Actions Needed To Improve the Review of Insurance Coverage of Disaster Victims Receiving Federal Assistance

CED-79-90: Published: Jun 18, 1979. Publicly Released: Jun 25, 1979.

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GAO agreed to review procedures used by federal agencies to insure the proper collection of funds due the government under federal flood insurance policies or private insurance policies of victims whom these agencies assist. After the President has declared an area a total disaster, the Administrator of the Federal Disaster Assistance Administration (FDAA) appoints a coordinator for all federal assistance programs in the area to provide temporary housing, funds for state grants to disaster victims, and loans for the repair and replacement of homes and personal property. Allegations have been made that federal agencies providing disaster relief have failed to deduct moneys paid under victims' insurance policies. FDAA is responsible for verifying that federal insurance does not duplicate the proceeds from private insurance. The allegations charged that while federal law is designed to provide disaster assistance to victims when their losses surpass their entitlements from private insurance, federal agencies have relied on information furnished by adjusters employed to protect the economic interests of insurance companies. There is a logical inference of a conflict of interest in such a situation.

Federal law prohibits government assistance for losses suffered in a major disaster, which are compensated by insurance or from other sources. FDAA has issued regulations to carry out this policy regarding temporary housing relief, and the Small Business Administration has done the same for the reestablishment of enterprises under its jurisdiction. This is the primary emphasis of all federal disaster relief programs. However, information gathered by GAO indicated that many homeowners' policies offer less than comprehensive coverage, that companies are often reluctant to verify claims at face value, and that legal action is frequently necessary for policyholders to secure payment of their claims. These facts suggest that insurance companies are inclined to abdicate their responsibilities to the government. GAO believed it was time to evaluate the reasonableness of private insurance payments and those of the National Flood Insurance Program to minimize federal assistance. Although the government is not empowered to audit insurance settlements to protect the rights of the insured, it does have a direct financial interest in their receiving maximum insurance payments, because these directly affect federal disaster relief benefits. Also, there is insufficient incentive for disaster victims to make formal claims and overcome various obstacles to obtain full payment from private insurers so long as they can expect full federal aid.

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