The U.S. House of Representatives, after extended debate last week, approved legislation designed to reform the insolvent National Flood Insurance Program by an overwhelming vote of 416-4. However, the final product contained amendments of deep concern to the insurance industry, including one that mandates a government probe into insurance company decisions on whether water damage to homes resulted from covered wind or uncovered flood losses.
The American Insurance Association said after the vote that while it supported the underlying bill, it hopes certain amendments will be revisited before the legislation is enacted. A major concern is a provision calling for an "investigation," rather than a study, of the wind-versus-flood issue.
Dennis Kelly, an AIA representative, also noted AIA's concern about an amendment by Rep. Jo Ann Davis, R-Va., which would extend the proof-of-loss deadline. Another amendment contained a retroactive clause dealing with claims dating from 2003.
Mr. Kelly noted that the U.S. Senate has yet to put its bill on the floor, "and we expect there will be a conference to work out the differences between the House and Senate bills."
A key difference between the House and Senate bills is that the House bill as passed last week increases the NFIP's borrowing authority to $25 billion. The Senate bill forgives approximately $20 billion of the NFIP's debt, but imposes tougher standards going forward than does the House bill. The Senate bill was passed by the Senate Banking Committee in May, and is awaiting floor action before the full Senate.
The Independent Insurance Agents and Brokers of America "praised" the House bill, especially the provision increasing the program's borrowing authority.
The Property Casualty Insurers Association of America "hailed" passage of the House bill, noting that it contains many reform provisions proposed by the trade group and its members.
The most controversial amendment was proposed by Rep. Gene Taylor, D-Miss. It charges the Government Accountability Office with "investigating" the wind/water issue in the wake of Hurricanes Katrina and Rita. The report is due six months from enactment of the legislation.
In the wake of 2005′s storm season, Rep. Taylor said, the NFIP itself has drawn little criticism. "I've had very few complaints about the federal flood insurance program," he noted. "But, I've had tens of thousands of complaints from people about their wind coverage."
The problem with the flood insurance claims system, particularly involving the wind/water issue, he said, is that it allows insurance companies not only to write, sell and collect fees for a flood policy, but that "we count on the private sector…to adjudicate the claim."
Such a system, he said, invites problems when an adjuster whose future depends on the insurance company is faced with a choice of a water-damage finding, which places the burden on the NFIP, or a wind finding, which the company would have to pay for.
"Knowing that, if you said 'the wind did it,' it's coming out of the company's pocketbook, but if you say 'it was water,' then it comes out of the taxpayers' pocketbook," he said. "Under this system, we have given the insurance companies the opportunity to stick it to the government every time there was a question, and I think they did."
Rep. Taylor's amendment received strong vocal support from Democrats, including Rep. Barney Frank, D-Mass.
Rep. Maxine Waters, D-Calif., blasted the "bickering among the insurance companies who were disputing damage" over wind/water issues. "We want to make sure the insurance companies are doing what they are supposed to do."
Rep. Mike Oxley, R-Ohio, who chairs the House Financial Services Committee and is manager of the flood bill, added that Republicans think it is "appropriate" that the GAO investigate the controversy.
"State Farm follows FEMA rules, procedures and guidelines, and makes its claims-paying decisions based on the facts surrounding each individual claim and the policy contract we hold with that customer," said a representative for State Farm, Fraser Engerman. "Even before Katrina, FEMA and the National Flood Insurance Program have had an ongoing review and claim re-inspection program to ensure appropriate NFIP guidelines have been followed."
Rep. Davis said her amendment will extend the deadline for filing for proof-of-loss for up to 180 days following a disaster. It will also prohibit NFIP from denying claims solely for failing to meet the deadline, and make this change retroactive to Sept. 18, 2003, to provide relief for Hurricane Isabel victims.
In many cases, claimants were reportedly pressured to sign adjusters' proof-of-loss within 60 days of the flood, even though they believed the adjusters had underestimated both the scope of damage and the associated costs to repair their properties, she said.
For Republicans, the bill needed to be passed to make up for the government's obligations to Katrina victims.
"We have an obligation to these estimated 225,000 policyholders who have already filed a claim relating to the events of 2005," Rep. Oxley said. "At the same time, we also have an obligation to reform and modernize the NFIP so that homeowners will have access to sensible flood insurance."
A phase-out of subsidies for flood insurance for properties used as secondary homes or vacation homes also generated controversy. "If you can afford one of those homes, you can afford to pay your freight," Rep. Oxley said.
The idea of a gradual phase-put drew a challenge from fiscally conservative Republicans, who sought an immediate end to the subsidies. "We have a duty to find savings wherever possible," said Rep. Steve Pearce, R-N.M., who proposed the amendment.
However, Rep. Frank, whose state includes expensive vacation homes in Cape Cod, cautioned that an immediate end to the subsidies could cause a severe shock to some areas that are reliant on vacation homes and tourist income, as well as small businesses in those areas that would also be affected by the Pearce amendment.
When Rep. Pearce countered that the premiums of New Mexico citizens, who have lower incomes and less valuable assets, should not be used to subsidize those of property owners on the coasts, and especially nonprimary residences, Rep. Frank responded that some form of subsidy exists in every national program.
"Every time something comes up there are some subsidies," he said. "The government is not a supermarket where you only pay for what you need."
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