COASTAL Act Could Spell Trouble For NFIP Extension

The provision would create a "standardized loss-allocation" system to distribute losses between the NFIP and private or residual-market-provided wind insurance following the total loss of any property that carries both flood and wind insurance.

It now has the support of the leadership of the committee, which is trying to determine how the proposed amendment will be dealt with on the Senate floor.

But there is concern that inclusion of the controversial amendment may indefinitely delay final action on a long-term extension of the NFIP. For example, congressional staffers and lobbyists said legislation is being prepared that would extend the authorization of the current NFIP law beyond the current Sept. 30 expiration.

This will allow for more time to make decisions on whether the provision will be made part of the bill passed by the Senate Banking Committee Sept. 8, or included in a manager's amendment that will be offered on the floor.

Big Controversy

Nothing in either the House or Senate bill is as controversial as the "wind-vs.-water" issue.

Wicker says his bill would help determine wind-vs.-water claims and provide greater certainty to homeowners and the insurance market, "ensuring certain losses from future storms are settled in a timely and equitable manner."

However, the COASTAL provision will also further delay certainty for the NFIP, which has been in limbo since the authorization for the current program expired Sept. 30, 2008, prompting numerous extensions interspersed with periods in 2010 when the program lapsed.

Industry Positions

Independent lawyers who have participated in the litigation dealing with settlement of claims from Hurricanes Katrina and Rita argue that the COASTAL provision will have limited impact, at best.

But John Sneed, president of BancorpSouth Insurance Services in Biloxi, Miss., argues that the amendment is a "win/win for consumers, the insurance industry and the federal government."

Sneed says, "Once the insurance companies realize how useful this methodology is, I think there will be a paradigm shift in the appetite for more coastal business. The key is requiring the purchase of flood insurance for every risk."

But David Rossmiller, a partner at Dunn Carney Allen Higgins & Tongue LLP in Portland, Ore., a specialist in complex insurance-coverage advice and litigation, is not sure.

"This appears to be pretty limited in scope, because it applies only to structures that are 'slabbed,' or completely wiped out," Rossmiller says.

"This is a relatively small percentage of structures affected by a hurricane, even with Katrina," Rossmiller adds.

Rossmiller, who advised both industry and plaintiff's lawyers in the extensive litigation prompted by Katrina/Rita losses, says the amendment gives the Secretary of Homeland Security the power to establish a standard mathematical formula to "determine and allocate wind losses and flood losses for indeterminate claims," meaning slab claims.

"Yet somehow, the amendment says, this mathematical formula is supposed to be applied to individual properties such that individual circumstances or conditions there are taken into account," Rossmiller says.

"Basically, the way I read this, it just makes the federal government, rather than insurance companies, the adjuster of first instance for slabbed buildings.

"It's an 'I'm from the government and I'm here to help you' kind of amendment," Rossmiller says.

"That may give some people comfort, but I'm not one of them," he adds.