Thursday, March 01, 2007

A Matter of Policy

Two posts ago, regarding the $20.8 billion that the NFIP had to borrow to pay flood claims from 2005, I wrote:

The NFIP must borrow the money from the U.S. Treasury because it was poorly managed. This is the federal government bailing *itself* out, not the people of the Gulf Coast who paid for flood insurance.
Actually, maybe it was the federal government bailing the private insurance companies out:
"I have no knowledge of any claims paid by the program that should have been paid by wind policies, which is administered by the private sector," David Maurstad, of the Federal Emergency Management Agency, told a House panel.

Maurstad said under questioning that when both wind and water damage occurred, FEMA paid the damages as a matter of policy.
Note that last sentence: “when both wind and water damage occurred, FEMA paid the damages as a matter of policy.”

In that sentence are two examples of how the NFIP is poorly managed.

First, “when both wind and water damage occurred,” only FEMA paid claims. Flood insurance does not cover wind damage. If wind damage occurred, homeowners insurance should pay for that damage. The NFIP borrowed money from the U.S. Treasury (American citizens) to pay what should have been covered by private insurance companies.

Second, “as a matter of policy.” Not only did FEMA pay for wind damage it should not have paid for, it did it as a rule. That’s not good policy.

Actually, it might not be the right policy at all:
Rep. Gene Taylor, D-Miss., demanded that Maurstad provide the legal basis for the federal government paying claims of wind and water damage.

***

"You guys are literally the puppets of the insurance industry," Taylor said at the hearing of the House Financial Services Committee's Oversight and Investigations Subcommittee.

"What concerns me is the total lack of oversight of taxpayers' money."
Along the coast, you can not deny that there was wind damage as well as flood damage. The winds were too strong.

State Farm released a statement saying, “State Farm sent a memo to its claims adjusters, but it encouraged them to look for evidence of wind damage.” When nothing but a slab is left like on the Mississippi coast, it is hard to find evidence of anything. At that point, private and federal insurance should work together to pay for damage. It shouldn’t be one or the other. I am sure there is some equation that can be devised to estimate how much wind damage may have occurred versus flood damage. And, even if it is not a perfect estimate, insurance companies can not deny that some wind damage did happen.

Before 2005, the NFIP paid all its claims from what it got in premiums. When it borrowed money, it had to pay the U.S. Treasury back. It can not pay back $20.8 billion. And, guess what. There was no disaster reserve.

So, now the NFIP is stuck with a debt it will never pay back. Private insurance companies failing to pay for wind damage increased that debt.

If the NFIP can’t pay back the Treasury, then the debt must be forgiven. That means all taxpayers wind up paying.

Maybe the private insurance companies who failed to pay for wind damage when both wind and flood occurred can be held liable. Then, the federal government can make them pay off the NFIP’s debt as part of the punishment.

8 comments:

mominem said...

If NFIP did not pay claims where the cause were questionable, wouldn't that put people in a worse position?

I think, but don't know, that NIFP could go after the wind insurers to recover any amount that the private insurer should have paid. (Subrogation ?)

I know in my case I got some money from both, and the adjusters were fairly careful to decide which was which.

The primary problem in Mississippi as I understand it is people whose home was totally destroyed and who didn't have flood insurance but want some money from the wind insurance.

Ed Rust said...

You are mistaken. This is about the people who did have flood insurance, whose homes were destroyed by a combination of wind and surge, and expected to collect the appropriate amounts from each policy. They had flood coverage, but not for the full value of their loss. They had wind damage before the surge. The State Farm guy is a liar. Here is the language in SF's guidance to its adjusters:

“Where wind acts concurrently with flooding to cause damage to the insured property, coverage for the loss exists only under flood coverage, if available.”

SF and other insurers who cover wind in homeowners insurance on the coast AND sell flood policies backed by the government get to use a single adjuster to handle both claims. They have a fiduciary duty to protect the taxpayers, and not place their company's interests above the NFIP's interests.

They rigged the system to pay flood and deny wind. They paid the flood policy limits without question, then challenged the wind claim. They hired supposedly independent adjusting and engineering firms to do the dirty work for them. They all should be prosecuted for fraud.

It is true that too many homes in Mississippi did not have flood insurance, primarily because the flood maps were so bad. That is a different problem created by NFIP, but it has nothing to do with than the issue in this article or yesterday's hearing. Those folks got some assistance from the homeowner grants.

As poorly as NFIP is managed, don't forget that about half of NFIP's Katrina shortfall was caused by the Corps of Engineers.

Clay said...

I stayed at Ole Miss during the storm. They have an excellent disaster response program there. I became close friends with the head of that program.

We talked at length about a number of topics. James Lee Witt, Disaster Mitigation, NFIP, etc.

Here's a fun little fact: the NFIP was NOT set up to provide flood insurance. It was slowly encourage people to move out of flood prone zones and build smarter instead of sprawling into areas that shouldn't be developed.

I hate to defend awful crooks like the insurance industry, but they have a point.

I found this online:
http://oldhammondhwy.blogspot.com/2006/12/this-is-not-false-alarmthis-is-not.html

I'm a young engineer in the city. I've got the money to invest in property, but there's a reason that I'm renting an apartment on the second floor in one of the highest areas in the city. I don't trust the Corps and I don't trust the city.

I have a feeling the NFIP is headed for disaster with some of the reforms I've heard about...

mominem said...

If nothing but a slab is left and the occupants aren't present, how do you determine relative liability?

It's a difficult problem.

da po' boy said...

Ed Rust wrote:

You are mistaken. This is about the people who did have flood insurance, whose homes were destroyed by a combination of wind and surge, and expected to collect the appropriate amounts from each policy.

Am I mistaken because if the homeowners insurance had paid for wind, then the flood insurance would still have paid out the same amount? My point is that bad policy lead to FEMA paying more (and having to borrow more) than it should have.

The way I read the article, FEMA paid for wind damage:

Maurstad said under questioning that when both wind and water damage occurred, FEMA paid the damages as a matter of policy.

Rep. Gene Taylor, D-Miss., demanded that Maurstad provide the legal basis for the federal government paying claims of wind and water damage.


That, to me, says FEMA paid for wind “when both wind and flood damage occurred.”

If the adjusters are acting illegally, that is another thing – and I totally think you are spot on about that.

Mominem, I thought the same thing as you when you asked: “If NFIP did not pay claims where the cause were questionable, wouldn't that put people in a worse position?” I am glad they got money. I just want it to come form the right pockets.

Ed Rust, I agree that I am mistaken when I say the NFIP is poorly managed. I should say it is poorly set up. Managers don’t make the policy. They implement it.

And do you have a link for that State Farm quote?

The State Farm guy is a liar. Here is the language in SF's guidance to its adjusters:

“Where wind acts concurrently with flooding to cause damage to the insured property, coverage for the loss exists only under flood coverage, if available.”


I would love to link to it if there is one. Thanks.

Anonymous said...
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mominem said...

In the event of damage from both flood and wind think that the payment would have been "coordinated" so that no policy holder would be paid for the same damage twice.

This is common practice in many instances, and basic fairness. If the wind blew the house down and then it was flooded, why should flood insurance pay for an undamaged house which didn't exist.

I know both my flood and homeowners insurance asked for copies of the others reports and other policy information.

da po' boy said...

Exactly. I am not saying homeowners should pay for flood damage. I am saying flood insurance shouldn't pay for wind damage.

And if NFIP is saying when both wind and water damage occur, FEMA will pay the damages as a matter of policy, then that's a bad policy.