Flood Insurance Program Doesn’t Know If Payments Covered Wind Damage

Since the National Flood Insurance Program does not collect data on both wind and flood damage claims from its insurers, it’s not possible to know if its billions of dollars in payments on hurricane-damaged properties accurately reflect flood only damage, a preliminary report from the government points out.

The report from the U.S. Government Accountability Office, which was in response to requests from members of Congress for an accounting of flood claim payments, suggests there could be a conflict of interest when the private insurer for a damaged property allocates wind and flood losses between itself and the federal program.

Similar disputes over coverage for wind versus water damage from the 2005 hurricane season have arisen between policyholders and private property/casualty insurers in the Gulf States. While many of these disputes have been settled, a number are still in court or arbitration.

Officials for the Federal Emergency Management Agency (FEMA), which administers the NFIP, told GAO staffers the they do not have authority to collect wind damage claims data from WYO insurers, even when the insurer services both the wind and flood policies on the same property.

“As a result, for hurricane-damaged properties, such as those damaged by Hurricanes Katrina and Rita, NFIP does not have all the information it needs to ensure that its claims payments were limited to damage caused by flooding,” the GAO found. “Concerns over the processing of these flood claims are heightened when the same insurance company serves as both NFIP’s WYO insurer and the property-casualty (wind) insurer for a given property. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating a potential conflict of interest.”

GAO also said that the lack of both flood and wind damage data limits the usefulness of FEMA’s quality assurance reinspection program for NFIP flood claims. GAO found that the NFIP reinspection program does not incorporate a means for systematically collecting and analyzing both the flood and wind damage data together to reevaluate the extent to which wind and flooding were deemed to have contributed toward damages to the property.

According to FEMA, the NFIP paid nearly $16 billion in flood claims in 2005. Since 1978, the NFIP has paid $31.4 billion for flood insurance claims and related costs.

GAO also studied the wind-related claims data collectively gathered by state insurance regulators but determined that this information would be of limited value to NFIP because it is not collected in enough geographic detail to match with the corresponding flood claims data on a property- or community-level basis.

“Without the ability to examine damages caused by both wind and flooding, the reinspection program is limited in its ability to confirm whether NFIP paid only for losses caused by flooding,” GAO concluded.

GAO presented its findings in testimony before the Subcommittee on Oversight and Investigations, Committee on Financial Services, and the Subcommittee on Management, Investigations, and Oversight, Committee on Homeland Security, House of Representatives

The agency is expected to issue recommendations to address the data issue in a future report.

More than 5 million people currently hold flood insurance policies in more than 20,200 communities across the U.S., according to FEMA.

Source: GAO
www.gao.gov