Hunter Blasts Insurer Conflicts On Flood Claims

Given all the controversy about wind versus flood coverage following Hurricane Katrina, I invited Bob Hunter, director of insurance at the Consumer Federation of America, to lay out his arguments for why he believes there is an inherent conflict of interest when insurers must settle both types of claims–one type they cover and one they do not. Mr. Hunter is well acquainted with the program, having dealt with the problem first hand as a former federal insurance administrator. Read what he has to say and let me know what you think of his suggested reforms.

Flood Program Must End
Insurer Conflicts Of Interest

BY J. ROBERT HUNTER

There has always been an inherent conflict of interest in private insurance companies settling claims for the National Flood Insurance Program. It has also been difficult to define fair compensation for privately provided services for the NFIP in a manner that is consistent with the federal governments duty to make sure costs are minimized for the benefit of taxpayers who subsidize the program.

Because of serious problems with both claims and fees, private insurers were removed from the NFIP in the 1970s. (Click here for a brief history of these issues.)

Awareness of these earlier problems is important because it shows the issues plaguing the NFIP today are endemic and long-lastingnot unique to the aftermath of Hurricane Katrina.
In the 1980s, President Ronald Reagan allowed insurers back into the NFIP through the Write Your Own program, where private insurers sell federal flood insurance along with private homeowners and business property coverage.

Hurricane Katrina exposed the severe conflict questions that arise when a private insurer settles both wind and flood claims. The conflict is obviouseach dollar the adjuster finds to be caused by wind comes out of the insurers pocket, while each dollar found to be flood comes out of the taxpayers pocket.

Worse, the insurer gets fees for settling the flood insurance claim that go up as the size of the payout goes up. The temptation for insurers to determine greater flood damage than is justifiedand less wind damageis great.

Lawsuits abound. In one, a WYO insurer allegedly paid flood insurance dollars even though no floodwaters entered the building. Other suits allege hundreds of claims were mishandled to the insurers benefit.

The best proof that WYO insurers are more worried about their own interests than that of the taxpayers is many WYO carriers adopted the anti-concurrent-causation clause in homeowners policies.

The blatantly anti-consumer clause works like this: If an insured wind claim happens, and at about the same time a flood claim occurs, the wind coverage is voided and the insurer pays nothing for wind (but will pay the flood claim). Insurers claim the legal right to revoke wind coverage because flood damage occurs, even for distinguishable flood damage occurring hours after the wind damage happened.

The use of the ACC clause by WYO insurers exposes taxpayers to huge potential liabilities not anticipated under flood rates, by making it more likely the NFIP will end up paying for at least some wind damage.

Other conflict questions have arisen after Hurricane Katrina.

WYO insurers get paid fees for handling flood insurance policies and claimsfees that appear to be excessive.

NFIP pays insurers an expense load based on the average costs for underwriting, policy writing and advertising, as well as taxes and general expenses in five property lines. Right now, that average is about 16 percent. To this is added a 15 percent commission allowance, paid to insurers regardless of whether an agent or broker receives a commission. A 1 percent addition is also paid (2 percent if the WYO insurer meets production goals).

On top of that, the insurer is reimbursed for allocated claims adjustment expenses (such as attorney and adjuster fees) and receives 3.3 percent of the amount of claims for unallocated claims adjustment expenses.

Overall, the overhead for the WYO companies approaches 40 percent, which is outlandishly high for insurers merely adding flood coverage to a homeowners policy.

REFORM PROPOSALS

There are several actions Congress can take to improve this situation, such as:

Study whether going back to a direct program administered by a competitively bid contractor would save money.

Eliminate conflict-of-interest questions, in part, perhaps, by bifurcating claims from policy serviceusing a contractor to do the claims and WYO insurers to service and sell flood insurance policies.

Bring competition to bear in setting feesperhaps by having competitive bids for regions of the country, or allowing insurers to discount the expense portion of the premium. This would allow insurers to compete for flood insurance market share by cutting fees.

Require FEMA to advertise which insurers offer the lowest costs to help consumers shop and encourage other WYO companies to cut flood fees and premiums.

Consider removing Computer Sciences Corp. as the contractor, data collector and auditor of the WYO Program. CSC is a major supplier of services to insurance companies, and this appears to be another conflict of interest that needs to be rectified.

Set a standard for participation as a WYO company that forbids an insurer from using a policy clause like ACC that has the effect of shifting privately insured claims into the NFIP.

Require a WYO company to use the best deal it has for its own costs when paying flood insurancefor example, no more charging the NFIP more for materials than the insurer is paying for wind damage.