National Flood Insurance Program:

Greater Transparency and Oversight of Wind and Flood Damage Determinations Are Needed

GAO-08-28: Published: Dec 28, 2007. Publicly Released: Jan 30, 2008.

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Disputes between policyholders and insurers after the 2005 hurricane season highlight the challenges in understanding the cause and extent of damages when properties are subjected to both high winds and flooding. Questions remain over the adequacy of steps taken by the Federal Emergency Management Agency (FEMA) to ensure that claims paid by the National Flood Insurance Program (NFIP) cover only those damages caused by flooding. GAO was asked to evaluate (1) issues that arise when multiple insurance policies provide coverage for losses from a single event, (2) state regulators' oversight of loss adjusters, and (3) information that NFIP collects to assess the accuracy of damage determinations and payments. GAO collected data from FEMA, reviewed reinspection reports and relevant policies and procedures, and interviewed state regulatory officials and others about adjuster oversight and NFIP.

Insurance coverage gaps and claims uncertainties can arise when coverage for hurricane damage is divided among multiple insurance policies. Coverage for hurricanes generally requires more than one policy because private homeowners policies generally exclude flood damage. But the extent of coverage under each policy depends on the cause of the damages, as determined through the claims adjustment process and the policy terms that cover a particular type of damage. This process is further complicated when the damaged property is subjected to a combination of high winds and flooding and evidence at the damage scene is limited. Other claims concerns can arise on such properties when the same insurer serves as both NFIP's write-your-own (WYO) insurer and the property-casualty (wind) insurer. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating an inherent conflict of interest. Differences in licensing and training requirements for insurance claims adjusters among states also create uncertainties about adjusters' qualifications. Prior to the 2005 hurricane season, some coastal states had few or no requirements, while others had requirements for most types of adjusters. Further, states can waive their normal oversight requirements after a catastrophic event to help address demand, as they did after Hurricane Katrina. As a result, significant variations can exist in the qualifications of claims adjusters available after a catastrophic event. Strengthened and more uniform state requirements for adjusters could enhance the qualifications of the adjuster force in future catastrophes and improve the quality and consistency of claims adjustments. NFIP does not systematically collect and analyze both wind and flood damage claims data, limiting FEMA's ability to assess the accuracy of flood payments on hurricane-damaged properties. The claims data collected by NFIP through the WYO insurers--including those that sell and service both wind and flood policies on a property--do not include information on whether wind contributed to total damages or the extent of wind damage as determined by the WYO insurer. The lack of this data also limits the usefulness of FEMA's quality assurance reinspection program to reevaluate the accuracy of payments. In addition, the aggregate claims data that state insurance regulators collectively gathered after Hurricanes Katrina and Rita were not intended to be used to assess wind and flood damage claims together on a property- or community-level basis. Further, FEMA program contractors do not have access to WYO insurers' policies, procedures, and instructions that describe to adjusters how wind and flood damages are to be determined when properties are subjected to both perils. FEMA officials stated that they did not have the authority to collect wind damage claims data from insurers. But without the ability to examine claims adjustment information for both the wind and flood damages, NFIP cannot always determine the extent to which each peril contributed to total property damages and the accuracy of the claims paid for losses caused by flooding.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: To strengthen and clarify FEMA's oversight of WYO insurers, particularly those that service both wind and flood damage claims on the same property, the Congress may wish to consider giving FEMA clear statutory access to both wind and flood damage claims information available from NFIP's WYO insurers in cases in which it is likely that both wind and flooding contributed to any damage or loss to covered properties, enabling NFIP to match and analyze the wind and flood damage apportionments made on hurricane-damaged properties in a systematic fashion, as appropriate.

    Status: Closed - Implemented

    Comments: The Flood Insurance Reform Priorities Act of 2010, which was passed by the House of Representatives on July 15, 2010 and referred to the Senate Committee on Banking, Housing and Urban Affairs on July 19, 2010, contains provisions would indicate that Congress has given consideration to this matter. Specifically, the bill requires WYO (write your own) insurers to maintain files, available to FEMA, that would detail the apportionment of wind and flood damage on individual properties. As of September 19, 2011, similar provisions were part of legislation being developed in the Senate for the reauthorization of the program.

    Matter: To strengthen and clarify FEMA's oversight of WYO insurers, particularly those that service both wind and flood damage claims on the same property, the Congress may wish to consider giving FEMA clear statutory access to the policies, procedures, and instructions used by WYO insurers and their adjusters for both flood and wind claims to assess and validate insurers' claims adjustment practices for identifying, apportioning, and quantifying damages in cases where there are combined perils.

    Status: Closed - Implemented

    Comments: The Flood Insurance Reform Priorities Act of 2010, which was passed by the House of Representatives on July 15, 2010 and referred to the Senate Committee on Banking, Housing and Urban Affairs on July 19, 2010, contains provisions that would address this matter for congressional consideration. Specifically, the bill requires WYO (write your own) insurers to provide, for approval by FEMA, their procedures for adjusting claims where individual properties sustained both windstorm and flood damage. As of September 19, 2011, similar provisions were part of legislation being developed in the Senate for the reauthorization of the program.

    Recommendation for Executive Action

    Recommendation: State insurance commissioners, acting through National Association for Insurance Commissioners, should enhance the quality and consistency of standards and oversight for all types of claims adjusters among states through more stringent and consistent licensing and training requirements for adjusters, including, in those states where appropriate, training to assess and apportion damages due to wind, flooding, or both.

    Agency Affected: National Association of Insurance Commissioners

    Status: Closed - Implemented

    Comments: Following Hurricane Katrina, GAO issued a report on the National Flood Insurance Program that highlighted issues related to insurance adjustments on properties subject to both wind and flooding (GAO-08-28) and recommended enhanced and more uniform training and requirements for adjusters. Since the report was issued, the NAIC has continued to promote more consistent licensing and training requirements for adjusters and has adopted a Guideline for Independent Adjuster Licensing. The Guideline includes provisions on license requirements, examination, continuing education and reporting of disciplinary actions. Also, the NAIC has formed a working group for Adjuster Licensing, which has created the NAIC Independent Adjuster Reciprocity Best Practices and Guidelines. The draft was recently exposed for comment. In addition, the working group created and adopted a Uniform Adjuster Licensing Application for Individual and Business Entity in 2010. This new application is customized for adjusters, who were previously subject to state-specific forms or the Uniform Application for producers. Such actions should enhance consumer protection, including more effective oversight of adjusters.

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