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.Note that last sentence: “when both wind and water damage occurred, FEMA paid the damages as a matter of policy.”
Maurstad said under questioning that 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.Along the coast, you can not deny that there was wind damage as well as flood damage. The winds were too strong.
"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."
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.