B-114860.OM, SEP 15, 1981

B-114860.OM: Sep 15, 1981

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PROGRAM WAS NOT INTENDED TO BE "SOCIAL WELFARE" PROGRAM ASSISTING FLOOD VICTIMS WHO FAILED TO OBTAIN OR MAINTAIN A VALID POLICY. WRO: MEMBERS OF YOUR STAFF HAVE REQUESTED OUR VIEWS ON THREE LEGAL QUESTIONS WHICH HAVE ARISEN DURING THE FINANCIAL STATEMENT AUDIT OF THE NATIONAL FLOOD INSURANCE PROGRAM. BELOW WE HAVE PARAPHRASED THE THREE QUESTIONS SUBMITTED. MEMBERS OF THE AUDIT STAFF HAVE INFORMED US THAT ELECTRONIC DATA SYSTEMS FEDERAL. THE CONTRACTOR WHICH CONDUCTS THE PROGRAM'S OPERATIONS MAY HAVE ACCEPTED CLAIMS FOR FLOOD DAMAGES CAUSED BY PERILS NOT RELATED TO NATURAL EVENTS. EXAMPLES GIVEN ARE FLOODS RESULTING FROM THE COLLAPSE OF A WATER TOWER. THE LEGISLATIVE HISTORY OF THE NATIONAL FLOOD INSURANCE ACT OF 1968 INDICATES THAT THE PROGRAM IS INTENDED TO MAKE AVAILABLE INSURANCE AGAINST LOSSES RESULTING ONLY FROM NATURAL FLOODS CAUSED BY NATURAL DISASTERS.

B-114860.OM, SEP 15, 1981

SUBJECT: LEGAL ISSUES INVOLVED IN AUDIT OF NATIONAL FLOOD INSURANCE PROGRAM - B-114860-O.M. DIGEST: 1. GAO EVALUATOR REQUESTS LEGAL OPINION CONCERNING ISSUES ARISING DURING COURSE OF FINANCIAL STATEMENT AUDIT OF NATIONAL FLOOD INSURANCE PROGRAM. 42 U.S.C. SECS. 4001 ET. SEQ. CONGRESS ESTABLISHED INSURANCE PROGRAM OUT OF CONCERN OVER COST OF RECURRING FLOOD DISASTERS. ACCORDINGLY, CONGRESS INTENDED THAT PROGRAM MAKE AVAILABLE INSURANCE ONLY AGAINST FLOODS RESULTING FROM NATURAL OCCURRANCES. 2. GAO EVALUATOR REQUESTS LEGAL OPINION CONCERNING ISSUES ARISING DURING COURSE OF FINANCIAL STATEMENT AUDIT OF NATIONAL FLOOD INSURANCE PROGRAM. 42 U.S.C. SECS. 4001 ET SEQ. FEDERAL EMERGENCY MANAGEMENT AGENCY MUST PREPARE FINANCIAL STATEMENTS FOR PROGRAM. 42 U.S.C. SEC. 4124 MAKES GOVERNMENT CORPORATION CONTROL ACT APPLICABLE TO PROGRAM. CORPORATION CONTROL ACT REQUIRES PREPARATION OF FINANCIAL STATEMENT. 31 U.S.C. SEC. 847 (1976). 3. GAO EVALUATOR REQUESTS LEGAL OPINION CONCERNING ISSUES ARISING DURING COURSE OF FINANCIAL STATEMENT AUDIT OF NATIONAL FLOOD INSURANCE PROGRAM, 42 U.S.C. SECS. 4001 ET SEQ. PROGRAM WAS NOT INTENDED TO BE "SOCIAL WELFARE" PROGRAM ASSISTING FLOOD VICTIMS WHO FAILED TO OBTAIN OR MAINTAIN A VALID POLICY. CASES CITED.

REGIONAL MANAGER, WRO:

MEMBERS OF YOUR STAFF HAVE REQUESTED OUR VIEWS ON THREE LEGAL QUESTIONS WHICH HAVE ARISEN DURING THE FINANCIAL STATEMENT AUDIT OF THE NATIONAL FLOOD INSURANCE PROGRAM. BELOW WE HAVE PARAPHRASED THE THREE QUESTIONS SUBMITTED, AND PROVIDED OUR ANSWERS TO THEM ALONG WITH OUR REASONS FOR OUR ANSWERS.

I. SHOULD INSURANCE PROTECTION AGAINST LOSSES RESULTING FROM FLOODS NOT CAUSED BY A NATURAL EVENT BE PROVIDED UNDER THE NATIONAL FLOOD INSURANCE PROGRAM?

MEMBERS OF THE AUDIT STAFF HAVE INFORMED US THAT ELECTRONIC DATA SYSTEMS FEDERAL, THE CONTRACTOR WHICH CONDUCTS THE PROGRAM'S OPERATIONS MAY HAVE ACCEPTED CLAIMS FOR FLOOD DAMAGES CAUSED BY PERILS NOT RELATED TO NATURAL EVENTS. EXAMPLES GIVEN ARE FLOODS RESULTING FROM THE COLLAPSE OF A WATER TOWER, THE DESTRUCTION OF A FIRE PLUG, OR THE BREAKING OF COMMUNITY WATER PIPES. THE LEGISLATIVE HISTORY OF THE NATIONAL FLOOD INSURANCE ACT OF 1968 INDICATES THAT THE PROGRAM IS INTENDED TO MAKE AVAILABLE INSURANCE AGAINST LOSSES RESULTING ONLY FROM NATURAL FLOODS CAUSED BY NATURAL DISASTERS. ALSO, THE DEFINITIONS OF "FLOOD" IN THE ACT, THE APPLICABLE REGULATIONS, AND THE POLICY FORMS ISSUED BY THE FEDERAL INSURANCE ADMINISTRATION INDICATE THAT ONLY NATURALLY CAUSED FLOODS ARE INSURED. ACCORDINGLY, AS EXPLAINED BELOW, ELECTRONIC DATA SYSTEMS FEDERAL SHOULD NOT BE PAYING CLAIMS FOR LOSSES RESULTING FROM UNNATURAL EVENTS SUCH AS THOSE CITED IN YOUR SUBMISSION.

CONGRESS ENACTED THE NATIONAL FLOOD INSURANCE ACT OF 1968 IN ORDER TO MEET ITS CONCERNS OVER THE EXTENSIVE COST OF PERSONAL AND PROPERTY LOSSES RESULTING FROM RECURRING FLOOD DISASTERS TO BOTH PRIVATE CITIZENS AND TO THE GOVERNMENT.

AT THE TIME OF ENACTMENT, PRIVATE FLOOD INSURANCE WAS NOT AVAILABLE BECAUSE OF THE HIGH RISK AND LACK OF UNDERWRITING STANDARDS. SPECIAL DISASTER LOANS WERE THE ONLY RELIEF AVAILABLE TO VICTIMS OF FLOOD DESTRUCTION. THE FEDERAL GOVERNMENT WAS ASSUMING A LARGE PART OF THE RESPONSIBILITY FOR PROVIDING RELIEF AND INDEMNIFICATION FOR PROPERTY LOSSES RESULTING FROM FLOODS, THE EXPENSE OF WHICH WAS CAUSING CONCERN IN THE CONGRESS.

THE GOVERNMENT WAS ALSO EXPENDING LARGE SUMS FOR FLOOD PREVENTION. CONGRESS THEREFORE PASSED THE NATIONAL FLOOD INSURANCE ACT (ACT) TO MAKE AVAILABLE FLOOD INSURANCE TO OCCUPANTS OF FLOOD PRONE AREAS AT REASONABLE RATES THROUGH A FEDERAL SUBSIDY, AND TO REQUIRE LOCAL GOVERNMENTS TO ADOPT ANTIFLOOD LAND USE AND CONTROL MEASURES AS A CONDITION FOR INSURANCE AVAILABILITY UNDER THE PROGRAM. CONGRESS ANTICIPATED THAT ENCOURAGING WISER LAND USE IN FLOOD PRONE AREAS WOULD REDUCE DISASTER LOSSES. CONGRESS EXPECTED THAT HAVING FLOOD PLAIN OCCUPANTS PAY PART OF THE PREMIUMS WOULD ALSO REDUCE THE FEDERAL COST RESULTING FROM FLOODS BECAUSE THE OCCUPANTS WOULD BE, IN EFFECT, SHARING DISASTER EXPENSES WITH THE GOVERNMENT.

THE HOUSE COMMITTEE ON BANKING AND CURRENCY, IN REPORTING ON THE ACT, INDICATED THAT THE PROGRAM WAS NEEDED TO PROTECT AGAINST NATURAL FLOODS. SEE 1968 U.S.C. CONG. AND ADMIN NEWS 2966 (REPRINTING H.R.REPT. NO. 90-1585, 90TH CONG., 2ND SESS. (1968)). FURTHER, THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, IN REPORTING THE FLOOD DISASTER PROTECTION ACT OF 1973, WHICH AMENDED THE ACT, ALSO DESCRIBED THE PROGRAM AS DESIGNED TO PROTECT AGAINST NATURALLY CAUSED FLOOD LOSSES. SEE 1973 U.S.C. CONG. AND ADMIN NEWS 3218 (REPRINTING S.REPT. NO. 93-583, 93RD CONG., 1ST SESS. (1973)).

THUS, THE "CONGRESSIONAL FINDINGS AND DECLARATION OF PURPOSE", THE ACT'S FIRST SECTION, PROVIDES:

"NECESSITY AND REASONS FOR FLOOD INSURANCE PROGRAM

"(A) THE CONGRESS FINDS THAT (1) FROM TIME TO TIME FLOOD DISASTERS HAVE CREATED PERSONAL HARDSHIPS AND ECONOMIC DISTRESS WHICH HAVE REQUIRED UNFORESEEN DISASTER RELIEF MEASURES AND HAVE PLACED AN INCREASING BURDEN ON THE NATION'S RESOURCES; (2) DESPITE THE INSTALLATION OF PREVENTIVE AND PROTECTIVE WORKS AND THE ADOPTION OF OTHER PUBLIC PROGRAMS DESIGNED TO REDUCE LOSSES CAUSED BY FLOOD DAMAGE, THESE METHODS HAVE NOT BEEN SUFFICIENT TO PROTECT ADEQUATELY AGAINST GROWING EXPOSURE TO FUTURE FLOOD LOSSES; (3) AS A MATTER OF NATIONAL POLICY, A REASONABLE METHOD OF SHARING THE RISK OF FLOOD LOSSES IS THROUGH A PROGRAM OF FLOOD INSURANCE WHICH CAN COMPLEMENT AND ENCOURAGE PREVENTIVE AND PROTECTIVE MEASURES; AND (4) IF SUCH A PROGRAM IS INITIATED AND CARRIED OUT GRADUALLY, IT CAN BE EXPANDED AS KNOWLEDGE IS GAINED AND EXPERIENCE IS APPRAISED, THUS EVENTUALLY MAKING FLOOD INSURANCE COVERAGE AVAILABLE ON REASONABLE TERMS AND CONDITIONS TO PERSONS WHO HAVE NEED FOR SUCH PROTECTION." U.S.C. SEC. 4001(A).

THE DEFINITIONS OF THE TERMS "FLOOD" FOUND IN THE ACT, THE APPLICABLE REGULATIONS AND IN THE STANDARD FLOOD INSURANCE POLICIES ISSUED UNDER THE PROGRAM, GIVE NO INDICATION THAT CONGRESS INTENDED TO PROVIDE COVERAGE FOR ANYTHING OTHER THAN NATURALLY CAUSED DAMAGE. SECTION 1370 OF THE ACT, AS AMENDED, 42 U.S.C. SEC. 4121, PROVIDES IN PART:

"(A) AS USED IN THIS CHAPTER -

"(1) THE TERM "FLOOD" SHALL HAVE SUCH MEANING AS MAY BE PRESCRIBED IN REGULATIONS OF THE SECRETARY, AND MAY INCLUDE INUNDATION FROM RISING WATERS OR FROM THE OVERFLOW OF STREAMS, RIVERS, OR OTHER BODIES OF WATER, OR FROM TIDAL SURGES, ABNORMALLY HIGH TIDAL WATER, TIDAL WAVES, TSUNAMIS, HURRICANES, OR OTHER SEVERE STORMS OR DELUGE; ***."

MOREOVER, THE LANGUAGE OF THE FOLLOWING SECTION, 42 U.S.C. SEC. 4122, INDICATES THAT WHEN CONGRESSS WAS REFERRING TO FLOODS IN THE ACT, IT WAS THINKING OF NATURAL OCCURRENCES. THE SECTION IS ENTITLED, "STUDIES OF OTHER NATURAL DISASTERS; COOPERATION AND CONSULTATION WITH OTHER DEPARTMENTS AND AGENCIES". ITS PURPOSE IS TO AUTHORIZE STUDIES TO DETERMINE WHETHER PROGRAM COVERAGE SHOULD BE EXTENDED TO ADDITIONAL NATURAL DISASTERS. THE SECTION MUST BE INTERPRETED IN THE CONTEXT OF THE ACT AS A WHOLE. WHEN THE CONGRESS IS SPEAKING OF "OTHER NATURAL DISASTERS", IN SECTION 4122, WE CONCLUDE THAT IT IS REFERRING TO NATURAL DISASTERS OTHER THAN THOSE MENTIONED IN THE ACT'S OTHER SECTIONS - FLOODS.

THE PERTINENT REGULATION, 44 C.F.R. SEC. 59.1 (1980) STATES:

"'FLOOD' OR 'FLOODING' MEANS:

"(A) A GENERAL AND TEMPORARY CONDITION OF PARTIAL OR COMPLETE INUNDATION OF NORMALLY DRY LAND AREAS FROM:

"(1) THE OVERFLOW OF INLAND OR TIDAL WATERS.

"(2) THE UNUSUAL AND RAPID ACCUMULATION OR RUNOFF OF SURFACE WATERS FROM ANY SOURCE.

"(3) MUDSLIDES (I.E., MUD FLOWS) WHICH ARE PROXIMATELY CAUSED OR PRECIPITATED BY ACCUMULATIONS OF WATER ON OR UNDER THE GROUND.

"(B) THE COLLAPSE OR SUBSIDENCE OF LAND ALONG THE SHORE OF A LAKE OR OTHER BODY OF WATER AS A RESULT OF EROSION OR UNDERMINING CAUSED BY WAVES OR CURRENTS OF WATER EXCEEDING ANTICIPATED CYCLICAL LEVELS OR SUDDENLY CAUSED BY AN UNUSUALLY HIGH WATER LEVEL IN A NATURAL BODY OF WATER, ACCOMPANIED BY A SEVERE STORM, OR BY AN UNANTICIPATED FORCE OF NATURE, SUCH AS FLASH FLOOD OR AN ABNORMAL TIDAL SURGE, OR BY SOME SIMILARLY UNUSUAL AND, UNFORESEEABLE EVENT WHICH RESULTS IN FLOODING AS DEFINED IN (A)(1) OF THIS SECTION."

THUS, THE REGULATION'S DEFINITION SPEAKS OF NATURAL OCCURRENCES. (THE MENTION IN SUBPARAGRAPH (A)(2) OF " *** SURFACE WATERS FROM ANY SOURCE" DOES NOT REFER TO "UNNATURAL" FLOODS.) WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY (UNABRIDGED) DEFINES SURFACE WATER AS:

"NATURAL WATER THAT HAS NOT PENETRATED MUCH BELOW THE SURFACE OF THE GROUND."

FINALLY, THE STANDARD FLOOD INSURANCE PROPERTY AND DWELLING POLICIES USED FOR THE PROGRAM DEFINE FLOOD IN THE SAME WAY AS THE REGULATION.

MOREOVER, THE POLICY STATES THAT IT DOES NOT COVER THE KIND OF OCCURRENCE YOU CITE IN YOUR SUBMISSION. IN ITS "PERILS EXCLUDED" SECTION, THE POLICY PROVIDES:

"THE INSURER SHALL NOT BE LIABLE FOR LOSS:

"A. BY *** (3) WATER, MOISTURE OR MUDSLIDE (I.E. MUDFLOW) DAMAGE OF ANY KIND RESULTING PRIMARILY FROM CONDITIONS, CAUSES OR OCCURRENCES WHICH ARE SOLELY RELATED TO THE DESCRIBED PREMISES OR ARE WITHIN THE CONTROL OF THE INSURED (INCLUDING BUT NOT LIMITED TO DESIGN, STRUCTURAL OR MECHANICAL DEFECTS, FAILURES, STOPPAGES OR BREAKAGES OF WATER OR SEWER LINES, DRAINS, PUMPS, FIXTURES, OR EQUIPMENT) OR ANY CONDITION WHICH CAUSES FLOODING WHICH IS SUBSTANTIALLY CONFINED TO THE DESCRIBED PREMISES OR PROPERTIES IMMEDIATELY ADJACENT THERETO ***."

II. IS THE FEDERAL EMERGENCY MANAGEMENT AGENCY REQUIRED TO PREPARE FINANCIAL STATEMENTS FOR THE FLOOD INSURANCE PROGRAM?

YES. THE FEDERAL EMERGENCY MANAGEMENT AGENCY IS REQUIRED TO PREPARE FINANCIAL STATEMENTS FOR THE FLOOD INSURANCE PROGRAM ANNUALLY. SECTION 1373 OF THE ACT, 42 U.S.C. SEC. 4124, STATES:

"THE PROVISIONS OF THE GOVERNMENT CORPORATION CONTROL ACT SHALL APPLY TO THE PROGRAM AUTHORIZED UNDER THIS CHAPTER TO THE SAME EXTENT AS THEY APPLY TO WHOLLY OWNED GOVERNMENT CORPORATIONS."

THE GOVERNMENT CORPORATION CONTROL ACT, 31 U.S.C. SECS. 841 ET SEQ. (1976), REQUIRES EACH WHOLLY OWNED GOVERNMENT CORPORATION TO PREPARE ANNUALLY "A BUSINESS-TYPE BUDGET" WHICH IT MUST SUBMIT TO THE OFFICE OF MANAGEMENT AND BUDGET. 31 U.S.C. SEC. 847 (1976). THIS BUDGET MUST INCLUDE A FINANCIAL STATEMENT. SECTION 847 DESCRIBES THE STATEMENT AS FOLLOWS:

"THE BUDGET PROGRAM SHALL CONTAIN ESTIMATES OF THE FINANCIAL CONDITION AND OPERATIONS OF THE CORPORATION FOR THE CURRENT AND ENSUING FISCAL YEARS AND THE ACTUAL CONDITION AND RESULTS OF OPERATION FOR THE LAST COMPLETED FISCAL YEAR. SUCH BUDGET PROGRAM SHALL INCLUDE A STATEMENT OF FINANCIAL CONDITION, A STATEMENT OF INCOME AND EXPENSE, AN ANALYSIS OF SURPLUS OR DEFICIT, A STATEMENT OF SOURCES AND APPLICATION OF FUNDS, AND SUCH OTHER SUPPLEMENTARY STATEMENTS AND INFORMATION AS ARE NECESSARY OR DESIRABLE TO MAKE KNOWN THE FINANCIAL CONDITION AND OPERATIONS OF THE CORPORATION. SUCH STATEMENTS SHALL INCLUDE ESTIMATES OF OPERATIONS BY MAJOR TYPES OF ACTIVITIES, TOGETHER WITH ESTIMATES OF ADMINISTRATIVE EXPENSES, ESTIMATES OF BORROWINGS, AND ESTIMATES OF THE AMOUNT OF GOVERNMENT CAPITAL FUNDS WHICH SHALL BE RETURNED TO THE TREASURY DURING THE FISCAL YEAR OR THE APPROPRIATIONS REQUIRED TO PROVIDE FOR THE RESTORATION OF CAPITAL IMPAIRMENTS."

ACCORDINGLY, THE FEDERAL EMERGENCY MANAGEMENT AGENCY, BY OPERATION OF SEC. 4124, MUST PREPARE THE FINANCIAL STATEMENTS DESCRIBED ABOVE ANNUALLY.

III. WAS THE NATIONAL FLOOD INSURANCE PROGRAM INTENDED, AT LEAST IN PART, AS A SOCIAL WELFARE PROGRAM SO THAT IT COULD PROVIDE BENEFITS TO FLOOD VICTIMS WHO FAILED TO OBTAIN OR MAINTAIN A POLICY?

NO. ELECTRONIC DATA SYSTEMS FEDERAL SHOULD PAY A FLOOD VICTIM'S CLAIM ONLY IF HE HAD A VALID POLICY IN EFFECT AT THE TIME OF THE LOSS. EXPLAINED IN OUR ANSWER TO QUESTION 1, CONGRESS EXPECTED THAT THE PROGRAM WOULD TAKE THE PLACE OF MUCH DISASTER RELIEF, AN ACTIVITY WHICH HAS THE CHARACTERISTICS OF A SOCIAL WELFARE PROGRAM. CONGRESS WANTED TO REDUCE THE FEDERAL GOVERNMENT'S ENTIRE EXPENDITURES DUE TO FLOOD DISASTERS. ITS INTENTION HAD BEEN TO PROVIDE BENEFITS WHERE THERE WAS NO INSURANCE COVERAGE, THEREBY IN EFFECT HAVING THE GOVERNMENT BEAR THE ENTIRE EXPENSE OF REBUILDING THE DAMAGE, IT WOULD NOT HAVE HAD TO PASS THE ACT. CONGRESS SPECIFICALLY DESIGNED THE PROGRAM SO THAT ITS BENEFICIARIES, FLOOD PLAIN OCCUPANTS, WOULD SHARE THE EXPENSE OF REPAIRING FLOOD DAMAGE THROUGH PREMIUM PAYMENTS.

THE EFFECT OF PROVIDING BENEFITS TO AN INDIVIDUAL WHO HAS NOT OBTAINED OR MAINTAINED A FLOOD INSURANCE POLICY IS THAT THE GOVERNMENT BEARS THE ENTIRE EXPENSE OF THE LOSS. ACCORDINGLY, SINCE THIS WAS WHAT THE CONGRESS WAS HOPING THE ACT WOULD ELIMINATE BY HAVING FLOOD INSURANCE SERVE AS THE MEANS OF INDEMNIFICATION FOR FLOOD LOSSES, WE CONCLUDE THAT PAYMENTS SHOULD NOT BE MADE WHERE THERE IS NO VALID COVERAGE.

MOREOVER, THE COURTS HAVE TREATED NATIONAL FLOOD INSURANCE AS A PROGRAM WHICH MAKES INSURANCE AVAILABLE ON A BUSINESSLIKE, CONTRACTUAL BASIS IN THE SAME WAY THAT PRIVATE INSURANCE COMPANIES DO, AND NOT AS A "SOCIAL WELFARE" PROGRAM. THE COURTS USE THE TEST OF WHETHER OR NOT THE DEFENDANT IS CONTRACTUALLY BOUND UNDER THE PROVISIONS OF THE INSURANCE POLICY AS THEIR BASIS FOR DECIDING IF THEY SHOULD GRANT RECOVERY IN LAW SUITS IN WHICH A PLAINTIFF CLAIMS RELIEF UNDER THE PROGRAM, JUST AS IN CASES INVOLVING PRIVATELY AVAILABLE INSURANCE. SEE E.G. WEST V. HARRIS, 573 F.2D 873 (5TH CIR. 1978); GOLDBLATT V. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, 482 F.SUPP. 642 (E.D.VA. 1979); JACKSON V. NATIONAL FLOOD INSURERS ASSOC., 398 F.SUPP. 1383 (S.D.TEX. 1974). IF THE COURTS DO NOT FIND COVERAGE UNDER THE CONTRACT, THEY DENY RELIEF. WINKLER V. GREAT AMERICAN INS. CO., 447 F.SUPP. 135 (E.D. N. Y. 1978); SEGAL V. GREAT AMERICAN INS. CO., 390 F.SUPP. 1074 (E.D. N. Y. 1974). IN TWO CASES, THE COURTS HAVE SPECIFICALLY REJECTED THE VIEW THAT CONGRESS INTENDED THAT PROGRAM INSURANCE BE TREATED DIFFERENTLY THAN PRIVATE INSURANCE FOR REASONS OF SOCIAL POLICY SO THAT BENEFITS WOULD BE PAYABLE EVEN THOUGH A CLAIMANT DID NOT HAVE A VALID CONTRACT. SEE DREWETT V. AETNA CASUALTY & SURETY CO., 539 F.2D 496 (5TH CIR. 1976); PRESLEY V. NATIONAL FLOOD INSURERS ASSOCIATION, 399 F.SUPP. 1242 (E.D.MO. 1975). IN EACH CASE, THE PLAINTIFFS SOUGHT RECOVERY ON PROGRAM POLICIES OBTAINED SHORTLY AFTER FLOODS HAD BEGUN. BOTH CASES ADDRESSED THE ISSUE OF WHETHER THE "LOSS IN- PROGRESS" PRINCIPLE, WHICH WOULD HAVE BARRED RECOVERY HAD THE CASES INVOLVED STRICTLY PRIVATE INSURANCE, APPLIED TO PROGRAM INSURANCE. UNDER THE LOSS-IN-PROGRESS RULE, A CONTRACT OF INSURANCE DOES NOT TAKE EFFECT IF A LOSS IS ALREADY IN PROGRESS AT THE TIME A POLICY IS ISSUED. BOTH COURTS HELD THAT THE PRINCIPLE APPLIED TO PROGRAM INSURANCE JUST AS IT DID TO PRIVATE INSURANCE. IN DREWETT, THE COURT DISCUSSED THE ISSUE AS FOLLOWS:

"DREWETT APPEALS ON THE GROUND THAT THE DISTRICT COURT ERRED IN APPLYING THE 'LOSS-IN-PROGRESS' PRINCIPLE TO A POLICY ISSUED UNDER THE PROVISIONS OF THE NATIONAL FLOOD INSURANCE PROGRAM. HE ARGUES THAT, BECAUSE THE STATUTE CREATING THE PROGRAM ANTICIPATES THAT PREMIUMS MAY BE CHARGED THAT ARE LOWER THAN THE ACTUARIAL COST OF INSURING PROPERTY IN FLOOD-PRONE AREAS (THE DIFFERENCE BEING SUBSIDIZED BY THE FEDERAL GOVERNMENT), SEE 42 U.S.C. SECS. 4014 AND 4015, IT IS INAPPROPRIATE TO APPLY INSURANCE LAW PRINCIPLES DEVELOPED ORIGINALLY TO APPLY TO PROFIT-SEEKING INSURERS. WHILE CONCEDING THAT THE ASSOCIATION IS NOT LIABLE FOR DAMAGE WHICH THE FLOOD DID TO HIS HOUSE BEFORE THE POLICY WAS ISSUED, DREWETT ARGUES THAT HE SHOULD RECOVER FOR THE ADDITIONAL DAMAGE DONE WHEN THE WATERS CONTINUED TO RISE AFTER THE POLICY WAS ISSUED.

"DREWETT'S CONTENTION IS WITHOUT MERIT. THE FLOOD INSURANCE PROGRAM IS ADMINISTERED WITH COOPERATION BETWEEN THE FEDERAL GOVERNMENT AND PRIVATE INSURANCE COMPANIES; THE PRIVATE COMPANIES CARRY SOME OF THE RISK, ALTHOUGH THE FEDERAL GOVERNMENT STANDS READY TO REINSURE AND REIMBURSE EXCESSIVE LOSSES. 42 U.S.C. SECS. 4017, 4041-84. THE PROGRAM ALSO REQUIRES ONGOING ACTUARIAL STUDIES TO HELP SET THE PREMIUMS TO BE CHARGED, 42 U.S.C. SEC. 4014. THE EVENTUAL GOAL OF THE PROGRAM IS TO DISCOURAGE BUILDING IN FLOOD-PRONE AREAS BY RAISING, OVER TIME, THE PREMIUMS ACTUALLY CHARGED TO EQUAL THE ACTUARIAL COST OF FLOOD INSURANCE. SEE U.S.C. CONGRESSIONAL AND ADMINISTRATIVE NEWS (1968) AT 2969, REPRINTING HOUSE REPORT NO. 1585, 90TH CONG., 2D SESS. (1968).

"IN SHORT, ALTHOUGH THE PROGRAM OFFERS SUBSIDIZED FLOOD INSURANCE, IT IS DESIGNED TO OPERATE MUCH LIKE ANY PRIVATE INSURANCE COMPANY AND EVENTUALLY TO ELIMINATE THE SUBSIDY. BECAUSE THE PROGRAM'S EXPOSURE TO CLAIMS AND ITS PREMIUMS ARE REQUIRED TO BE ESTIMATED IN ACCORDANCE WITH STANDARD INSURANCE PRACTICES, AND BECAUSE PRIVATE INSURERS CARRY PART OF THE RISK, IT IS CLEAR THAT CONGRESS DID NOT INTEND TO ABROGATE STANDARD INSURANCE LAW PRINCIPLES WHICH AFFECT SUCH ESTIMATES AND RISKS. NOTHING IN THE STATUTE OR REGULATIONS PROMULGATED UNDER IT, SEE 24 C.F.R. PARTS 1909-18, REQUIRES OTHERWISE. DREWETT CITES NO AUTHORITY TO SUGGEST THE CONTRARY." 539 F.2D AT 497 (1976). THE COURT IN PRESLEY, REFERRING TO ITS DECISION TO DENY RECOVERY STATED:

"THIS RESULT IS NOT INCONSISTENT WITH THE PURPOSES BEHIND THE NATIONAL FLOOD INSURANCE ACT OF 1968, 42 U.S.C. SEC. 4001 ET. SEQ., UNDER WHICH PLAINTIFFS' POLICY WAS ISSUED. THE NATIONAL FLOOD INSURANCE ACT PROVIDES FEDERAL REIMBURSEMENT TO PARTICIPATING COMPANIES IN ORDER TO PERMIT THEM TO MAKE FLOOD INSURANCE AVAILABLE AT REASONABLE PREMIUM RATES TO PERSONS RESIDING IN FLOOD PRONE AREAS WHERE INSURANCE WAS PREVIOUSLY UNAVAILABLE OR WAS AVAILABLE ONLY AT PROHIBITIVE RATES. 42 U.S.C. SEC. 4001. IN ESTABLISHING THIS FLOOD INSURANCE PROGRAM CONGRESS WAS HOPEFUL THAT THE PLAN WOULD PERMIT HANDLING OF FLOOD LOSSES TO THE GREATEST EXTENT POSSIBLE THROUGH THE PRIVATE INSURANCE INDUSTRY RATHER THAN THROUGH SPECIAL FEDERAL DISASTER RELIEF PROGRAMS. 1968 U.S.C. CONGRESSIONAL AND ADMINISTRATIVE NEWS, PP. 2965-2973. HOWEVER, NOTHING IN THE ACT NOR THE LEGISLATIVE HISTORY SUGGESTS THAT PARTICIPATING INSURANCE COMPANIES MUST REIMBURSE PERSONS FOR LOSSES WHICH HAVE ALREADY BEGUN AT THE TIME THEY APPLY FOR INSURANCE." 399 F.SUPP. 1245 (1975).