There is an "inherent conflict of interest" in having private insurance companies determine who is responsible for paying wind-versus-water damages following hurricanes–the insurer or the National Flood Insurance Program, a federal government report suggests.
"The NFIP must balance pressures to quickly pay claims to policyholders with ensuring that it is enforcing the terms of the flood policy," according to the Government Accountability Office report on the insurance industry's handling of wind-versus-water claims, which cited no direct evidence of insurer misconduct.
Disputes over whether Hurricane Katrina losses in 2005 were covered by federal flood insurance, or were wind-related and thus covered by private homeowners policies, prompted numerous lawsuits by angry claimants–including two members of Congress, who called hearings to examine industry practices.
GAO said "concerns can…materialize when the…insurer determines not only the damage caused by flooding that is covered by the flood policy but also the damage caused by wind that is covered under its own property-casualty policy."
GAO said this ends up "creating an inherent conflict of interest that must be managed or mitigated" by granting the NFIP's parent–the Federal Emergency Management Agency–greater authority to access detailed reports of how Write-Your-Own insurers administering flood policies divided up wind and flood damage claims.
The GAO report suggests that Congress should grant FEMA this authority even though it would place "unneeded burdens and costs" on the NFIP.
GAO also recommended that states improve the "quality and consistency" of their oversight of adjusters who make the decision as to whether wind or water was the cause of damage after a hurricane.
Insurance industry officials disagreed with GAO's recommendations. A representative of the American Insurance Association said adopting GAO's suggestions raises the possibility that Congress might "hastily embrace" calls to mandate more data collection "before they have concretely identified a problem."
But the report was embraced by Rep. Gene Taylor, D-Miss., who battled his own homeowners insurer, State Farm, over his Katrina claim and led the charge in Congress to hold insurers accountable for alleged misconduct (along with Sen. Trent Lott, R-Miss., who left office at the end of last year).
Rep. Taylor renewed his call to include wind coverage in the NFIP as Congress works to renew the program before it expires on Sept. 30. That provision is included in H.R. 3121, which passed the House last September.
"I applaud the GAO for confirming that insurance companies have an inherent conflict of interest when they are allowed to determine whether to assign damages to their own wind insurance policies or to the federal flood insurance policy claims," Rep. Taylor said. "The report reinforces my proposal to give homeowners the option to buy wind and flood coverage in the same policy."
He said he "strongly supported" GAO's recommendations that insurers be required to turn over their wind-claim files so that FEMA can verify the companies applied the same standards to the flood insurance claims as to their own wind claims.
Rep. Taylor said he is "disappointed, but not surprised," FEMA opposes that recommendation. "FEMA needs to recognize that its oversight responsibility is to protect federal taxpayers, not insurance companies," he added.
The latest report was prepared by the GAO at the request of Rep. Spencer Bachus, R-Ala., ranking minority member of the House Financial Services Committee.
Responding to the report, Rep. Bachus said it "contains a number of sensible recommendations that will bring clarity to the process" and "warrant a thorough discussion in the Financial Services Committee."
While the GAO report suggested conflicts might be "inherent" in the claims-handling process, industry officials pointed out that it did not accuse insurers of any wrongdoing.
Dennis Kelly, an AIA staff official, said the GAO report "is yet another study that has failed to demonstrate that insurers have a pattern or practice of abuse."
"Once again, a federal government report has confirmed what the insurance industry has been saying since the 2005 hurricane season: Insurance companies did not engage in wrongdoing to avoid paying claims," said Carl Parks, senior vice president of government affairs at the National Association of Mutual Insurance Companies.
"This report has no mention of any evidence that the insurance industry engaged in a pattern of improperly attributing wind damage to water, which would have forced American taxpayers to foot the bill through the NFIP," he added.
Mr. Parks noted that the GAO report is the second from a federal agency in six months that said the industry engaged in no wrongdoing in handling wind-versus-water claims, citing the Department of Homeland Security's study in August 2007.
Cliston Brown, director of federal public affairs for the Property Casualty Insurers Association of America, said Congress should focus "on renewing and improving the National Flood Insurance Program before it expires."
Passing legislation to keep the NFIP in place "is our top legislative priority in 2008, and we urge members of Congress to act expeditiously to preserve and enhance this vital program," Mr. Brown added.
On the issue of updated training and compliance, Mr. Brown said PCI "agrees that adjusters should be well trained and regulated, as provided by state law, because it is of the utmost importance to policyholders that adjusters are able to do their jobs in the most effective manner possible."
Mr. Brown added that PCI is "ready to work with federal legislators and state regulators to ensure the NFIP is administered correctly and that all consumers are treated fairly before and after a disaster strikes."
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