Two government agencies investigating the handling of flood claims in the aftermath of the 2005 storm season offered stern criticism of both the insurance industry and the Federal Emergency Management Agency at a Capitol Hill hearing last week, but neither offered hard evidence of wrongdoing on the industry's part.

The main concern at a joint hearing of the Oversight and Investigations Subcommittees of the House Financial Services Committee and Homeland Security Committee was that insurers operating under the Write-Your-Own aspect of the National Flood Insurance Program could have pressured adjusters to cite only flood damages in cases where an actual evaluation might have shown significant wind-related damage as well.

Such a scenario would have put the burden of claims unfairly on the NFIP, and thus on taxpayers.

Witnesses at the hearing–representing the Government Accountability Office and the Inspector General's Office at the Department of Homeland Security–said their investigations had been hampered somewhat by a lack of information in FEMA files and reluctance on the part of insurers to turn over their own information.

The Inspector General's Office investigated the issue after a request by the former Financial Services Committee chair–Mike Oxley, R-Ohio–while the mandate for the GAO study was inserted last year in Homeland Security appropriations legislation by Sen. Trent Lott, R-Miss.

As of now, neither study has found any wrongdoing on the industry's part, although no final conclusions have been reached.

“Although nothing came to our attention during our limited review to indicate that WYOs attributed wind damage to flooding,” said Matt Jadacki, deputy inspector general for disaster assistance oversight at the Department of Homeland Security, “we cannot rule out the possibility that it occurred.”

Much of the problem, said Mr. Jadacki, was that FEMA's files on flood claims generally provided information on the flood aspects of a claim but not the corroborating information on any wind damages that may have been determined. “When we finished our work” with the NFIP's files, he said, “it just wasn't there.”

While FEMA did conduct audits of adjudicated claims, Mr. Jadacki said the inspector general's investigation found that these were typically more administrative in nature and would not have challenged the original assessment of wind-versus-water damage. “I believe they used a 'checklist' approach,” he said.

Orice Williams, GAO's director of financial markets and community investment, said her agency had a similar experience, adding that FEMA required any information provided to the GAO be approved first by FEMA officials.

GAO spoke with the National Association of Insurance Commissioners and with some individual state insurance commissioners, but they were unable to provide information that was specific enough to gauge against the NFIP claims information.

Insurance companies, she added, “were generally unwilling to meet with us.”

Mr. Jadacki said his office had spoken with “about 15 companies” and was supposed to have received information recently regarding some of the claims information. He added he had not yet seen the information, nor knew if it had been received, due to the mail inspection process at the department.

In speaking at the hearing, some members sought to ensure that findings that abuses may have occurred should not be taken as proof of guilt.

“If this is true, it is an outrage,” said Rep. Gary Miller, R-Calif. However, he added, “there is a difference between the potential for wrongdoing and the finding of actual wrongdoing,” and advised that the committee take a “cautious” track.

Others had a different attitude.

Rep. Gene Taylor, R-Miss.–who appeared at the hearing as a guest of the committees because he does not serve on either panel, and who also sat in on a similar hearing earlier in the day focused on NFIP reform legislation and flood mapping–pointed to accounts of fraudulent claims in Mississippi and New Orleans newspapers.

He also suggested that the assignment of claims to the flood program may have been the result of comments made to industry leaders by David Maurstad, who oversees the NFIP for FEMA.

At both hearings, Rep. Taylor asked for subpoenas to be issued for information regarding comments made by Mr. Maurstad at a meeting with members of the insurance industry on Sept. 7, 2005, in which he referenced prior conference calls with the heads of some insurance companies.

In the weeks following that meeting, FEMA put out guidance for insurers that stated storm-surge flooding would likely be the cause of much of the damage stemming from Katrina. “The door was opened when this guidance came out,” Mr. Jadacki said.

Rep. Christopher Carney, D-Pa., who chairs the Homeland Security subcommittee, said he had directed his staff to look further into that meeting as well as Mr. Maurstad's comments.

The Financial Services subcommittee chairman, Rep. Mel Watt, D-N.C., told Rep. Taylor that his committee had requested from insurers information regarding their Katrina-related claims, and that carriers were told to comply by June 14. “A number of insurance companies have made some sounds about the possibility that they would object to providing the subcommittee with some of that information,” he said.

At the earlier hearing, Fidelity National Insurance Company's president and chief executive officer, Mark Davey, said his company has a solution for what Rep. Taylor had described as a “natural conflict of interest” in having a WYO send out an adjuster to evaluate both the wind and water claims.

Mr. Davey, appearing on behalf of the Property and Casualty Insurers Association of America, explained that Fidelity runs its flood insurance and homeowners insurance as two entirely separate businesses.

“It's two separate claims files, with two separate adjusters and no communication between them,” he said, adding that the homeowners' business is run out of Fidelity's Omaha office, while flood insurance operations are based in Florida.

Another issue raised at the earlier hearing was the impact of paying claims from the 2005 storm season on the NFIP. The program has had to borrow roughly $23 billion from the federal government, and paying only interest on those loans each year would account for almost half of the money the NFIP takes in annually.

Congress may have to consider the money borrowed by FEMA for the flood program as spent, suggested Thomas Minkler, president of the New Hampshire-based Clark-Mortenson Agency, appearing on behalf of the Independent Insurance Agents and Brokers of America–a position echoed by other witnesses at the hearing.

“The long-term survival of the program may require Congress to consider eliminating [NFIP's] debt and the resulting interest payments,” he added.

Special Reports /

Federal Investigators Fail To Nail Insurers On Claims For Flood Versus Wind

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