Insurers Try To Keep Their Heads Above Water

Do property insurers have an inherent conflict of interest when adjusting wind-versus-water damage claims following hurricanes? Sure they do. But the bigger question is, what should Congress do about it?

The Government Accountability Office recently released a report that raised questions about whether private insurers who sell property coverage to homes and businesses, but who also administer federal flood insurance policies, can be trusted to adjust claims when evidence of both wind and water damage is present after a hurricane. (To read NU's complete story about the GAO report, click here.)

The questions raised were more than academic, given the number of policyholders left in the lurch, as well as all the lawsuits, regulatory actions and congressional hearings prompted by claim disputes after Hurricane Katrina.

As reported by Washington Editor Dave Postal, the GAO warned that concerns canmaterialize when theinsurer 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 NFIPs parentthe Federal Emergency Management Agencygreater 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.

However, as insurers were quick to point out, the GAO report did not cite any instances of actual wrongdoing on the part of the industry.

That said, it's quite a leap to faith to expect an insurer that can get off the hook on a property claim hit by both wind and water to resist the temptation to simply toss the damage off to the federal flood policy, especially with the anti-concurrent causation clause so handy when both hazards are present.

But what's the alternative?

If the government settles the claim, won't government adjusters face the same “inherent conflict” and be tempted to dump claims on private carriers writing wind damage?

If the NFIP offers both wind and water coverage, I don't have much confidence actuarially sound rates will be charged–they certainly were not on flood coverage. Plus, the limits of coverage for private wind versus federal water claims are different, thereby setting up an inherent internal conflict, or forcing the government to offer full replacement value for both. Right?

Of course, you could have an independent adjusting force set up to settle such claims, but wouldn't that greatly increase the cost of the program–and thus the premiums that would need to be charged? And who would the adjusters report to?

Or, as I would suggest, should Congress leave the program the way it is, but increase its auditing of wind vs. water claim adjusting to make sure insurers know Uncle Sam isn't snoozing and oblivious?

With the NFIP up for reauthorization this fall, this debate will come to a head soon. What do you folks think should be done?