GAO Urges Changes in Wind, Flood Damage Determinations

Government adjusters trying to assess the accuracy of flood claims payments from the 2005 hurricane season were hampered by a lack of access to data on wind damage from the National Flood Insurance Program and private insurers, according to a new government report.

The brouhaha between policyholders and insurers in the wake of the 2005 hurricane season raised questions about claim payments by the nation’s flood insurance program when a property is subjected to flooding, high winds and rain all at once.

A new report by the U.S. Government Accountability Office on how the NFIP and the Federal Emergency Management Agency handled hurricane claims found complications with private homeowners policies generally began with flood damage exclusions because these require consumers to purchase multiple policies for adequate coverage. This, the GAO said, caused gaps in coverage and ambiguity in claims.

The process was further weakened when properties were subjected to the combination of high winds and flooding because “the extent of coverage under each policy depended on the cause of the damages, as determined through the claims adjustment process and the policy terms that cover a particular type of damage,” said the GAO. “And evidence at the scene of the damage is often limited.”

The report found fault with the lack of data available from the NFIP to assist FEMA with claims assessments.

“The 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 report said.

The GAO said the lack of this data also limited FEMA’s reinspection program.

According to the GAO, the aggregate claims data state insurance regulators collectively gathered after Hurricanes Katrina and Rita were never intended to be used to assess wind and flood damage claims on a property — or community — basis.

The GAO said that FEMA contractors did not have access to WYO insurers’ policies, procedures and instructions on how to determine wind and flood damages when properties are subjected to both perils.

“FEMA officials stated they did not have the authority to collect wind claims data from insurers. And without the ability to examine that information, the NFIP could not 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,” said the GAO.

The report recommends that Congress consider providing FEMA clear authority to obtain wind damage claims information from WYO insurers and the policies, procedures, and instructions used by WYO insurers for determining wind damage versus flood damage when properties are subjected to both perils.

“Such authority would enhance FEMA’s ability to monitor and reevaluate the
accuracy of NFIP flood damage payments that result from the wind and
flood damage apportionments and its controls over the inherent conflict
of interest involving WYO insurers that sell and service both wind and
flood policies,” the GAO said.

In some cases the GAO found insurers serving as both the NFIP’s write-your-own (WYO) insurer and the property-casualty (wind) insurer, creating an inherent conflict of interest because that company then held the responsibility for determining damages and losses to itself.

Another problem was different state licensing requirements for adjusters, creating discrepancies about adjusters’ qualifications, according to the GAO, “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,” the report said.

The GAO said more uniformity in state requirements for adjusters could enhance the qualifications of the adjuster force in future catastrophes and improve consistency.

Source: GAO