Study Finds No Evidence Insurers Finagled Wind Versus Flood Losses...Yet

The U.S. Department of Homeland Security told Congress last week in an interim report it has uncovered “no evidence” that private homeowners carriers improperly shifted Hurricane Katrina wind-damage losses to the government's flood insurance program, but did not totally let insurers off the hook.

Indeed, the agency made clear that it wasn't prepared to completely exonerate private carriers, citing inadequate information on the claims-handling process and holding out the possibility that such cost-shifting might have occurred.

DHS officials said they don't believe a final report by the inspector general will be issued until early 2008, so the interim version will have to serve as the basis on which Congress acts on legislation reforming the National Flood Insurance Program.

Brian Martin, an aide to Rep. Gene Taylor, D-Miss.–who has been critical of insurer claim-handling following Katrina, and who sued his homeowners insurer over his own Katrina claim–said that from press reports, “we know that insurers shifted liabilities to NFIP. The evidence is there in dozens of cases that have been reported…”

He said insurers should cooperate with the inspector general's continuing inquiry.

(Meanwhile, the U.S. Attorney's Office in Mississippi is considering whether to take up a whistleblower suit by two former adjusters who say several insurers made it their practice to improperly attribute Katrina home wind-damage to destruction by flooding covered by the NFIP.)

A first vote on legislation reforming the NFIP and adding wind coverage to the federal program could be acted on by the full House by mid-October, according to Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee.

The legislation–H.R. 3121–was reported out by the committee on July 27 by a vote of 38-29, largely along party lines.

While adding wind coverage to the NFIP program could pass the House, it faces a tougher road in the Senate. In addition, the Bush administration has voiced deep concerns about adding wind coverage, as have most insurance industry groups.

The DHS report appeared to clear the NFIP's Write-Your-Own insurers, which administer federal flood insurance policies, along with insurance agents selling the federal coverage and claims adjusters handling Katrina losses from allegations by a host of people–including some members of Congress–of improper claims-handling and/or fraud.

At the same time, DHS did not give insurers a clean bill of health, noting that, “although nothing came to our attention during our limited review to indicate WYOs attributed wind damage to flooding, we cannot rule out the possibility that it occurred…”

Justin Roth, a senior director at the National Association of Mutual Insurance Companies, said it is NAMIC's “hope that, with this interim report, we can begin to move beyond the criticism of the insurance industry and work with other stakeholders to address issues that are important to those who were affected by Hurricane Katrina.”

He said the initial findings of the study “just confirm what we have been saying all along–that insurance companies acted responsibly following Hurricane Katrina, and, in fact, the vast majority of consumers impacted by the storm have indicated they were satisfied with how their companies handled their claims.”

Patricia Borowski, senior vice president of the National Association of Professional Insurance Agents, took the report's results with a grain of salt. “The results of the inspector general's interim report can best be summed up as: 'On the one hand this, on the other hand that, and in the final analysis, it depends,'” she said.

While the report stated that based on the scope of the review completed thus far, the sample “revealed no evidence that wind damages were improperly attributed to flooding,” it quickly noted that based on its limited review “we cannot rule out the possibility that it occurred,” and went on to cite complicating factors, Ms. Borowski added.

The inspector general then noted that a final report will include other evidence, she said. “Therefore, we believe that it is best to place this interim report on a shelf, not act on it, and wait until a final report is completed,” according to Ms. Borowski.

The report presents findings it admits are inconclusive and contradictory, she noted, “causing PIA to question its value.”

“From our perspective, the focus of DHS should be on the accuracy of their declarations of the status of flood and the NFIP's actions to trigger flood coverage under federal flood insurance policies–both actions which we support. Anything else is a matter for state courts,” she concluded.

The report cited a number of factors as reasons for hedging, including the difficulty in sorting out wind and flood damage–”especially when there is nothing left of the property except a foundation (slab)”–as well as the fact that oversight by the Federal Emergency Management Agency, a unit of DHS, is “limited.”

The report–by DHS Inspector General Richard Skinner–suggested that FEMA needs to increase oversight over damage claims that involve both wind and water on the same structure.

DHS added that while “our limited review of the flood claims indicated that payouts on flood claims were timely and complied to National Flood Insurance Program terms,” there is “little evidence in flood claim files to determine whether flood payouts were fair and equitable for damages caused by both wind and water affecting the same structure.”

In addition, Mr. Skinner said, “FEMA did not maintain documentation indicating the total damage to a structure and how much was attributable to flood and wind, nor is it required by the NFIP.”

As a result, NFIP oversight focused primarily on whether the flood claim was correctly adjudicated, with little or no consideration for wind damage as a contributing factor, Mr. Skinner said.

“Under the current process, it is difficult to determine whether the NFIP paid a higher percentage or the entire damaging claim involving both perils,” his report added.

A FEMA representative said the agency has no authority to examine insurance company wind-damage data, but its parent agency, DHS, is using subpoena power granted by Congress to do so.

Rep. Taylor's aide said insurers should cooperate with the investigation and turn over files requested by the inspector general. “The OIG should not have to subpoena the insurers to find out how they apportioned damage when there was both wind and flood damage,” said Mr. Martin.

If insurance companies claimed the benefit of the doubt in their favor and shifted the burden of proof to policyholders for wind damage, “then they could have shifted billions of dollars onto taxpayers and policyholders,” he added.