claims information from WYO insurers and to access the WYO insurers'
claims adjustment guidance. The letter notes that having such authority
would place "unneeded burden and costs" on NFIP, given its current
oversight of the WYO insurers. We disagree; such authority is a
necessary control given the potential federal exposure to flood losses
and the inherent conflict of interest that exists when the same
insurance company is responsible for determining the extent of the
flood damage that NFIP must pay and the extent of the wind damage that
is the responsibility of the company itself. Likewise, FEMA should be
able to access the policies, procedures, and instructions used by WYO
insurers and their adjusters for both flood and wind damage claims to
assess and validate claims adjustment practices and damage
apportionments when properties have been subjected to both perils. As
we note in the report, FEMA would not have to collect such information
on all claims; rather, this authority would enable the agency to
request such information on an as-needed basis when uncertainties
exist, such as when the physical evidence has been compromised or
limited physical evidence remains. The Department of Homeland
Security's written comments and our responses are discussed in more
detail at the end of this letter. NAIC did not provided written
comments but orally expressed general agreement with the draft's
findings and recommendations. FEMA and NAIC provided technical comments
that we have incorporated as appropriate.
Background:
The federal government has long been a participant in addressing risks
that private property-casualty insurers have been unable or unwilling
to insure. One of these risks is damage due to flooding. While NFIP
backs the flood insurance policy, it generally contracts the sale and
servicing of the policies out to private property-casualty insurers,
known as WYO insurance companies.[Footnote 5] About 96 percent of
NFIP's policies are sold and serviced by WYO insurers. For a given
property, the WYO insurer writing and administering the flood insurance
policy on behalf of NFIP may also provide coverage for wind-related
risks on the same property.
Through its program contractor, FEMA operates a reinspection program to
monitor and oversee claims adjustments and address concerns about flood
payments. The reinspection program's activities encompass reevaluating
the flood adjustments and claims payments made on damaged property to
determine whether NFIP paid the proper amount for flood-related
damages. The program conducts on-site reinspections and reevaluations
of a sample of flood claim adjustments.
Determining the cause and extent of damages is primarily the job of
insurance adjusters, who are either employed or contracted by insurance
companies and generally licensed by the states. Adjusters assess
damage; estimate losses; and submit required reports, work sheets, and
photographs to the insurance company, which reviews the claims and
approves them for payment. In general, insurance adjusters are paid on
a percentage basis or fee schedule tied to the amount of damages. These
adjusters can fall into several categories:
* Staff (or company) adjusters are employees of insurance companies who
determine the amount of damages payable on claims under a contract of
insurance.
* Independent adjusters and adjuster firms are contractors that
insurance companies hire to assess damages and determine claims losses.
* Emergency adjusters are sometimes allowed by states to operate on a
temporary basis to further augment the force of adjusters following a
catastrophe.
* Public adjusters are hired by and work on behalf of property owners
to assess damages and help prepare claims.
Insurance adjusters are regulated by the states, which have been
granted authority by Congress to oversee insurance activities. The
federal government retains the authority to regulate insurance, giving
primary responsibility for insurance regulation to the states in
accordance with the McCarran-Ferguson Act of 1945.[Footnote 6] State
insurance regulators' oversight includes requirements pertaining to the
licensing and training of insurance adjusters. In addition, adjusters
that have been licensed or allowed to operate by a state can also be
certified as flood adjusters by NFIP to assess flood damages on
properties.
A property owner who has experienced hurricane damages can initiate a
flood insurance claim by contacting the insurance agent of the WYO
insurer that sold the NFIP flood policy. The agent relays the claim
information to the WYO insurer, which assigns a flood claims adjuster
to the case. The adjuster will then inspect the property to determine
the damage caused by flooding and the extent to which that damage is
covered under the flood policy. To help carry out this work, insurance
adjusters commonly use software that organizes the damage information
and estimates the repair or replacement costs for such damages. Factors
utilized in determining loss estimates include the square footage of
the building; the type of building materials; and the cost of materials
and repairs at the market rate, which is subject to change. Once the
assessment of a damaged property is complete, the adjuster files a
report with the WYO insurance company, which reviews the claim and
approves or denies it for payment to the policyholder (see fig. 1).
Figure 1: Key Flood Insurance Claims Processing Steps on Flood-Damaged
Properties:
[See PDF for image]
This figure is an illustration of the key flood insurance claims
processing steps on flood-damaged properties. The following data is
depicted:
1) Policyholder contacts WYO insurance agent or company;
2) WYO insurer assigns adjuster(s) to the property[A];
3) Adjuster(s) contacts policyholder and sets time to view property;
4) Adjuster(s) determines cause and scope of damages, taking notes,
measurements, and photos[B];
5) Adjuster(s) prepares claim documentation and damage estimates for
damage claims;
6) Policyholder obtains WYO insurer‘s estimate of flood damage;
7) Policyholder and WYO insurer agree on the flood claim settlement;
8) Policyholder receives payment for flood damage claim from the WYO
insurer;
9) WYO insurer receives reimbursement of flood claim payment from NFIP.
Sources: GAO (analysis); Art Explosion (images).
[A] The insurance adjuster that assesses flood damages must be an NFIP-
certified flood adjuster.
[B] Insurance companies may also decide to hire an engineer to assess
the cause(s) of damages, depending on the damage scenario.
[End of figure]
Likewise, for wind-related damage claims on hurricane-damaged
properties, property owners can contact the insurance agent or company
that sold them their property-casualty policy to start the claims
process. For some property owners, their property-casualty insurer for
wind-related risks is the same company that serves as NFIP's WYO
insurer. In such cases, both the wind and flood insurance policies will
be processed by the same insurer.[Footnote 7] In other cases, where the
property-casualty insurer is a different company than the WYO insurer,
claims for wind and flood damages will be processed separately by
different insurers.
Both the insurance industry and NFIP incurred unprecedented storm
losses from the 2005 hurricane season. State insurance regulators
estimated that property-casualty insurers had paid out approximately
$22.4 billion in claims tied to Hurricane Katrina (excluding flood) as
of December 31, 2006.[Footnote 8] However, industry observers estimate
that insured losses tied to Hurricane Katrina alone (other than flood)
could total more than $40 billion, depending on the outcome of
outstanding claims and ongoing litigation. FEMA estimated that NFIP had
paid over $15.7 billion in flood insurance claims from Hurricane
Katrina as of August 31, 2007, encompassing approximately 99 percent of
all flood claims received.
As of September 2007, FEMA had about 68 employees, assisted by about
170 contractor employees, to manage and oversee the NFIP and the
National Flood Insurance Fund, into which premiums are deposited and
claims and expenses are paid. Their management responsibilities include
establishing and updating NFIP regulations, analyzing data to determine
flood insurance rates, and offering training to insurance agents and
adjusters. In addition, FEMA and its program contractor are responsible
for monitoring and overseeing the quality of the performance of the WYO
insurance companies to assure that NFIP is administered properly.
We have recently completed related work highlighting concerns with
payment formulas for services rendered by WYO insurers.[Footnote 9] We
are also engaged in other ongoing work focused on reviewing various
aspects of the oversight of WYO insurers.
Potential Coverage Gaps and Claims Uncertainties Can Arise When
Homeowners Have Multiple Policies That Cover Different Perils:
Insurance coverage for hurricane damages commonly requires the purchase
of multiple insurance policies--a general homeowners policy, an NFIP
policy, and in some areas, a special policy for wind damage. But even
with these policies, homeowners cannot be certain that all damage
resulting from a hurricane will be covered because the areas and limits
of coverage differ across policies. Further, because both homeowners
and NFIP policies can be serviced by a single WYO insurer, a conflict
of interest exists during the adjustment process. Since Hurricane
Katrina, legal disputes have been ongoing between property-casualty
insurers and policyholders over damage determinations and the
interpretation of policy language concerning coverage for damages that
may have resulted from both wind and flooding.
Covering Hurricane Damages Often Requires Two or More Policies with
Different Limits and Coverage:
Property owners cannot currently purchase a single insurance policy for
all hurricane-related damages because policies offered by property-
casualty insurers generally exclude coverage for flood damage and
sometimes may exclude coverage for wind-related damage. Property owners
in flood-prone areas frequently have at least two insurance policies--
for example, a homeowners policy from a private insurer and a flood
insurance policy backed by NFIP. Additionally, on certain properties in
coastal areas, private insurers sometimes exclude from homeowners
policies coverage for wind-related damage, requiring policyholders to
either pay an additional premium for wind-related risks on their
primary policy or to purchase a separate supplemental policy for wind-
related damages. In such cases, this supplemental coverage is typically
provided by a state-sponsored wind insurance pool that has been created
to address shortages in the availability of insurance for wind-related
risks. Moreover, some property owners may also have excess flood
insurance if the value of their home exceeds the coverage limits
offered by NFIP.
Private property-casualty insurance policies differ from the government-
sponsored flood insurance policy in several ways. For example, key
differences exist between the level of coverage offered by NFIP and
that offered under common homeowners policies. Available coverage for
damages under an NFIP policy is limited by law to $250,000 for the
structure and $100,000 for contents, although the replacement cost
value of some homes exceeds such limits.[Footnote 10] Generally,
private homeowners policies can cover the replacement cost value of the
house, and coverage may be obtained to insure personal property,
including outside property and personal belongings (e.g., trees,
plants, decks, and fences), in contrast to an NFIP policy. Further,
while homeowners policies often provide coverage for additional living
expenses if a house is rendered uninhabitable, NFIP does not insure
policyholders for such coverage, although such expenses may be offset
through other disaster assistance provided by FEMA.[Footnote 11]
Insurance Coverage Gaps, Claims Adjustment Uncertainties, and Conflicts
of Interest Can Materialize When Two or More Policies Cover One Event:
Property owners do not know in advance whether their insurance policies
will cover all damages from a hurricane, because the payments
ultimately will depend on the extent to which each policy will cover
the damages--that is, whether the damages are determined to be the
result of hurricane winds, flooding, or some combination of both. Even
property owners that purchase the maximum amount of flood insurance
available through NFIP, along with other private insurance for wind-
related risks, do not know whether they are completely covered until
the insurers' claims adjusters determine what caused the damage. Given
the differences between the coverage offered under flood insurance and
the coverage offered by private property-casualty insurance, the damage
determinations can be crucial. For example, a homeowner whose house is
worth $450,000 may have both a flood insurance policy and wind
coverage, but flood insurance covers only up to $250,000 in damages. If
damages to the policyholder's house are severe, and all of it is
determined to be from flooding, the property owner may not receive
enough compensation to fully rebuild and pay for temporary housing
under the terms of the NFIP flood policy.[Footnote 12] But if all of
the damages are determined to have been caused by wind, the homeowner
may be able to fully recoup their losses and additional living
expenses. Hence, insurance coverage uncertainties can arise when
hurricane damages occur.
Claims adjustment uncertainties include challenges that can arise in
assessing and adjusting damages due to wind and flooding when the
evidence of damage at the damage scene is limited or compromised. As a
result of the magnitude and severity of damage from Hurricanes Katrina
and Rita, evidence of the damaged structures was often limited or
compromised. In some cases, buildings were completely destroyed,
leaving little except the foundations. Insurance claims adjusters and
industry participants we spoke with acknowledged that assessing the
cause and extent of damages was more problematic when little evidence
of the structure was left. Exacerbating such difficulties was the fact
that adjusters commonly arrived on the damage site several weeks after
Hurricane Katrina occurred, given the scope of damage. During the time
between Hurricane Katrina and the arrival of the adjusters, the
remaining evidence at damage scenes may have been further compromised
by subsequent natural and man-made events (such as the clearing of
debris from streets and roadways).
Finally, there is an inherent conflict of interest when the same
insurer is responsible for assessing damages for its own property-
casualty policy, as well as for the NFIP policy, each covering
different perils on the same property. As part of the WYO arrangement,
private property-casualty insurers are responsible for selling and
servicing NFIP policies, including performing the claims adjustment
activities to assess the cause and extent of damages.[Footnote 13] When
the WYO insurer writes and services its own policy, along with the NFIP
policy for the same property, the insurer is responsible for
determining the cause of damages and, in turn, how much of the damages
it will pay for and how much NFIP will cover. In certain damage
scenarios, the WYO insurer that covers a policyholder for wind losses
can have a vested economic interest in the outcome of the damage
determination that it performs when the property is subjected to a
combination of high winds and flooding. In such cases, a conflict of
interest exists with the WYO insurer as it determines which damages
were caused by wind, to be paid by itself, and which damages were
caused by flooding, to be paid by NFIP. Moreover, the amount WYO
insurers are compensated for servicing a flood claim also increases as
the amount of flood damage on a claim increases--an allowance of 3.3
percent of each claim settlement amount.
Legal Disputes Involving Policy Coverage Have Arisen Since the 2005
Hurricane Season:
In the aftermath of the 2005 hurricane season, legal disputes emerged
between policyholders and insurers that centered largely on the extent
to which damages would be covered under a homeowners policy, as
distinct from an NFIP policy, when both high winds and flooding
occurred. Such disputes have been and continue to be argued and
resolved though state and federal courts, as well as through mediation
programs.
Many of these cases have concerned the interpretation and/or
enforceability of certain property-casualty policy language in the
context of challenging the cause of the damages or losses. For example,
some disputes have raised the question of whether a policy's flood
exclusion language clearly excluded the water-related event, such as
storm surge, that caused the damages at issue. Other cases have
challenged the enforceability of a property-casualty policy's anti-
concurrent causation clause. Such a clause generally provides that
coverage is precluded for damage caused directly or indirectly by an
excluded cause of loss (for example, flood), regardless of any other
cause (for example, wind) that contributes concurrently to or in any
sequence with the loss. Many of these cases are still working their way
through the judicial trial and appeals processes and will eventually be
resolved based on the particular language of the policy, the evidence
presented by both the policyholders and the insurers, and the governing
state law.
State mediation efforts have been initiated to help address the backlog
of unresolved claims between policyholders and insurance companies on
private homeowners policies.[Footnote 14] These programs, particularly
in Louisiana and Mississippi, have played a major role in facilitating
many settlements of residential property insurance claims arising out
of Hurricanes Katrina and Rita. Established after the 2005 hurricane
season, these programs offer policyholders and insurers a nonbinding,
alternative dispute resolution procedure to resolve claims and avoid
the delays, expenses, and uncertainties of resolving the disputes
through the courts. On the whole, state insurance regulators in
Mississippi and Louisiana report that the majority of cases brought to
mediation have been resolved.
Lack of Uniformity in Licensing and Training Requirements among States
Creates Uncertainties about Some Adjusters' Qualifications:
In spite of the importance of the insurance claims adjuster to
policyholders after a national catastrophe, licensing and training
requirements for adjusters vary considerably by state. Some states have
no requirements for insurance claims adjusters, others have them for
most types of adjusters, and many states have them for some types of
adjusters but not for others. This lack of uniformity results in
uncertainties over the qualifications and training of claims adjusters.
Further, states may temporarily relax these requirements after a
catastrophe. Claims adjusters who adjust flood insurance claims,
however, must be trained and certified by NFIP. Following Hurricane
Katrina, some states that lacked licensing requirements for adjusters
passed laws to raise the level of oversight for adjusters.
States' Licensing and Training Requirements for Claims Adjusters Vary
Widely:
During our review, we found that adjuster licensing and training
requirements varied considerably among states, including those along
the Gulf Coast. Of the eight coastal states we contacted, most had
varying degrees of licensing and training requirements for different
types of adjusters during the 2005 hurricane season (Florida, Georgia,
Mississippi, North Carolina, South Carolina, and Texas), while two
states (Louisiana and Alabama) had no examination or continuing
education requirements for claims adjusters at that time. Some of the
coastal states had also instituted some common licensing requirements
for staff adjusters, independent adjusters, and public adjusters, while
others had varying requirements for different types of adjusters.
Similarly, information gathered from industry representatives showed
that licensing and training requirements varied substantially among the
states nationwide. Figure 2 summarizes the varying level of
requirements for claims adjusters among several coastal states, as well
as recent legislation enacted in some of the coastal states impacted by
Hurricane Katrina to strengthen their requirements.
Figure 2: Licensing and Training Requirements for Adjusters in Selected
Coastal States as of 2007:
[See PDF for image]
This figure is a table depicting the licensing and training
requirements for adjusters in selected coastal states as of 2007.
Louisiana[A]:
State licensing exam:
Adjuster, Staff/company: [Check][C];
Adjuster, Independent: [Check][C];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check][C].
Continuing education:
Adjuster, Staff/company: [Check][C];
Adjuster, Independent: [Check][C];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check][C].
Payment scheme:
Adjuster, Staff/company: Flat fee;
Adjuster, Independent: Flat fee;
Adjuster, Emergency: Undefined;
Adjuster, Public: Flat fee.
Mississippi[B]:
State licensing exam:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Continuing education:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check][C].
Payment scheme:
Adjuster, Staff/company: Salary;
Adjuster, Independent: Undefined;
Adjuster, Emergency: Undefined;
Adjuster, Public: Percent of claim/settlement.
Florida:
State licensing exam:
Adjuster, Staff/company: [Check];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Continuing education:
Adjuster, Staff/company: [Check];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Payment scheme:
Adjuster, Staff/company: Salary;
Adjuster, Independent: Undefined;
Adjuster, Emergency: Undefined;
Adjuster, Public: Percent of claim/settlement.
Texas:
State licensing exam:
Adjuster, Staff/company: [Check];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Continuing education:
Adjuster, Staff/company: [Check];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Empty].
Payment scheme:
Adjuster, Staff/company: Fee schedule;
Adjuster, Independent: Fee schedule;
Adjuster, Emergency: Fee schedule;
Adjuster, Public: Percent of claim/settlement.
South Carolina:
State licensing exam:
Adjuster, Staff/company: [Check];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Continuing education:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Empty];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Empty].
Payment scheme:
Adjuster, Staff/company: Salary;
Adjuster, Independent: Undefined;
Adjuster, Emergency: Undefined;
Adjuster, Public: Undefined.
North Carolina:
State licensing exam:
Adjuster, Staff/company: [Check];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Continuing education:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Empty];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Empty].
Payment scheme:
Adjuster, Staff/company: Salary;
Adjuster, Independent: Salary;
Adjuster, Emergency: Undefined;
Adjuster, Public: Percent of claim/settlement.
Georgia:
State licensing exam:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Continuing education:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Check];
Adjuster, Emergency: [Empty];
Adjuster, Public: [Check].
Payment scheme:
Adjuster, Staff/company: Undefined;
Adjuster, Independent: Undefined;
Adjuster, Emergency: Undefined;
Adjuster, Public: Undefined.
Alabama:
State licensing exam:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Empty];
Adjuster, Emergency: [Empty];
Adjuster, Public: Not allowed[D].
Continuing education:
Adjuster, Staff/company: [Empty];
Adjuster, Independent: [Empty];
Adjuster, Emergency: [Empty];
Adjuster, Public: Not allowed[D].
Payment scheme:
Adjuster, Staff/company: Salary;
Adjuster, Independent: Hourly;
Adjuster, Emergency: Hourly;
Adjuster, Public: Not allowed[D].
Source: GAO summary of information from state insurance regulators and
legislation enacted after Hurricane Katrina.
[A] In 2006, Louisiana enacted both The Louisiana Claims Adjuster Act
(Acts 2006, No. 783) and The Louisiana Public Adjuster Act (Acts 2006,
No. 806). Beginning June 30, 2007, these Acts generally require
licensure, along with a licensing examination, for staff/company
adjusters, independent adjusters, and public adjusters, respectively.
The latter Act prohibits public adjusters from being paid a fee
contingent on or a percentage of a claim amount.
[B] In 2007, Mississippi enacted House Bill No. 1524, which provided,
among other things, for the licensure and regulation of public
adjusters.
[C] Requirements were established after the 2005 hurricane season.
[D] Alabama law prohibits public adjusters from operating independently
and considers such activities as the unauthorized practice of law.
[End of figure]
For coastal states with licensing and training requirements for claims
adjusters, a state licensing examination has been the principal
oversight tool used to regulate the entry of adjusters into the
marketplace. According to insurance regulators, the state licensing
exam typically includes questions on insurance regulation, adjusting
practices, and different kinds of insurance policies. Some states also
require a certain level of continuing education before a license can be
renewed, while others do not.
Continuing education requirements also vary among states for different
types of adjusters. For the states we contacted, continuing education
requirements were mixed, with some of the states requiring a certain
level of continuing education for some types of adjusters, while other
states did not have continuing education requirements. For example,
during the 2005 hurricane season, staff and independent adjusters
employed in Florida and Texas were required to take at least 24 hours
of continuing education every 2 years, while other coastal states had
no continuing education requirements for some types of adjusters.
Motivated largely by concerns about the adjustment process, some states
that were impacted by the 2005 hurricanes enacted legislation to raise
their level of oversight for adjusters. When Hurricane Katrina hit,
Louisiana did not regulate any types of adjusters, and adjusters were
able to conduct business there without a license.[Footnote 15] In 2006,
the Louisiana State Legislature passed, and the governor signed, The
Louisiana Claims Adjuster Act, which required that staff and
independent adjusters become licensed beginning on June 30, 2007. Like
other states, the Louisiana Department of Insurance will issue
nonresident adjusters a reciprocal license as long as they are
currently licensed in their home states.
In Mississippi, legislative proposals were also introduced for
additional oversight requirements for public adjusters. After Hurricane
Katrina, the state of Mississippi allowed public adjusters to work in
the state under an emergency provision approved by the Insurance
Commissioner. In 2007, the Mississippi State Legislature passed, and
the governor signed, a bill to allow public insurance adjusters to
operate in the state permanently and have their practices regulated, a
change that requires these adjusters to get certifications, licenses,
and continuing education.
In addition to licensing and training requirements, some state
regulators we contacted also said they relied on insurance companies'
quality control measures to help ensure the quality of adjusters.
Insurance companies and adjuster firms generally provide some degree of
in-house or external training for their adjusters, according to
industry participants. However, insurance companies and adjuster firms
we contacted generally declined to share company-specific instructions
and manuals for their insurance claims adjusters, citing proprietary
concerns.
In contrast to the varying requirements for claims adjusters among the
states, NFIP conducts limited but uniform mandatory training to certify
individuals as flood adjusters. Flood adjusters must be trained and
certified annually. In addition, FEMA provides ongoing oversight of
NFIP claims adjustments through its claims reinspection program.
However, because independent claims adjusters must be licensed by a
state to be certified as a flood adjuster, the underlying
qualifications and training for adjusters that seek to become flood
adjusters remain varied, as they depend on the state. In the absence of
uniform state standards for claims adjusters, neither NFIP, state
insurance regulators, nor policyholders can be certain of the minimum
qualifications held by a claims adjuster assigned to a particular
property, increasing the possibility of inconsistent claims adjustments
and payments for similarly damaged properties.
States May Waive Requirements for Adjusters During Emergencies,
Potentially Magnifying the Impacts of Varied State Standards:
Given the lack of uniformity for adjuster licensing and training
requirements among states, the qualifications and level of training of
the adjusters called upon in catastrophe situations can vary
considerably. A state's normal oversight requirements for claims
adjusters can be weakened by nonresident licensed adjusters that are
allowed to operate from states with less stringent requirements.
Further, while most states have some adjuster licensing and training
requirements that are applicable to some types of adjusters, these
oversight measures can be waived in emergency situations, as they were
in the aftermath of Hurricane Katrina.
The majority of states allow nonresident adjusters to operate within
state borders as long as the adjusters are licensed in other
states.[Footnote 16] However, differences in the qualifications and
training of adjusters allowed to operate in a state can materialize
when this practice of reciprocity occurs in the absence of uniform
regulatory requirements. In most of the coastal states we reviewed,
nonresident adjusters were exempted from taking the licensing exams if
they were licensed in their home state. Although some states have
similar licensing examination requirements, oversight of adjusters,
nevertheless, lacks uniformity. Issues related to the quality and
consistency of regulatory requirements for insurance claims adjusters
across states also exist in other aspects of insurance regulation. For
other regulatory functions--such as the licensing of insurance agents-
-many states accept licenses from other states as long as those states
reciprocate. As we have reported in other work, success with state
reciprocity of licensing functions depends on the adequacy and
uniformity of requirements among states.[Footnote 17] In the absence of
adequate and consistent licensing requirements, reciprocity can reduce
one state's level of oversight to the more limited standards of
another.
Additionally, all of the coastal states we contacted had provisions for
allowing "emergency adjusters" to augment the normal force of adjusters
by waiving the normal licensing and training requirements for
adjusters, if warranted by the scope of damage. Accordingly, coastal
states most impacted by Hurricane Katrina invoked emergency procedures
to allow additional adjusters to operate in their states without having
to meet the normal licensing and training requirements. However, a
state's oversight requirements for claims adjusters may be weakened
when nonresident licensed adjusters from states with less stringent
requirements are allowed to operate in states with higher standards.
During our review, insurance regulatory officials and industry
participants and observers acknowledged possible inconsistencies and
errors in adjustments that arose, given the shortage of adjusters and
the varying qualifications of those that worked in the aftermath of
Hurricane Katrina.
Some states have attempted to address concerns and uncertainties over
the qualifications of emergency adjusters with other varied approaches.
For example, Florida, Mississippi, North Carolina, and Texas require
that work performed by emergency adjusters be reviewed and certified by
a sponsoring licensed adjuster or insurance company. North Carolina has
set minimum guidelines for certifying adjusters on an emergency basis
that take into account, for instance, their level of experience. South
Carolina requires that emergency adjusters file an adjuster licensing
application, while Louisiana, which had no oversight requirements for
emergency adjusters during the 2005 hurricane season, now requires
emergency adjusters to register their name and employment contact
information but imposes no other requirements.
State insurance regulators can also use market conduct examinations to
further scrutinize a company's claims adjustment processes. As we have
reported in previous work, state practices for market conduct exams
vary widely and are not always performed on a routine basis by most
insurance departments.[Footnote 18] However, most states can initiate
targeted examinations to assess certain company activities if they
receive consumer complaints suggesting a potential issue. The types of
consumer complaints received by state insurance regulators include
those related to the denial of claims, the untimely processing of
claims, and the misrepresentation of coverage. Some states had
initiated market conduct examinations on selected companies to assess
their claims handling activities tied to the 2005 hurricane season and
subsequent consumer complaints. For example, state insurance regulators
in Louisiana conducted several market conduct examinations on various
insurers. However, according to state regulators, these examinations
were focused on evaluating the timeliness of claims payments in
accordance with state statutes, rather than examinations on the wind
versus flood issue. In Mississippi, state regulators mentioned that
market conduct examinations pertaining to claims processing activities
following Hurricane Katrina were still ongoing.
Lack of Relevant Claims Data Limits FEMA's Ability to Oversee Hurricane
Damage Assessments:
Limited data are available for evaluating the damage assessments and
claims payments when properties are subjected to both high winds and
flooding and the extent of damage caused by each peril is difficult to
determine. Data collected by NFIP from WYO insurers--including those
that serviced both NFIP flood policies along with their own policies
for wind-related risks on the same properties--include only information
on damage deemed by the WYO insurers to have been caused by flooding.
This limited information prevents NFIP from knowing how each peril
contributed to the total damages in order to verify that flood
insurance claims payments were accurate. The lack of data also limits
FEMA's reinspection program because the wind damage information is
relevant to understanding how all perils contributed to damages when
certain properties were subjected to both high winds and flooding.
Further, the lack of transparency over the extent of wind damage deemed
to have contributed to total damages limits FEMA's ability to address
conflicts of interest that arise if the WYO insurer is also the wind
insurer on the property. FEMA and NFIP program officials have stated
that they do not have the authority to access data on wind claims for
NFIP-insured properties. NFIP program contractors also stated they
cannot access WYO insurers' policies, procedures, or instructions
describing to adjusters how wind damage should be determined in
conjunction with flood damage when properties are subjected to both
perils.
NFIP Generally Lacks Needed Data on Wind Damage Claims for Properties
That It Insures:
NFIP does not systematically collect and analyze data on wind-related
damage when collecting flood claims data on properties subjected to
both high winds and flooding, such as those damaged in the aftermath of
Hurricanes Katrina and Rita. Further, NFIP has not sought such
information even when the same insurance company serves as both the
NFIP WYO insurer and the insurer for wind-related risks. WYO insurers
are required to submit flood damage claims data in accordance with
NFIP's Transaction Record Reporting and Processing (TRRP) Plan for
inclusion in the NFIP's claims database.[Footnote 19] In our review of
data elements in NFIP's claims database, we found that NFIP does not
require WYO insurers that are responsible for adjusting flood claims to
report information on property damages in a manner that could allow
NFIP to differentiate how these damages (to the building or its
contents) were divided between wind and flooding.
Specifically, the TRRP Plan for WYO insurers instructs them to include
only flood-related damage in the data fields on "Total Building
Damages" and "Total Damage to Contents." Further, the "Cause of Loss"
data field does not incorporate an option to explicitly identify
property damages caused or partially caused by wind. As a result, WYO
insurers do not report total property damages in a manner that 1)
identifies the existence of wind damage or 2) discerns whether damages
were divided between wind and flooding for properties that were
subjected to a combination of both perils. Further, NFIP program
contractors stated that they did not systematically track whether the
WYO insurer processing a flood claim on a property was also the wind
insurer for that property. This lack of information limits FEMA's
ability to adequately oversee the WYO insurers and verify that damage
paid for under the flood policy was caused only by the covered loss of
flooding. In past years, the determination over the cause of damages
has been an issue. For example, as we reported in 2005, following
Hurricane Isabel, one of the reasons that claims for additional losses
were not paid was because damage was not due to flooding, but wind-
driven rain.[Footnote 20]
NFIP's normal claims processing activities were stressed during the
2005 hurricane season. For both Hurricanes Katrina and Rita, FEMA
estimates that NFIP has paid approximately $16.2 billion in claims,
with average payments exceeding $95,000 and $47,000,
respectively.[Footnote 21] As we reported in December 2006, in an
effort to assist policyholders, FEMA approved expedited NFIP claims
processing methods that were unique to Hurricanes Katrina and
Rita.[Footnote 22] Some expedited methods included the use of aerial
and satellite photography and flood depth data in place of a site visit
by a claims adjuster for properties that likely had covered damages
exceeding policy limits. Under other expedited methods, FEMA also
authorized claims adjustments without site visits if only foundations
were left and the square-foot measurements of the dwellings were known.
Such expedited procedures facilitated the prompt processing of flood
claims payments to policyholders, but once these flood claims--and
others--were processed, NFIP did not systematically collect
corresponding wind damage claims data on an after-the-fact basis.
Without information on both wind and flood damages to certain
properties subjected to both perils, NFIP has reduced assurances that
the amounts it paid for flood claims were actually limited to flood
damage.
FEMA officials stated that they do not have access to wind damage
claims data from the WYO insurers. Accordingly, NFIP does not
systematically collect data on wind damage for properties for which a
flood claim has been received. Rather, FEMA officials maintain that
they review the quality of claims adjustments through their
reinspection program and periodic operational reviews of companies.
FEMA officials that we contacted expressed different opinions
concerning the need for the authority to obtain wind-related data.
While some FEMA and NFIP contract officials stated that having the
authority to obtain and analyze wind-related claims information would
be helpful in reviewing claims, other senior FEMA officials questioned
the usefulness of such information, maintaining that existing oversight
activities are generally sufficient without an additional review of
wind-related claims data.
Without analyzing wind-related claims information, however, FEMA's
oversight process is limited for determining whether the inherent
conflict of interest that exists when a WYO insurer services its own
policy and the flood insurance policy on the same property is adversely
affecting claims determinations. This concern has also been noted in a
Department of Homeland Security's Office of Inspector General's interim
report, which stated, "NFIP oversight focused primarily on whether the
flood claim was correctly adjudicated with little or no consideration
for wind damage as a contributing factor."[Footnote 23] The work being
performed by the Office of Inspector General also includes subpoenaing
wind claims information from WYO insurers to reevaluate wind versus
flood determinations. This work was ongoing as of the time this report
was being completed.
FEMA's Reinspection Program Has Limited Ability to Validate the
Accuracy of Payments on Certain Hurricane-Damaged Properties Given the
Lack of Information Available on Wind-Related Damage Claims:
FEMA's reinspection program, which reevaluates the adjustment process
and flood payments made, does not collect information that could help
enable FEMA to validate the claims payments on certain hurricane-
damaged properties. The reinspection program does not systematically
evaluate the apportionment of damages between wind and flooding, even
when a conflict of interest exists with a WYO insurer. For example, the
program does not have a means of identifying whether wind-related
damage contributed to losses on the properties it evaluates or the
extent of such losses. Without the ability to examine damages caused by
both wind and flooding in some cases, the reinspection program is
limited in its ability to assess whether NFIP paid only the portion of
damages it was obligated to pay under the flood policy.
During our study, we reviewed 740 reinspection files for properties
with flood claims associated with Hurricanes Katrina and Rita. We found
that most of these files did not document a determination of whether or
not damages were caused by a combination of wind and flooding and did
not adequately document whether the claim paid actually reflected only
the damage covered by the flood insurance policy versus damage caused
by other uncovered damages, such as wind. Rather, the files contained
limited and inconsistent documentation concerning the presence or
extent of wind-related damage on properties and lacked the
documentation that would have enabled NFIP to verify that damages paid
for under the flood policy were caused only by the covered loss of
flooding.
Specifically, the reinspection activities focused on reevaluating the
extent to which building and content damages were caused by flooding in
the absence of information concerning wind-related damage. While some
of the files documented damages that had been caused by a combination
of wind and flooding, most did not. Around two-thirds of the 740
reinspection files did not indicate whether the damages had been caused
only by flooding or by a combination of wind and flooding and did not
include enough documentation for a reviewer to make such a
determination. Approximately 26 percent of the files indicated that the
damages were caused only by flooding, and 8 percent indicated that the
damages were caused by a combination of wind and flooding. When NFIP
program contractors conducting the reinspections did indicate that
damages were caused by a combination of wind and flooding, insufficient
documentation existed to determine the extent to which the wind damage
contributed to total property damages and, hence, the accuracy of the
flood damage claim.
Concerning the lack of wind damage claims data available to NFIP, we
found that hurricane claims data gathered separately by state insurance
regulators were of limited value for understanding how wind and
flooding contributed to property damages. In the aftermath of
Hurricanes Katrina and Rita, state insurance regulators in Alabama,
Florida, Louisiana, Mississippi, and Texas jointly established a data
call mechanism to collect aggregate claims data associated with the
storms reported by property-casualty insurers.[Footnote 24] But such
data were of limited value for assessing how wind and flooding
contributed to damages because this information lacked sufficient
geographic detail to be matched with corresponding flood claims data on
a community-level (e.g., zip-code) or property-level basis. Rather,
claims data reported by property-casualty insurers were reported on a
statewide and county-or parish-level basis for different elements. As a
result, the hurricane claims data collectively gathered by state
insurance regulators would have been of limited benefit to NFIP to
understand how both wind and flooding contributed to property damages.
State insurance regulators, through NAIC, are currently developing
specifications and exploring the feasibility of collecting more
geographically detailed information for an updated disaster reporting
system based on lessons learned from recent hurricanes and comments
from interested parties about monitoring insurance claims following a
natural disaster.
In the aftermath of the 2005 hurricane season, the NFIP reinspection
process was also challenged by the severity and scope of the damages.
Many properties were completely destroyed, making damage determinations
and reevaluations of such determinations difficult. The on-site
reinspections of properties with flood claims associated with
Hurricanes Katrina and Rita were generally conducted several months
after the event--delays that were to some extent understandable,
considering the magnitude of the devastation. But the delays further
limited FEMA's ability to reevaluate the quality and accuracy of the
initial damage determinations, given the ongoing natural and man-made
events that continued to alter the damage scenes.
Additionally, we have previously reported that FEMA did not choose
statistically valid random samples of the universe of all closed claims
for its reinspection process. Therefore, the results of the
reinspections could not be projected to the universe of properties for
which flood claims were made.[Footnote 25] Accordingly, we have
previously recommended that FEMA select a statistically valid sample of
reinspections for its reinspection program. FEMA has agreed to
implement this recommendation.
Finally, NFIP program contractors responsible for administering the
reinspection program also mentioned that they do not have access to WYO
companies' adjusting policies, procedures, and instructions to assess
the guidance provided to their adjusters (company staff or contracted)
for discerning and quantifying the damages caused by wind versus
flooding. The lack of information on the specific methodologies and
instructions conveyed by WYO insurers to their force of adjusters
diminishes the transparency over how damages were discerned between
wind and flooding on hurricane-damaged properties and the extent to
which these instructions are consistent with or at odds with FEMA's
instructions to adjusters. Absent such information along with the wind-
related claims data, FEMA's oversight of the NFIP WYO insurers to
assess the accuracy of flood claims payments is limited, particularly
in cases where the WYO insurer is also the wind insurer on the same
property.
Conclusions:
Resolving the unique insurance issues posed by hurricanes requires
actions to address numerous uncertainties. The NFIP must balance
pressures to quickly pay claims to policyholders with ensuring that it
is enforcing the terms of the flood policy. Uncertainties involved in
this process begin with the extent of covered damages from multiple
policies, contingent on the damage scenario, and continue with the
claims adjustment and regulatory oversight activities that follow. As
we have seen, policyholders do not know in advance of a hurricane the
extent to which damages will be covered because the amount of insured
losses depends on whether it is a multiperil event, how much of the
damages are caused by wind and how much by flooding, and how policy
language will be interpreted in accordance with relevant state laws.
Other concerns can also materialize when the WYO insurer determines not
only the damage caused by flooding that is covered by the flood policy,
but also the damage caused by wind that is covered under its own
property-casualty policy, creating an inherent conflict of interest
that must be managed or mitigated. In the aftermath of Katrina,
policyholders and insurance companies were and continue to be uncertain
as to how current language on property-casualty insurance policies will
be interpreted, and numerous lawsuits continue to make their way
through federal and state courts.
Once an event has occurred, other uncertainties arise concerning the
qualifications and training of claims adjusters. State licensing and
training requirements vary considerably, and standards that do exist
may be relaxed or eliminated after a major catastrophe, depending on
the scope of damage. Additionally, uncertainties remain over the
probability of accurately discerning the extent to which damages were
caused by wind versus flooding on certain hurricane-damaged properties.
The difficulty in performing this task can increase when evidence
remaining at the damage scene is limited or compromised. Not
surprisingly, the variations in adjusters' qualifications, coupled with
limited or compromised evidence at damage scenes, foster debate and
uncertainty over the way damage determinations are made, the
consistency of adjustments for similarly damaged properties, and how
losses are apportioned between flood and wind insurers. In the absence
of uniform state standards for claims adjusters, state insurance
regulators, as well as policyholders, cannot be certain of the minimum
qualifications or level of professional training of a claims adjuster
assigned to a particular property, increasing the possibility of
inconsistent claims adjustments and payments for similarly damaged
properties.
Uncertainties are also present in the oversight of claims adjustment
processes, given the lack of information concerning both wind and flood
damage claims for certain hurricane-damaged properties. FEMA cannot be
certain of the quality of NFIP claims adjustments allocating damage to
flooding in cases where damages may have been caused by a combination
of wind and flooding because NFIP does not systematically collect and
analyze both types of damage claims data together on a property-level
basis. Although FEMA officials believe they can verify the accuracy of
flood claim payments without the wind data, there are situations where
additional information is warranted. Without information on the wind
damage claims adjustments prepared by WYO insurers at the time they
submit flood claims on hurricane-damaged properties, FEMA lacks
controls to independently assess whether or not the apportionments
between flood and wind damage appear reasonable. FEMA officials have
determined that they currently lack the authority to access the WYO
insurers' claims data and guidance to adjusters for wind-related claims
to evaluate the reasonableness of the flood claims for properties that
were also subject to damage from high winds. Hence, for a given
property, NFIP does not know how each peril contributed to the total
property damages or how adjusters working for the WYO insurers made
such determinations. As a result, FEMA cannot be certain whether NFIP
has paid only for damage caused by flooding when insurers with a
financial interest in apportioning damages between wind and flooding
are responsible for making such apportionments.
Matters for Congressional Consideration:
To strengthen and clarify FEMA's oversight of WYO insurers,
particularly those that service both wind and flood damage claims on
the same property, we recommend the Congress consider giving FEMA clear
statutory access to:
* both wind and flood damage claims information available from NFIP's
WYO insurers in cases in which it is likely that both wind and flooding
contributed to any damage or loss to covered properties, enabling NFIP
to match and analyze the wind and flood damage apportionments made on
hurricane-damaged properties in a systematic fashion, as appropriate;
and:
* the policies, procedures, and instructions used by WYO insurers and
their adjusters for both flood and wind claims to assess and validate
insurers' claims adjustment practices for identifying, apportioning,
and quantifying damages in cases where there are combined perils.
Recommendation for Action:
We recommend that state insurance commissioners, acting through NAIC,
enhance the quality and consistency of standards and oversight for all
types of claims adjusters among states through more stringent and
consistent licensing and training requirements for adjusters,
including, in those states where appropriate, training to assess and
apportion damages due to wind, flooding, or both.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from FEMA and NAIC. The
Department of Homeland Security provided written comments on a draft of
this report, which have been reprinted in appendix II. FEMA concurred
with our recommendation to strengthen licensing requirements for
adjusters but disagreed with the matters for congressional
consideration to give FEMA clear statutory authority to obtain 1) wind
damage claims information available from WYO insurers and 2) the
policies, procedures, and instructions used for determining wind damage
versus flood damage when properties are subjected to both perils. In
oral comments, NAIC expressed general agreement with the draft's
findings and recommendations. In addition, both FEMA and NAIC provided
technical comments, which we have incorporated as appropriate.
FEMA stated that it believed existing oversight measures for NFIP and
WYO insurers were sufficient and that statutory access to wind and
flood damage claims information from NFIP WYO insurers would place an
unneeded burden and cost on NFIP. FEMA also stated that it did not
believe NFIP needs the wind estimate or data to determine the amount of
flood damage that occurred. It also noted that additional unnecessary
costs would be incurred to access and analyze wind damage claims
information from WYO insurers. We disagree. Because of the inherent
conflict of interest that exists when WYO insurers are the property-
casualty insurers for wind claims and are also responsible for
servicing the flood claims on the same properties, FEMA must ensure
that its internal controls are sufficient to minimize the potential
adverse impacts of this conflict on the accuracy of damage
determinations and flood claims payments. Accurately determining claims
payments is particularly important, given the likely eventuality that
FEMA would need to draw on the U.S. Treasury to pay flood losses that
exceed the funds available from premiums.
We do not suggest that FEMA collect and analyze wind claims data for
each claim or even each flood event. Rather, we recommend that FEMA
have the ability to access wind damage claims information when it is
available from the WYO insurer--that is, in circumstances when the WYO
insurer is responsible for servicing both the wind and flood policies
on the same property and when uncertainties exist, such as when the
physical evidence has been compromised or limited physical evidence
remains. Obtaining wind damage claims information that is already
available from WYO insurers establishes proper transparency over the
adjustment process when both wind and flooding contribute to damages
without an unreasonable or costly burden. As long as a conflict of
interest exists with a WYO insurer that services its own policy for
wind-related risks along with the NFIP flood policy on the same
property, additional controls are warranted. When properties are
subjected to both wind and flood perils, particularly in cases where
uncertainties exist due to limited or compromised evidence at the
damage scene, collecting enough information to understand whether or
not the WYO insurer is also the wind insurer for the same property and,
if so, the extent of damage it determined to be caused by wind versus
flooding, is key to maintaining transparency over the adjustment
process. Furthermore, when the same insurance company has already
determined the amount of damage caused by wind and flooding for a given
property, obtaining and assessing this available information should not
be cost prohibitive for FEMA or WYO insurers. The authority to access
policies, procedures, and guidance used for determining wind versus
flood damage would enable FEMA to have a more complete understanding
about how concurrent damages are handled by the WYO insurers. Such
information would strengthen FEMA's oversight and ability to identify
abuses and better ensure the accuracy of flood payments made.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the
Administrator of FEMA; the Chief Executive Officer of NAIC; the
Chairman of the House Committee on Financial Services; the Chairman and
Ranking Member of the Senate Committee on Banking, Housing, and Urban
Affairs; the Chairman and Ranking Member of the House Committee on
Homeland Security; the Chairman and Ranking Member of the Senate
Committee on Homeland Security and Governmental Affairs; and other
interested committees and parties. We will also make copies available
to others on request. In addition, the report will be available at no
charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-8678 or williamso@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix III.
Sincerely yours,
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
To evaluate how key insurance coverage issues can arise when multiple
insurance plans are tied to a hurricane-damaged property, we contacted
and collected information from the Federal Emergency Management Agency
(FEMA), National Flood Insurance Program (NFIP) contractors, state
insurance regulators, the National Association of Insurance
Commissioners (NAIC), property-casualty insurers, state-sponsored wind
insurers, insurance agents, claims adjusters, industry associations,
and mediators. This work encompassed reviewing key areas and limits of
coverage from insurance policies offered through NFIP and property-
casualty insurers to identify potential gaps in coverage that can arise
based on the terms of such policies and the nature of the damage.
Additionally, we reviewed the roles and responsibilities of write-your-
own (WYO) insurers that service NFIP policies to identify whether a
conflict of interest exists with a WYO insurer in certain
circumstances.
To evaluate state insurance regulators' oversight of the licensing and
performance of loss adjusters, we contacted and collected information
from state insurance regulators, NAIC, property-casualty insurers,
state-sponsored wind insurers, claims adjusters, and industry
associations. We collected and compared licensing and training
requirements for claims adjusters provided by state insurance
regulators in several coastal states, incorporating information on
requirements that existed prior to the 2005 hurricane season, as well
as subsequent legislation enacted by some coastal states to strengthen
oversight requirements for adjusters. We also discussed the activities,
challenges, and damage scenarios encountered by claims adjusters in the
aftermath of recent hurricanes with state regulators, FEMA and NFIP
program officials, and industry participants. We also requested
information from some property-casualty insurers and claims adjustment
firms on their guidance (policies, procedures, manuals, and
instructions) to claims adjusters on how to discern and quantify wind
versus flood damages when properties are subjected to both perils.
Industry participants declined to provide such information, citing
proprietary concerns and ongoing litigation. This work included on-site
fieldwork in Florida, Illinois, Louisiana, Mississippi, North Carolina,
Pennsylvania, South Carolina, and Texas.
To evaluate the completeness of the information that NFIP collects and
analyzes in order to determine whether damage determinations and flood
payments made accurately reflect the actual distribution of losses
between wind and flooding, we reviewed claims information collected by
NFIP from WYO insurers serving the flood claims. This work included
reviewing the type of information routinely collected from WYO insurers
through NFIP's Transaction Record Reporting and Processing (TRRP) Plan.
In addition, we obtained information on FEMA's reinspection program
that is used to reevaluate the quality of NFIP claims that have been
processed. We assessed the type of information used by NFIP to validate
the damage determinations made by WYO insurers, reviewing a
statistically valid sample of files (740) of reinspections that NFIP
conducted on selected properties from Hurricanes Katrina and Rita. We
also reviewed hurricane claims data collectively gathered by several
state insurance regulators to ascertain the extent to which such
information would be useful for assessing wind versus flood damage
determinations made on properties. We conducted our review between May
2006 and November 2007 in accordance with generally accepted government
auditing standards.
[End of section]
Appendix II: Comments from the Department of Homeland Security:
U.S. Department of Homeland Security:
Washington, DC 20528
[hyperlink, http://www.dhs.gov]
December 4, 2007:
Ms. Orice Williams:
Director, Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Williams:
RE: Draft Report GAO-08-28, National Flood Insurance Program: Greater
Transparency and Oversight of Wind and Flood Damage Determinations
Needed (GAO Job Code 250287):
The Department of Homeland Security (DHS) appreciates the opportunity
to review and comment on the draft report referenced above. The U.S.
Government Accountability Office (GAO) raises a matter for
Congressional consideration and makes one recommendation to state
insurance commissioners. No recommendations are specifically directed
to DHS or its component, the Federal Emergency Management Agency
(FEMA).
FEMA officials agree with the recommendation to strengthen the
licensing requirements for adjusters, thereby enhancing the quality and
consistency of standards and oversight for claims adjusters among
states. FEMA's National Flood Insurance Program (NFIP) requires uniform
standards throughout the country, at least five years of property
insurance adjusting experience, and attendance at a claims presentation
annually. These requirements have served the program well. The
operation of the insurance claims process in the private insurance
industry and in the NFIP would improve if the states' insurance
departments worked through the National Association of Insurance
Commissioners to strengthen licensing and training of adjusters.
FEMA officials disagree with GAO on the matter for Congressional
consideration. Specifically, GAO recommends that Congress consider
giving FEMA clear statutory authority to obtain wind damage claims
information from write-your-own (WYO) insurers and the policies,
procedures, and instructions used by write-your-own insurers for
determining wind damage versus flood damage when properties are
subjected to both perils. GAO believes the statutory access will
strengthen and clarify FEMA's oversight of write-your-own insurers.
FEMA officials disagree and feel that the existing means of auditing
and managing the National Flood Insurance program and write-your-own
insurers are sufficient.
FEMA officials believe that statutory access to wind and flood damage
claims information from the NFIP's write-your-own companies would place
an unneeded burden and cost on the National Flood Insurance Program.
Existing processes proved to be sufficient in determining properly
adjusted claims associated with hurricanes Katrina and Rita. There has
been no documented discovery that claims were handled inappropriately
when it came to wind and flood damages. In fact, GAO indicated during
this engagement and the DHS Office of the Inspector General stated in
the interim report Hurricane Katrina: A Review of Wind vs. Flood that
they could not find evidence that NFIP paid more than obligated to
policyholders. The program handled an unprecedented number of claims in
2004 and 2005 with little complaint and very few lawsuits.
FEMA officials do not believe the NFIP needs the wind estimate or data
to determine the amount of flood damage that has occurred. Claim
adjustment is not an allocation of damage to various causes of loss. It
is the determination of damages by the insured cause of loss that is
the subject of the insurance. In this determination insurance claim
adjusters prepare a room-by-room, line-by-line, itemized, unit-cost
estimate of only the flood damage. Since photographs of the building
are required, the experienced company examiner can determine if damage
above the flood water line, i.e., damage from wind is included in the
loss settlement. If it appears that wind damage was paid and it is not
fully explained in the adjuster's narrative report, the estimate is
returned to the adjusting firm to be reevaluated or explained. In the
rare cases (more prevalent in Mississippi as a result of hurricane
Katrina) where the property was totally destroyed, both wind and flood
could have contributed to the same damage. Flood insurance paid the
claim when there was no evidence to contradict that the property was
demolished by a storm surge. However, if it was determined by solid
evidence that damage was caused first by wind to the roof and siding,
and then by flood to the foundation and lower framing and flooring, the
flood insurance paid flood damage and the wind insurance paid wind
related damage.
Additional cost would be incurred by the program if independent flood
insurance adjusting firms are to be responsible for reviewing the wind
claim file or estimate on each flood loss in which wind may have
contributed. These independent flood insurance adjusting firms would
most certainly renegotiate fee schedules upward for this additional
work. The marginal value of such data would be costly. If FEMA or its
contractor is to review and evaluate wind claim files as part of the
reinspection process, additional staff would be needed. If FEMA is to
review wind claim files as part of its operation review process,
additional insurance reviewers will be needed for this work as well.
FEMA would still have no authority to demand private wind claim data of
companies not participating in the WYO program even if FEMA is given
the statutory authority to require the companies participating in the
WYO program to provide their wind claim data and procedures. The non-
participating companies would likely be forced to legally challenge any
requirement to provide their private claims data to the Federal
government if requested to do so. If they are successful in this
challenge, requiring this information only of WYO companies would
create an inequity. In addition, the logistical problems and costs
associated with requiring a company to copy a wind file and provide it
to the NFIP would be onerous. This would especially be the case for
those WYO companies providing only the wind coverage. The WYO company
providing the flood coverage may not know the identity of the WYO
company providing the wind coverage.
At the recommendation of GAO in a previous report addressing Katrina
related claims handling (GAO-07-169 issued in December 2006), FEMA has
improved its re-inspection program through random sampling techniques
used to determine which claims are to be re-inspected. In addition to
implementing this recommendation, additional staff is being hired this
year, FY 2008, to conduct more in depth operational reviews of the WYO
claim files. As with any effort that increases the number of
inspections or reviews, additional personnel are needed to meet this
challenge.
Sincerely,
Signed by:
Steven J. Pecinovsky:
Director:
Departmental GAO/OIG Liaison Office:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice M. Williams, (202) 512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Lawrence D. Cluff, Assistant
Director; Tania Calhoun; Emily Chalmers; Rudy Chatlos; Chir-Jen Huang;
Barry Kirby; Kristopher Natoli (intern); and Melvin Thomas made key
contributions to this report.
Footnotes:
[1] The NFIP was established under the authority of the National Flood
Insurance Act of 1968, 42 U.S.C. §§ 4001 et seq., as a subsidized
program sponsored by the federal government.
[2] State insurance regulators periodically perform market conduct
examinations on insurance companies to review their market practices,
including sales, underwriting, and claims processing and payment
activities.
[3] Through its program contractor, FEMA operates a reinspection
program to monitor and oversee claims adjustments and address concerns
about flood payments by reevaluating a sample of flood claims.
[4] FEMA states that it has statutory authority to obtain certain
additional claims data but that its access is limited to the purposes
of audit and examination and not for initial claims processing.
Specifically, the National Flood Insurance Act gives FEMA access, for
the purpose of audit and examination, to any books, documents, papers,
and records of the WYO companies that are "pertinent to the costs of
the program undertaken or the services being rendered." 42 U.S.C. §
4084. The Act requires WYO companies to keep such records as FEMA
prescribes, including "records which fully disclose the total costs of
the program undertaken or the services being rendered, and such other
records as will facilitate an effective audit." Id.
[5] NFIP contracts with private insurers to sell and administer flood
insurance policies through the WYO arrangement, allowing the insurers
to write flood policies backed by the federal government.
[6] McCarran-Ferguson Act of 1945, Pub. L. No. 79-5, ch. 20, 59 Stat.
33 (1945), codified as amended at 15 U.S.C. §§ 1011-1015. See also GAO,
Ultimate Effects of McCarran-Ferguson Federal Antitrust Exemption on
Insurance Activity Are Unclear, GAO-05-81R (Washington, D.C.: July 28,
2005).
[7] NFIP program contractors stated that they did not know how often
the same WYO company also insured a property for wind damage because
they did not systematically collect that information. However, a FEMA
official we contacted stated that such a circumstance likely occurs in
the majority of cases.
[8] This amount represents claims reported to NAIC by property-casualty
insurers for multiple lines of business, including fire and allied
lines, farm owners, homeowners, mobile homeowners, commercial multi-
peril, commercial auto physical damage, private passenger auto physical
damage, ocean marine, and other lines (excluding flood).
[9] GAO, National Flood Insurance Program: FEMA's Management and
Oversight of Payments for Insurance Company Services Should Be
Improved, GAO-07-1078 (Washington D.C.: Sept. 5, 2007).
[10] Replacement cost value is the cost to replace property with the
same kind of material and construction (without deduction for
depreciation). Excess flood insurance is also available in the private
insurance market.
[11] FEMA provides limited reimbursement for living expenses incurred
during evacuations. To be eligible for such assistance, the home must
be the primary residence of those seeking assistance. In addition, the
home must either have been damaged by the disaster, or those impacted
must have been prohibited from returning to it when the general
evacuation order was lifted. FEMA states that the agency reviews
requests for such assistance on a case-by-case basis.
[12] Excess flood insurance policies are available in the private
sector and provide coverage above the NFIP limits.
[13] The WYO insurer, using either its own staff adjusters or
contracted adjusters, is responsible for performing the claims
adjustment functions. Additionally, insurers may contract to obtain
additional engineering expertise to assess the cause of damages.
[14] NFIP does not participate in these mediation programs to settle
flood claims with policyholders.
[15] In the aftermath of Hurricane Katrina, the Louisiana Department of
Insurance requested insurance companies provide the names and Social
Security numbers of adjusters to the department.
[16] This information is summarized from state adjuster licensing
requirements compiled by the Property Casualty Insurers Association of
America.
[17] GAO, Regulatory Initiatives of the National Association of
Insurance Commissioners, GAO-01-885R (Washington D.C.: July 6, 2001).
[18] GAO, Insurance Regulation: Common Standards and Improved
Coordination Needed to Strengthen Market Regulation, GAO-03-433
(Washington D.C.: Sept. 30, 2003).
[19] NFIP requires each WYO company to meet the requirements of the WYO
TRRP Plan (identifying claims data to be reported to NFIP) and to
submit monthly financial and statistical reports. 44 C.F.R. Part 62,
Appendices A and B.
[20] GAO, Federal Emergency Management Agency: Improvements Needed to
Enhance Oversight and Management of the National Flood Insurance
Program, GAO-06-119 (Washington, D.C.: Oct. 18, 2005).
[21] FEMA estimates that Hurricane Katrina alone accounts for over
$15.7 billion in flood insurance claims.
[22] GAO, National Flood Insurance Program: New Processes Aided
Hurricane Katrina Claims Handling, but FEMA's Oversight Should Be
Improved, GAO-07-169 (Washington, D.C.: Dec. 15, 2006).
[23] Department of Homeland Security, Office of Inspector General,
Interim Report - Hurricane Katrina: A Review of Wind Versus Flood
Issues, OIG-07-62 (July 2007).
[24] This data call mechanism, the Insurance Disaster Reporting System
(IDRS), enabled regulators to better understand the total number of
claims tied to the storms, the type of claims, the extent of losses,
and the number of claims considered closed by insurers. Components of
the IDRS data call mechanism were primarily developed by the state of
Florida. State insurance regulators decided to use Florida's data
collection application, since it was readily available. Regulators
implemented the data call in three phases. Generally, the Phase I data
were used to track the total number of claims and amount of losses tied
to a storm. Phase II data further broke out the claims data by the type
of damage that caused the losses. Phase III data were used to collect
and track information on how many of the claims the private insurers
considered closed.
[25] GAO-06-119.
[End of section]
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