Consumers, Carriers Clash Over Flood Insurance

WASHINGTON--The Consumer Federation of America is urging Congress to make carriers change the way they handle flood coverage, which an insurance trade group says would make it more expensive.

The controversy stems from a letter the CFA sent to Congress asking it to bar insurance companies involved in the "write your own" flood coverage program from using "anticoncurrent causation" clauses in their homeowners' policies to refuse to pay wind claims.

The letter was sent to the chairman and ranking minority member of the House Financial Services Committee following the introduction this week of legislation that would reform the National Flood Insurance Program and give it more money to pay claims.

But Ben McKay, senior vice president, federal government relations at the Property Casualty Insurers Association of America, said the CFA and its insurance director, J. Robert Hunter, are wrong.

Mr. McKay said the letter "inaccurately claims" that "write your own" insurers have a "conflict of interest" when they sell wind coverage and flood coverage. Mr. McKay also questions Mr. Hunter's proposed solution, which PCI claims "would increase claims-handling costs for private citizens."

In the letter, the CFA asked Rep. Barney Frank, D-Mass., chairman of the committee, and Rep. Spencer Bachus, R-Ala., ranking minority member, to keep insurers from using what it termed "egregious" concurrent causation clauses to pay "legitimate" claims when they are first made.

Mr. Hunter noted that in February Mississippi Attorney General Jim Hood testified that a number of insurance companies operating on the Gulf Coast had tried to escape paying legitimate homeowners' claims after Hurricane Katrina through the use of such causation clauses.

Although the clauses were invalidated by a Mississippi judge, Mr. Hunter said, insurers intended to refuse to pay wind damage caused by the hurricane if flooding occurred at about the same time, even if the flood hit hours after a home was damaged by wind.

Mr. Hunter said the court ruling only affected insurers in Mississippi, so insurers may still be using concurrent causation clauses in other states in the region.

The CFA's solution to the problem is to eliminate the conflict of interest that "write-your-own" insurers have.

Travis Plunkett, CFA's legislative director, said the federal government should declare that, in order to be a "write your own" company, an insurer must not place any requirements in private policies that would cause taxpayers to pay any part of a claim that should have been paid by the private policy," he said.

"WYO companies should readily accept this law," Mr. Plunkett said. "They make a good income, with no risk, servicing the NFIP. They should not be shifting illegitimate costs to the NFIP."

Mr. Hunter said that if the companies balk at the requirement, the NFIP has a direct servicing entity in place that could handle NFIP policies."

He noted that the direct servicing is a tested alternative to the WYO coverage because the NFIP used only direct placement from 1976 to 1984. According to Mr. Hunter, the direct program costs about one-half as much per policy to administer as with WYO insurers.

But PCI's Mr. McKay denies this.

"FEMA's mitigation director, David Maurstad, has said there is absolutely no evidence that this claim is true," Mr. McKay said.

"That's a nice sound bite for Mr. Hunter, but unfortunately, it's based on unproven allegations," Mr. McKay said. "The alternative to the current system is for there to be two adjusters, increasing the costs to the program, even though the overwhelming majority of policyholders are satisfied."

Rep. Frank is a primary author of the new flood program bill, the same legislation that passed the House last year but failed to be enacted. The FSC is the House committee responsible for acting initially on the legislation.

The bill is being introduced because the NFIP, which is run by the Federal Emergency Management Agency, has told Congress it will likely run out of money in September unless its borrowing authority is increased.