[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                   NATIONAL FLOOD INSURANCE PROGRAM:
                 ISSUES EXPOSED BY THE 2005 HURRICANES

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                                AND THE

                      SUBCOMMITTEE ON MANAGEMENT,
                     INVESTIGATIONS, AND OVERSIGHT

                                 OF THE

                     COMMITTEE ON HOMELAND SECURITY

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 12, 2007

                               __________

  Printed for the use of the Committee on Financial Services and the 
                     Committee on Homeland Security

                           Serial No. 110-39

                   (Committee on Financial Services)

                           Serial No. 110-46

                    (Committee on Homeland Security)



                    U.S. GOVERNMENT PRINTING OFFICE
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_____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
              Subcommittee on Oversight and Investigations

                MELVIN L. WATT, North Carolina, Chairman

LUIS V. GUTIERREZ, Illinois          GARY G. MILLER, California
MAXINE WATERS, California            PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         RON PAUL, Texas
MICHAEL E. CAPUANO, Massachusetts    STEVEN C. LaTOURETTE, Ohio
CAROLYN McCARTHY, New York           J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida                   TOM PRICE, Georgia
TIM MAHONEY, Florida                 MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida               PETER J. ROSKAM, Illinois
?

                     COMMITTEE ON HOMELAND SECURITY

               BENNIE G. THOMPSON, Mississippi, Chairman

LORETTA SANCHEZ, California,         PETER T. KING, New York
EDWARD J. MARKEY, Massachusetts      LAMAR SMITH, Texas
NORMAN D. DICKS, Washington          CHRISTOPHER SHAYS, Connecticut
JANE HARMAN, California              MARK E. SOUDER, Indiana
PETER A. DeFAZIO, Oregon             TOM DAVIS, Virginia
NITA M. LOWEY, New York              DANIEL E. LUNGREN, California
ELEANOR HOLMES NORTON, District of   MIKE ROGERS, Alabama
Columbia                             BOBBY JINDAL, Louisiana
ZOE LOFGREN, California              DAVID G. REICHERT, Washington
SHEILA JACKSON-LEE, Texas            MICHAEL T. McCAUL, Texas
DONNA M. CHRISTENSEN, U.S. Virgin    CHARLES W. DENT, Pennsylvania
Islands                              GINNY BROWN-WAITE, Florida
BOB ETHERIDGE, North Carolina         MARSHA BLACKBURN, Tennessee
JAMES R. LANGEVIN, Rhode Island      GUS M. BILIRAKIS, Florida
HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee
CHRISTOPHER P. CARNEY, Pennsylvania
YVETTE D. CLARKE, New York
AL GREEN, Texas
ED PERLMUTTER, Colorado
VACANCY

       Jessica Herrera-Flanigan, Staff Director & General Counsel

                     Rosaline Cohen, Chief Counsel

                     Michael Twinchek, Chief Clerk

                Robert O'Connor, Minority Staff Director

                                 ______

       SUBCOMMITTEE ON MANAGEMENT, INVESTIGATIONS, AND OVERSIGHT

             CHRISTOPHER P. CARNEY, Pennsylvania, Chairman

PETER A. DeFAZIO, Oregon             MIKE ROGERS, Alabama
YVETTE D. CLARKE, New York           TOM DAVIS, Virginia
ED PERLMUTTER, Colorado              MICHAEL T. McCAUL, Texas
VACANCY                              PETER T. KING, New York (Ex 
BENNIE G. THOMPSON, Mississippi (Ex  Officio)
Officio)

                    Jeff Greene, Director & Counsel

                         Brian Turbyfill, Clerk

                    Michael Russell, Senior Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 12, 2007................................................     1
Appendix:
    June 12, 2007................................................    35

                               WITNESSES
                         Tuesday, June 12, 2007

Jadacki, Matt, Deputy Inspector General for Disaster Assistance 
  Oversight, Office of the Inspector General, U.S. Department of 
  Homeland Security..............................................    14
Williams, Orice M., Director, Financial Markets and Community 
  Investment, Government Accountability Office...................    16

                                APPENDIX

Prepared statements:
    Miller, Hon. Gary G..........................................    36
    Jadacki, Matt................................................    40
    Williams, Orice M............................................    58

              Additional Material Submitted for the Record

Watt, Hon. Melvin:
    Editorial from the Times-Picayune............................    73
    Letter to David M. Walker from Michael G. Oxley..............    76
    Language from appropriations bill............................    78
    Copy of insurance company complaint..........................    80
Taylor, Hon. Gene:
    Series of articles from the Times-Picayune...................    98
Williams, Orice M.:
    Responses to questions submitted by Hon. Christopher P. 
      Carney.....................................................   118
    Responses to questions submitted by Hon. Mike Rogers.........   122
    Responses to questions submitted by Hon. Melvin L. Watt......   131


                   NATIONAL FLOOD INSURANCE PROGRAM:
                 ISSUES EXPOSED BY THE 2005 HURRICANES

                              ----------                              


                         Tuesday, June 12, 2007

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                     and Subcommitte on Management,
                     Investigations, and Oversight,
                            Committee on Homeland Security,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 3:11 p.m., in 
room 2128, Rayburn House Office Building, Hon. Melvin Watt 
[chairman of the Subcommittee on Oversight & Investigations] 
presiding.
    Present from the Subcommittee on Oversight & 
Investigations: Representatives Watt, Klein, Wexler; Miller and 
Bachus [ex officio].
    From the Subcommittee on Management, Investigations, and 
Oversight: Representatives Carney, Clarke, Perlmutter; and 
Rogers.
    Also present: Representatives Taylor, Scott, and Jindal.
    Chairman Watt. This joint hearing of the Committee on 
Financial Services Oversight and Investigations Subcommittee 
and the Committee on Homeland Security Management, 
Investigations, and Oversight Subcommittee will come to order.
    I will recognize myself for a brief opening statement. I 
apologize to everyone who has been so patiently waiting for us, 
but we were called for a series of votes, and got sidetracked 
in our schedule, so we'll try to move along quickly.
    I recognize myself for a 5-minute opening statement, or 
less.
    It has been nearly 2 years since the devastation of 
Hurricanes Katrina and Rita. Gulf Coast residents are still 
trying to rebuild their homes, their lives, and their 
businesses. A potential roadblock to this recovery is the 
ongoing conflict over the insurance claims process in the Gulf 
Coast.
    This is the second in a series of hearings the Financial 
Services Subcommittee on Oversight and Investigations has held 
on the issue of insurance practices in the Gulf Coast in the 
wake of Katrina and Rita.
    The first hearing explored the overall insurance claims 
payment process in the Gulf Coast after the 2005 hurricanes. We 
heard testimony from FEMA representatives, the Mississippi 
attorney general, industry experts, and several Gulf Coast 
representatives who have been personally affected by the 
tragedy.
    Much of the controversy in the aftermath of the 2005 
hurricanes has focused on the insurance claims payment process 
and the allegation that hurricane victims have not received 
adequate compensation because damage caused by wind, which is 
supposed to be paid by private insurers under homeowners 
policies have been improperly classified as flood damage and 
paid by the National Flood Insurance Program (NFIP).
    This question has spawned numerous lawsuits and at least 
one grand jury investigation.
    Rehashing the merits of the individual lawsuits is not our 
purpose today. Today, we move the debate forward by seeking to 
shed light on the actual data concerning flood and wind claims 
as a result of Katrina and Rita, including possible data 
limitations that may have hampered FEMA in its ability to 
provide proper oversight of the National Flood Insurance 
Program.
    We are pleased to have two Government witnesses, one from 
the Department of Homeland Security Inspector General's Office, 
and the other from the Government Accountability Office, or 
GAO, both of whom have been investigating the related issues of 
the availability and quality of data concerning flood and wind 
claims and FEMA's oversight of the National Flood Insurance 
Program.
    These investigations and evaluations have been done 
pursuant to two different requests, which I'm going to put in 
the record.
    One, the GAO study, I believe, was initiated at the request 
of the former chairman of the Financial Services Committee, 
Mike Oxley, in a letter dated January 24, 2006, and joined in 
by the current chairman of the Financial Services Committee, 
Representative Barney Frank.
    The second investigation was initiated pursuant to an 
appropriations bill which directed that the Inspector General 
investigate whether and to what extent in adjusting and 
settling claims resulting from Hurricane Katrina, insurers 
making flood insurance coverage available under the Write-Your-
Own program pursuant to 1345 of the National Flood Insurance 
Act improperly attributed damages from such hurricane to 
flooding.
    I will ask unanimous consent to submit former Chairman 
Oxley's letter and the language which authorized the Inspector 
General study for the record.
    Without objection, it is so ordered.
    Both of these Agencies are preparing reports on these 
issues which should be released this year or early next year.
    Today, they will offer preliminary findings from these 
reports. We hope that their testimony will help provide 
transparency and accountability regarding the operation of the 
National Flood Insurance Program and the overall insurance 
claims payment process in the Gulf so that taxpayers, Gulf 
Coast residents, and the Members of Congress can have 
confidence that the National Flood Insurance Program and the 
private insurance market are each living up to their 
responsibility and that catastrophe victims are treated fairly.
    I now recognize the ranking member of the Financial 
Services Oversight Subcommittee, Mr. Gary Miller, for his 
opening statement.
    Mr. Miller. Thank you, Mr. Chairman.
    I would like to ask unanimous consent that members of the 
full Committee on Financial Services and the Committee on 
Homeland Security be allowed to make opening statements at 
today's subcommittee hearing to the extent that they are 
allotted time.
    With that, I grant myself 5 minutes.
    I thank the chairman for holding this hearing, and I'd like 
to welcome the Homeland Security Subcommittee on Management and 
Investigation here today, and also the witnesses; we are glad 
you are here with us.
    There is no question that the 2005 hurricane season 
resulted in significant strain to the NFIP. The claims 
resulting from the losses from the catastrophic hurricanes are 
unprecedented in the history of the program.
    Obviously, with almost $18 billion in flood claims being 
paid by the Treasury rather than the flood program itself, we 
must ensure that taxpayers are not footing the bill for 
inappropriate claim adjustments.
    Some have alleged that insurers shifted wind claims to the 
flood program so they could pay less for the wind portion of 
the hurricane loss. If this is true, it is an outrage that 
should be rectified immediately, and those engaged in such 
fraud should be strongly punished.
    Particularly in cases of property damage by both flooding 
and wind, strong oversight must be in place for the National 
Flood Insurance Program to ensure that it does not pay out more 
than it should.
    This is a difficult prospect. Flood and wind damage are 
supposed to be assessed separately, but in some cases they 
occur simultaneously.
    At our first hearing on this subject, we heard from the 
Mitigation Division Director and Federal Insurance 
Administrator for the Federal Emergency Management Agency, 
David Maurstad, who testified that the NFIP only paid for 
damage associated with flood and only up to the covered limits.
    According to Mr. Maurstad, there is a rigorous program of 
oversight in place to ensure that the NFIP only pays for damage 
caused by flooding. Mr. Maurstad testified that no claims from 
the 2005 hurricanes have come to his attention that should not 
have been paid at the levels they were paid.
    I look forward to hearing from the witnesses today who have 
been given the difficult task of assessing whether FEMA has 
taken adequate steps to ensure that the NFIP's flood claim 
payments are accurate and appropriate.
    As I said previously, this subcommittee was assured by FEMA 
at the last hearing that controls are in place to assure that 
the NFIP does not pay out more than is required under the terms 
of the flood policy.
    Today, we have the opportunity to hear the opinions of 
independent sources about whether they agree with FEMA's 
assessment about its oversight process and its ability to 
ensure the accurate payment of claims.
    If the NFIP paid more than it should have after the 2005 
hurricanes because insurance companies pushed wind losses to 
the flood program rather than paying for them under homeowners 
policies, then we must hold them accountable for their actions.
    But let me just say that there is a difference between the 
potential of wrongdoing and the finding of actual wrongdoing. 
This is an important distinction as we proceed today.
    I have reviewed the written statements of the witnesses 
today and I understand that misbehavior on the part of the 
insurance companies that write both flood and wind policies for 
the customers cannot be ruled out at this point in time of the 
investigation; they just haven't completed the reviews yet. Let 
us not prejudge the findings of these important investigations, 
or vilify the entire insurance industry for claim shifting, 
without concrete evidence to prove such allegations of 
widespread wrongdoing occurred.
    In conclusion, I think we need to proceed cautiously today. 
We have all seen the anecdotal news reports and heard stories 
of our colleagues from the region about practices by some 
insurance companies that, if true, are very disturbing and must 
be addressed.
    I am also aware of examples of companies that use two 
separate adjusters for handling wind claims and water claims to 
avoid the potential for conflict, as has been alleged. Such 
adjusters have been kept separate. They did not communicate 
with one another, and they utilized completely different claim 
systems.
    Did insurance companies abuse the NFIP to protect their 
bottom lines? Was such abuse widespread? At this point we do 
not have the evidence to make a determination either way. We 
just don't know, and we need to allow the GAO and DHS IG to 
complete their important work before rushing to judgment.
    We need to take the preliminary findings of these reports 
at face value and for the purpose of moving forward with the 
NFIP's reform legislation.
    We should use this hearing to ask important questions about 
ways to avoid the potential for abuse in the future. For 
example, we should consider how we ensure that Write-Your-Own, 
WYO, insurance companies do not have the ability to defraud the 
NFIP when the structure endures wind and flood damage?
    Is it best to require more coordination between flood and 
wind damages or is it best to require absolute separation 
between the claims, including requiring different claims 
adjusters?
    Should the existing NFIP claims adjustment procedure be 
revisited to ensure any potential conflicts of interest are 
eliminated?
    Once the GAO and DHS IG complete their important studies, 
we will have a better sense of whether and to what extent 
damages from the 2005 hurricanes were improperly attributed to 
flood rather than wind.
    With that, I yield back.
    Chairman Watt. I thank the gentleman.
    I'm pleased to yield 5 minutes to the chairman of the 
Homeland Security Management, Investigations, and Oversight 
Subcommittee, Mr. Carney, from Pennsylvania.
    Mr. Carney. Thank you, Mr. Chairman.
    I'd like to thank Chairman Frank, of course, and you, 
Chairman Watt, for holding this joint hearing with my 
subcommittee regarding the NFIP.
    In the wake of any catastrophe, whether a natural disaster 
or a terrorist attack, government and the private sector have 
to do their part for the country to recover. If either fails to 
fulfill its responsibilities, recovery will at best be delayed 
and at worst be impossible.
    Nearly 2 years after Katrina and Rita struck the Gulf 
Coast, we are still trying to understand why this public-
private partnership broke down and what it is going to take to 
fix it.
    In my own district, which is more than 1,200 miles from New 
Orleans, my neighbors have had their own struggles with 
flooding. In fact, some of my constituents are still living in 
FEMA trailers, nearly a year after 2006's flooding.
    The NFIP and FEMA's other flood-related programs must work 
better. We must find a happy medium, and that medium must 
include proper oversight.
    I am troubled, as I'm sure most of us here today are, by 
the news that private insurance companies may have manipulated 
FEMA to pay out claims for which FEMA should not be 
responsible. If that's true, it is simply despicable.
    I recently took a trip down to the Gulf Coast to see how 
the recovery was going. The people down there aren't looking 
for a handout, they are just looking for a hand up. They just 
want to rebuild and get on with their lives. And I hear the 
same sentiments from my neighbors, who are still waiting for 
their claims to be paid.
    That said, when insurance is using every legal loophole and 
tactic to avoid paying out on a claim they should be 
responsible for, the system is broken, and as far as I'm 
concerned, if that system is broken, it is a disservice to not 
only the citizens who have come to rely on it, but also the 
country as a whole.
    I know that Chairman Thompson, when he arrives, and Ranking 
Member Rogers also have a lot to say, so I won't take up much 
more time. I just want to emphasize that this is only the 
beginning of a new chapter in the oversight of the NFIP.
    I'm looking forward to continued cooperation from the 
Financial Services Committee when it comes to examining the 
insurance meltdown that resulted from the 2005 hurricane 
season.
    Hopefully, any changes that we can help bring about will 
mitigate problems we've seen elsewhere across the country with 
NFIP payments.
    With that, I yield back, Mr. Chairman.
    Chairman Watt. I thank the gentleman for his statement, and 
I welcome the members of the Homeland Security Committee to our 
humble facility over here. Thank you for being here.
    I will now recognize Representative Rogers from Alabama for 
5 minutes.
    Mr. Rogers. Thank you, Chairman Watt, and Chairman Carney, 
and I want to join you in thanking the witnesses for taking 
time to be here with us today.
    Let me say at the outset that it's a special privilege to 
participate today with my good friend and colleague, Spencer 
Bachus, from Alabama, as well.
    The folks in Alabama are fortunate to have a member of 
their State's congressional delegation serve as the highest 
ranking Republican on the Financial Services Committee.
    This joint subcommittee hearing will examine issues that 
came to light in the National Flood Insurance Program after 
Hurricanes Katrina and Rita.
    Just last week, our Management Subcommittee held a field 
hearing in the storm-ravaged area of Mississippi's Gulf Coast. 
We saw firsthand some of the extent of devastation that was 
caused by Hurricane Katrina.
    Almost 22 months after Hurricane Katrina, many of the 
damaged homes remain gutted because of disputes over insurance 
coverage, and many lots remain vacant because folks can't get 
affordable insurance to rebuild.
    In our meetings with State and local officials, we heard 
about some of the challenges folks along the Gulf Coast are 
facing within insurance claims.
    The insurance department in my home State of Alabama 
learned a number of lessons after Hurricane Ivan in 2004. 
Therefore, after Hurricane Katrina struck, the department set 
up operations at each of the FEMA disaster recovery centers and 
sent staff to shelters throughout the State.
    One of the main issues today affecting insurance coverage 
is whether damage to a private home was caused by wind or 
water. Homeowners insurance generally covers losses from wind 
and wind-driven rain, but not from flooding or flood-driven 
water.
    The Federal Government underwrites flood insurance through 
the National Flood Insurance Program. One of the problems we 
will hear about today is how the flood insurance program is 
seriously underfunded. Currently, the program is borrowing 
several billion dollars to cover losses from Hurricane Katrina 
that are estimated to be around $25 billion.
    Another problem is how gaps occur in the homeowners 
policies that result in lack of insurance coverage when damage 
occurs and problems exist in how the National Flood Insurance 
Program interacts with States.
    We look forward to hearing from our witnesses today about 
these and other problems that have arisen in the aftermath of 
the hurricanes in 2005, and what steps can be taken to fix 
them.
    Thank you, Chairman Watt, and I yield back.
    Chairman Watt. I thank the gentleman.
    I now recognize Representative Wexler from Florida for 5 
minutes.
    Mr. Wexler. Thank you, Mr. Chairman. I won't take the full 
5 minutes.
    I just want to thank you, Mr. Chairman, for calling this 
hearing.
    Mr. Carney talked about an insurance meltdown, and while 
many States have their extraordinary stories, Florida has been 
struggling with the devastating consequences of particularly 
Hurricanes Katrina and Rita, and what this struggle and the 
ensuing insurance meltdown has established is that there is an 
essential role for the Federal Government to play.
    Congressman Klein, Congressman Mahoney, and I are working 
together with others in the Florida delegation to follow what 
our State legislature did, which was to eliminate certain 
things like cherry-picking and to undo some of the rate 
increases that happened after Katrina and Rita, but what it 
showed was that the relief to Floridians was fairly limited, 
and the logical next step is for there to be a comprehensive 
national catastrophic insurance fund that is created, which 
increases the capital available to the private insurance 
market, which caps the liability of insurance companies in the 
context of a national disaster with an absolute requirement 
that it be homeowners that benefit from the changes and the 
reforms, and that it not simply be an opportunity for the 
insurance companies to gain more profits.
    Mr. Chairman, I again congratulate you for holding this 
hearing, and for those of us in Florida who have watched the 
insurance meltdown and it's creating all sorts of negative 
economic ramifications in the context of real estate and so 
forth, we implore you and the rest of this committee to 
urgently consider a national catastrophic insurance fund.
    Thank you very much.
    Chairman Watt. I thank the gentleman for his opening 
statement. I now recognize for 5 minutes the gentleman from 
Alabama--who has already been raved about by his colleague from 
Alabama, and is no doubt basking in that raving--Mr. Bachus, 
the ranking member of the full Financial Services Committee.
    Mr. Bachus. Thank you, Mr. Chairman. I want to commend you 
and Mr. Carney for convening this hearing, and I also want to 
recognize Ranking Members Miller and Rogers for the hearings 
they have held and for the bipartisan concern that the victims 
of these hurricanes are being treated fairly when their claims 
are being adjudicated by the insurance companies.
    Our focus after the hurricanes--Katrina, Rita, and Wilma--
when we really saw a record number of losses, $60 billion in 
losses, our first priority was trying to get immediate relief 
to the victims, and this committee tried to act post-haste in 
that regard, and we passed several pieces of legislation.
    We also acted to commission a report by GAO to determine 
whether insurance claims and insurance adjusters were being 
properly regulated and overseen as they adjudicated these 
claims, and to also make recommendations for strengthening 
consumer protections with regard to future natural disasters 
when we begin to hear some disturbing reports about how 
citizens were being treated and their claims being handled.
    Congress also enacted legislation last year directing the 
Department of Homeland Security Inspector General to conduct a 
similar inquiry of Katrina-related flood claims as a parallel 
investigation to our GAO investigation, and today's hearing, as 
the chairman said, was meant to focus on the preliminary 
findings of those two investigations.
    These initial reports that we've received from both GAO and 
Homeland Security Inspector General are troubling on a number 
of levels.
    While they say they haven't discerned any pattern of abuse 
or illegal activities, it appears that neither they nor the 
State regulators have the information necessary to make this 
determination with any confidence.
    In fact, as late as our February oversight hearing on this 
matter, we were assured that the quality oversight had not been 
compromised, but the reports today call that into question.
    Following any disaster, the government and private sector 
must work together to adjust claims and remit compensation. 
This coordination is important to ensure that consumers are 
fully compensated and not subject to competing claims analysis 
that can potentially be doubly adverse and result in no payment 
or unfair payment.
    But coordination of claims adjustment can also create 
potential conflicts that must be carefully supervised. Members 
have heard allegations that entities may have improperly 
shifted costs or charged higher reimbursement rates to the 
Federal Government, and thus to the taxpayers. We expect and 
want companies to earn a profit, but not by shifting costs 
illegally to taxpayers.
    With tens of thousands of claims being processed, mistakes 
are inevitable, but if our investigations determine that 
there's been a pattern of misbehavior, conscious wrongful 
behavior, or intent to defraud, the offenders must be held 
accountable and their behaviors corrected.
    Let me conclude by thanking our witnesses for being here 
today and for their willingness to provide additional 
information and insight.
    Chairman Watt, I particularly look forward to working with 
you in a balanced, bipartisan manner, and with the chairman and 
ranking member of Homeland Security, as well as Mr. Miller, as 
we continue our congressional followup to ensure that all 
parties, including victims and taxpayers, have been and will be 
treated fairly in the future.
    Chairman Watt. I thank the gentleman for his statement, and 
I am pleased to ask unanimous consent that members who do not 
serve on either the Financial Services Committee or the 
Homeland Security Committee be allowed to sit on the dais and 
join us for this hearing.
    Without objection, it is so ordered.
    And I'm pleased to welcome two members from the Gulf region 
and ask them to give us opening statements, also.
    I will now recognize the gentleman from Mississippi, Mr. 
Gene Taylor, for 5 minutes.
    Mr. Taylor. Thank you, Mr. Chairman, for your extraordinary 
courtesy.
    Mr. Chairman, in light of today's hearing, I would hope 
several things that have come out both in the South Mississippi 
Sun Herald and the Times Picayune articles that have been 
published as recently as today call into mind apparently the 
widespread misuse of the National Flood Insurance Program.
    If you were to read the Sun Herald on a daily basis, you 
would hear horror stories of how individuals have been ruled in 
court to have been cheated out of their homeowners policies.
    If you were to read the Times Picayune, it leads to a 
slightly similar and slightly different conclusion, that in the 
course of telling individuals that your plan isn't going to 
pay, that it's all flood, that the taxpayers have been stuck 
with the tab for claims that should have been paid by the 
private sector.
    Mr. Chairman, in light of today's article in the Times 
Picayune, I would ask that this committee subpoena records of a 
September 7, 2005, meeting between the Administrator of the 
flood program, David Maurstad, and approximately 300 insurance 
agents, in which he outlined the National Flood Insurance 
Program's attitude towards the whole wind versus water issue, 
because based on something that Mr. Maurstad said in this room, 
where he said, ``I instructed them whenever there was wind and 
water to pay the flood claim in full,'' I'm not sure he has the 
legal authority to do that.
    The way I read the United States Code, it says, and I'm 
reading 44 CFR 62.23:
    ``The entire responsibility for providing a proper 
adjustment of combined wind and water claims and flood alone 
claims is the responsibility of the Write-Your-Own company, 
which is a private sector company, which has been hired to sell 
the policy and adjudicate the claim.''
    It is further complicated by a memo to the State Farm 
Insurance Company dated September 13, 2005, and I quote, where 
they say:
    ``Where wind acts concurrently with flooding to cause 
damage to the insured property, coverage for the loss exists 
only under flood coverage.''
    So on one hand, the United States Code gives them the 
responsibility to sell the policy and adjudicate the claim, and 
yet a State Farm memo to its agents tells them that whenever 
there's wind and water, blame it all on the water.
    So that person who had a homeowners policy, they suddenly 
were not going to get paid on that homeowners policy.
    But for individuals or taxpayers who don't live in the 
affected area, suddenly we see a circumstance where we feel 
like the Federal Government has been billed for claims that 
should have been paid by the private sector.
    I would also like to enter for the record a series of 
articles from the Times Picayune where it spells out that homes 
that had zero flood damage still billed the National Flood 
Insurance Program $80,000, $100,000, $150,000, whatever the 
private sector felt like they could stick the taxpayers with.
    Again, this leads to a series of troubling situations in 
which some attorneys in the Louisiana area have filed suit just 
last week under the Fraudulent Claims Act, claiming that 
possibly billions of dollars of claims that should have been 
paid by the private sector are being paid for by the National 
Flood Insurance Program.
    Mr. Chairman, as a representative of the coastal area, I am 
pleased that I didn't have a single complaint from individual 
homeowners who felt like their flood insurance program wasn't 
fair with them. I think that's a good thing.
    On the flip side, I've had thousands of complaints from 
homeowners who said, ``I built my house the way they told me 
to, I paid my premium, and when the day came to file my 
homeowners claim, I was told that because I couldn't prove 
whether the wind got there first or the water got there first, 
that I would be receiving nothing on my homeowners policy.''
    In fact, one of the more interesting cases involves a 
doctor who lives 100 yards from me, who for years was an 
advocate of tort reform, who is now on a commercial calling for 
insurance reform, after his almost $900,000 policy was not paid 
by State Farm.
    So Mr. Chairman, I think there are some very interesting 
questions that involve individuals and their policies, that 
involve Americans collectively, and certainly something that, 
on behalf of the 52 percent of all Americans who live in a 
coastal community, who if it hasn't happened to them yet, could 
certainly happen to them next. These are the sort of questions 
that I would hope this committee and other committees in 
Congress can get an answer to.
    Thank you very much for letting me participate.
    Chairman Watt. I thank the gentleman for his opening 
statement, and I've been reminded that my unanimous consent 
request was less than articulate, which is not unusual, so let 
me state it again.
    Let me ask unanimous consent that, in addition to being 
allowed to sit on the dais, members, including Mr. Taylor and 
Mr. Jindal, who may not be members of either of the 
subcommittees, be allowed to make opening statements to the 
extent that the timeframe allows that to happen, and to be able 
to ask the witnesses questions at the end of the committee 
process.
    Hearing no objection, I will now recognize Mr. Jindal from 
Louisiana for 5 minutes, hopefully the last opening statement.
    Mr. Jindal. Thank you, Mr. Chairman.
    I also want to thank the ranking members for allowing me to 
participate today and for having this hearing.
    It has been nearly 2 years since Hurricanes Katrina and 
Rita devastated the Gulf Coast, including large areas of my 
home State of Louisiana.
    We now know that Katrina was the single most significant 
natural or manmade disaster to affect our country. The combined 
effect of those 2005 storms--Katrina, Rita, and Wilma--caused 
nearly $60 billion in losses.
    Over half of our country's population now lives along the 
coast in 673 counties and parishes. In areas such as these, 
many residents are required to purchase at least two insurance 
policies--the required flood insurance, in addition to a 
regular homeowners insurance policy that offers wind coverage.
    As most of us living in coastal areas know well, the 
National Flood Insurance Act allows homeowners to purchase up 
to $250,000 of NFIP insurance coverage for residents, an 
additional $100,000 for personal property. Exclusions under the 
flood policy include damages caused by wind or a windstorm.
    While FEMA is charged with management and oversight of the 
National Flood Insurance Program, it is our brand name 
insurance companies that sell and service the vast majority of 
these flood policies. These companies get premiums from selling 
the insurance, but they're not responsible for actually paying 
out claims.
    Taxpayers like you and I collectively, the citizens, the 
taxpayers of our Nation are responsible for paying flood claims 
filed by NFIP policyholders.
    As it turns out, the amount each insurance company receives 
for selling a flood policy varies by company.
    Each is currently, ``reimbursed''--that's the terminology 
the NFIP uses--at a basic rate of 30.8 percent for the expenses 
of selling, working with the NFIP to issue policies and settle 
claims.
    There are bonus percentages available in 1 percent 
increments for marketing and growth.
    Let me underscore what I've just said. Taxpayers, through 
the United States Treasury, are responsible for paying flood 
claims. That's an important point in light of the following.
    In 2006, after the worst hurricane season ever recorded, 
insurance companies, even after all those damages, continued to 
have a very profitable year.
    We're here in part to find out whether the American 
taxpayer improperly picked up the tab for insurance claims that 
should have been paid by these companies.
    We'll hear from our witnesses from the GAO and others, 
we'll hear about a potential weakness in the way that our flood 
insurance program is administered.
    For example, a property and casualty insurer is able to 
insure a single property for both wind and flood damage.
    Potential conflict of interest can arise when the insurer, 
who has a financial interest in minimizing claims paid by the 
company, also performs a claims analysis on behalf of the NFIP.
    In other words, a single company can determine and 
apportion the damages caused by the wind policy that it insures 
along with those caused by flooding, which is insured by the 
NFIP and paid for by the Federal Treasury.
    In the aftermath of an event as large as Katrina, it was 
certainly difficult at times to determine whether the source of 
damage was either wind destroyed the top of the roof and 
allowed a property to flood, or if the damage was caused by 
rising floodwaters and failed levees.
    Moreover, the NFIP does not collect the information it 
needs to help evaluate whether it has paid only what it is 
obligated under the flood policy.
    While we appreciate that after those hurricanes, the NFIP 
approved expedited claims processing to make sure that 
homeowners were not prevented from rebuilding by red tape, we 
must ensure, we must correct the fact that the NFIP's normal 
claims processing activities did not incorporate a means to 
systematically collect information on wind versus flood-related 
damages.
    As we discover more about this crack in the system by which 
flood insurance is administered, we must have the strongest 
safeguards to prevent insurers from deliberately categorizing 
wind as water damage, therefore allowing them to potentially 
shift costs to the Federal Government without any oversight.
    I certainly hope, Mr. Chairman, as we have these hearings, 
we'll also have the chance to discuss in a future hearing a 
bill that Mr. Taylor and I have offered, H.R. 920, the Multiple 
Peril Insurance Act. That bill would allow policyholders to get 
their wind and flood coverage combined, therefore avoiding the 
fight between the source of wind and flood coverage.
    I also want to echo the comment of my colleague from 
Florida calling for a hearing on national reinsurance, which I 
think is also called for.
    Mr. Chairman, again, I thank you for allowing me to 
participate, and I thank you for having this hearing, to make 
sure we're protecting not only policyholders, but also 
taxpayers.
    Chairman Watt. I thank you for being here.
    It has been called to my attention that Mr. Jindal is a 
member of the Homeland Security Committee, so I misstated that, 
and I thank him for being here.
    Without objection, all members' opening statements will be 
made a part of the record.
    Chairman Watt. Mr. Klein, did you want to make an opening 
statement?
    Mr. Klein. I do, yes.
    Chairman Watt. Okay. In that case, let me recognize Mr. 
Klein for 5 minutes.
    Mr. Klein. Thank you, Mr. Chairman, and thank you, chairs 
of both committees, for calling this meeting today.
    Those of us who live in States that have been hit by 
hurricanes over the last number of years also understand the 
history of the National Flood Insurance Program, because it's 
something that impacts people all over the United States.
    And one of the original reasons for it was that the 
insurance industry was unwilling to, based on their view of the 
risk, underwrite that risk at that time, and because the 
capacity was too large, among other reasons, and that's how the 
plan got to its place right now.
    I think there's broad recognition that there needs to be 
updating of mapping and technology to make it more efficient, 
but I think one of the subjects we're going to hear about a 
little more today is the efficiencies of how it administered 
the claims and how that operates vis-a-vis the private 
insurance that some of the folks in the areas that were 
impacted had.
    The problem we saw in Florida was very similar, and I won't 
rehash what was already discussed.
    But suffice it to say what I believe is going on is that 
there is a narrowing of responsibility of the private insurance 
side of things.
    Insurance is a contract. The private insurance contract is 
one between a homeowner and between the company, and it's 
obviously always subject to interpretation, but what we saw 
over the last few years in these major disasters where there 
was a wind versus water pointing of the fingers going both 
ways, it was something that everybody was trying to put the 
burden on someone else, which is obviously why we're having a 
serious problem in dealing with general insurance, homeowners 
and property and casualty insurance, as well.
    So I certainly look forward to the opportunity of figuring 
out through the testimony today what can be improved upon in 
the National Flood Insurance Program, whether or not the 
history over the last number of years is one in which there 
could be things done differently so that, on a going forward 
basis, the floodplain does what it's supposed to do.
    But I think this will hopefully also be helpful to us in 
understanding what is going on in the rest of the market of 
insurance so that we can put the proper burdens that are 
bargained for in an insurance contract on those that provide 
underwritten insurance.
    And to the extent that we see, whether it's natural 
disasters such as earthquakes, hurricanes, tornadoes, or any 
number of other non-flood types of insurance arrangements, that 
there needs to be fairness.
    Consumers should be prepared to pay a fair price that's 
actuarially based, but at the same time, insurance is a for-
profit business. We understand that. But it's not one in which 
they should be constantly looking for the other party or the 
homeowner, in many cases, to shoulder that burden.
    A bargain is a bargain, and we need to make sure that when 
that bargain is bargained for, it's held.
    So Mr. Chairman, thank you for doing this today. Hopefully, 
this will help us evaluate what we need to do in this area, as 
well as a national risk catastrophe arrangement.
    Chairman Watt. I thank the gentleman for his opening 
statement.
    I'm pleased now to introduce the witnesses who have joined 
us for today.
    First, Mr. Matt Jadacki, who is the Deputy Inspector 
General for the Office of Disaster Assistance Oversight for the 
U.S. Department of Homeland Security.
    The Office of Disaster Assistance Oversight is tasked with 
proactively implementing internal control reviews and contract 
audits to ensure that disaster assistance funds are being spent 
wisely, and Mr. Jadacki is also responsible for coordinating 
the audit activities of other Federal Inspectors General who 
have an oversight responsibility for the funds transferred to 
their respective Departments and Agencies by FEMA to assist in 
the disaster relief efforts.
    Prior to taking this position, Mr. Jadacki was the Chief 
Financial Officer and Chief Administrative Officer of the 
National Weather Service, a component of the National Oceanic 
and Atmospheric Administration. And before that, he was the 
acting CFO of FEMA, managing 11 branches with over 200 
employees.
    He holds a B.S. degree in business management from the 
University of Maryland at College Park, and we won't hold that 
against him, even though I'm a Carolina graduate.
    Our second witness today will be Ms. Orice M. Williams. She 
has spent 16 years in civil service at the Government 
Accountability Office. She is currently a Director in the GAO's 
Financial Markets and Community Investment team, and in this 
capacity, she is responsible for leading numerous teams that 
work on a variety of cost-cutting public policy issues in the 
financial services sector.
    Her portfolio of work is generally concentrated in 
securities and futures oversight, banking, insurance, and 
accounting policy, and she received an MBA with a concentration 
in finance from Virginia Tech in 1990, and a B.S. degree in 
business and finance from Virginia Commonwealth University in 
1988.
    Mr. Jadacki and Ms. Williams, we thank you both for being 
here. Without objection, your written statements will be made a 
part of the record, and each of you will be recognized for a 5-
minute summary of your testimony.
    There is a lighting system that's in front of you, and a 
yellow light will come on when you have a minute to go, and 
then a red light will come on, so just kind of wrap up at that 
point. We won't be too heavy handed about that, but be 
cognizant that the lighting system is alerting you to wrap up.
    Mr. Jadacki, you are recognized.

    STATEMENT OF MATT JADACKI, DEPUTY INSPECTOR GENERAL FOR 
DISASTER ASSISTANCE OVERSIGHT, OFFICE OF THE INSPECTOR GENERAL, 
              U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Jadacki. Thank you. Good afternoon, Chairman Watt, 
Chairman Carney, members of the subcommittee, and guests.
    As you may be aware, in the Department of Homeland Security 
2007 Appropriations Act, we, the Inspector General's Office of 
the Department of Homeland Security, were directed to 
investigate whether and to what extent insurance companies 
participating in the National Flood Insurance Program, referred 
to as Write-Your-Own companies, improperly attributed damages 
from Hurricane Katrina to flooding rather than to windstorms 
covered under homeowner policies or wind insurance pools.
    First, let me give you a little background on the Write-
Your-Own companies. Homeowner insurance policies typically 
cover wind, but not flood damage. Write-Your-Owns are private 
sector insurance companies authorized by the National Flood 
Insurance Program to sell insurance.
    The Write-Your-Own companies have no financial exposure 
when damage is caused by flood because the Federal Government, 
through the NFIP, reimburses the Write-Your-Owns for claims 
they pay.
    Although the NFIP does not have direct control over the 
Write-Your-Owns, the Write-Your-Owns agree each year to the 
terms and conditions with the Federal Emergency Management 
Agency on various compliance and business issues. This 
agreement provides, among other things, that the Write-Your-
Owns will comply with the written standards, procedures, and 
guidance issued by FEMA.
    We reviewed a number of claims files in three Mississippi 
counties, analyzed the legal opinions, reinspection reports, 
and the NFIP complaint files. We also spoke with officials from 
FEMA, Mississippi Insurance Association representatives, 
insurance adjustors, Write-Your-Own officials, and other 
experts.
    It is important to note that we did not have the same 
access to the Write-Your-Own records of wind claims as we did 
to the flood claims that are funded by the Government. The wind 
claims are likely placed to find indications that the Write-
Your-Owns may have attributed wind damage to flooding.
    We have, however, issued administrative subpoenas for those 
records. We will issue a final report after we have received 
and reviewed the Write-Your-Own records of wind claims.
    Storm surge flooding was the primary cause of damages 
sustained along the Mississippi coast, but high wind velocity 
before the surges and water also caused damage.
    The central question is whether the Write-Your-Own 
companies, in settling claims, may have improperly attributed 
damage caused by wind to flooding in order to avoid liability 
under the standard homeowners policy. The question is 
especially relevant in situations where the same Write-Your-Own 
held both the homeowner and flood policies for the insured 
property.
    To answer these questions, we analyzed flood claims, and we 
interviewed homeowners, flood adjustors, and representatives 
from insurance associations and Write-Your-Own companies. We 
discussed with FEMA officials, looked at quality controls, and 
we reviewed appeals and complaint files.
    Although nothing came to our attention from our work on 
solely the flood claims to indicate the Write-Your-Owns 
attributed wind damage to flooding, we cannot rule out the 
possibility that it occurred.
    Flood adjusters were professionals and based their 
determinations on the physical evidence they observed, however, 
there are several complicating factors that contributed to a 
perception that Write-Your-Owns may have attributed wind damage 
to flooding, such as difficulty in distinguishing wind and 
flood damage, especially when there was nothing left on the 
property except for a foundation, otherwise known as a slab.
    Language in homeowners insurance policies can exclude 
coverage if funding occurs concurrent with wind or other causes 
of damage. Adjusters are either working for the Write-Your-Own 
companies or for companies hired by Write-Your-Owns. This 
creates the perception of a conflict of interest and FEMA's 
oversight of Write-Your-Own companies is limited and needs 
improvement.
    FEMA needs to increase oversight over damage claims that 
involve both wind and water on the same structure. Our review 
of the flood claims indicated that payouts on flood claims were 
timely and complied with the NFIP terms. However, there is 
little evidence in the flood claim files to determine whether 
flood payouts were fair and equitable for damages caused by 
both wind and water affecting the same structure. In addition, 
FEMA did not maintain documentation indicating the total damage 
to a structure and how much was attributable to flood and wind, 
nor is it required by the National Flood Insurance Program.
    As a result, NFIP oversight focused primarily on whether 
the flood claim was correctly adjudicated, with little or no 
consideration for wind damage as a contributing factor. Under 
the current process, it is difficult to determine whether the 
NFIP paid a higher percentage or the entire damage claim 
involving both perils.
    We will be issuing an interim report in the next couple of 
weeks, and we will have recommendations for the FEMA 
Administrator.
    The first recommendation: require Write-Your-Own insurance 
companies to document and make available to the NFIP the 
rationale and methodology for calculating flood and wind damage 
when there's evidence that both perils contributed to the 
damage, and revise the NFIP claims adjustor manual to reflect 
these requirements.
    The second recommendation: expand the reinspection process 
to include review and determination that flood and wind damage 
on the same structure was settled in a fair and equitable 
manner to ensure that wind damage was not paid under the flood 
policy.
    Third: provide clear and concise guidance for adjusting 
total loss claims after catastrophic events when structures are 
completely destroyed by wind and water.
    As I stated earlier, we issued administrative subpoenas for 
the Write-Your-Own insurance company records, providing both 
wind and flood coverage.
    We plan to corroborate the documentation and assertions 
made in our review to determine whether and to what extent 
damages were improperly attributed to flooding rather than 
wind. We also plan to compare whether unit pricing for like 
materials paid under flood and wind claims were consistent and 
reasonable. We will issue our final report upon completion of 
our wind claim analysis.
    Chairman Watt, Chairman Carney, this concludes my prepared 
statement. I will be pleased to answer any questions you or 
other members of the subcommittee may have.
    [The prepared statement of Mr. Jadacki can be found on page 
40 of the appendix.]
    Chairman Watt. Thank you so much.
    Ms. Williams.

STATEMENT OF ORICE M. WILLIAMS, DIRECTOR, FINANCIAL MARKETS AND 
     COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Williams. Chairman Watt, Chairman Carney, and members 
of the subcommittees, I am pleased to be here this afternoon to 
discuss the National Flood Insurance Program, also known as 
NFIP, and FEMA's oversight of flood claims paid following the 
2005 hurricane season.
    As you well know, events such as hurricanes can pose 
particular challenges in determining damages caused by wind 
versus flooding.
    For the NFIP, this includes balancing its desire to make 
policyholders whole and ensuring that it pays for damages 
caused by flooding.
    Unlike past years, the 2005 hurricane season has placed 
increased scrutiny on the NFIP's internal controls and FEMA's 
oversight, given the more than $15 billion borrowed from 
Treasury to cover claims, and the likelihood that the NFIP will 
be unable to repay this debt.
    While our work in this area is ongoing, I would like to 
share a few preliminary observations.
    First, for properties experiencing both wind and flood 
damages, the NFIP did not consistently collect information that 
would enable it to determine, either at the time the NFIP claim 
was paid or later, whether the amount paid reflected only 
damages caused by flooding.
    Claims data collected from Write-Your-Own insurers, which 
are a network of property casualty insurance companies that 
sell and service flood policies on behalf of the NFIP, did not 
include information on total damages to the property from all 
perils, meaning they did not systematically report the 
existence of wind damage nor the amount of damage caused by 
wind when adjusting a flood claim, even when the Write-Your-Own 
insurer was also the wind insurer on the same property.
    Why, you ask. According to FEMA, claims paid by a Write-
Your-Own insurance company that do not involve flood insurance 
proceeds and the related data are not accessible by FEMA.
    Simply put, for hurricane damaged properties subjected to 
both high winds and flooding, the NFIP may not have all the 
information it needs to ensure that it's claims payments are 
limited to only flood damages. This is especially troublesome 
in cases where only foundations remained.
    Second, we found that this lack of wind data also limited 
the effectiveness of FEMA's quality assurance reinspection 
program, an important part of FEMA's oversight of the NFIP.
    Specifically, the FEMA quality reinspection program did not 
incorporate a means for collecting and analyzing both the flood 
and wind damage data together in a systematic way to determine 
how much wind and flooding contributed toward damages to a 
property.
    Without the ability to examine the damages caused by both 
wind and flooding, the reinspection program is limited in its 
usefulness as a tool to assess whether the NFIP paid only for 
losses caused by flooding.
    Before I conclude, I would also like to briefly discuss 
challenges we face obtaining key information and data from FEMA 
related to several ongoing engagements involving the NFIP.
    To date, we have faced extensive delays in obtaining 
requested documents and data from FEMA, which is impacting our 
ability to complete our work in a timely manner.
    Now, instead of program staff being able to provide 
requested information directly to us, it must be routed through 
a FEMA coordinator who shares it with general counsel and DHS 
reviewers before it can be sent to GAO.
    Given this elaborate review process, we have had to add 
several months to the length of our engagements, which is 
threatening our ability to provide timely information to our 
requestors and the Congress as it considers legislation that 
would directly impact the NFIP.
    In summary, we cannot assess whether the NFIP paid for 
claims that should have been paid by property-casualty insurers 
given the lack of information collected by the NFIP on wind-
related damages.
    Moreover, we found the existing oversight structure did not 
allow FEMA to determine whether certain claims paid were 
accurate.
    While we are making no recommendations today, we do 
anticipate recommendations in our final report to be issued 
later this year.
    This concludes my oral statement, and I would be happy to 
answer any questions that you may have.
    Thank you.
    [The prepared statement of Ms. Williams can be found on 
page 58 of the appendix.]
    Chairman Watt. Thank you, Ms. Williams. I thank both 
witnesses for their testimony, and I will recognize myself for 
5 minutes for questioning.
    Let me ask unanimous consent first to submit for the record 
an editorial from the Times Picayune dated June 10, 2007, and 
ask unanimous consent to submit for the record a copy of the 
complaint that was filed in United States of America ex rel 
Branch Consultants v. Allstate Insurance Company and a number 
of other insurance companies.
    Mr. Bachus. Mr. Chairman? Will members of the committees be 
supplied with a copy of--
    Chairman Watt. Yes, absolutely.
    Mr. Bachus. I have no objection.
    Chairman Watt. Without objection, these documents will be 
submitted for the record.
    Chairman Watt. The first question is one I want to ask both 
witnesses. I submitted for the record, under a unanimous 
consent request, the appropriations language that authorized 
your study and the letter from Mr. Oxley which authorized one 
of the studies. One of the concerns I have is whether you have 
pursued the studies as aggressively as those documents give you 
the authority to pursue them. It appeared to me that most of 
what was done had to do with the internal records of FEMA and 
the flood insurance program, with the exception of the 
administrative subpoenas that have been issued.
    The question I want to ask is, to what extent have you gone 
outside the flood insurance program's records to inquire about 
potential abuses of the program in this process?
    Mr. Jadacki?
    Mr. Jadacki. Okay. I mentioned before that the 
administrative subpoenas were issued because we did talk to 
different insurance companies to discuss their methodology, how 
they would determine if there were two perils involved, both 
flood and water, how would they make a determination of 
allocating the adjustment or the claims.
    When we asked for the files to corroborate what they said, 
we were told that we didn't have access to those, and also 
there's a legal opinion that FEMA put out that says that they 
do not have that.
    So we focused a lot of our work initially thinking we can 
get a lot of information out of the flood files, thinking there 
would be some documentation in the files that would indicate 
there was consideration of wind and other types of peril that 
occurred, but when we finished our work, it just wasn't there. 
You may see a box that was checked for flood or something like 
that.
    So we talked to a number of the insurance companies, I 
think 15 different insurance companies. We actually contacted 
35 of the insured, if they were willing to talk to us, to see 
if they were satisfied with their settlement or not.
    We talked to insurance industries, we did talk to some of 
the State folks, and we did talk to some of the other folks 
involved in the insurance industry.
    We tried to look at every bit of information that was out 
there, but we were unable to get our hands on the homeowners 
policies from the insurance companies.
    So we have what we need on the flood side. It's just that 
we need to corroborate with what they were saying, because in 
almost all cases, yes, we do pay, there is a methodology, 
there's some--there's a way of allocating those costs. We just 
haven't been able to corroborate that yet.
    Chairman Watt. Ms. Williams?
    Ms. Williams. Our experience was similar.
    We followed a similar process. We talked to the NAIC and 
State insurance commissioners, among others. We also collected 
from the NAIC the information that had been collected by the 
Gulf Coast States through a special call involving the 
property-casualty claims that had been paid.
    But we found that information was collected on an aggregate 
basis, and we weren't able to get to ZIP Code level information 
that would have helped us do any type of comparison.
    We also attempted to contact insurance companies and we 
found that the insurance companies were generally unwilling to 
meet with us or provide us information.
    Part of our larger study deals specifically with adjusters, 
including how the adjusters are overseen and regulated. We were 
able to collect that information from the States.
    But in terms of getting information from the insurance 
companies, such as how they actually apportion damages, we 
weren't able to get information such as adjuster manuals.
    Chairman Watt. Mr. Jadacki, on Page 3 of your written 
testimony, you indicate that you interviewed 20 flood adjusters 
who did some of the damage investigations for the properties, 
and these adjusters were not involved in any wind damage 
assessments, felt that they were not under pressure from the 
Write-Your-Own program to attribute wind damage to flooding.
    If I take the Times Picayune article and the complaint 
which I've submitted for the record, there seems to be a 
completely different picture being painted here.
    Have you had the opportunity to talk to any of the 
adjusters who are plaintiffs in the lawsuit which alleges 
massive pressure and misallocation to the flood insurance 
program?
    Mr. Jadacki. We just got a copy, I think the lawsuit was 
sealed until about a week or two ago, so we just got a copy of 
the lawsuit, as well as some of the addresses, and we will be 
pursuing those. We have already asked the NFIP for copies of 
those files to find out what's going on.
    Especially troubling is when it's alleged that there's no 
indication of any water being involved in some of those 
structures, and yet the claims were paid out, so it's part of 
our process of reviewing some of the information on the 
additional claims files. We'll probably also talk with the 
insurance companies about those files, too, and try to get to 
the bottom of that, also.
    Chairman Watt. Does the letter from former Chairman Oxley 
and the appropriations language give you sufficient authority 
in your opinion to get to the bottom of whether there was in 
fact an improper transfer of responsibility following the 
hurricanes?
    Mr. Jadacki. We can look at claims files and infer what 
happened, looking at the claims files, but it's trying to get, 
attempting to get information from the insurance companies 
about the other half of the equation, if there was damage, both 
wind and water, has been problematic. We have not been able to 
get that information.
    As I said, we've issued subpoenas for that information, and 
we've received a couple, but I haven't had a chance to analyze 
those yet.
    Chairman Watt. My time has expired, and I recognize the 
ranking member of the subcommittee, Mr. Miller, for 5 minutes.
    Mr. Miller. Mr. Jadacki, following up on that, we heard 
from Director David Maurstad earlier in the year, as FEMA 
Director, and we were very specific in what we were talking 
about, and he said that they had reviewed thousands of files, 
basically reinspected those files to see what was in them, to 
see if there was any pattern of abuse by Write-Your-Own 
companies. And he was very specific at that point in time that 
there was not. Now, have you had an opportunity to review those 
same files that he reinspected?
    Mr. Jadacki. Yes. We reviewed a number of reinspection 
files, and for the most part, a lot of the reinspection focuses 
on documentation--was the documentation in the file, were 
proofs of loss filed, were the insured there, some of those 
types of things.
    I don't think we found any cases--we found a couple of 
cases where some dollar amounts were disputed, but they were 
negligible amounts, a couple hundred dollars, and that was 
about it.
    But we found no cases where a reinspection, based on the 
reinspection report, an insurance company was challenged based 
on the payout, saying, based on our review, you should have 
paid wind, you shouldn't have paid water, we found none of 
that.
    Mr. Miller. Was there adequate information requested by the 
director of the insurance companies that was in those files to 
make a reasonable determination on whether the oversight was 
proper on the Write-Your-Own, or if it was improper? Did you--
    Mr. Jadacki. The inspection files focused solely on the 
flood payout.
    Was there a property here, looking at watermarks, was it 
correctly adjusted, again were the documents in the case, those 
types of things.
    We found no indications that it actually challenged, saying 
this appears to be a wind claim, why did you pay the flood 
claim? We came across none of those instances.
    Mr. Miller. Did you find any inconsistencies within his 
finding as far as what FEMA did when they reinspected the 
NFIP's claims? Were they adequately reviewed, the NFIP's 
claims, do you believe?
    Mr. Jadacki. I believe they were--they probably used the 
checklist approach, just looking at a number of different 
documents and what to look for in the file and whether, again, 
whether there was documentation in the file, there were some 
pictures, and those types of things, but again, I think it was 
more of an administrative review versus reviewing or 
challenging the adjudication process.
    Mr. Miller. Now, you're just in the process of collecting 
information. How far into that process do you believe you 
actually are at this point?
    Mr. Miller. Well, we've reviewed all the claims files from 
the flood insurance, so those files were readily available to 
us, because that's under the purview of the Department of 
Homeland Security, and, you know, we've looked at a lot of 
those files.
    And there are indications in there, in some cases, looking 
at pictures that a tree may have fallen on a house or a roof 
may have been damaged, but we know what the flood payment was, 
but there's literally nothing in some of the files that say, 
okay, in addition to the flood payment, there was a wind, 
something that was caused, damaged by the wind, whether it be a 
roof blowing off or a tree blowing on a roof, and those types 
of things. There's just very little evidence in the files that 
actually occurred.
    As I mentioned in my testimony, I think the adjusters did a 
real good job of adjusting the flood claims, but it remains to 
be seen about what type of job they did when they were actually 
allocating the losses between flood and wind, if they even did 
that.
    Mr. Miller. So looking at the flood issue, you're pretty 
much in agreement with what FEMA's conclusions were based on 
the work they did?
    Mr. Jadacki. Solely on the flood insurance.
    Mr. Miller. How do we, through the process you're 
undertaking, how do we ensure that Write-Your-Own insurance 
companies do not have the ability to defraud the NFIP when a 
structure endures wind and flooding at the same time?
    Is there going to be something you're doing that you're 
going to come back to us, and can you give us some kind of an 
idea when that conclusion is going to occur, how long the 
process is going to--
    Mr. Jadacki. We're going to issue an interim report 
hopefully in the next couple of weeks, and I mentioned in my 
opening remarks--
    Mr. Miller. In the next couple of weeks?
    Mr. Jadacki. In the next couple of weeks, an interim 
report, just based on the work on the flood insurance claims 
files, and then once we get the information from the insurance, 
we'll issue a final report sometime later on this summer.
    Mr. Miller. But as it applies to Write-Your-Own, to have--
we're looking for a complete report here--
    Mr. Jadacki. Right.
    Mr. Miller.--on not only flood but one on wind, and the 
Write-Your-Owns, we want--how long do you think it will take 
you to have that conclusion on Write-Your-Owns also?
    Mr. Jadacki. It depends when the insurance companies 
deliver the documents. The due date was June 8th, although we 
haven't received all of the documents, because they go through 
the mailing process at Homeland Security, and screening.
    It all depends on what's in those files, you know. If we 
get a little bit of information, it could be pretty quick. If 
there are a lot more questions we have to go back on, it may be 
a little bit longer than that.
    The reason we're issuing an interim report is that there 
are some issues that the NFIP needs to address immediately, and 
one of those issues is the fact that they need to consider if 
there's more than--if there's wind and water, they need to 
consider wind, at least put evidence in the file that both 
perils were considered and one wasn't excluded just because, 
you know, because of causation clause and those types of 
things. So we think there needs to be evidence in the files to 
indicate that, yes, other perils were considered.
    Mr. Miller. Will your report include aspects of existing 
NFIP claims adjustment procedures? Should we be revisiting 
those to ensure that the conflict of interest would be 
eliminated in the future, and will you give us some kind of an 
overview on how that might take place?
    Mr. Jadacki. I think in the final report we will be 
addressing that. In the interim report, I don't think we can 
address it yet, because we don't know until we look at the wind 
files, the homeowner files that we've subpoenaed, just what 
happened with that, whether they were adjusted in a fair and 
equitable manner or whether a lot of the costs were in fact 
shifted to the National Flood Insurance Program, and the 
reasons why.
    Mr. Miller. Have you been receiving what you would consider 
a fair and reasonable response from Write-Your-Own insurance 
companies to get information?
    Mr. Jadacki. We had a number of phone calls, conference 
calls with them to explain what the process is. They all 
assured us that they had methodologies, they all assured us 
that there were multiple perils, that they were all considered.
    However, we have not had an opportunity to corroborate--
    Mr. Miller. But you're going to?
    Mr. Jadacki. We are going to. Right.
    We asked for a series of items, claims files, information 
regarding engineering reports and modeling and some of those 
types of things when there are two types of damage, two causes 
of damage to a structure.
    Mr. Miller. It seems like they're going in the right 
direction, and based on the responses I received, it seems like 
you're going to do an accurate, complete overview of the 
process and give us recommendations if there is some failure in 
portions of it.
    Thank you very much, Mr. Chairman.
    Chairman Watt. Thank you.
    Mr. Carney is recognized for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman.
    Before I begin my questions, I want to address my good 
friend from Mississippi, Mr. Taylor's, concern about the 
September 7th meeting. I have directed my staff to investigate 
that already, and we are looking into that.
    Ms. Williams, in your testimony you quote a letter from 
FEMA in which they wrote that wind claims paid by Write-Your-
Own companies are, ``not accessible by FEMA and indeed do not 
need to be.''
    Ms. Williams. Yes.
    Mr. Carney. Can you explain what that means?
    In other words, what is FEMA's basis for claiming that the 
wind side of the adjustment process is completely irrelevant?
    Ms. Williams. Well, this is an example of our inability to 
get information from FEMA. We met with them last week and 
attempted to address this issue specifically. Until you get to 
the ``conversely,'' the message seems fairly straightforward, 
but the ``conversely'' really changes things.
    We tried to find out exactly how they are able to determine 
the flood damages without having access to anything else from 
the Write-Your-Own companies if there is wind involved. This is 
something that we're still trying to work through with FEMA to 
get an answer about how they're able to do this without getting 
all of the information.
    Mr. Carney. And so far, no luck?
    Ms. Williams. Correct.
    Mr. Carney. Now, this is a process you described, that they 
are going through multiple channels before they answer you on 
this?
    Ms. Williams. Yes.
    Mr. Carney. Okay.
    Mr. Jadacki, in your prepared statement, you said that, 
``Nothing came to our attention during our limited review to 
indicate that Write-Your-Owns attribute wind damage to 
flooding,'' but that you, ``cannot rule out the possibility 
that it occurred.''
    However, since you haven't seen any claim files for wind 
damage, is it true that you have not yet reviewed the documents 
to show whether there was damage attributed to flooding or not?
    Mr. Jadacki. That's correct, we have not--I mentioned 
towards the end of my testimony that we plan to corroborate. We 
have information from a structure, or a number of structures, 
that we reviewed, and we know what the flood claim payment was, 
okay, and there is some evidence, based on pictures and things 
like that, where, and also testimonial evidence, that the 
insurance companies said, ``Yes, we did pay some wind claims on 
that structure.''
    However, we can't corroborate that until we take a look at 
those files, so once we get the files in on those structures, 
we can match it up and say, okay, yes, there was some element 
of flood and there was an element of wind that was paid.
    The next step would be, was it fair and reasonable, based 
on the damages. If it's, you know, if the flood pays $200,000 
and the wind only comes up with $500, we're going to question 
those types of things. So those are the types of things we'll 
be looking at as we review our claims files for the wind 
damage.
    Mr. Carney. Okay. Thank you. No further questions.
    Chairman Watt. I thank the gentleman.
    Mr. Bachus is recognized for 5 minutes.
    Mr. Bachus. Is there a natural conflict of interest when 
you have a Write-Your-Own company or an insurance company 
adjuster that is employed by the insurance adjuster, adjusting 
both the flood claim and the wind claim, when how he adjusts 
and computes and pro-rates that damage can either benefit his 
company or work to their detriment? When he is adjusting for 
both the Government and the flood insurance program, and his 
own company, is that a natural conflict of interest?
    Ms. Williams. Our position is that there is definitely the 
potential for a conflict of interest when that happens.
    Mr. Bachus. Okay. Thank you.
    Mr. Jadacki. And I agree with that, too, especially if it's 
an adjuster who works for the insurance company versus a 
catastrophic adjuster who works for an independent adjusting 
firm. But then again, the independent adjusters are also paid 
by the insurance company, which is reimbursed by the Federal 
Emergency Management Agency, through the NFIP. So yes, there is 
an inherent conflict that's out there.
    Mr. Bachus. Okay.
    Now, your initial report, and I think both of you really 
dealt with this, indicates that there's a lack of coordination 
between FEMA and the Write-Your-Own companies, and that may 
have contributed to improper payment of claims by FEMA.
    There were actually wind claims which may have been the 
responsibility of the private sector. Is that what--I read your 
testimony to indicate that you at least have suspicion of that?
    Ms. Williams. About the oversight provided, the oversight 
of the Write-Your-Own companies by FEMA.
    Mr. Bachus. Is that really insufficient to ensure that 
doesn't happen, that costs aren't shifted?
    Ms. Williams. Yes, in some situations.
    Mr. Bachus. Okay. So if taxpayers have been asked to pay 
for non-flood-related damages, you really don't have the 
information, because of the lack of coordination, to know 
whether that happened or not?
    Ms. Williams. Correct. We also looked at reinspection files 
and we found that, while there was definitely the foresight 
that there was a possibility of having combination claims, the 
information in the claims files was collected incompletely.
    For example, in two-thirds of the files we reviewed, we 
found that a question about whether or not the damage was 
combination damage went unanswered, or there were other cases 
where there was an indication that there was flood damage but 
there were pictures in the file that indicated wind damage. So 
there were lots of questions raised in the file review. Even 
though there was an opportunity to indicate whether or not wind 
was involved, there was no information recorded..
    Mr. Bachus. Mr. Jadacki.
    Mr. Jadacki. I think one of the things that's absent from a 
flood insurance policy that's common practice in the insurance 
industry is a coordination clause. They use it in medical 
insurance, they use it in other types of insurance, where 
there's several insurance entities that provide insurance over 
another entity, there's a coordination clause, where they 
would--and a good example is that recently the insurance 
companies settled on the World Trade Center.
    So they're all talking about who is going to be paying 
what. You know, if they're all going to pay the same amount and 
they're going to, you know, get this big windfall, they all 
know.
    What is lacking in the National Flood Insurance Program is 
that they're operating in a vacuum. They're just looking at 
what the flood payment was for, and that's it, and they're not 
considering any other types of peril, whether they contributed 
or not. And once that flood payment is paid, they've met their 
contractual obligation, and that's it.
    I think a coordination clause would go a long way, that we 
have to consider other types of insurance and insurance 
payments out there when adjudicating a claim.
    Mr. Bachus. Let me ask you this. Congressman Taylor has 
proposed a multi-peril approach where both flood and wind are 
covered. If that's not done, are there going to be some natural 
gaps in coverage or questions every time you have a loss of a 
home, in a case where there's both a flood surge or wind?
    Mr. Jadacki. I believe under the current process, you're 
always going to have that, especially, you know, there's some 
cases where you have flooding but no wind, and other cases 
where you have wind but no flooding, but in this case, where 
you have extreme winds and extreme flooding, and in my written 
testimony, a lot of the homes on the Mississippi coast were 
subjected to hurricane-force winds, you know, for 4 or 5 hours 
sustained before--so the question is, you know, were these 
structures significantly damaged before the water came in, but, 
you know, looking at some of the claims files, it seems like 
water was the primary cause in a lot of these homes, and I 
would question that.
    Mr. Bachus. Could I have one more question, if the chairman 
will allow?
    Chairman Watt. Yes, sir.
    Mr. Bachus. In many cases, even from the TV coverage of the 
hurricanes, you saw cases where wind damage from a storm 
started to blow a house apart, and then the flood or the surge 
caused by the storm finished the job. In those cases, at least 
there have been reports that I've read, by the press and some 
homeowners, that insurers denied coverage for the wind damage, 
and they did that through their anti-concurrent causation 
provisions or clauses.
    Are these clauses--it obviously allows them to escape a 
claim on certain cases, but would you comment on that, either 
one of you? Did you look at those anti-concurrent clauses?
    Mr. Jadacki. Yes, we actually looked at the concurrent 
causation, the anti-concurrent causation, the proximate cause, 
the efficient proximate cause. There's all sorts of terminology 
that's floating around out there, no pun intended, regarding, 
you know, how they're settling these claims.
    I think some of the companies hid behind that anti-
concurrent causation clause by saying that it is flood, and 
that's going to be it, you're denied wind claims, and I think 
that's pretty prevalent. I think that's a subject of many 
lawsuits that are out there.
    Mr. Bachus. And you also saw evidence of that?
    Mr. Jadacki. We saw evidence of that, right.
    But again, we haven't looked at the wind claim files to see 
if, in fact, they were denied, or whether they did in fact--I 
think if you asked me a year ago, when a lot of the wind claims 
were being denied, then yes, I think it was probably prevalent. 
In the past year or so, a lot of the insurance companies have 
been stepping up to the plate and paying the insured for wind 
damage.
    Again, once we get the wind files, we'll be able to 
corroborate that, or say definitely that wasn't the case. But 
it is out there, and I think it is a way that the insurance 
companies can protect themselves from multi-perils by saying 
the clause is in place and we're only going to pay for flood, 
not wind.
    Mr. Bachus. Okay. Ms. Williams, would you like to comment 
on that, or add anything?
    Ms. Williams. My only comment is that we are looking at the 
gaps from having multiple policies, so that will be part of the 
final report, but ultimately, this issue is going to be 
resolved by the courts.
    Mr. Bachus. Thank you.
    Chairman Watt. The gentlelady from New York, Ms. Clarke, a 
member of the Homeland Security Committee, is recognized for 5 
minutes.
    Ms. Clarke. Thank you very much, Mr. Chairman. And I want 
to thank both Mr. Jadacki and Ms. Williams for coming and 
sharing your insights with us.
    Since 1968, millions of Americans have depended on the 
National Flood Insurance Program to help them resume normal 
lives after the tragedy of a disaster. However, Hurricane 
Katrina and Hurricane Rita exposed problems with the system 
that have greatly retarded the recovery of many families still 
attempting to regain their footing nearly 2 years after the 
disasters.
    It is my hope that these reports will bring much-needed 
change to the NFIP, including the way it conducts oversight, 
and the way that it coordinates private insurance issuers.
    I'd like to ask you, Mr. Jadacki, FEMA has told committee 
staff that even when overwhelming evidence comes out that a 
home was destroyed by wind, and thus should have been covered 
by private homeowners policies, it will not attempt to recover 
a Federal flood insurance payment made by the WYO company that 
adjusted the flood claim and that holds the wind policy.
    Do you agree with this policy, and can you see any reason 
why FEMA should not try to recoup this payment?
    Mr. Jadacki. I believe that FEMA, if there's evidence--I 
believe that if there's evidence of several different perils, 
then I think it should be correctly allocated among those 
perils.
    It's difficult, because people evacuate and nobody was 
there, it's difficult to determine, but based on some 
engineering reports reviewed, based on some of the file 
evidence that we've seen from flood files, I think 
determinations can be made.
    It may not be an exact science, but I think determinations 
can be made, and I think that what needs to happen is that the 
correct allocation between wind and water needs to be made.
    Ms. Clarke. And who would be ultimately responsible for 
making sure that is done?
    Mr. Jadacki. Well, it depends on who has the insurance.
    If the same Write-Your-Own company writes the flood 
insurance as well as the homeowner insurance, under the current 
process, it would be up to that insurance company to allocate 
that amount between flood and wind.
    If there is a different insurance company or the insured 
has taken a flood insurance program directly from the National 
Flood Insurance Program, which a small portion do, then that 
coordination clause I talked about earlier would have to come 
into effect where they have to actually sit down and get 
together and discuss what the correct allocation is going to 
be.
    Ms. Clarke. So you are in favor of a coordination clause?
    Mr. Jadacki. Absolutely.
    Ms. Clarke. Ms. Williams, I understand that GAO feels that 
FEMA does not reinspect a valid number of sample claims in 
conducting oversight. In your estimation, how short does FEMA 
fall, and does it have the resources to check adequate amounts 
to conduct the oversight?
    Ms. Williams. In terms of choosing the sample, FEMA's 
approach is to go in and pull certain files based on certain 
characteristics. GAO's recommendation is for FEMA to actually 
do a random sample so that they would be able to project the 
results to the universe. It's unclear if it would actually 
involve FEMA having to pull more files. It's just the 
methodology used to select the files to review.
    Ms. Clarke. And so are you suggesting that there is a much 
more effective and efficient way of going about doing this; is 
that your finding?
    Ms. Williams. GAO's position is that there is a more 
efficient way. I think what Katrina illustrated is that you are 
talking about a huge increase in the volume of claims that were 
actually processed, so if you are going to pull a random sample 
then, in years when you're dealing with a catastrophe like a 
Katrina, it would involve sampling a higher volume of claims. 
But yes, we do think a random sample would be more efficient.
    Ms. Clarke. Thank you very much, Mr. Chairman. Thank you, 
witnesses.
    Chairman Watt. I thank the gentlelady.
    The gentleman from Louisiana, Mr. Jindal, a member of the 
Homeland Security Committee.
    Mr. Jindal. Thank you, Mr. Chairman.
    I have two questions. I'll go ahead and ask both of them, 
to give Ms. Williams the chance to answer both.
    The first is that, immediately after Hurricane Katrina, the 
NFIP was, I think, appropriately lauded for trying to 
streamline its claims handling process so it could get claims 
checks in the hands of policyholders more quickly.
    This effort was greatly appreciated by policyholders 
throughout the Gulf Coast, who were desperate to rebuild. This 
process involved new procedures that allowed adjusters to rely 
on satellite photos to determine a property's flood damage.
    However, I don't think the process should have been 
streamlined at the expense of the integrity of the program or 
to jeopardize the taxpayers' interest.
    My first question is, in your opinion, is the adoption of 
the GAO's October 2005 recommendations that the NFIP select 
claims to be reinspected from a random sample of all closed 
claims, is that enough of a safeguard to allow the NFIP in the 
future to use an expedited claims process during another 
hurricane season if it becomes necessary?
    The second question is, and again I'll give you both of 
them, there have been several examples after the storms where 
the NFIP's lack of oversight allowed the insurance companies, 
or may have allowed the insurance companies to deny coverage to 
their own policyholders unless they could definitively prove 
the damage was caused by wind. One example, on the West Bank in 
Jefferson Parish, an insurance company paid $51,000 for 8 
inches of water inside the home. The flood estimate, however, 
included costs that probably weren't caused by flooding, such 
as $7,000 for roof damage, $18,000 for exterior finish, and 
$20,000 for framing. The same policyholder only got less than 
$6,000 for wind coverage.
    As I'm sure you're aware, the branch consultants, former 
insurance adjusters, have inspected, reinspected 150 properties 
with both wind and flood damage. They actually think this 
particular homeowner may have suffered $95,000 of wind damage.
    I have a lengthier question. I guess my bottom line is, has 
the GAO undertaken a study or developed or analyzed safeguards 
that could be used to prevent insurers from shifting what is 
appropriately wind damage and classifying it as water damage?
    I'll ask you to answer both of these questions in either 
order.
    Ms. Williams. Okay. In terms of sampling, is implementing 
our recommendation about sampling going to be enough, it will 
be a start.
    We are in the process of continuing to look at this issue 
and we do think that there are probably additional safeguards 
that will also need to be built into the program. Katrina 
really did change everything in terms of the level of internal 
controls needed and oversight required.
    Once the NFIP had to go to the Treasury to borrow the funds 
it borrowed, and given its unlikely ability to repay those, it 
elevates the level of oversight required. So we will be looking 
at this issue and we hope to have recommendations beyond 
sampling methodology.
    In terms of the second question, I think it ties into that. 
This is something that we're looking at, and we do expect to 
have recommendations in our final report.
    Mr. Jindal. In conclusion, I certainly want to applaud both 
witnesses. Thank you for your work.
    I mean, certainly I think we've covered a very important 
topic today about how do we safeguard taxpayers' funding, and I 
would encourage you to continue.
    We have to find the right balance. We don't want to see 
taxpayers' dollars wasted. At the same time, we want to make 
sure, God forbid, if there's another large catastrophe, we do 
have a way to expedite getting help to policyholders.
    Thank you. Thank you, Mr. Chairman.
    Chairman Watt. Thank you.
    The gentleman from Mississippi, Mr. Taylor, is recognized 
now, with the previously approved unanimous consent request, 
for 5 minutes.
    Mr. Taylor. Thank you, Mr. Chairman. I do want to thank our 
witnesses for being here.
    I am troubled, Mr. Jadacki, that your Agency took so long 
to start looking into this. I mean, by the second week of 
September, checks for hundreds of thousands of dollars were 
being drawn on the Treasury. The cumulative effect of that is 
in the billions of dollars. But to the best of my knowledge, by 
June of 2006, your Agency wasn't looking into whether this was 
handled properly.
    I, with the help of Chairman Oxley and Chairman Frank, was 
able to pass language through the House that said it ought to 
be looked into. By July of 2006, Senator Lott put an amendment 
on an appropriations bill for $3 million for this to be looked 
into. And quite frankly , I'm not so sure we have gotten our $3 
million worth.
    I would like to ask, have you taken the time to look at the 
meeting that occurred on September 7, 2005, where apparently 
Director Maurstad sat down with hundreds of representatives 
from the insurance industry and outlined how this was to have 
been handled, and included in that a statement where he says he 
had already been in touch with the heads of the major insurance 
agencies. Is there a written record of this meeting anywhere, 
and have you seen it?
    Mr. Jadacki. No, we have not seen a written record of that 
meeting. We've seen guidance that was issued around the same 
time by Dave Maurstad, but we haven't seen any record of that 
meeting.
    Mr. Taylor. The reason I ask this is, you know, there's a 
part of me that wonders if quite possibly Mr. Maurstad did not 
misspeak, and the reason that no one in Homeland Security was 
looking to see if we were paying bills we shouldn't have is 
because someone made a commitment, at the very top level of our 
Nation, that he shouldn't have made.
    The second thing--and again, I'm trying to be fair with 
you, because I think you've been fair. I did notice that you 
mentioned that you have questions about the Write-Your-Own and 
that you admitted that there were 4 hours, up to 4 and 5 hours 
of wind before the water ever got there, and I'm sure in your 
capacity you understand then that at the end of 4 hours of 
hurricane winds, if a single two-by-four was still standing on 
a house, as far as the homeowner policy was concerned, if a 
wave knocked down that last two-by-four, that becomes a 
concurrent causation which means they're not going to pay 
anything on the homeowner's policy. On the flip side, it means 
that our Nation paid everything, when we should have just been 
paying for a two-by-four.
    And so going back to 44 CFR 62.23, the entire 
responsibility for providing a proper adjustment for both 
combined wind and water claims and the flood alone claims is 
the responsibility of the national Write-Your-Own company.
    Going back to the CFR, I'm a bit confused that when you 
asked the companies to justify having the taxpayer pay the 
whole bill rather than the wind paying some of that, that they 
weren't willing to provide more evidence.
    That doesn't sound to me like a fair adjustment of the 
claim. It sounds to me like they're trying to hide something.
    And I would welcome your comments on that, because again, I 
do appreciate your looking into this. I think you're kind of 
late. Quite frankly, I will use my own slab as an example.
    Mr. Jadacki. Right.
    Mr. Taylor. By the time you started looking into this, most 
of the lots in South Mississippi had already been cleaned. Most 
of the evidence had been destroyed.
    I would have had a great deal more confidence that our 
Nation was doing a fair keeping of its own books if these 
investigations had been taking place when the snapped trees 
were still standing there, when partial houses were still 
there.
    I wonder how good an investigation you could have done?
    Mr. Jadacki. Right.
    Mr. Taylor. The last thing I'd like you to comment on is 
that I've noticed there are actually more employees of Computer 
Science Corporation working for the National Flood Insurance 
Program than national flood insurance employees.
    Did anyone ever look to see if Computer Science Corporation 
also has contracts with State Farm, Allstate, or Nationwide? 
Are there additional conflicts of interest on top of the ones 
that we already are aware of today?
    Mr. Jadacki. Let me start with, our focus initially after 
Hurricane Katrina was on FEMA and some of the problems that 
FEMA was having in the Gulf area.
    We focused mostly--and I'm not using it as an excuse, I'm 
just telling you where the initial focus of the IG was, being 
on the ground with the individual assistance program, the 
housing, some of the things that we all have read about, we all 
are aware of.
    We really didn't get any early indications that this was 
going on with the flood insurance program. We were aware of 
some of the issues that were going on with guidance going out 
to the different flood insurance programs.
    There was guidance that went out in September by FEMA that 
basically attributed or suggested that the storm surge was the 
primary cause of damage in the Gulf area, and I think based on 
that, based on a review of the flood claim files, that the 
insurance companies hung their hat on that, that guidance that 
was out there, and that the normal traditional type of 
adjudication procedures, going out, looking at, checking, you 
know, looking at various patterns on the ground, were ignored 
because the insurance companies had the option of looking at a 
picture from space, a satellite view, or based on square 
footage of a residence or a home or a structure, they can 
adjudicate the claim based on that.
    In some cases, the adjusters never even had to show up at a 
property, and were paid by FEMA, you know, depending on how 
they did it. So, you know, I think the door was opened when 
this guidance came out, saying it's storm surge, and that's 
going to be it.
    I think in a lot of cases, the wind never came into play, 
and I think a lot of the lawsuits that resulted questioned 
that, and I think because of that, a lot of these lawsuits are 
being settled. But I think that's what happened back early on.
    Mr. Taylor. I'm curious--if I may, Mr. Chairman.
    Chairman Watt. I ask unanimous consent for 3 additional 
minutes for the gentleman.
    Mr. Taylor. My memory is certainly not perfect, but I know 
that in the fall of 2005, additional funds had to be 
appropriated through emergency supplementals to keep the 
National Flood Insurance Program from issuing worthless checks.
    So people had to know that the claims, I mean, going to 
the, again, the first, second week of September of 2005, it was 
common knowledge throughout our Nation that an enormous number 
of claims were being filed on the Federal flood insurance 
program that were going to add up to billions of dollars.
    Again, I ask the question, didn't anyone in the Inspector 
General's office of Homeland Security, which has the overall 
responsibility for this, wasn't there anyone who was asking the 
question, ``Are we paying bills that we ought to be paying or 
are we getting stuck with bills that we shouldn't be paying?''
    I'll just use an example: If I were to sell a $150,000 boat 
to the Department of Homeland Security, I have to believe that 
somebody would come out and make sure that a boat was actually 
delivered. But the National Flood Insurance Program was writing 
$150,000, $200,000 checks on a daily basis--
    Mr. Jadacki. Right.
    Mr. Taylor.--that no one apparently was taking the time to 
see if it was a valid claim.
    And what I find particularly troubling, since our Nation 
has spent $3 million for your study, is that there are articles 
dated May 31st that say claims were paid where there was no 
flood damage, $95,000, in the Times Picayune; May 20th, where 
it says a family was paid--that Allstate filed a $135,000 claim 
on contents to a home when the family only asked for $38,000, 
so apparently they got $100,000 of taxpayer money that the 
family didn't even ask for.
    Another article from May 20th, which outlines in just one 
instance with one family where the private insurance company 
was paying 76 cents per square foot to have sheetrock replaced, 
flood insurance was billed $3.31. Private sector insurance was 
paying $23.48 for carpet to be replaced in the exact same home 
upstairs, where downstairs they were paying $28.43 where it was 
attributed to flood. Paint upstairs, where they said the wind 
did it, 80 cents a square foot. Downstairs, where they said the 
flood did it, $1.15.
    I mean, if the Times Picayune can find this, I have to 
believe that the Department of Homeland Security ought to be 
able to find this.
    Mr. Jadacki. Right. And that's one of the things, as I 
mentioned in my written testimony, that we will be looking at, 
prices for like kind types of things, things like drywall, 
things--replacement for carpet, and those types of things, to 
see if in fact that the flood insurance, as indicated in the 
newspaper articles, was paying 3 or 4 times more than what the 
private sector insurance companies would pay.
    Right now, we don't have access to that information, but 
once we get that, we're going to corroborate, because we have 
the pricing lists, in most cases, for the flood insurance 
claims that were paid, and if there's evidence of a wind claim 
payment, there should be a pricing list on that, too, and we'll 
be able to identify those discrepancies.
    We've also had several meetings with the FEMA folks, based 
on those articles, and forwarded it to them, and said, ``Please 
explain how this can happen,'' and we have yet to hear back 
from them about the explanation of that, the various pricing 
levels, and also the cases where there is no apparent flooding 
in New Orleans, but yet the structures received significant 
amounts of flood insurance damage.
    Mr. Taylor. Do you need any additional legal authority to 
conduct your study?
    Mr. Jadacki. We believe we really don't have oversight over 
the private sector insurance companies.
    If by law we can get that authority, that would certainly 
help our case, but I think it would help more if the National 
Flood Insurance Program, the authorities that they would have, 
which would require that if there are indications where there's 
joint payments, that there would be evidence in the flood file 
to show that. I think that would go a long way.
    Quite frankly, we were caught off guard when we reviewed a 
lot of claims filed, because we thought for sure there would be 
evidence in there, and basically, there's a box that says, 
``You got flooded and it's going to be a flood claim,'' and in 
very limited instances, unless you look at a picture, was there 
anything explaining that, yes, part of the structure is going 
to be paid through the flood insurance program and this part is 
going to be paid from the wind claims.
    We actually looked, we looked for roofs disappearing, we 
looked for contents that were paid on a second-story floor when 
there are 8 or 12 inches of, you know, water in there, but we 
just could not tell from the flood files what was being paid 
and whether it was fair and equitable based on both wind and 
water. It just wasn't there.
    Mr. Taylor. So under existing law, if State Farm says 
$200,000 worth of damage, water did it all--
    Mr. Jadacki. Right.
    Mr. Taylor.--you have no legal authority to question that, 
you just issue a check?
    Mr. Jadacki. That's the way it works. If there's evidence 
supporting the $200,000 that was all caused by flood, that's 
fine. That's the way the process works.
    But if there is another $150,000 of damage because of wind, 
there's no evidence right now in the flood files that would 
indicate that was the case, nor is there any evidence saying a 
$200,000 payment, $100,000 is attributable to flood, and 
$100,000 is going to be attributable to wind. There's nothing 
in the files that would indicate that.
    Mr. Taylor. Thank you, Mr. Chairman.
    Chairman Watt. I thank the gentleman.
    Let me just do a couple of things.
    First of all, I ask unanimous consent that the newspaper 
articles that you've made reference to be made a part of the 
record, and if you would make sure we get a copy of them, we'll 
put them in the record so that all of the members of the two 
subcommittees will have access to that information.
    Second, I would like to advise the gentleman that quite 
possibly at some point in the very near future, we'll be coming 
face-to-face as a committee with the same dilemma that the 
Inspector General is in now, because the committee, the 
subcommittee has made a request under its investigation 
authority for a number of documents, which request is to be 
complied with by June 14th, so you have about 2 or 3 more days 
to find out whether the private carriers will be willing to 
provide information to the committee about this, and then we'll 
make some assessment of what the consequences are if we don't 
get the information.
    So that might be giving the Inspector General more 
authority, it might be taking more authority ourselves. We'll 
have to assess that.
    But I want the gentleman to at least know that is coming 
right down the pike, because preliminarily, a number of the 
insurance companies have made some sounds about the prospect 
that they will object to providing certain information to the 
subcommittee that would allow us to make an evaluation. So 
we're trying to figure out where that will come out as of the 
14th of June.
    Now, with the ranking member's permission, let me just ask 
two additional questions.
    First of all, can we get some reasonable, your best 
estimates of when you believe your final reports will be out 
based on what you know now?
    I'm not trying to hold you to that, because I know that you 
have some obstacles that you're dealing with, but your best 
estimate that you're able to give at this moment, of when your 
final reports will be out.
    Ms. Williams and Mr. Jadacki.
    Ms. Williams. We're hoping October.
    Chairman Watt. Of 2008?
    Ms. Williams. Of this year.
    Chairman Watt. 2007?
    Ms. Williams. Yes, of 2007.
    Chairman Watt. Oh, okay. I didn't want to give you an extra 
year.
    Mr. Jadacki?
    Mr. Jadacki. Okay. We, like I mentioned earlier, we plan to 
issue an interim report in the next couple of weeks, just based 
on the work of the flood insurance program.
    I'll say within the next 30 to 60 days, we will probably 
get our final report out.
    The missing link is again getting the records from the 
insurance companies and matching them up. We've done tons of 
work in the flood area. We just need to corroborate some of the 
statements, some of the records, some of the file information 
that we got with the records from the insurance companies.
    Chairman Watt. And finally, from my perspective, I'll give 
the ranking member and any other members who want to ask one or 
two additional questions that opportunity, but will the scope 
of your report, if you find that there were improper 
allocations between flood insurance and private insurance, will 
the scope of your report detail those and provide suggestions 
about what recourse is available to FEMA and/or the other 
Departments of the Federal Government to redress those improper 
allocations?
    Ms. Williams. Our report will focus on the oversight 
component of it, because we don't have the information that the 
IG is going to be getting. We aren't going to be in a position 
to identify specific cases. That will most likely be left to 
the IG. So we will be looking at the broader oversight issue.
    Chairman Watt. Mr. Jadacki, I think the ball has been 
punted to you.
    Mr. Jadacki. That's fine. Thank you very much. If there are 
any indications that there were misallocations, we will 
certainly highlight those. If there are indications that it is 
as a result of a fraud or some sort of bigger scheme, we would 
have to probably consult with the Department of Justice, U.S. 
Attorney's Office, who would most likely be handling those 
cases.
    So there are certain things, as you all know, that are 
ongoing, you know, investigations. We may not report those 
things.
    It all depends on what we find in those files. Again, if 
it's just a simple misallocation or some formula that wasn't 
used correctly, yes, we'll probably talk about those types of 
things, and if we have to, we can talk in general terms, but 
certainly, yes, if we find any indications, we will be 
reporting those, because it is a concern of ours as a control 
problem, too.
    Chairman Watt. Does the ranking member have any additional 
questions?
    Mr. Miller. My comment to the IG on the part of it being a 
complete report, I'm concerned that you have an adequate amount 
of time to prepare a complete report rather than just being 
rapid in your response to us.
    I would rather see, if you find information that's coming 
to you that you think needs further investigation, that you 
just keep us abreast of that, and let us know what's going on--
I'm speaking for myself--so when you're through, we have 
something that we can actually look at and that we feel is 
complete and we can act upon.
    Chairman Watt. If the gentleman will yield just briefly, I 
would say exactly the same thing from the Chair's perspective.
    My question was not designed to put pressure on you to 
produce a speedy, incomplete report. It was just to get some 
estimate, or your best estimate at this point of when you 
projected that was coming. I fully concur with the ranking 
member that I would rather have a thorough, complete report 
than a quick, incomplete report.
    So I yield back to the gentleman.
    Mr. Miller. I'm just concerned that, you know, you're doing 
an investigation right now, and if information comes to you and 
becomes relevant, you might have to expand your investigation.
    I don't know. Maybe you'll get the information, it's 
adequate, and you can prepare it in a, you know, rapid amount 
of time, but I would just emphasize that I think we're both 
looking for something that's adequate and complete.
    I yield back.
    Chairman Watt. Does the gentlelady from New York wish to be 
recognized again?
    In that case, the Chair notes that some members may have 
additional questions for this panel which they may wish to 
submit in writing.
    Without objection, the hearing record will remain open for 
30 days for members to submit written questions to these 
witnesses and to place their responses in the record, and we 
would ask the witnesses to respond as expeditiously as possible 
if that occurs.
    I believe that completes the hearing, and consequently, 
this hearing is adjourned.
    [Whereupon, at 4:55 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             June 12, 2007


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