[Senate Hearing 113-483]
[From the U.S. Government Publishing Office]
S. Hrg. 113-483
THE FLOOD INSURANCE CLAIMS PROCESS IN COMMUNITIES AFTER SANDY: LESSONS
LEARNED AND POTENTIAL IMPROVEMENTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE NATIONAL FLOOD INSURANCE PROGRAM'S CLAIM PROCESS IN THE
AFTERMATH OF HURRICANE SANDY
__________
JULY 30, 2014
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
_______
U.S. GOVERNMENT PUBLISHING OFFICE
91-460 PDF WASHINGTON : 2015
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Dawn Ratliff, Chief Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Housing, Transportation, and Community Development
ROBERT MENENDEZ, New Jersey, Chairman
JERRY MORAN, Kansas, Ranking Republican Member
JACK REED, Rhode Island BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York PATRICK J. TOOMEY, Pennsylvania
SHERROD BROWN, Ohio MARK KIRK, Illinois
JEFF MERKLEY, Oregon TOM COBURN, Oklahoma
JOE MANCHIN III, West Virginia DEAN HELLER, Nevada
ELIZABETH WARREN, Massachusetts RICHARD C. SHELBY, Alabama
HEIDI HEITKAMP, North Dakota
William Ruder, Republican Subcommittee Staff Director
Jason Tuber, Legislative Assistant
(ii)
C O N T E N T S
----------
WEDNESDAY, JULY 30, 2014
Page
Opening statement of Chairman Menendez........................... 1
Opening statements, comments, or prepared statements of:
Senator Booker............................................... 2
Prepared statement....................................... 32
Senator Schumer
Prepared statement....................................... 32
WITNESSES
Craig Fugate, Administrator, Federal Emergency Management Agency,
Department of Homeland Security................................ 4
Prepared statement........................................... 33
Responses to written questions of:
Senator Reed............................................. 44
Senator Schumer.......................................... 47
Senator Warren........................................... 48
Donald Griffin, Vice President, Property Casualty Insurers
Association of America......................................... 23
Prepared statement........................................... 38
Maryann Flanigan, Supervising Attorney, New Jersey Legal
Services, Hurricane Sandy Legal Assistance Project............. 25
Prepared statement........................................... 41
(iii)
THE FLOOD INSURANCE CLAIMS PROCESS IN COMMUNITIES AFTER SANDY: LESSONS
LEARNED AND POTENTIAL IMPROVEMENTS
----------
WEDNESDAY, JULY 30, 2014
U.S. Senate,
Subcommittee on Housing, Transportation, and Community
Development
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 9:59 a.m., in room 538, Dirksen
Senate Office Building, Senator Robert Menendez, Chairman of
the Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ
Chairman Menendez. This hearing will come to order.
We have two panels today to examine the National Flood
Insurance Program's claim process, particularly how it was
administered in the aftermath of Superstorm Sandy. This is in
response to the hundreds of letters, emails and phone calls I
have received from desperate homeowners looking for help.
And so let me thank our first panelist this morning when he
gets here, FEMA Administrator Fugate, for being here to shed
some light on what we must do to fix the process and make sure
that it is a fair process with clear guidelines for homeowners
in my State and around the country.
Through their circumstances, and though their circumstances
after Sandy may have varied, their stories follow a common
thread. They did the responsible thing. They have faithfully
paid for flood insurance for 10, 20, or even 30 years. They
never had a claim until Sandy devastated their houses, only to
find out it was not enough.
They assumed, since they had insurance, that they would be
made whole and have the resources necessary to rebuild. They
survived the wind and the rain and storm surge only to face
another nightmare--a flood insurance claim process that
threatened to take what the storm had not.
One of my constituents, Doug Quinn, who is with us here
today, who I had the pleasure of meeting on Monday, said that
when he contacted my office he said, ``I was in my home the
night the flood waters rushed in. I waded out through waist-
deep water at midnight while electrical transformers exploded
and houses burned down. That was the easy part. It is the year
and a half since then that has been the tragedy.''
Doug had maximum coverage of $250,000 and received
estimates of up to $254,000 in damages, but he only received
$90,000, a third of what he needed to rebuild.
And Doug is not alone. The fact is the entire claims
process, from the initial filing to the way claims are
processed to the appeals process, is tilted against homeowners
like Doug.
Another constituent of mine, Steve Picciano, from Ortley
Beach, appealed his settlement to FEMA, but after repeatedly
inquiring about its status FEMA finally acknowledged it sent a
response to the wrong address.
A couple from Keansburg was only able to recover $21,000
even after a public adjuster confirmed there was more than 4
times that amount, or $87,000, in damage. When the couple tried
to challenge the settlement, they were repeatedly told their
case was closed.
Underpayments and overly complex requirements; the
runaround from FEMA on the appeals process; arbitrary,
inflexible deadlines; overuse of highly technical exemptions--
all highlight a program that in my view clearly needs
improvement.
While FEMA, of course, needs to prevent taxpayers and
prevent waste, fraud, and abuse, it is also necessary to
protect policyholders and ensure that they are treated fairly.
The question is how we strike the proper balance between
protecting taxpayers against overpayments while not
systemically shortchanging hardworking families who played by
the rules.
I think we should agree--and I would hope Administrator
Fugate would agree--that the process needs to be made fair.
Homeowners want to know what common-sense reforms FEMA can make
to stop focusing disproportionately on overpayment while
neglecting to protect qualified homeowners from being low-
balled and unable to rebuild.
We need answers, and I hope this hearing will help us get
there. I hope our witnesses will address the issue of
homeowners in New Jersey, and I am sure elsewhere, who have had
to threaten litigation just to get their insurance company to
make them whole in time of disaster after they have paid their
premiums and played by the rules.
Affordable, accessible and robust flood insurance is
critical to the prosperity and economic future of my State and
every State that suffers the effects of a storm like Sandy. The
stakes are simply too high to get it wrong, and I look forward
to hearing from the Administrator and from our second panel on
how we can absolutely be certain we get it right.
I understand Senator Booker has joined us and would like to
make a statement.
I have already asked our colleague from Louisiana; at this
point, he does not want to make a statement. So that is why I
have turned to you.
STATEMENT OF SENATOR CORY A. BOOKER
Senator Booker. Well, I want to first and foremost thank
the Chairman, who is also my senior Senator. He has been--since
the time I was a mayor when Sandy hit--simply heroic, frankly,
in your attention to the needs of our citizens in so many
hundreds of thousands that were affected by Superstorm Sandy.
Your outstanding and persistent work is something I greatly
appreciate now as your colleague. I am honored to be a partner
with you, bringing attention to this important issue.
I do want to thank Senator Vitter as well, someone that has
a deep and personal experience with this issue and had to
struggle with it and fight with it during the aftermath of
Katrina, and I appreciate his leadership as well, as the
example he is modeling for myself in my early days here in the
U.S. Senate.
I want to thank, say thanks to, Administrator Fugate for
being here. It is good to see him, and I welcome him.
And, a special welcome to Ms. Flanigan. I want to thank her
for her work on the Hurricane Sandy legal Assistance Project.
As Chairman Menendez and one of my other colleagues,
Senator Schumer, know well, the effects of Superstorm Sandy,
though the storm may have come and gone, the effects continue
to be felt in grievous manners every single day by people all
across the State of New Jersey.
The stories, as Senator Menendez pointed out, are
countless. They continue to come to our office--stories of
families who experienced the pain of the storm but now are
going through extraordinarily painful, difficult, challenging
processes. They were uprooted, but now the challenges they face
and continue to face are simply unimaginable and outside of the
glare of the media.
I very much appreciate the Chairman, who has used this
Subcommittee to examine how the insurance claim process has
proceeded after Superstorm Sandy.
The way it has proceeded is unacceptable. It is not what
Americans should have to endure. When you have your homes
destroyed, when you have your lives leveled, your possessions
rotted by water and wind, you should have systems in place that
empower you through this process and work to make you whole
again, not systems that, as some constituents have told us, put
you in a constant fight just to get what you deserve, make you
have to spend upwards of a full-time job just doing what should
be a matter of course and with greater ease.
In a time that we should be serving, we are now seeing our
constituents, instead, suffer. Thousands upon thousands--this
is not an exception to the rule, but thousands upon thousands
of homeowners have been stymied at every step of the claims
process, from experiencing filing problems to struggling
through appeals processes, to finding their final insurance
payments being far below what they expected or believe they
deserve.
I have heard challenges like Senator Menendez's that
continue to come in our offices, by phone or dropping in, in
our mobile office hours, people seeking us out for help--
challenges from people like Colleen and Brian Hennen. The
Hennens have had to take their insurance company to court to
dispute hundreds of thousands of dollars of damages after their
Monmouth County home was destroyed and condemned after Sandy,
expending themselves the legal resources, the energy and the
time and the emotional challenges of just fighting for what
they justly deserve.
I have heard from a small business owner in Long Beach
Island, whose shop took on two feet of water and has had to
struggle to haggle, to fight with claims adjusters, while
waiting patiently for months and at times over a year to be
compensated in a piecemeal manner, with only portions of their
claims satisfied.
Like Senator Menendez, we regularly hear from New Jerseyans
who have been paying insurance premiums for years and years and
years--thousands and thousands of dollars of paying insurance
premiums. But now, when they need their insurance company the
most, they are left out in the cold.
These New Jerseyans are struggling to pay their mortgages,
to rebuild their homes, all while trying to work regular
business hours, but at the same time battling their insurance
providers for funds to which they are entitled.
These stories, as Senator Menendez knows, go on and on and
on.
Now it is New Jersey. But when the next storm hits, when
the next tornado comes, when the next flood waters rise, what
will other Americans experience if we do not get this system
right and make it fair and make it honorable, reflecting of the
best spirit of America?
So I want to thank you again, our witnesses, and I hope
this hearing helps shine lights on the needed reforms to ensure
that policyholders--to ensure that Americans--receive the
payments that they deserve when disaster strikes.
Thank you, Chairman.
Chairman Menendez. Thank you, Senator Booker. Thank you for
your advocacy. I could not have a better partner in trying to
help us in this fight.
And, thank you for joining us today.
If no other Member wishes to make a statement, our first
panelist today is Craig Fugate, the Administrator of the
Federal Emergency Management Administration.
Mr. Administrator, your full statement will be included in
the record, without objection. I would ask you to summarize it
in about 5 minutes, and then we will get into a Q&A.
STATEMENT OF CRAIG FUGATE, ADMINISTRATOR, FEDERAL EMERGENCY
MANAGEMENT AGENCY, DEPARTMENT OF HOMELAND SECURITY
Mr. Fugate. Thank you, Mr. Chairman, Senator Vitter,
Senator Booker.
Flood insurance, of all the programs I administer, is
probably one of the most complex and challenging. It is a
program that was originally created in 1968, not as a consumer
policy but as a policy to protect the lending institutions that
provided the funds to back the mortgages.
Over time, Congress has recognized that only providing
coverage for the structure itself did not meet the needs, so
you directed the flood insurance program to begin providing
insurance for contents.
But one of the key elements of this--and these are
decisions made prior to this Administration--was that the flood
insurance program would not be a replacement value program.
This is what most people are familiar with oftentimes in their
homeowner's policy, whether they have a fire, a tornado, where
their coverage is based upon replacement of losses.
The National Flood Insurance Program does not run that way.
It runs as what they call an actual cash value program. An
example: If I have a refrigerator that is perfectly fine and
working, but it is 10 years old at the time of a flood, the
replacement cost does not count. It is the depreciate value of
that at 10 years.
And so for many people who have actual cash value and are
not familiar with that, when they look at their policy, they
have paid for $100,000 worth of contents; they have $250,000 in
many cases, the maximum amount that we provide for the
mortgage.
But as an actual cash value, we are limited to only
reimbursing and paying out what the cash value was at the time.
And there are certain deductibles that are within that. As
far as with the primary coverage it is only to the building
itself, not to any of the outbuildings, decks or other things
that maybe another policy would cover.
And, again, this makes it rather challenging as a different
policy than people are familiar with. So that is part one.
Part two has been in the servicing of those claims. As
Senator Menendez points out, post-Katrina and other events, it
was looking at improper payments, both under and over, and
trying to reduce that percentage.
We do look at both overpayments and underpayments.
Underpayments--we do this through audits and reviews, where we
find that the payment that was made was not should have been
paid and should have been more. We also look at overpayments
and seek those funds back under the improper payment reviews
that we are required to do.
But, again, it is not a standard homeowner's policy that
people are familiar with. This is part of the reason why when
you do purchase flood insurance we do have a homeowner's guide
to go with it that we give you at the time of the insurance
because it is different, to explain that.
And we have looked at what we found in Sandy. Because of
the sheer volume of claims, we made some decisions early on to
take some risk and do some partial payments on the front end,
particularly if we could provide estimated amounts against
total damages to get people back in their homes and make
repairs without waiting for the full settlement.
We, again, try to adjudicate these in the interest of
paying what is the claim and not try to use this program to
somehow reduce payments. Our goal is to pay what the actual
cash value is to the extent possible.
Where there are disagreements, there is an appeals process.
If the appeals process fails, there is the opportunity to take
this to litigation.
I have asked staff to continue to review this, and in
several cases that Senator Menendez has pointed to me, I am
also concerned with some of the irregularities.
So I have asked the inspector general to step in and look
at some of the cases you have referred to us, Senator, because
I am not sure, given that there are players beyond FEMA, that I
can answer this just looking at internal reviews.
And in some cases you have asked questions that staff have
not been able to provide me what is the management and
oversight of that; is that sufficient?
So I have asked the IG in several cases to look at this,
not only from the standpoint of were the payments being made
appropriate but also to audit the management of that and ensure
that we have the accurate and adequate controls, that we
provide rapid payments, appropriate to the losses, with not
making fraud prevention our only goal. But the goal is to
ensure rapid, accurate payments to the claimants at the time of
the disaster based upon their coverage.
With that, Mr. Chairman, I will turn it back over.
Chairman Menendez. Well, thank you.
Let me go over a series of things.
And I am glad to hear that you have asked the inspector
general to look at the program because I think the program has
significant faults, as I have experienced by listening to a
wide range.
After 40 years of public life, I have a basic philosophy.
If I hear one person complain about something, maybe they are
just not happy. If I have two or three people complain about
it, maybe it is a coincidence. When I have hundreds complain
about it, something is wrong.
So tell me; what is the penalty for a Write-Your-Own that
makes an overpayment, meaning it pays a flood insurance
claimant too much?
Mr. Fugate. They have to----
Chairman Menendez. Can you put your microphone on?
Mr. Fugate. Sorry, Senator.
They have to reimburse the flood insurance program at the
determination that there was an overpayment.
Chairman Menendez. And what happens if FEMA determines that
a Write-Your-Own has made an underpayment, meaning that it pays
a flood insurance claimant too little?
Mr. Fugate. Then we have to go back and pay the claimant
the difference of the underpayment to what was actually owed.
And we also look at the record and percentages that Write-
Your-Owns have of over and underpayments. There is a review
board made up of Write-Your-Owns and FEMA staff that would then
look at that and see, if this is a pattern, is it in excess of
what we would expect to see as an error rate, are there
underlying trends, and what remedial actions may be taken
address that, whether it is further training or other
sanctions.
Chairman Menendez. So a Write-Your-Own can be threatened
with being thrown out of the program for a pattern of
underpayments, but there is no direct, tangible monetary
consequence like there is for an overpayment.
Mr. Fugate. Well, again, with the overpayments, when they
have to pay that back--and they have to make a decision whether
they absorb that cost or seek that back from the person they
paid to--it is not in their interest to get this wrong because
it is for them, for public relations purposes, just as negative
if they have to go back and seek money back and the losses to
them are based upon that as well as having to pay back the
flood insurance fund.
Chairman Menendez. But a Write-Your-Own would not have to
pay the difference it had underpaid a policyholder in the same
way it would have to reimburse FEMA for an overpayment.
Mr. Fugate. Again, Senator, the flood insurance program
ultimately makes the payments, and if there are overages or
underages, it has to be made up in the flood insurance program.
So the Write-Your-Owns are a conduit, but if you overpay,
that has to come back into the flood insurance; if it is an
underpay, it still comes out of the flood insurance.
The Write-Your-Owns get percentages for handling claims,
but the actual payments are basically to the flood insurance
program. Overage and underages have to be balanced out in that
account.
Chairman Menendez. Well, my point is there are no direct
monetary penalties for a Write-Your-Own that makes
underpayments.
I understand the overpayments.
The only action that FEMA takes with regard to
underpayments is to conduct more audits if the improper payment
rate reaches 20 percent and then, potentially, kick out the
Write-Your-Own of the program if the problem continues.
So, if that is the case, let me ask you; in the 40-plus
years that the National Flood Insurance Program has been
operating, how many Write-Your-Owns have been thrown out of the
program due to repeated patterns of underpaying claims?
Mr. Fugate. I am not aware of any, Senator.
Chairman Menendez. OK. So, if there are none in 40 years,
either they are doing an exceptional job or we are not doing a
particular good job of conducting the type of audit and doing
the type of metrics and information to determine whether there
are underpayments taking place in a systematic fashion.
If an insurance company pays a claimant too much money, it
is on the hook for every dollar it overpaid while at the same
time, if any insurer pays a claimant too little, the penalty
is, in practice, nonexistent.
So, to me, in terms of incentives, this structure clearly
seems to influence the Write-Your-Owns to be more conservative
when adjusting for claims, which leads to policyholders being
low-balled.
Mr. Fugate. The response to that, Senator, is again part of
what we want to look at is the trend, but the other part of
that is they are paid a percentage of the total claim. So, if
they are underwriting, then they are actually reducing what
their reimbursables are.
And, again, these are rather expensive policies to service.
So I am sure the Write-Your-Owns want the right balance, that
they are not underwriting claims unnecessarily because the
penalty then again is based upon their reimbursables for the
expenses of doing the program.
Chairman Menendez. Well, let's talk about that
``incentive.''
The reality is that the Write-Your-Owns actually have had
the amount that they would be paid on commission cut to less
than half of what it was prior to 2009. So they used to get 3.3
percent commission. That number was reduced to 1.5 in 2009,
which further diminishes their incentive to make the settlement
as full as possible.
And when you compare the incentive to the threat that the
Write-Your-Own faces of an overpayment punishment, this
drastically reduced commission is dwarfed by the threat of
clawback and overpayment punishment.
And so, look, I do not want anybody to be overpaid. I want
to safeguard the taxpayers' money. But I do not want anybody to
be underpaid--paid less than what they are due.
You were not here for my opening statement, but one of my
constituents, who sits in the audience, even at actual cash
value received clearly far less than his actual cash value
damages.
And so his story is a story that is replicated by literally
hundreds of others in our State. So we have got to get this set
of balance right.
And when the insurance companies basically say, well, if I
get in a position where I am considered overpaying, I am going
to have to pay that back versus if I am far more conservative
and underpay, I do not have the risk. If there is an error to
be made, I am going to make it on the side of underpaying, not
overpaying, because at the end of the day the consequences to
me are greater than the incentives are to me to do the right
thing.
And so we have got to find a way in which we can create the
right balance because there is a reason that the statute treats
underpayment equally. It does not say that it is less important
than overpayment. It says it is to be treated equally. And that
is not what is happening.
I have a series of other questions, but I have colleagues
here. So let me turn to them.
Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman, and thank you, Mr.
Administrator.
First of all, let me express support for everything your
States are going through in the aftermath of Sandy, and I
certainly want to continue to be supportive of all of us
addressing that in a full and robust and effective way. So,
please count me in on all of that.
And this hearing is certainly important in that regard.
But I also wanted to take the opportunity, since we have
the Administrator here, to ask him more broadly about some
flood and FEMA issues, and so I am going to use my time doing
that.
Mr. Administrator, we have talked before, particularly in
the midst of the Biggert-Waters debate and fixing that, about
the fact that according to a RAND study, which was commissioned
by FEMA--this was back in September 2013--only 49 percent of
homeowners required by law to have flood insurance actually
bought it. And so that is clearly an issue in terms of making
the program solvent.
I found that figure amazingly low. I think that is, again,
clearly an issue in terms of making the program sustainable.
When we talked about it in the past, you pointed,
basically, as the only necessary fix or the prime fix, to
something that we did pass into law, which was a major increase
in the penalty for that, from a few hundred dollars to $2,000.
What is the experience so far in terms of that getting
people's attention and dramatically increasing, or not, that 49
percent figure?
Mr. Fugate. Senator Vitter, I think we are going to have to
wait and see. This will be kicking in as we see policies or
mortgages or some kind of transaction that would bring about
that you have to have it.
The issue has been, were people purchasing flood insurance
which, with federally backed mortgages, purchasing that is a
requirement?
And they either have to buy flood insurance or an
equivalent from the private sector.
But the issue raised was, was this being enforced from the
lenders' perspective to ensure that if they were in that
special risk area they were purchasing flood insurance?
So, as we go through implementing the law and we see those
transactions, a lot of this will be done through the mortgage
companies that are making these loans because the penalty is,
if they are not doing that, that is where the penalties kick
in.
Senator Vitter. So besides increasing--let me ask it a
different way.
Besides increasing the penalty, are we doing anything
differently in terms of tracking and proactive enforcement?
Mr. Fugate. Again, we are working with former Secretary
Shaun Donovan at HUD, to work with a lot of the Federal lenders
to make sure that this was being communicated, that with a
federally backed mortgage, if you are in a special risk area,
you are required to have flood insurance equivalent to the
National Flood Insurance Program or a private policy if your
State provides that you can get that equivalent, as a condition
of that mortgage. So a lot of it has been on the education
front.
Senator Vitter. OK. Well, I mean, in my opinion that word
was out. That has always been a bottom-line policy. Certainly
in a place like Louisiana, everybody knows that. But the figure
was still 49 percent.
Let me ask the same question a different way. Is FEMA doing
anything to track policyholders versus those required to
purchase insurance, to just basically look at the two lists and
see the overlap or lack of overlap?
Mr. Fugate. We could look at that, Senator--and it grows--
but again, I really would have to ask staff to provide that in
writing because one of the challenges is, if you can identify
how many homes are in the special risk area, you then have to
determine how many of those have federally backed mortgages and
that would trigger the requirement.
So we could look at how many are written, how many homes
are there and what that delta is, but it would not tell us what
percentage of them have it.
You could probably look at the area and make some educated
guesses, depending upon the age of the homes, but it would be
something that we would have to go back and actually pull that
and get a sample.
Senator Vitter. Well, I am not just talking about numbers.
I am talking about actual lists to compare, to proactively
compare, OK, who has the requirement, who has the insurance.
And it does not sound like anyone is doing that, and if the
figure is really as low as 49 percent, we need to do that.
In our previous conversation, you basically say, well, you
increase the figure and you also increase the risk; you
increase coverage.
Well, that is true, but I have to believe that the folks
not buying insurance tend to have lower risk.
So I have to believe that the program is going to move far
ahead financially the higher you get that participation figure.
Mr. Fugate. I understand, Senator.
Senator Vitter. OK. Another issue we talked about
previously that started me is the Write-Your-Own margin.
Last time we talked, I think studies showed the Write-Your-
Own margin was 30 percent when these folks doing Write-Your-Own
policies assume none of the risk; so, basically, 30 percent for
doing the paperwork, for facilitating that.
Now I know there is work involved, but 30 percent seems
like a huge margin when they assume absolutely none of the
risk.
Has that changed any, or is there any effort at FEMA to
reduce that?
Mr. Fugate. Yes, Senator. We are looking at that.
That was a flat rate. Particularly when you look at
policies out of the special risk area, when you are talking
about policies that only pull maybe $350 or $500, there is a
cost of writing that.
But, as you pointed out, with Biggert-Waters and now even
with homeowners' affordability, when you start seeing premiums
in thousands of dollars, does that flat percentage rate make
sense?
So we have asked the flood insurance administrator to work
with Write-Your-Owns on what that should look like, given the
increased rates, as rather a flat percentage. Should it be more
scaled to the work involved, and what does that cost?
Obviously, these are businesses. We do not want to price
businesses out of servicing the policies, but it should not, as
you point out, be a reward for writing the more expensive
policies beyond which their expenses and reasonable benefit to
them would incur.
Senator Vitter. And, roughly, what do you think the
timeline will be to come to a conclusion in terms of new
policy?
Mr. Fugate. Since we just went from one reauthorization to
another substantial rewrite, Senator, I would need to get with
staff and ask them what that is going to be.
We have been focused on implementing the program to stop
the increases and to begin the refunds. So this would be an
additional to ask them to look at and get back to you on that
timeframe.
Senator Vitter. If you could get back to me.
And if I could just have 30 seconds in closing, Mr.
Chairman, let me make the broader point that I think we really
need to look at the cost side, at the administrative cost side,
of this program.
When we talk about the flood insurance program being in the
red, there is an assumption that we are basically subsidizing a
lot of risk.
Well, in fact, from 1978 to 2013, we took in a lot more
dollars in premiums than we paid out in claims. We took in 13
percent more dollars in premiums than we paid out in claims.
Now I know there are other costs, like mitigation, which is
not pure administrative cost and that reduces risk, but I think
a lot of the problem is the administrative and cost side of the
program, both in Government and in the Write-Your-Own program.
And I think we need to continue to look at that and continue to
get the participation rate way up from 49 percent.
Chairman Menendez. Thank you, Senator.
We look forward to working with you and appreciate your
offers of continuing support for our efforts.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman, and thank you,
Administrator Fugate.
When Congress passed Biggert-Waters a few years ago,
homeowners got blindsided by significant rate increases and new
flood zone maps.
And many of us worked together to design and to draft the
bipartisan Homeowners Flood Insurance Affordability Act, which
gave homeowners immediate relief on huge rate increases. And I
was glad to be part of that process, but I am still concerned
about the ongoing mapping process.
Last week, during testimony before the Senate
Appropriations Committee, you stated that about 50 percent of
the flood maps are up to date, about 40 percent need to be
reviewed to figure out if they are OK, and about 8 to 10
percent are clearly out of date and have to be changed.
Now these new flood maps create a lot of difficulties for
homeowners in Massachusetts and all around the country. And a
particular point of contention has been that the flood maps do
not analyze individual homes so that people are swept into
flood zone designations based on a general area, not on the
risks their home may face if it is a few feet higher or a few
feet lower than their neighbors. And this lack of detail often
requires homeowners who want to challenge a flood zone
designation to have to go out and hire a survey just to be able
to tell where they are.
So I was very glad to hear you say last week that FEMA is
working with engineers to implement a digital mapping
technology that will map individual homes and make sure that
the flood maps are more accurate.
So I just want to be clear on this part. Will this
technology mean that FEMA flood designations can go home by
home so that each homeowner will know the elevation and,
therefore, their part of the risk that their home faces?
Mr. Fugate. Yes, Senator, that is the goal.
What we are talking about doing is we are working and
partnering with the USGS, the U.S. Geological Survey, and that
most of our mapping has always been not structure-based but
just a train underneath it.
Senator Warren. Right.
Mr. Fugate. With ground-based LIDAR and other techniques,
it is actually possible--and there has been some work done that
shows this actually can be cost-effective--to shoot an
elevation that would show us in most homes that base flood
elevation.
I do not think it will be 100 percent because some
structures, even from the outside, you cannot tell what that
first floor is, and that is what determines your base
elevation. So, if you have got a partial basement or something,
that may be hard to see.
But, in general, our goal would be to get to the accuracy
in the maps where we can, most of the time, make the
determination from the digital elevations without requiring
further survey. I do not think it will eliminate for all cases,
but for the majority of them. And it would give us a better
tool to rate that risk.
Senator Warren. All right. So we will be going property by
property, and that information then would be available to the
homeowners.
Mr. Fugate. Exactly.
Senator Warren. So, if the homeowner wants to say, wait a
minute, we are higher than the others around here, for example,
then they have already got the information, in effect, for free
in this process. Good.
So when do you anticipate that the digital mapping
technology will be in widespread use by FEMA?
Mr. Fugate. Well, again, we are very much in the pilot
phase. We want to make sure that as we go forward with this--we
have seen some interesting demonstrations that we think lead us
there.
That is why we are partnering with USGS, which is our
primary national GIS map manager, to go: Can we build that
elevation? What areas should we do it in?
I do not think we can do it in every part of the country,
but certainly where we have populations at risk from flooding.
And then, what does that look like, and how do we
incorporate that into our current maps--because this is, again,
something that will then determine local ordinances of how they
build in the future, and the more accurate the maps, the better
the outcomes will be.
Senator Warren. Well, fair enough.
But the question I asked is, what kind of timetable do you
think you have on this?
Mr. Fugate. My experience has been until I have more
information I could not give you the timetable of when we would
implement.
We are, right now, working with USGS on the feasibility of
looking at some of this and going and saying, does this work,
and can we do some pilots to demonstrate it works? And then
that will tell us what it would take and how long it takes to
roll this out across the country.
Senator Warren. Well, what happens in the meantime to
people who have been newly designated into flood zones that
they think are not accurate and they want to challenge it?
Mr. Fugate. Well, again, as you pointed out, the process is
the flood maps are for the area, not per structure, and they
would still have to produce elevation certificates to determine
what height they are.
And that is something we are looking at. How do we address
that in the intermediate stage while we look at where the
technology can take us?
This technology is probably, I would say right now, proof
of concept, another year or two to get that, and then it would
be the implementation.
I am optimistic. Some of the early work says this could be
faster than our current techniques.
But I am not sure. So we wanted to do the proof of concept.
We want to work with USGS.
But, to me, the gold standard for mapping is digital
elevation maps that are accurate enough to do structure-by-
structure determinations versus I just do the area and then I
still have to go back and do survey work to get those base
flood elevations.
Senator Warren. Well, I appreciate that.
I really want to say here, though, this is a real hardship
on people who are newly being designated in these flood zone
areas. The costs of coming back and appealing so that you are
not required to carry flood insurance that, factually, you
believe you should not have to carry is really important to
these families.
And so if we see a new way to deal with this on the horizon
that would be more accurate, save people money, perhaps reduce
the need for appeals, but certainly reduce the cost of the
appeals, then I think you have to start thinking about that in
terms of what happens to people in the meantime.
And telling people, well, sorry, our science has not caught
up, but we are almost on the threshold, but in the meantime you
have either got to spend a lot of money on flood insurance that
you may not need or a lot of money challenging flood insurance
cannot be the right place for a homeowner.
So I urge you to think about what should happen in the
interim as you move toward this science and, in the interim,
how it is that we better serve families who have newly been
added to these flood zones.
Mr. Fugate. We will, Senator.
Senator Warren. Thank you, Mr. Chairman.
Chairman Menendez. Thank you, Senator.
Let me ask you, Administrator; the flood insurance Reform
Act of 2004 established an appeals process and required FEMA to
respond to appeals within 90 days. Did FEMA comply with this
requirement in the months after Sandy?
Mr. Fugate. No, sir. We exceeded that, and we had to beef
up and bring in more staffing for that program to handle the
caseload.
It was not until, I believe, January of this year that we
cleared that block and are currently meeting the requirement to
be within 90 days or less.
Chairman Menendez. How many appeals during this window were
not responded to?
Mr. Fugate. Off the top of my head, Senator, I would have
to respond for the record.
It was in, I believe, more than the hundreds. I think it
was in the thousands, but I do not have a specific number.
Chairman Menendez. We have asked this question, and we are
told that you do not track these data. If that is the case,
that you do not track the data on the program, it is necessary
to understand how it is or is not working.
And if you do not track this information, I do not know how
exactly you know there is a problem until it gets so big that
you realize there is a problem.
And if you track the information, it would give you an
opportunity to intervene earlier in the process before you have
a problem.
But one of my big problems here is the consequences, right?
So the law says it is 90 days. And if you fail to comply
with the law, then leaving disaster victims in limbo for months
is not only bad enough; it also jeopardizes their legal rights
because FEMA is arguing in court that the 1-year statute of
limitations for lawsuits begins when the Write-Your-Own creates
a first denial, not after the appeal process is complete or a
proof of loss is filed.
Now an average citizen without a law degree, they are going
to assume that they should wait for the appeal to be completed
before they go ahead and file a lawsuit.
So while disaster victims are waiting 4, 5, or 6 months or
more for FEMA to rule on their appeal, the window for their
legal rights is quickly closing, especially a person who is not
versed in the law, which actually creates--I am not saying that
you do it, but it creates potentially a perverse incentive for
FEMA to delay so that appeals are reduced in terms of the
number of lawsuits.
Mr. Fugate. Well, Senator, we have no incentive not to pay
claims. The normal time to file your claim is within 60 days of
an event. We have expanded that to 2 years. We are trying as
many cases as we can to address the backlog of appeals.
The statute of limitations in the case which you state,
quite honestly, is what the attorneys have determined, working
with Justice, but that does not preclude a judge from
determining the statute of limitations does not apply in this
case, in these lawsuits.
But in most cases I would rather get the cases resolved and
not have to wait for legal remedy.
Chairman Menendez. Let me just say you may not say you have
an incentive, but at the same time that FEMA is not meeting its
deadlines under the law it is strictly imposing deadlines on
policyholders. In fact, 270 claims were summarily rejected
because the policyholders, who had suffered through the second
largest natural disaster in our Nation's history, missed one of
FEMA's imposed deadlines.
So we have the ultimate hypocrisy and double standard here.
You do not have to live under the deadline, and there is no
consequence to you--not you personally, no consequence to the
agency--for not meeting the deadline, but there is a
consequence for the policyholder for not meeting the deadline.
That is when people think poorly of their Government.
Mr. Fugate. I understand, Senator. Direction would be
appreciated.
But I also have to operate within the regulations of the
programs, and where I can, we are trying to get these cases
resolved and settled.
Chairman Menendez. Well, the regulations under the program
involve the law, which supersedes regulations, which say you
have to respond in 90 days.
Do you think it is fair that disaster victims were forced
to comply with FEMA-imposed deadlines while FEMA fails to
comply with its own deadlines?
Mr. Fugate. Again, Senator, with the claims and the number
of appeals and staffing that up, we did not meet the deadlines.
We worked----
Chairman Menendez. Well, I hope you will look at those 270
cases that you, from my perspective, arbitrarily and
capriciously decided: They did not hit a specific deadline. So,
therefore, you know what? You are closed. But we get to go
ahead and not respond in not only 90 days, but 120 days, 150
days.
Some cases that we have are 180 days before you all
responded and then no consequence to you but consequences to
the policyholders. That is fundamentally unfair.
Let me ask you; do you track the percentage of appeals that
overturned in favor of the policyholder?
Mr. Fugate. Not that I am aware of, Senator.
Chairman Menendez. Well, if you do not track that, it seems
to me that that is information that is critically important to
determine whether the claims process is working efficiently.
I mean, I think that there is a high successful appeal rate
is a red flag that initial claims adjusting is flawed, which
would give you the wherewithal to say we need to do something
here. But in the absence of knowing that information, there is
no drive to be able to deal with it.
Let me ask you this; what about the new--that we put in the
law on Biggert-Waters a flood insurance advocate?
There are people who have no idea that, number one, they
have an appeal process. And those who do engage in an appeal
process, who have never had to file a flood insurance claim, go
alone through the appeal process or litigation and need help to
navigate the process.
Our flood insurance bill created a flood insurance
advocate, and we are trying to convince you at FEMA that this
position should help policyholders with filing claims and
appeals in addition to questions about the policy itself and
mapping.
Is that something that FEMA will consider?
And if not the flood advocate, is there any entity at FEMA
for helping policyholders go through each of the steps of the
appeal process?
Mr. Fugate. Senator, my staff basically did not want me to
go into a lot of details about this because they are still
formulating it.
But I said, well, I do not agree. I think we have to make
this. Since this is an advocate, how do we create them as an
independent office, not part or subservient to the flood
insurance program?
I do not think they should be limited to just looking at
map disputes. I think on a day-to-day basis we have to have an
advocacy office which provides the basis to look at the
customers and represent the customers on issues dealing with
that.
But in a Sandy-like event that office would be too small.
So how would we expand that capability during those kinds of
events?
So I am looking at this as an advocate for the consumers,
not for any one section of Write-Your-Owns or only to limit
itself to map issues.
So we are looking at how to structure that.
Senator, I do appreciate the fact that this came after the
President's proposed budget and you have, through the Senate
and the House, provided funding to establish this office. That
is a key step in moving forward since this will be a new
initiative as we go forward into the future budget.
But it is something that I am very serious about, that I
want this office to be the voice of the consumers and be the
focal point for consumers for all flood insurance issues and
not limit it to just maps.
Chairman Menendez. Well, look, I hope that that ends up
being the case, and I agree with you on what your perspective
is as to what the advocate should be.
I also hope that we get a better data management system
because I think that is critical, to be able to know the
consequences of low-balling individuals even under current
value that is taking place. Certainly, we have hundreds of
cases in that regard, and I think that without the data
management you cannot make intelligent decisions.
And I know that you are very capable of making intelligent
decisions, but you cannot make intelligent decisions if you do
not have the information on which to do it.
Senator Schumer, would you like to----
Senator Schumer. I would. Thank you, Mr. Chairman.
First, I want to thank you, Mr. Chairman, for your
diligence and partnership on Sandy. Our States are recovering
and recovering well in good part because of your leadership.
And I would like to thank Senator Booker for his leadership
on this issue as well.
Our New York-New Jersey, Senator Gillibrand and myself,
work great with you guys.
I also want to thank Administrator Fugate. I think FEMA has
done an excellent job overall. There are things I disagree
with, obviously, but an excellent job overall in helping us
with Superstorm Sandy.
In fact, just yesterday we were able to announce that NYC
Langone Hospital received $1.13 billion from FEMA to recover
the damage. We worked well together. It is a new way of doing
things, where they get the money more up front so they do not
have to have 30 different applications, and that is because of
the good work of FEMA.
So now that you know I have praised you, you know I am
going to have a point that you will not particularly--that is
not a positive one.
I have a serious point of concern related to flood
insurance claims that have come straight from constituents on
Long Island and New York City. I must raise it to your level.
I am doing this in concert with Senator Gillibrand, who I
know has talked to you about this as well. She is not on this
Committee, and so I am asking the questions, but it is really
from both of us.
It appears that a select few attorneys hired by Write-Your-
Own insurance companies and paid by FEMA are cashing in on the
backs of struggling homeowners. There are still many homeowners
trying to resolve their home insurance claims and receive
compensation for their losses.
I have learned that for each day a homeowner in New York
waits to settle their claims there are attorneys benefiting
from dragging these cases out. These are attorneys hired not by
FEMA but by insurance companies for policies underwritten by
flood insurance, and it appears they are using legal tactics to
prevent homeowners from being paid back for their losses.
I do not intend to be critical of you, Administrator
Fugate, but because FEMA underwrites the Write-Your-Own
policies and pays the legal expenses, I want to raise these
concerns to your attention and consider what can be done to
spare homeowners from the grips of overly litigious attorneys
who have no incentive to try and resolve matters. In fact, they
may have an incentive to stretch it out; they get more hourly
fees. And the homeowners there are unable to deal with the
issue.
So these are my questions.
And I am going to ask my entire statement go in the record.
Chairman Menendez. Without objection.
Senator Schumer. But we have been told that attorneys for
the Write-Your-Own insurance companies are drawing out the
legal battles with homeowners in an effort to drive up billable
hours.
The kicker is that the Write-Your-Own insurance companies
are not even paying the legal bills for their attorneys. You
are; FEMA is.
So let me get into my specific questions here.
First, given all of what I have mentioned, I read in a
letter that defense counsel representing Write-Your-Own
companies before the Eastern District of New York filed with
the court on June 18th that the current prediction of the costs
from Sandy as the total defense fees from just this 1 event are
likely to exceed the total defense costs incurred by NFIP for
all flood insurance events for the previous 20 years, that
FEMA's legal bills might exceed $25 million.
There was a letter saying that in the Eastern District.
So, given all of that, first, will you perform an audit of
the Write-Your-Own insurance companies' expenses and implement
internal concerns for two reasons, two-fold--one, to make sure
that FEMA is not overpaying, two, to make sure that homeowners
are not stuck in lengthy legal battles and taxpayers are not
reimbursing companies for excessive and inappropriate
litigation costs?
Mr. Fugate. Senator, I went one further. I turned this over
to the IG. I have enough concern that I have too many pieces of
this of what does not appear to be what the practice was
supposed to be.
We provided additional guidance to Write-Your-Owns, what we
think are going to be acceptable legal fees. We have made it
very clear that if there is fraud alleged it should be referred
to the Justice Department. If this is an honest disagreement
over what is eligible versus what the Write-Your-Owns are, I
would much rather look at the administrative remedies versus
the court costs.
But in any case, based upon concerns that when I heard the
issues being raised, it hit the threshold that something does
not sound right, I am not sure FEMA has--we do not have any
investigatory authorities. That is only vested in the DHS IG.
So we have asked the IG to take a look at this.
Senator Schumer. But something smells wrong to you. We are
not saying that something is wrong, but it is worth
investigating, for sure.
Mr. Fugate. I have heard from too many cases of concerns
that I cannot answer myself, and since I am not empowered to
conduct investigations with outside parties, I have asked the
Department's inspector general to take a look at this.
We have also provided additional guidance back to the
Write-Your-Owns on what we think are adequate defense of these.
But, again, our goal is if we think it is fraud it should
go to the Justice Department, but we should not be just
litigating as a delaying tactic to not pay claims.
Senator Schumer. Right. I have heard--and if the Chair will
indulge me for just a minute more.
I have heard that there are situations where the litigation
costs exceed the cost of settlement.
So, first, are you aware if this has happened, and second,
shouldn't there be some rule that that should not be?
Mr. Fugate. Again, these are things I have heard, Senator.
That is why I have asked staff to reach back out to the Write-
Your-Owns.
And, again, this refers back to the administrative
remedies. If there are opportunities to settle, I want to take
all the administrative actions versus protractive court cases
as a remedy here.
Senator Schumer. Right. Now, as part of the flood insurance
bill that was passed, there was language that would allow
homeowners to receive credit for partial mitigation.
This is a separate question really, right? I will submit
that one in writing because I know my colleagues are eager.
But I would urge you to do the strongest possible
oversight. Something really seems wrong here, and we need it
checked out--lawyers and insurance companies taking advantage
of homeowners and taking advantage of the U.S. Government and
FEMA's payment system.
Mr. Fugate. Again, Senator, I know of no actual wrongdoing,
but I have concerns. And because I do not have the ability to
do these types of investigations, I have asked the DHS IG to
look at this matter.
Senator Schumer. Thank you very much.
Chairman Menendez. Thank you, Senator.
I would like to give Senator Booker an opportunity to ask
any questions.
Senator Booker. I really appreciate it and appreciate the
thorough questioning, pointing out a lot of the issues, Senator
Menendez, that I have as well.
Just very quickly, first of all, I just want to say, again,
my office has worked well with your agency. I am just very
grateful, Honorable Fugate, for how really dedicated of a
public servant you are. I just want to make sure I say that for
the record.
I understand from your testimony that these numbers of
insurance claims are large. The ones that have missed deadlines
go into the hundreds. The number of cases that are dismissed as
a result go into the hundreds. Is that correct?
Mr. Fugate. I believe so, yes, Senator.
Senator Booker. OK. And how does this compare to other
disasters like Hurricane Katrina coming through?
Is there something we have seen in the Sandy claims where
people are missing more deadlines, or are these numbers
commensurate?
Mr. Fugate. I would have to go back and respond for the
record and give you what we saw from Katrina to Sandy.
My sense is that overall we actually saw fewer appeals and
things of that nature, but the deadlines--again, the 60-day
claim deadline we suspended for 2 years.
We know there are some additional claims when it comes to
some of the mitigation that will come in further out.
And, again, we were focused initially on doing some things
to get money in people's pockets--partial expenses, immediate
repairs--without waiting for final settlement.
So in some cases, as Senator Menendez said, we missed
deadlines. But on the other case, we were trying to do some
things to try to speed up a process, to get people back in
their homes.
So it is trying a balancing act. We did not achieve that
proper balance.
But as far as comparing Sandy to a lot of the large-scale
events, I will ask staff to prepare in writing if your staff
can say here is what you want to measure.
And if we have those data--as Senator Menendez said, one of
my challenges is where I do or do not have data, but where I
have it I can show you what those comparisons were.
Senator Booker. OK. And just, again, I want to be specific.
Shifting gears now, back to what Senator Schumer was talking
about, every time--so if I miss a deadline, I file a lawsuit.
This is very costly to your agency. The estimate I got--and
I want to confirm it--is about $19,000 per lawsuit, correct?
Mr. Fugate. If we provided that number, I would assume that
is accurate.
Senator Booker. OK. And that just seems a lot of taxpayer
numbers, as Senator Schumer was saying.
Mr. Fugate. Particularly, Senator, when you factor in these
are $250,000 in property and $100,000 in contents. So
litigation is something that is very costly for all parties,
and the flood insurance program pays for the litigation on
behalf of the Write-Your-Owns.
So, again, I do not think litigation is a good resolution,
but it is the option when all else fails for people.
Senator Booker. But seeing the high number of litigation
claims and the gross amount of taxpayer dollars being expended,
this is something that obviously you are committed to auditing
and figuring out a way that we can reduce this in the future?
Mr. Fugate. Yes, Senator, and also make sure that, again, I
want a clear brightline.
And this is a very rare event, but when there is fraud,
this is a criminal justice matter. It should not be civil
litigation.
If we are looking at our civil litigation where we have
disputes, we have to make sure costs are reasonable to the
claims. We should not be spending tens of dollars to defend
dollars in claims differences.
So we are committed to looking at that but also how do we
make sure that if there are differences in civil that we are
not spending tens of dollars to defend possible claims of
dollars.
Senator Booker. And the last thing--and then I am done--is
just the tracking system you all have in place is from the time
I was in grade school and back in the early 1980s. This system
is costly to maintain. It has not been updated in the ways that
it should and provides only a limited access.
To me, transparency is such an important part of
Government's responsibility.
And according to FEMA officials the system is neither
efficient nor effective and does not adequately support the
program's mission.
The GAO testified in 2010 that identifying and correcting
errors in submissions required 30 days to 6 months and that, in
general, the claims processing cycle itself took 2 to 3 months.
This system has to be changed, has to be upgraded, has to
be brought into the modern system.
Can you just really quickly tell me what the process is
going to be for addressing that as rapidly as possible and
bringing us into the 21st Century era, not back in the days
when I had a very large afro?
[Laughter.]
Mr. Fugate. Senator, in looking at technology acquisition
in the Federal Government, when I got here, one of the first
things I dealt with was a situation where the NextGen flood
program was in such disarray. The IG found that I had
significant conflict of interest. The program was not
performing. We ended up shutting it down. That was a $40
million loss.
And I have been around and seen a lot of Federal
procurements where even more dollars in trying to acquire this
technology resulted in we did not get where we wanted to go.
And in that timeframe, as Senator Menendez will tell you,
there has been a lot of difficulty in reauthorizing the flood
insurance program. So we ran for a long time, reauthorized
weeks to months.
So we did not have the stability to go: What is the
program, and how do we go forward?
Now that we have the Homeowners Flood Insurance
Affordability Act, we have now been working and scoping and
building the program to start that process.
I do not know if it is going to be quick, but the one thing
I want to make sure is we are not building a system that is a
Frankenstein monster. I want to build it modular. I want to get
it right. We have been scoping this, and I want to go forward
because I do not want to own the next $40 million we spend on a
system that cannot do what it was supposed to do.
Senator Booker. Thank you, Senator Menendez.
Chairman Menendez. Senator Schumer.
Senator Schumer. Thank you.
I have one more question. I thank the Chairman for his
indulgence.
I have been told that there is only one attorney who does
all of the litigation for the Write-Your-Owns, which would mean
his billing, if it is 25 to $50 million in expenses, is to him.
To boot, I have heard he is from New Orleans.
First question, is that true?
Second, what is the mechanism for selecting the attorneys?
Is it totally up to the insurance companies? Do you oversee it?
Do you have any say in it? And should that change?
Mr. Fugate. Again, Senator, without getting into too much
detail since I have asked the IG to look at this, those are my
understandings.
Write-Your-Owns do select their attorneys. Oftentimes, they
use attorneys that have had experience in this before. So,
obviously, after Katrina, there were a lot of claims down
there.
Senator Schumer. Only one? There is only one?
Mr. Fugate. I do not know that for sure, Senator. That is,
again, why I have asked the IG to look at it.
Senator Schumer. That is what I have been told.
Mr. Fugate. Again, I have heard this, and that is why I
have asked the IG to look at this and determine if that is the
case and what is going on.
Senator Schumer. You have heard that there might be just
one doing it all.
Mr. Fugate. Yes, sir.
Senator Schumer. OK.
Mr. Fugate. For the majority of the cases, yes.
Senator Schumer. Then I hope you will look into this.
Changes we may need to do regulatorily or statutorily--the
IG is looking into specifics.
Mr. Fugate. Yes, sir, Senator.
And this is what I have asked the IG. I have asked him for
both looking at this to determine what is going on and also
make management recommendations of how we should front-end.
That is, again, one of the functions of the IG. It is not
just to find fraud and waste but to help us invoke management
so that we minimize that and get the value and the programs
delivered the way they are supposed to.
Senator Schumer. Thank you.
Thank you, Mr. Chairman.
Chairman Menendez. Thank you.
Mr. Administrator, we have a vote going on.
Let me make four key points to you, and we are either going
to get an administrative response or we are going to get a
legislative response.
I would prefer that it be an administrative response so we
can work together, but if it has to be legislative, so be it.
We have a standard, in my view, that is stacked against
process and a standard that is stacked against policyholders.
There are uneven penalties for underpayment versus overpayment.
There are uneven incentives as it relates to underpayment
versus overpayment.
I do not want anybody getting a dime that they should not
get. By the same token, I do not want a policyholder who has
done the right thing for 10, 20, 30 years, in some cases,
getting low-balled simply because the process is stacked
against them.
So we have got to figure out a structural effort to create
a greater balance.
Second, if the policyholder has to live by deadlines, so
does FEMA. And if FEMA cannot live under those deadlines, then
the policyholder should have the opportunity to have the same
period of time that you cannot live by extended so that they do
not have their rights foreclosed.
I think to have the expectation that an average citizen is
Perry Mason is totally unacceptable.
And so I think there is a double standard, and that is not
a double standard that we should have. Disaster victims already
have enough challenges as they deal with this question.
Number three, we have got to get these data, help you get
this data system running, because we cannot know and I do not
know how it is that claims, the numbers of those who are
appealed, the numbers who successfully appeal, the numbers that
litigate and successfully appeal. I cannot tell the size of
this problem and whether there is a systematic problem or just
an occurrence problem. We need to get that straight.
And we need a flood insurance advocate who not only is
dealing with the immediacy of rates and flood maps but is an
advocate as to the totality of what happens to someone with
flood insurance. And I think in that, hopefully, we are in
agreement, listening to your comments.
It is just simply wrong from my perspective that we have a
system when not one Write-Your-Own in 40 years has ever been
kicked out of the program because they consistently low-balled
policyholders. Now maybe they are all doing a great job, but
every time I hear these hundreds of cases I think something is
wrong.
So we look forward to working with you.
I do want to applaud you in the aftermath of Sandy. You
were on the scene. You were engaged. Your people were
fantastic.
But once the storm went aside, in the immediacy, this
program is what for a lot of people is their lifeline--the
difference between being able to get back in their homes and
not being able to get back in their homes.
Doug Quinn, who is one of my constituents, is a Marine. He
served his country honorably. He did the right thing. He paid
his policies. He did not ever make a claim until Sandy came
along.
To step into his home, as I did this past Monday, and to
see that now so much time after Sandy he still cannot live
there with his daughter is just not acceptable. Not acceptable.
So I hope we can work together to make this right. In the
absence of that, we will see a legislative response to it.
Mr. Fugate. Senator, as I told you, I will do as much as I
can administratively. And when I hit the walls, where the
attorneys tell me I cannot go any further, I will communicate
to you that I have hit a wall and I need your help.
Chairman Menendez. If you need legislative responses, you
let me know, and we will be deducing our own. But if you need
legislative responses, I am always willing to pursue it. We
have got to make this program right.
Mr. Fugate. As you helped us with Biggert-Waters when you
asked me the question and I told you I hit the wall, you were
willing to step forward on what had to be done to change that
law.
So, again, my history is when I cannot get to where you
think I need to be I want to let you know. We may not agree to
the reasons, but if my attorneys or my programs are not able to
go any further I need to be up-front with you that I do not
have a way forward; it may require legislation. But as much as
I have the administrative ability, I will continue to work.
Chairman Menendez. We are ready and able and willing to go,
and we will do so if you bring us information, or in the
absence of seeing a change that creates a greater equity in
this process, we will do it ourselves.
With the thanks of the Committee for your appearance, for
our next panel, we have two votes, one that is just ending,
then another one immediately. So we should be back in 10
minutes.
This hearing is in recess subject to the call of the Chair.
[Recess.]
Chairman Menendez. This hearing will come back to order.
Thank you to our second panel for bearing with us as we had
votes on the floor.
Our second panel today includes Donald Griffin of the
Property Casualty Insurers Association of America and Maryann
Flanigan, Supervising Attorney of the New Jersey Legal Services
of the Hurricane Sandy Legal Assistance Project.
Thank you to both of you for joining us.
Your full statements will be included in the record,
without objection. I would ask you to summarize them in about 5
minutes or so, so we can engage in some questions and answers.
And, with that, Mr. Griffin, we will start off with you.
STATEMENT OF DONALD GRIFFIN, VICE PRESIDENT, PROPERTY CASUALTY
INSURERS ASSOCIATION OF AMERICA
Mr. Griffin. Thank you, Senator. It is a pleasure to be
here.
My name is Don Griffin, and I am Vice President of Personal
Lines with the Property Casualty Insurers Association of
America. I also chair the Write-Your-Own Flood Insurance
Coalition.
PCI is composed of more than 1,000 member companies
representing the broadest cross section of any national trade
association. PCI members also include two-thirds of the Write-
Your-Own insurers that partner with FEMA to administer the
National Flood Insurance Program.
Thank you for the opportunity to appear before you today.
My testimony is provided on behalf of PCI.
PCI commends the Subcommittee for highlighting the merit in
taking some time while information and memories are fresh to
review lessons learned from Sandy. This will be helpful, too,
as Congress, the NFIP and the WYOs prepare for the fast-
approaching 2017 NFIP reauthorization.
WYOs' first priority is our policyholders. We want a
program that works to protect policyholders and that is simple
enough for everyone in the marketplace to understand so that
consumers know what they need to buy, agents can explain how
the coverage works and insurers can correctly service the
program.
So how are claims handled?
Well, Congress passes legislation that generally
establishes how the NFIP is to work, FEMA sets the rule, and
the WYO insurers service the policyholders and the Federal
Government.
The compensation paid to insurers to administer the claims
is offset by the expenses incurred to pay claims adjusters,
legal fees, and other administrative costs. The WYOs are the
third-party administrators for the NFIP and the Federal
Government.
WYO insurers do, however, have significant incentives to
keep their policyholders happy and to follow Federal flood
insurance claims regulations.
Decisions on flood claims payments are made by the
adjusters. When policyholders experience a flood loss, they
contact their insurance agent or WYO insurer. The insurer then
assigns a trained, certified flood claims adjuster who may be
an employee of the WYO or an independent contractor. The flood
claims adjuster determines the amount payable on any claim
based on very specific guidelines established and rules
established by the NFIP.
Ultimately, WYO insurers are responsible for any
overpayments, and the WYOs are audited regularly by the Federal
Government.
WYOs are generally compensated in proportion to the amount
of the loss paid. The compensation formulas are set by the NFIP
and periodically updated. In 2009, for example, as you pointed
out earlier, Senator, in response to a GAO recommendation
subsequent to Katrina, the claims compensation formula was
refined by reducing the portion tied to the claim value and
adjusting the payment based on the WYO's premium volume.
There are also specific processes in place for
policyholders to appeal claims decisions to the NFIP. The most
appeals process was put in place as a result of the passage of
the Flood Insurance Reform Act of 2004.
Finally, administering and marketing the flood insurance
program is very complex and expensive, and the number of
insurers willing to do so has declined significantly in recent
years. Many WYOs have determined that the reputational, legal
and financial risks are too great. Unfortunately, as fewer
insurers market flood insurance, fewer consumers will purchase
this needed protection.
So what did we learn from Sandy?
In the immediate aftermath of any natural catastrophe, it
is critical for local, State, and Federal officials to
coordinate their efforts to get people back to their homes and
businesses to begin remediation and rebuilding. Insurers need
to be at the table during pre and postdisaster planning and
coordination. It is also essential to the rebuilding process
that local officials, Government and law enforcement allow
insurers and claims adjusters into damaged areas as soon as it
is safe, at least as soon as the property owners are provided
access.
An issue that arose following Superstorm Sandy was the lack
of available trained flood insurance adjusters. Most certified
flood adjusters are located in areas that frequently flood.
Often, States implement reciprocal recognition of claims
adjusters from other States to help. However, sometimes it is
difficult, given the impact of the event and the number of
requests, to process the necessary paperwork needed in a timely
manner, leading to delays in responding to claimant needs.
PCI supports Federal legislation to require more reciprocal
claims adjuster recognition.
In conclusion, sir, PCI will be hosting a National Flood
Conference next year in D.C., with FEMA and all the different
flood insurance stakeholders attending, to discuss how to
simplify and improve the program in advance of the next
Congressional reauthorization cycle.
We look forward to working with you on your concerns and
would welcome your participation at our national conference.
On behalf of PCI and our member companies, thank you for
the opportunity to present our views today. We look forward to
working with you to protect consumers and improve the National
Flood Insurance Program.
I would be happy to answer any questions.
Chairman Menendez. Thank you very much.
Ms. Flanigan.
STATEMENT OF MARYANN FLANIGAN, SUPERVISING ATTORNEY, NEW JERSEY
LEGAL SERVICES, HURRICANE SANDY LEGAL ASSISTANCE PROJECT
Ms. Flanigan. Thank you, Senator Menendez, for having us
here today. Thank you for this opportunity to appear on behalf
of the New Jersey Legal Services System and on behalf of New
Jersey residents who were affected by Storm Sandy.
With funding from the Robin Hood Foundation, the Hurricane
Sandy New Jersey Relief Fund and the State of New Jersey, Legal
Services was able to begin providing legal assistance within 2
weeks after Sandy left the State via our toll-free statewide
hotline.
LSNJ is the major legal assistance provider in the State of
New Jersey for Sandy victims, and we have provided legal
assistance in more than 2,500 cases to residents who were
affected by Sandy. Even now in July of 2014, 21 months after
the storm, new Sandy clients continue to contact our offices on
a daily basis. Many of these clients contact us for assistance
with flood insurance claims.
Sandy-affected New Jersey residents have sought assistance
from Legal Services on a number of issues that highlighted the
need for legislative attention, but one of the most prominent
issues has involved underpayment or erroneous denials of flood
insurance claims. Literally, hundreds of New Jerseyans have
come to us for help with their flood insurance denials and
underpayments.
We have served as a critical resource for these disaster
victims but especially for those in the low to moderate-income
population.
Today, I will speak about the barriers that Sandy victims
face when filing flood insurance claims, and I will highlight
areas which can benefit greatly from careful attention and
improvement.
First, flood insurance companies routinely undervalue
claims, thereby creating barriers to repairing and rebuilding.
Almost every client who has contacted us regarding a flood
insurance issue has had a problem involving an insufficient
offer.
In one case, an adjuster from the Midwest suggested a claim
for approximately $40,000 less than what the client needed in
order to meet the covered repairs. After examining the line-by-
line estimate prepared by the adjuster, it was very clear that
materials could not be purchased in New Jersey for the unit
prices listed.
This low-balling of flood insurance claims happens all too
often and results in the insured suffering an unreasonable
delay in making needed repairs to the home. The insured must
then either sacrifice quality by finding a way to purchase
materials for a cheaper price, or they must accrue additional
expenses by taking out loans to cover the cost of repairs.
In one particularly egregious case, a homeowner carried
homeowner and flood insurance through the same WYO, and when
the client's home was damaged on a sea-facing avenue, suffering
approximately four feet of flood damage, the flood insurance
department denied the client's claim, stating that the damage
was caused by wind-driven rain, and meanwhile, the homeowner
insurance department denied the claim, stating that the damage
was caused by flood water.
The client had to appeal both claims, and several months
passed before the homeowner insurance department finally sent a
structural engineer to prepare a report about the causes of
damage. The client used that structural engineer report from
the homeowner department to submit to the flood department.
At that point in time, the flood insurance department
finally handled the claim more fairly, but the client had been
displaced from her home for approximately 7 months at this
point. And this was finally when the flood insurance department
began to assess the scope of flood damage.
A potential Federal remedy for this issue would be
modification of the existing incentive and penalty system for
flood insurance companies when claims are undervalued.
The second point I will address is the process for
appealing or submitting a flood insurance claim is excessively
complicated and WYOs do often create extra requirements with
which the insured must comply. Oftentimes, the insurance
companies offer little support or guidance to their insureds.
A couple in Union Beach, New Jersey, submitted a proof of
loss to their WYO in order to appeal the denial. They
eventually received notice that their proof of loss was denied.
The insured company did not explain the reason for denial or
offer any guidance for what the couple could submit in order to
lead to a reassessment or approval of the claim.
Another client in Toms River, New Jersey, wanted to speak
with her flood claim agent regarding her appeal, but the claim
agent said he could not speak to her because the client had
hired a public adjuster. Although there is no regulation
prohibiting an insurance agent from speaking to the insured
after a public adjuster was hired, several clients tell us that
their flood insurance agents refuse to speak with them.
A potential Federal remedy would be straightforward
guidance from the NFIP to all flood insurance companies, which
establishes a standard requirement that WYOs refrain from
creating extra requirements in the flood claim process.
The third point is that the statute of limitations for
filing a lawsuit should not begin to run until the proof of
loss has been submitted and denied in whole or in part. The
SFIP strictly limits and reserves the rights of client claims
if they are not submitted within the appropriate timeframe.
A potential Federal remedy would be amending FEMA
regulations so that the limitations timeline does not begin to
run until there is a partial or complete denial of a submitted
proof of loss.
The fourth point is that the complexities of the flood
claim appeals process have a particularly negative impact on
low to moderate-income insureds. IN some ways, New Jerseyans
who are low to moderate-income were the worst affected by
Hurricane Sandy. Not only were they displaced and forced to
incur additional expenses, but they also may have lost income
if their jobs were affected by Sandy.
A potential Federal remedy to reduce the costs for low to
moderate-income insureds who have to go through the appeal
process by trying to hire attorneys would be simplifying the
flood insurance claim appeal process and establishing a robust
flood advocate as authorized under the Homeowner Flood
Insurance Affordability act so that insureds would be better
equipped to effectively handle their appeals without incurring
attorney expenses.
And if I may just quickly address my fifth point, thank
you.
Policy coverage terms should be written in clearer
language, and coverage should be more comprehensive in the case
of a total loss due to flood damage. Many clients do not
understand their coverage terms, and they do not understand
that a flood insurance policy does not indemnify for a total
loss in the way that most homeowner insurance policies do.
A potential Federal remedy would be modifying standard
flood insurance policy language so that policies are written in
clearer terms and a directive from the NFIP requiring flood
insurance agents to explain coverage limits to the insured.
Thank you.
Chairman Menendez. Well, thank you both for your testimony
and your insights.
Let me start with you, Mr. Griffin.
I understand that in response to a perceived pattern of
flood claim overpayments following Hurricane Katrina, in 2009,
the National Flood Insurance Program changed the way that it
compensates Write-Your-Own companies and adjusters for
adjusting and paying flood claims.
According to your testimony today, the calculation changed
from 3.3 percent of the claim to 1.5 percent of the claim value
plus 1 percent of the premiums written. Is that correct?
Mr. Griffin. That is correct, Senator.
Chairman Menendez. Now, however well-reasoned the 2009
claims payment compensation may have been, couldn't reducing
the percentage of claim value paid to handle a claim also
reduce the claim handlers' incentive to make certain they are
including all amounts due the policyholder in every claim?
Mr. Griffin. Well, Senator, it could. However, as I
mentioned before, the insurer's reputation in many cases is on
the line.
Most of the Write-Your-Owns sell additional products in
addition to the flood policy. They sell auto or home or
business policies. So they have an incentive to get it right
because they want to make sure that policyholder is satisfied
and stays with them for the other business that they have.
Chairman Menendez. Well, I understand that, but let's see
how the structure actually works to affect the decision-making
process.
Prior to Katrina, the NFIP did not apply the Improper
Payments Act to Write-Your-Own claim payments. Since then, the
NFIP has applied the Improper Payments Act to Write-Your-Owns.
What impact does that change have on Write-Your-Owns?
Mr. Griffin. Well, as you have heard earlier in testimony,
if there is an overpayment situation, the WYOs are required to
reimburse FEMA for that money. So they must pay back out of
their own assets.
Chairman Menendez. So insurance companies have been
obviously more concerned about making overpayments based upon
the set of circumstances under which they now find themselves
having to, in essence, pay clawback, what FEMA considers as an
overpayment.
Mr. Griffin. That is correct, sir.
Chairman Menendez. Now, Write-Your-Owns can be held liable
for overpayments on flood claims they handle. Do you think
being held financially liable for overpaying a flood claim is a
pretty strong incentive for Write-Your-Owns to make certain
that flood claim payments include nothing that could even
arguably be deemed an overpayment?
Mr. Griffin. Yes, sir, it does.
Chairman Menendez. And isn't it a fact that Write-Your-Owns
can appeal FEMA's determination of a claim that was overpaid?
Mr. Griffin. I am not sure how they can, whether they can
do that, or not. They may be able to appeal that process.
Chairman Menendez. My understanding is they cannot appeal
FEMA's determination that a claim was overpaid.
So, basically, if you are making a decision about
overpayment versus just payment and it is a question for you
and you can clawback--FEMA can clawback the money--and you
cannot appeal it and say, no, we think we made the right
determination, well, I think human nature is going to indicate
exactly what is going to happen in cases like that.
What if we coupled the impact of the overpayment penalty
with the 2009 reduction in the percentage of the claim that the
National Flood Insurance Program pays for claims handling?
Wouldn't it be fair to assume a claims handler, with less
of a financial stake in the claim value and an awareness they
could be held financially liable if any portion of the claim
value is later deemed an overpayment, might think twice before
settling on the larger of two equally well supported claim
values?
Mr. Griffin. It could, Senator, but again, remember the
adjuster's job is to follow the rules that are set up by FEMA
and apply them fairly so that the number of disputes with
regard to claims payments are minimized.
Chairman Menendez. I gather that, but I also can see from
my experience in New Jersey that if there is an error it is
made on the side of underpayment--I will call it that--versus
overpayment because of the system, the way it is stacked.
Are there any penalties assessed by the National Flood
Insurance Program on underpayments made by Write-Your-Owns?
Mr. Griffin. No, there are not, sir.
Chairman Menendez. OK. So the bottom line is that if you
overpay you can--if they think you overpaid, FEMA can claw it
back; and if you underpay, there is no penalty.
So that is part of a balance that seems to me to be totally
unbalanced.
Do you know if the National Flood Insurance Program even
tracks underpayments for Write-Your-Owns?
Mr. Griffin. I was not aware that they did. I heard
Administrator Fugate talk about the fact that they do have some
information on that, but it sounds like their data has not been
well kept over the years.
Chairman Menendez. They conduct audits, but there are no
tangible penalties for underpayments.
Would it be accurate to say that the disincentives that the
National Flood Insurance Program imposes on overpayments
outweigh those that are imposed on underpayments?
Mr. Griffin. It could, sir. Yes, it could, but as I say, we
do not have the data to know how this is being handled. So it
is hard for us to say how it would be an entirely disincentive.
Our job is to try and make sure that the policyholder gets
every dollar they are entitled to under the rules that are
established and apply them fairly. If there are questionable
amounts, then obviously, they will err on the side of
conservatism.
Chairman Menendez. There are hundreds of cases that we
have. And not every case that comes to me do I believe is
automatically valid; maybe there is a misinterpretation of the
policy or the law.
But there are plenty of cases that I have reviewed with my
staff to get a good grasp of this, in which clearly there is,
my words, low-balling taking place. And whether that low-
balling is intentional or out of concern of the consequences of
the way the program is stacked, it just simply is unacceptable.
Let me ask Ms. Flanigan; can you describe the most common
obstacles that policyholders are experiencing?
Ms. Flanigan. The most common obstacles that policyholders
are facing involve undervaluation of claims, erroneous denials,
extensive delays in communication from the flood insurance
providers and the lack of clear guidance from the insurance
companies about how the policyholders can effectively pursue
appeals.
Chairman Menendez. And in view of that, do you believe that
the claims and appeal process is clear and easy to understand?
Ms. Flanigan. I believe the claims and appeal processes
could be much easier to understand. There is room for a lot of
improvement in the way that the processes are explained in the
standard flood insurance policy, and claim agents might be able
to provide more meaningful assistance to policyholders if they
are trained to assist insureds throughout the appeal and claims
processes.
Chairman Menendez. Now FEMA is trying to throw out many New
Jersey lawsuits based on the statute of limitations rather than
getting to the merits of the case to see whether there has been
low-balling.
And FEMA takes the position that the clock starts on the
statute of limitations when the homeowner receives any letter
saying the word, denial, even if the policyholder has not yet
submitted a proof of loss form.
Don't you think that a completed claim requires a proof of
loss form?
Ms. Flanigan. I do think that a completed claim requires a
proof of loss form. There cannot really be a claim if the
claim--if the insured has not submitted a proof of loss form.
There is no way to really deny or even approve the claim.
And the current scheme sets up so many barriers to
effective processing of appeals and particularly for low and
moderate-income clients. They do not often have the resources
to actually even have an attorney to help them with the case or
help with submitting a proof of loss, and they end up at a
significant disadvantage.
Chairman Menendez. And don't you think that it is
ridiculous for FEMA to argue that the statute of limitations
can run even before the homeowner has ever submitted a proof of
loss?
Ms. Flanigan. It does not seem to make sense that the
statute of limitations would run before a homeowner submits a
proof of loss.
Chairman Menendez. Well, this is--I appreciate both of your
testimonies because what I have come to believe is that
structurally the system is stacked against policyholders.
And when the risk for an insurance company is greater for
overpayment than any real consequence for underpayment, well,
that dictates to me what is going to happen when it is not
clear-cut and even maybe where it is. The incentives are on one
side of the ledger and not on the other side of the ledger.
I think that there is a clear problem with the appeals
process, one, for people even knowing about it and, two, for
being able to navigate it and understand it.
Three, I think that if you have to live by a deadline as a
policyholder, FEMA should live its deadlines as policyholders.
I mean as the overall under the statutory provisions of the law
that say that they need to be able to respond in 90 days, or if
not, there should be some extension.
It is pretty ridiculous to toll the statute of limitations
before there is even a proof of loss. I have not practiced law
in a while, but there are some fundamental principles that do
not take a rocket scientist to figure out.
And these elements in which in 40 years not one Write-Your-
Own has been ultimately taken out of the program for
underpayment is just beyond the scope of imagination. Yet, I am
sure that there are those who, with overpayments, have faced
that consequence or a consequence of some significance.
So we need to change this.
And I have to be honest with you. I appreciate Legal
Services and everything they have done, but my God, we should
not have to have people go to Legal Services to work this
process, or in the case--I do not know; do you have to have
income qualifications in this particular program of Legal
Services.
Ms. Flanigan. Through our Hurricane Sandy Legal Assistant
Project, we have a varying kind of income eligibility
qualification. And, fortunately, due to the funders that I
mentioned earlier, we are able to assist just about any client
who comes to us for assistance with a flood insurance issue.
Chairman Menendez. That is good to hear because I know,
normally, Legal Services has some type of income criteria.
But the bottom line is that this is about real people, real
lives, real families, who do the right thing. They pay their
premiums. They follow the rules. They obey the law. And, when
it comes time when they have a need, you do not have the law
actually living up to their expectation and their needs.
Now I understand about current policy value, but that does
not dictate the results we are getting in so many of these
cases. We are getting far below current value realities.
And I think we have to do a better job of educating the
public about what these policies mean when people are buying
them.
Now in some cases they have no choice. If they have a
mortgage, the mortgage company insists on having flood
insurance policies, but at least they should clearly
understand.
For those who have to get flood insurance as a result of
holding a mortgage, or for those who do not have a mortgage,
they should understand what the flood insurance policy is and
is not going to pay.
And I do not think people get to read the fine print in a
way that makes it very clear. I think there are some very clear
statements up front that can be made that people will
understand the nature of what their policies are.
So we need to ultimately work to get a balance here at the
end of the day.
And, as I said to the Administrator, we have got to end the
low-balling. We have got to live by the law. If policyholders
have to live by the law, so does FEMA. We have got to have the
data that drives us. And we have to have flood insurance
advocates, as you suggest, being able to make the case, along
with well-established institutions like Legal Services.
And I hope the industry is--and I appreciate your offer,
and I am happy to take you up on it. I hope the industry is
willing to work with us to get this right because I do agree
that the industry's reputation is at stake.
And, while FEMA takes a fair share of the brunt, the other
reality is an industry that has to do the right thing and has
to stand up for its policyholders and has to ultimately,
legitimately argue back with FEMA when they are overarching.
And I think that maybe you are in a disproportionate set of
circumstances where you feel you cannot do that. But if you are
going to have companies that write these polices, we have got
to get a just result for these policyholders.
So we look forward to working with you on that.
Well, you have been very helpful in helping us fill out the
record here and understanding some of the challenges.
This hearing record will remain open to the close of
business tomorrow.
And with the thanks of the Committee, this hearing is
adjourned.
[Whereupon, at 11:57 a.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
Administrator Fugate, first let me say that I know how hard you
have worked and the strides that FEMA has made in helping the New York/
New Jersey region recover from Superstorm Sandy. In fact, just
yesterday we were able to announce that NYU Langone Medical Center
would receive $1.13 billion from FEMA to help it recover from damage
caused by Sandy. That is just one example, but it is certainly
emblematic of all the good work that FEMA has done in getting money out
the door to help the region recover and build back stronger.
I do have a serious point of concern related to flood insurance
claims that have come straight from constituents on Long Island and in
New York City, that I must raise to your level.
It appears that a select few Attorneys hired by Write-Your-Own
insurance companies, and paid by FEMA, are cashing in on the backs of
struggling homeowners.
As you know, there are still many homeowners trying to resolve
their home insurance claims and receive compensation for their losses.
I have learned that for each day a homeowner in New York waits to
settle their claim, there are attorneys benefiting from dragging these
cases out.
These attorneys are hired by the insurance companies for policies
underwritten by the National Flood Insurance Program, and it appears
they are using legal tactics to prevent homeowners from being paid back
for their losses.
So, I do not intend to be critical of you, Administrator Fugate,
but because FEMA underwrites these Write-Your-Own policies and pays the
legal expenses I want to raise these concerns to your attention and
consider what can be done to spare homeowners from the grips of overly
litigious attorneys who have no incentive to try to resolve matters
these matters quickly or efficiently.
So, let me tell you what we have heard. Policyholders whose claims
have been denied by these insurance companies have the ability to
pursue legal action to resolve a dispute over the coverage that they
believe they are entitled. And the insurance companies are certainly
entitled to defend the determinations that they've made and the
compensation that they believe is appropriate. However, we have been
told that these insurance companies almost exclusively hire one law
firm from Louisiana to litigate all of the claims brought by
policyholders. And even more concerning, there are serious allegations
that these attorneys have relied upon troubling legal tactics to
continue to deny homeowners a resolution to their flood insurance
claims.
We have been told that attorneys for the Write-Your-Own insurance
companies are attempting to draw out legal battles with homeowners in
an effort to drive up their own billable hours while contemporaneously
causing policyholders to drop these lawsuits because of their own
mounting legal expenses. FEMA has left oversight of these legal matters
to the insurance companies themselves, but there seems to be a perverse
incentive structure in place that promotes these cases going to trial
rather than being subject to an audit that calls into question the
terms of a settlement.
Denying homeowners who have suffered immense losses from Sandy and
are struggling to get back on their feet is bad enough, but the kicker
is that these Write-Your-Own insurance companies are not even paying
the legal bills for their attorneys that are dragging out these cases--
the Federal Government is paying.
I will get into a few of my specific questions in a moment, but the
bottom line is that FEMA must have significant oversight of these legal
matters not only to ensure that Federal dollars are not being wasted in
unnecessary legal defense fees but also to ensure that homeowners are
not being purposefully denied compensation for their loses that they
suffered during the storm.
______
PREPARED STATEMENT OF SENATOR CORY A. BOOKER
Thank you, Mr. Chairman, and thank you to the Subcommittee for
allowing me to participate in this important hearing today.
Thanks to Administrator Fugate for being here, and welcome to Mr.
Griffin.
And a special welcome to Ms. Flannigan--thank you for the work of
the Hurricane Sandy Legal Assistance Project.
As Chairman Menendez and Senator Schumer know well, the effects of
Superstorm Sandy continue to be felt every day by people across New
Jersey and New York.
The stories are countless--of the families uprooted and facing
challenges unimaginable to most of us.
I very much appreciate the Chairman using his Subcommittee to
examine how insurance claims have been processed after Superstorm
Sandy.
Thousands upon thousands of homeowners have been stymied at every
step of the claims process, from experiencing filing problems, to
struggling through the appeals process, to finding their final
insurance payout being far below what they expected.
I've heard of these challenges from people like Colleen and Brian
Hennen. The Hennens have had to take their insurance company to court
to dispute hundreds of thousands of dollars of damages after their
Monmouth County home was destroyed and condemned after Sandy.
I've heard from a small business owner in Long Beach Island whose
shop took on 2 feet of water and has had to haggle with claims
adjusters while waiting patiently for months--and at times over a
year--to be compensated piecemeal with only portions of their claims.
Like Senator Menendez, I regularly hear from New Jerseyans who have
been paying insurance premiums for years, but now when they need their
insurance company the most, they're left out in the cold. These New
Jerseyans are struggling to pay their mortgage, rebuild their home, and
work regular hours while battling their insurance providers for funds
to which they are entitled.
The stories go on.
So, thank you again to our witnesses and I hope this hearing helps
shed light on the reforms needed to ensure that policyholders receive
the payments they deserve.
______
PREPARED STATEMENT OF CRAIG FUGATE
Administrator, Federal Emergency Management Agency, Department of
Homeland Security
July 30, 2014
Introduction
Good morning Chairman Johnson, Ranking Member Crapo, and Members of
the Subcommittee, I am Craig Fugate, Administrator for the Department
of Homeland Security's (DHS) Federal Emergency Management Agency
(FEMA). I appreciate the opportunity to be here today to discuss the
National Flood Insurance Program (NFIP) and claims paid as a result of
Hurricane Sandy.
More than 144,000 NFIP policyholders submitted notices of flood
loss stemming from Hurricane Sandy, and the NFIP has paid out more than
$8.1 billion in flood claims to enable these policyholders to rebuild
homes, businesses and communities. These policyholders made the
proactive decision to protect themselves by investing in flood
insurance. We have an obligation to these insured survivors, and to the
taxpayers, to administer this program well and we take this
responsibility very seriously.
Since Hurricane Sandy made landfall in 2012, FEMA's Federal
Insurance & Mitigation Administration (FIMA) has been hard at work to
help in the recovery, processing Hurricane Sandy-related insurance
claims, and implementing the Biggert-Waters Flood Insurance Reform Act
and the Homeowners Flood Insurance Affordability Act (HFIAA).
At this point, more than 99 percent of the flood insurance claims
related to Hurricane Sandy that were filed by homeowners have been
closed. There are only approximately 640 claims still outstanding.
In this testimony, I will discuss the NFIP and, in particular, our
claims and appeals processes, policies, and successes.
Claims Related to Hurricane Sandy
FEMA moved quickly to process Hurricane Sandy-related claims. The
average claim payment related to Hurricane Sandy is $61,000, with the
NFIP paying claims totaling more than $8.1 billion.
When Hurricane Sandy made landfall, 236,000 NFIP policies were in
place in New Jersey. As a result of the storm, 74,000 Hurricane Sandy
claims were made in New Jersey. Of those, only 1,300 were appealed.
Differences have been resolved among the adjusters, the policyholders,
and the policyholders' contractors and local building materials
suppliers. Based on preliminary data, we expect there may be only 453
Sandy lawsuits filed in New Jersey. This means that 98.2 percent of the
claims were resolved.
In New York, 169,000 policies were in place when Hurricane Sandy
hit. As a result of the storm, 57,000 claims were made in New York. Of
those, only 885 were appealed. Based on the preliminary data, we expect
there may be only 400 Sandy lawsuits filed in New York. This means that
98.5 percent of these claims were resolved. The remaining open claims
are due to mitigating factors such as ongoing litigation, requests for
additional payment, or outstanding requests for Increased Cost of
Compliance (ICC) benefits.
NFIP policyholders may also be eligible for up to $30,000 in ICC
coverage to bring their building into compliance with their community's
floodplain ordinance. Elevation, relocation, demolition, and flood
proofing are all covered options under ICC coverage.
In New Jersey, 7,000 policyholders submitted claims for ICC
coverage and the NFIP has paid out $69 million thus far. In New York,
1,500 policyholders submitted claims for ICC coverage and the NFIP has
paid out $12 million thus far.
Efforts To Process Claims Rapidly Post-Sandy
The NFIP effectively responded to the postdisaster needs of its
policyholders by creating a rapid claims process and by instituting
programmatic changes that significantly reduced the procedural burden
on policyholders. For example, we deployed our Director of Claims and
other key NFIP leaders to the impacted area where they worked directly
with the States to find ways to accelerate assistance and payments to
policyholders. These changes included:
Authorizing advance payments of up to $5,000 for claims
prior to meeting with adjusters for inspections;
Authorizing another advance payment of up to $25,000 for
certain mechanical elements of the building to get heating and
electricity restored; and
Authorizing an additional $5,000 for necessary permanent
repairs to doors and windows to secure a given building once
heating and electricity were restored.
These claim advances, known as the 5/25/5 initiative, enabled
policyholders to get back into their homes as soon as possible with
necessary heat and electricity. Additionally, we extended the grace
period for payment of NFIP renewal premiums. We also gave policyholders
extensions to file their proof of loss statements. For Hurricane Sandy,
NFIP policyholders have up to 2 years after the date of loss to file
their proofs of loss.
In addition, the NFIP established community Flood Response Offices
in New York and New Jersey to provide services to NFIP flood-certified
adjusters, as well as Adjuster Certification Workshops in New Jersey.
On-site Adjuster Briefings also educated an expanded corps of flood-
certified adjusters on program changes made specifically to meet the
needs of communities impacted by the storm. To bolster the numbers of
adjusters who were able to respond to Hurricane Sandy claims, the NFIP
implemented emergency adjuster certification for adjusters who were
actively flood certified during the past 2 years, granting them a 12
month certification extension. This emergency adjuster certification
made an additional 5,000 adjusters available to handle the large influx
of claims related to the storm.
Early on, the Associate Administrator of FIMA went to the impacted
States with senior leadership and met with State emergency management
officials and State insurance commissioners to identify ways to get
claims resolved expeditiously and to identify any concerns. The NFIP
also deployed expert staff to work in the Governor's Office in New
Jersey, worked closely with the Governor's office in New York, and sent
experts to work with the FEMA Joint Field Offices in New Jersey and New
York.
Increased Borrowing Authority
When Hurricane Sandy made landfall, the NFIP owed the U.S. Treasury
$17 billion to cover losses stemming from Hurricanes Katrina and Rita.
Existing authorities only allowed the NFIP to borrow an additional $3
billion before reaching the $20.7 billion cap. The NFIP used modeling
from previous hurricane flood events and geospatial technology to
estimate potential claims as a result of Hurricane Sandy, and estimated
the borrowing cap could be hit as soon as early January 2013.
On December 31, 2012, Congress amended the National Flood Insurance
Act of 1968 (NFIA) to increase FEMA's borrowing authority from $20.7
billion to $30.4 billion. This enabled FEMA to cover losses stemming
from Hurricane Sandy. The President signed this bill into law (Pub. L.
No. 113-1) on January 6, 2013, increasing FEMA's borrowing authority
and allowing the Agency to continue paying flood insurance claims from
Hurricane Sandy. We are grateful to Congress for this legislation,
which was part of the supplemental the administration requested.
National Flood Insurance Program Background and Coverage Basics
National Flood Insurance Program Background
Established by Congress in 1968, the NFIP helps communities better
understand their flood risk, and provides affordable flood insurance to
help lessen the devastating consequences of flooding in communities
that agree to adopt and enforce floodplain ordinances consistent with
the criteria developed by FEMA for sound land use in the floodplain. In
1973, Congress amended the NFIP to prohibit Federally backed lenders
from making loans secured by property located in a special flood hazard
area unless the property was covered by flood insurance for the life of
the loan.
The NFIP serves as the foundation for national efforts to reduce
the loss of life and property from flood. The program identifies areas
of special flood hazards and flood risk zone data, and through its
floodplain management criteria and grants, mitigates the long-term
risks to people and property from the effects of flooding, and offers
flood insurance in participating communities.
The NFIP works closely in partnership with more than 80
participating private insurance companies--commonly known as Write-
Your-Own (WYO) companies--to market, sell, administer and adjust claims
for policyholders. By encouraging sound floodplain management efforts,
the NFIP is estimated to save the Nation $1.7 billion annually in
avoided flood losses.
The NFIP supports 5.2 million policies, representing $1.2 trillion
of coverage in force. The average claim paid is approximately $61,000.
Coverage Basics
The NFIP pays claims for direct physical loss by flood to the
policyholder's insured property. For family dwellings that house one to
four families, the NFIP offers up to $250,000 in direct physical loss
due to flood, and up to $100,000 for contents coverage with a
deductible. When a loss is covered under the policy, the NFIP will only
pay that part of the loss that exceeds the deductible. The same is true
for contents coverage, which has a separate deductible.
NFIP Replacement Cost Value and Actual Cash Value
Property insurance contents claims are settled using two different
methods.
The Actual Cash Value settlement (ACV) is at the replacement cost
at the time of loss, less the value of its physical depreciation. This
means if the policyholder has a 10-year-old couch that can be replaced
on the date of loss for $2,000 but the physical depreciation on the
date of loss due to wear and tear and the age of the piece is $1,000,
the ACV settlement will be $1,000. Put simply, the couch was worth
$1,000 on the date of loss. To pay more than the item is worth,
especially in a residual market, has been long considered to be the
policyholder's windfall.
The Replacement Cost Value (RCV) settlement is based on the
replacement cost of the item at the time of loss without any deduction
for physical depreciation. In the above ``couch'' example, if an RCV
endorsement is purchased by the owner, that claim would be settled at
$2,000 rather than the ACV of $1,000. Some RCV contents endorsements
limit the payment to a multiple of the ACV. In the above, even if there
was a limit of twice the ACV, the full $2,000 would be paid. However,
if the couch was older and in worse condition than in this example, the
full RCV might not be paid.
The cost of an RCV contents policy would significantly increase the
premium required for contents coverage and would also be very expensive
for the NFIP. All of this would translate into higher premiums for
contents coverage.
In all cases, the value of the NFIP insured building does not
include the value of land or any other improvement (building or
nonbuilding structure) on the same parcel of land.
The NFIP policy is an actual cash value (ACV) policy for all
building and contents, with very limited exception applicable to
primary residential buildings insured up to 80 percent of the
dwelling's full replacement value. ACV means settlement amounts are
based on the actual cash value of the property less depreciation at the
time of loss for all building and content claims. Paying only the
actual value of property on the date of loss is typical for many
residual market insurance programs, especially those, like the NFIP,
that are premium sensitive.
Building claims under the terms of the Residential Condominium
Building Association Policy (RCBAP) are settled at RCV, subject to a
coinsurance clause, that allows the policyholder to be a coinsurer in
return for purchasing building limits that are less than 80 percent of
the full replacement cost of the building or the maximum NFIP limits
available, $250,000, times the number of units in the building.
All other buildings are insured at ACV. Building depreciation is
also physical depreciation because of age, wear, and tear. In a
building, for example, elements like paint and wall covering will
depreciate considerably more quickly than framing wood. However,
deteriorated framing lumber with damage that is not associated with the
current flood will not be worth as much as the same age wood that had
not deteriorated.
HVAC systems and water heaters also have shorter life spans than
framing. In all buildings, the condition of materials is considered in
determining the depreciation and ultimately the dwelling's ACV. This
could mean several hundred dollars, and in some cases of a building in
poor condition it could mean a difference of thousands of dollars in
claim payments, but would be commensurate with the actual value of the
building.
For eligible principal residences, the NFIP will settle building
claims based on replacement cost values. This means the NFIP will pay
to repair or replace the damage to the dwelling after application of
the deductible and without deduction for depreciation. FEMA does not
offer replacement coverage for contents. Were FEMA to offer replacement
coverage for buildings and contents, it would result in significantly
higher premiums.
All NFIP claims are individually adjusted to give personal
attention to each policyholder's losses and an NFIP flood certified
adjuster is assigned to each claim. Building and contents claims both
require a site visit. The determination of physical depreciation
requires the adjuster to not only make a depreciation determination
based on the age of either a contents item or a building element, but
also to take into consideration the condition of the item or element on
the date of loss. Often the adjuster will find items or elements that
have been purchased or installed for an extended time, but are in
pristine condition. In these cases, only a small amount of depreciation
will be charged. Also, relatively recent purchases or installations may
be in poor condition requiring a heavier depreciation charge. The
adjusters are experienced in these determinations, which add an
additional degree of fairness to the ultimate ACV of a contents item or
building element.
Other Coverage Factors
Among other exclusions, the NFIP excludes coverage for decks and
provides limited coverage in basements.
Much like traditional homeowner's policies, the standard flood
insurance policy includes a clause that requires the insurer--in this
case the NFIP--to name the policyholder and any known mortgagee on all
Building, Coverage A claim payments. The NFIP must include the lender's
name on these payments to protect their collateral allowing continued
lending in flood-prone areas.
In addition, for eligible risks, some private insurance markets
provide citizens flood insurance for coverage in excess of the maximum
NFIP limits.
Claims Process and Improper Payments
Claims Process
FEMA is committed to efficiently and quickly resolving claims with
the help of its WYO partners, with the ultimate goal of getting all
funds that can be paid legally into the hands of eligible policyholders
as soon as possible. All insurers of real property and their contents
are similarly concerned about getting claim funds in the hands of their
policyholders as quickly as possible.
The claims process was adjusted for Hurricane Sandy survivors to
modify the proof of loss filing requirement. (Steps 10-14 represent
minor modifications to the regular claims process to represent proof of
loss--normally the proof of loss is due 60 days after the date of
loss.)
The claims process is as follows:
1. The policyholder calls their insurance agent to report the loss.
2. The policyholder's insurance agent reports the claim to either
the WYO Company or the Direct Servicing Agent (DSA).
3. The WYO Company/DSA (insurer) verifies that coverage was in force
on the date of loss.
4. If coverage was in force before the flood was in progress, the
insurer assigns the claim to an independent claims adjusting
firm hired by the insurer.
5. The adjusting firm assigns the claim to an independent NFIP
flood-certified adjuster hired by the adjusting firm.
6. The adjuster contacts the policyholder within 24 to 48 hours to
schedule an appointment to visit the policyholder's property,
with the visit itself usually occurring within 72 hours of the
assignment.
7. The adjuster meets with the policyholder at the property. During
this scoping visit, which can last hours or several days for
larger projects, the adjuster will:
a. Inspect the property to verify that direct physical loss by or
from flood has occurred (as defined in the Standard Flood
Insurance Policy (SFIP));
b. Offer to recommend an advance payment (if appropriate). The
adjuster must take care to consider the size of the recommended
advance against the probable loss and the deductible;
c. Scope the loss, to include measuring, taking pictures,
diagramming, and noting specific damage, and documenting serial
and model numbers of damaged major appliances and electronics;
d. Meet with the policyholder to discuss the policy, explain the
claim process, answer any question, and establish reasonable
expectations;
e. If the policyholder also has contents coverage, the adjuster
explains the contents process and provides inventory sheets to
list the damaged contents, the current replacement cost value,
age, and other details; and
f. If applicable, identify the need for expert opinions from
engineers regarding foundation damage and accountants or
salvors for commercial stock or inventory claims.
8. After completing all assigned scoping visits, the adjuster writes
the NFIP flood claim repair estimates and closing papers, which
are detailed and contain room-by-room, line-by-line estimates
of flood damage.
9. The adjuster sends a copy of the completed estimate to the
policyholder and informs the policyholder that the estimate is
only a recommendation. Only the insurer has the authority to
determine what will actually be paid.
10. The adjuster sends a copy of the completed estimate, contents
claim and closing papers to the insurer.
11. The insurer examines the adjuster's closing documents to verify
that the adjuster's recommended payment is correct and is the
maximum amount that can be paid legally.
12. The WYO Company/DSA then makes the payment to the policyholder.
Payment is typically made in two checks--one for building and
one for contents. The building claim check must name any
mortgagee know at the time of payment
13. If the policyholder considers the payment inadequate, he/she
must submit to his/her insurer a complete, proof of loss signed
and sworn to by the policyholder attaching all documentation
supporting the additional requested amount should be sent to
the insurer.
14. The insurer must consider the valid proof of loss and determine
whether additional reimbursement is appropriate.
Improper Payments
FEMA is the steward of Federal funds under the NFIP and is
committed to reducing and eliminating waste, fraud, and abuse. FEMA and
WYO companies take this responsibility very seriously. Particular focus
was placed on this priority after Hurricane Katrina, when overpayments
occurred and FEMA subsequently built a greater number of safeguards
into programs across the agency. These changes have decreased improper
payments over time, and increased confidence in the programs that are
designed to assist survivors. FEMA tracks all improper payments through
an audit of payments consistent with the Improper Payment Information
Act. As demonstrated in the chart below representing NFIP payments,
improper payments have decreased over time due to strengthened
oversight and a commitment to educating WYO companies on potential
penalties for noncompliance. The data collected does not differentiate
overpayment, underpayment, or fraud.
The NFIP claims mechanism incentivizes adjusters to recommend
accurate claims payments, and pay accurate claims quickly. Adjuster
compensation amounts are on a schedule of payments based on the amount
the policyholder is paid. NFIP insurers receive 1.5 percent of paid
claims for their Unallocated Loss Adjustment Expenses, those expenses
that cannot be allocated to an individual claim, for instance, the
opening and operation of a catastrophe office. Neither the adjusters
nor the insurers get paid until the policyholder gets paid.
While underpayments are rare, they are treated as a critical error
in dealing with the WYO company at fault and closely monitored through
an auditing process. If an audit finds that a WYO company has made
improper payments in 20 percent or more of their claims, FEMA requires
a follow up audit within 12 months. This process helps ensure proper
oversight.
Additionally, complaints and concerns are tracked and assessed
during operational reviews of WYO companies.
Proof of Loss Extension
The NFIP policy requires policyholders to submit a valid proof of
loss with supporting documentation to the NFIP insurer within 60 days
from the loss. For Hurricane Sandy, FEMA extended the deadline for
submitting a proof of loss from 60 days to 24 months after the loss.
Appeals process
Once the NFIP insurer has issued a final written denial, in whole
or part, of a claim, the policyholder may appeal the denial to FEMA.
This process is detailed in the NFIP Flood Insurance Claims Handbook,
which is provided to the policyholder.
Prior to filing an appeal, policyholders should:
1. Try to resolve coverage issues with the adjuster or the
adjuster's supervisor.
2. If the adjuster's supervisor can't resolve your issues, the
policyholder should contact the NFIP insurer's claims
representative and ask for assistance.
3. If policyholder still has questions or concerns, the policyholder
should send the formal appeal along with the supporting
documentation directly to the Associate Administrator for the
Federal Insurance and Mitigation Administration.
4. Prior to issuing an appeal decision, the Associate Administrator
may request additional documents from the policyholder or the
insurer and may conduct a reinspection. After gathering the
documentation, the Associate Administrator will issue written
appeal decision.
5. A policyholder who does not agree with the appeal decision has
the option of filing suit against the NFIP insurer within 1
year of the date the insurer denied the claim.
Of the more than 144,000 insurance claims received in the aftermath
of Hurricane Sandy, 2,800 or 1.9 percent have been appealed. This large
influx of appeals caused a backlog that FEMA worked quickly to resolve.
A monthly plan was established to resolve the issue, which involved
leveraging existing claims resources as well as bringing in additional
claims, correspondence, and quality control resources. Because of these
efforts, this backlog was cleared in January 2014.
As of July 11, 2014, there were 122 total outstanding NFIP claims
appeals and there were none that are over 90 days old.
Conclusion
Through the NFIP, tens of thousands of survivors better understand
how to mitigate their risk and when a flood does occur, have received
payments that are helping them to rebuild their homes, businesses and
communities. FEMA has an obligation to these survivors and to be good
stewards of taxpayer dollars. We take this responsibility very
seriously and have put a process in place that effectively settles
legitimate claims and has a low improper payment rate.
We are grateful to Congress for the supplemental borrowing
authority provided in the aftermath of Hurricane Sandy, and we look
forward to working with Congress as we close out the few remaining
claims.
______
PREPARED STATEMENT OF DONALD GRIFFIN
Vice President, Property Casualty Insurers Association of America
July 30, 2014
My name is Don Griffin and I am vice president of personal lines
with the Property Casualty Insurers Association of America (PCI). PCI
is composed of more than 1,000 member companies, representing the
broadest cross section of insurers of any national trade association.
Our members write more than $195 billion in annual premium and 39
percent of the Nation's home, auto, and business insurance, reflecting
the diversity and strength of the U.S. and global insurance markets.
PCI members also include two-thirds of the ``Write-Your-Own'' (WYO)
insurers that partner with FEMA to administer the National Flood
Insurance Program (NFIP). I also chair the WYO Flood Insurance
Coalition that includes all the primary insurer trade associations and
WYOs. My testimony today is provided on behalf of PCI. Thank you for
the opportunity to appear before you today on behalf of PCI and our
members.
Background on Flood Insurance Claims Payments
PCI commends the Subcommittee for highlighting the merit in taking
some time while information and memories are fresh to review lessons
learned from Sandy. Further, identifying and recording lessons learned
from Sandy will be helpful too as Congress, the NFIP and WYOs prepare
for the fast approaching 2017 NFIP reauthorization.
Congress passes legislation that generally establishes how the NFIP
is to work, FEMA sets the rules, and WYO insurers service the
policyholders and the Federal Government. The compensation paid to
insurers to administer claims is offset by the expenses incurred to pay
claims adjusters, legal fees, and other administrative costs. The WYOs
are the third-party administrators for the NFIP for the Federal
Government. WYO insurers do have significant incentives, however, to
keep their policyholders happy and to follow Federal flood insurance
claims regulations.
Decisions on Federal flood insurance claims payments are made by
claims adjusters. When policyholders experience a flood loss, they
contact their insurance agent or WYO insurer. The insurer then assigns
a flood claims adjuster, who may be an employee of the WYO or an
independent contractor. The flood claims adjuster determines the amount
payable on a claim based on very specific guidelines and rules
established by the NFIP. Ultimately the WYO insurers are responsible
for any overpayments and WYO insurers are audited regularly by the
Federal Government under the Improper Payments Elimination and Recovery
Act (IPERA) to ensure that they follow Federal requirements and do not
overpay claimants.
Claims adjusters and the independent contracting firms they
represent are generally compensated in proportion to the amount of the
loss paid. The compensation formulas are set by the NFIP and
periodically updated. For example, in response to GAO recommendation
subsequent to Katrina, in 2009 the claims compensation formula was
refined by reducing the portion tied to the claim value and adjusting
payment based on the WYO's NFIP premium volume. There are also specific
processes in place for dissatisfied policyholders to appeal claims
decisions to the NFIP. The most recent appeals process was put in place
as a result of the passage of the Flood Insurance Reform Act of 2004.
Insurers with unhappy policyholders face both individual consumer
retention risks and reputational risks, particularly since most people
are unaware that the rules for determining most flood insurance claims
are set by the Federal Government and insurers do not have a direct
risk-bearing interest.
Finally, administering and marketing the flood program is very
complex and expensive, and the number of insurers willing to do so has
declined significantly in recent years. Many WYOs have determined that
the reputational, legal, and financial risks are too great.
Unfortunately, as fewer insurers market flood insurance, fewer
consumers will purchase flood insurance.
Lessons Learned From Superstorm Sandy and Potential Areas of Reform
Governmental Coordination
In the immediate aftermath of a natural catastrophe it is critical
for local, State, and Federal officials to coordinate their efforts to
get basic services up and running as quickly as possible to get people
back to their homes and businesses to begin remediation and rebuilding.
Insurers need to be at the table during pre- and postdisaster emergency
planning and coordination. It is also essential to the rebuilding
process that local law enforcement and Government officials allow
insurers and claims adjusters into damaged areas as soon it is safe--at
least as soon as property owners are provided access.
An issue that arose with Superstorm Sandy, was the lack of
available flood insurance adjusters, and that can delay the claims
settlement and the rebuilding process. Most flood insurance adjusters
are located in areas that frequently flood. Often States implement
reciprocal recognition of claims adjusters from other States to help.
Often the State insurance department grants such access, with the
proper credentials, but sometimes it is difficult, given the impact of
the event and the number of requests, to process the necessary
paperwork needed in a timely manner, leading to delays in responding to
claimant needs. PCI also supports Federal legislation to require more
reciprocal claims adjuster recognition.
Flood Insurance Advocate
The Homeowners Flood Insurance Affordability Act (HFIAA)
established the office of the Flood Insurance Advocate. In light of the
considerable Congressional changes to the Federal flood insurance
program last term through the Biggert-Waters Flood Insurance Reform Act
(BW-12) and this year in the HFIAA, WYOs hope that the Advocate can be
a central location to respond to inquiries by consumers, Congress and
the media. As mentioned previously, the program is very complex and
there are many questions regarding recent legislation and mapping. We
understand that the NFIP has established the goal of filling that
position by the end of this year and hope the Administrator will be
able to find candidates with an understanding of mapping, flood
insurance, and claims--that will all be needed for the Flood Advocate
to best serve consumers and the NFIP.
Mitigation
Preparation is a key factor in minimizing financial loss after a
natural catastrophe. Strong, uniform statewide building codes that are
regularly updated play a significant role in reducing the risk of
injury or death to homeowners during a natural catastrophe. Structures
built or retrofitted to comply with the most recent edition of the
International Building Code, and other recognized building standards,
incur less property damage during a significant weather event. Less
property damage following an event reduces the need for Federal
disaster aid, and can help expedite a community's recovery after a
natural catastrophe. PCI promotes strong building codes and responsible
land use policies, which are crucial for all stakeholders, to promote
public safety and to be as prepared as possible for the next hurricane,
tornado, or flood disaster.
Private Sector Participation
The increased complexity of the NFIP, along with increased costs
for low-risk, voluntary NFIP policyholders also risk decreasing NFIP
participation. Together, these and other pressures could lead to
additional adverse selection in the future, increased taxpayer exposure
and the need for additional Federal aid following the next major
catastrophe. Growing the number of both policyholders and insurers will
benefit both taxpayers and the NFIP.
PCI also supports increasing private sector involvement in flood
insurance. BW-12 included a provision expressly authorizing FEMA to
obtain reinsurance from the private market. PCI looks forward to
working with companies and regulators to make certain consumers and
other marketplace participants are properly educated and protected as
this area develops.
Program Growth and Risk Spread
Insurers participating in the WYO program are responsible for
helping administer more than 80 percent of the NFIP business.
Unfortunately, despite continued expensive education and outreach
efforts by WYO companies, the number of homeowners and businesses
purchasing flood insurance protection has peaked at about 5.5 million
policyholders. This level of insurance protection is far below the
needs of vulnerable consumers. Future storms will continue to expose
gaps in both the number of consumers who are uninsured for flood risk
as well as the many families and businesses that are underinsured for
their exposures. Consumers need to be educated about the importance of
having flood insurance and encouraged to continue purchasing it.
Likewise, more needs to be done to assure that BW-12 provisions
designed to incentivize lenders to require flood coverage are having
the intended effect.
Conclusion
The NFIP is an essential program to protecting millions of American
businesses and families from catastrophic risk. PCI's WYO companies
appreciate the opportunity to service the Federal Government and
consumers and welcome a discussion with the Committee about how to
improve the claims process. PCI also welcomes the Committee's interest
in reforms addressing many of the lessons learned from Superstorm
Sandy, including the need for better Government cooperation with
industry, the need for the Federal flood advocate to address consumer
questions, the benefits of improved mitigation efforts, the need for
more private sector involvement and expansion of flood insurance
coverage to better protect individual and business consumers.
On behalf of PCI and our member companies, thank you for the
opportunity to present our views today. We look forward to working with
you to protect consumers and improve the National Flood Insurance
Program.
______
PREPARED STATEMENT OF MARYANN FLANIGAN
Supervising Attorney, New Jersey Legal Services, Hurricane Sandy Legal
Assistance Project
July 30, 2014
Thank you for this opportunity to appear here today on behalf of
the New Jersey Legal Services system, and on behalf of New Jersey
residents who were affected by Storm Sandy. With funding from the Robin
Hood Foundation, the Hurricane Sandy New Jersey Relief Fund and the
State of New Jersey, Legal Services was able to begin providing legal
assistance within 2 weeks after Sandy left our State. LSNJ established
a statewide hotline (888-222-5765) which still operates and receives
calls daily. LSNJ is the major legal assistance provider in the State
of New Jersey for Sandy victims. Through our hotline, Web site, and
targeted outreach, we have provided legal assistance in more than 2,500
cases to residents who were affected by Sandy. We have assisted even
more residents through educational materials which are accessed through
our Web site and distributed as flyers throughout the State. Even now
in July of 2014, 21 months after the storm, new Sandy clients continue
to contact our offices on a daily basis; many of these clients contact
us for assistance with flood insurance claims.
Sandy-affected New Jersey residents have sought assistance from
Legal Services on a breadth of issues that highlighted the need for
legislative attention in certain areas, but one of the most prominent
issues has involved underpayment or erroneous denials of flood
insurance claims. Literally hundreds of New Jerseyans have come to LSNJ
for help with their flood insurance denials and underpayments. Legal
Services has served as a critical resource for disaster victims in need
of assistance, especially for victims in the low to moderate income
population. Today I will speak about the barriers that Sandy victims
face when filing flood insurance claims, and I will highlight areas
which can benefit greatly from careful attention and improvement.
1. Flood Insurance Companies Routinely Undervalue Claims, Thereby
Creating Barriers To Repairing and Rebuilding
Almost every client who contacted LSNJ regarding a flood insurance
issue had the same problem: the flood insurance claim offer was
insufficient. Flood insurance carriers often subcontract the adjustment
of flood claims to adjusters from all over the country; an adjuster
from the midwest adjusted a client's claim for flood loss at
approximately $40,000 less than what the client needed in order to make
the covered repairs. After examining the line-by-line estimate prepared
by the adjuster, it was clear that materials could not be purchased in
New Jersey for the unit prices listed. This low-balling of flood
insurance claims happens all too often, and results in the insured
suffering an unreasonable delay in making needed repairs to the home.
The insured must either sacrifice quality by finding a way to purchase
materials which are within the covered price range, or accrue
additional expenses by taking out loans to cover the cost of repairs
and other living arrangements while fighting for a fair settlement
offer.
One particularly egregious case occurred when a homeowner carried
homeowner and flood insurance through the same private Write-Your-Own
(WYO) insurance company. The client's home was on a sea-facing avenue
on which all of the homes suffered approximately 4 feet of flood
damage. The flood insurance department denied the claim stating that
the damage was caused by wind-driven rain and the homeowner insurance
department denied the claim stating the damage was caused by flood
water. The client had to appeal both claims and several months passed
before the homeowner insurance department sent a structural engineer to
prepare a report regarding causes of damage. The client used the
structural engineer report as evidence of flood damage, and the flood
insurance department then handled her claim more fairly. At that point
in time, the client had been displaced from her home for approximately
7 months before the flood insurance department began to assess the
scope of flood damage to her home.
A potential Federal remedy for this issue would be modification of
the existing incentive and penalty system for flood insurance companies
when claims are undervalued.
2. The Process for Appealing or Supplementing a Flood Insurance Claim
Is Excessively Complicated and Write-Your-Own (WYO) Insurance
Companies Often Create Extra Requirements With Which the
Insured Must Comply. The Insurance Companies Offer Little
Support or Guidance to Their Insureds
When clients contact LSNJ for assistance with a flood insurance
claim, we start out by providing a simplified explanation of how to
appeal an underpayment or denial. While the National Flood Insurance
Program (NFIP) requires ``detailed repair estimates'' in the Standard
Flood Insurance Policy (SFIP) Dwelling Form 44 CFR 61 APPENDIX A
(1)(VII)(H)(4)(f.), WYOs tend to reject detailed estimates if they are
not prepared by specific software which creates an estimate report in
an identical format to the one prepared by the claim adjuster. The
insurance companies often do not offer any clear explanation or
guidance to the insured when the estimate is rejected.
By the time that the client contacts us, the client typically has
had several conversations with the flood claim agent about the
underpayment or denial. After we explain the flood insurance appeal
process, clients often express gratitude for the information and state
that they did not understand the appeal process before speaking with
LSNJ. That is to say, the client did not receive a clear explanation of
the appeal process from the flood claim agent. Clients also tell
stories of unreturned phone calls and emails to claim agents, and the
clients tend to have a sense of dismay about the entire flood claim
process.
After a couple in Union Beach, New Jersey, submitted a proof of
loss to appeal their denial, they received notice that their proof of
loss was denied. The insurance company did not explain the reason for
the denial or offer guidance for what could be submitted in order to
lead to a reassessment or approval. Another client in Toms River wanted
to speak with her flood claim agent regarding her appeal, and the claim
agent said he could not speak to her because she hired a public
adjuster. Although there is no regulation prohibiting an insurance
agent from speaking to the insured after a public adjuster has been
hired to assist with the claim, several clients tell us that their
flood insurance agents refuse to speak with them. Then, when these
clients have difficulty getting in touch with their public adjusters,
they are in the dark about the progress of their appeal and they have
no idea when they might be able to return to a normal and stable living
situation.
A potential Federal remedy would be straightforward guidance from
the NFIP to all flood insurance companies which establishes a standard
requirement that WYOs refrain from creating any extra requirements in
the flood claim process.
3. The Statute of Limitations for Filing a Lawsuit Should not Begin To
Run Until a Proof of Loss Has Been Submitted and Denied in
Whole or in Part
Client claim rights are limited severely by the lawsuit statute of
limitations built into the SFIP. The statute of limitations clause
explains that the client must file suit within 1 year of the first
partial or whole denial of the flood insurance claim, without regard to
the submission or review of a proof of loss. Therefore, clients may
find themselves fighting with the insurance company for several months
over a proof of loss form without any clear decision (approval or
denial) while the statute of limitations clock is ticking. Then the
client may still be fighting for an approval or denial of the proof of
loss when the statute of limitations time runs out. If the proof of
loss is subsequently denied, the client then has no recourse through
the judicial process and must resort back to fighting the insurance
company with another proof of loss through the same exact process.
A potential Federal remedy would be amending FEMA regulations so
that the limitations timeline does not begin to run until there is a
partial or complete denial of a submitted proof of loss form.
4. The Complexities of the Flood Claim Appeal Process Have a
Particularly Negative Impact on Low to Moderate Income Insureds
Low to moderate income New Jerseyans affected by Sandy were in some
ways the worst-off in the flood insurance claim process. Not only were
they displaced and forced to incur additional expenses in the
relocation or rebuilding processes, but they also may have lost income
if their jobs were affected by Sandy. When these clients sought
assistance navigating the flood insurance appeal process, they found
themselves unable to afford attorney fees. If they were fortunate
enough to find an attorney who would provide services on a contingent
fee basis, the low to moderate income client then had to make the hard
decision of figuring out how to possibly repair the home with only two-
thirds of what they needed to get from the insurance company. In many
situations, attorneys would not take flood insurance appeal claims
because the respective recovery amounts might be too low to compensate
for the work required. With limited resources, LSNJ has been able to
assist many of these low to moderate income New Jerseyans in navigating
the appeal process. However, these clients find themselves struggling
to pursue the appeal because of the costs for hiring a structural
engineer or a contractor who can provide a ``detailed estimate'' in the
format that the flood insurance provider wants. Also, these clients
sometimes are unable to devote sufficient time to thoroughly preparing
the appeal because of employment responsibilities and other day-to-day
obligations.
A potential Federal remedy would be simplifying the flood insurance
claim appeal process and establishing a robust flood advocate as
authorized under the Homeowner Flood Insurance Affordability Act so
that insureds would be better equipped to effectively handle their
appeals without incurring attorney expenses.
5. Policy Coverage Terms Should Be Written in Clearer Language and
Coverage Should Be More Comprehensive in the Case of a Total
Loss Due to Flood Damage
Many clients do not understand their coverage terms. They do not
understand that the flood insurance policy does not indemnify for a
total loss in the way that typical homeowner insurance policies do. A
client whose home is covered for $250,000 under the flood insurance
policy does not expect to hear that although the home was substantially
damaged and needs to be completely rebuilt after suffering five feet of
flood water damage, the flood insurance policy will only pay for the
part of the home which was damaged by flood water--even if that amount
is less than $250,000. Policy terms should be written in clearer
language and explained to the insured whenever the policy is renewed.
A potential Federal remedy would be modifying SFIP language so that
policies are written in clearer terms and a directive from the NFIP
requiring flood insurance agents to explain coverage limits to the
insured.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM CRAIG FUGATE
Q.1. One of the complaints that is often raised about the
National Flood Insurance Program (NFIP) concerns the accuracy
of flood maps. To help address this criticism, I worked on a
provision of the Biggert-Waters Act to establish a Technical
Mapping Advisory Council or TMAC. This interagency and
stakeholder group will help advise FEMA on the development of
flood maps, including how to evaluate and depict future risk
due to phenomena like sea-level-rise. I'm pleased that 2 years
after the authorization of the TMAC a slate of members was
finally appointed a few weeks ago.
Can you discuss how you will be utilizing the TMAC to
improve the quality of flood maps and to help individuals and
communities understand future risks?
Can you also comment about how FEMA, through TMAC and with
other Federal agencies such as NOAA and the U.S. Geological
Survey, is working to give States and localities technical
information and data that might help them mitigate their flood
risk for the short and long-term?
A.1. The Technical Mapping Advisory Council (TMAC) will be
preparing written recommendations in a future conditions risk
assessment and modeling report that will be submitted to the
Federal Emergency Management Agency (FEMA) Administrator. The
report is due 1 year after the first public meeting of the
TMAC, which will be held at the U.S. Geological Survey (USGS)
on September 30 and October 1, 2014. The future conditions risk
assessment and modeling report is a one-time report
specifically called for in the Biggert-Waters 2012 legislation
that will be produced in parallel with the first annual
recommendations report. The separate annual report, also due to
the FEMA Administrator 1 year after the first public meeting of
the TMAC, will contain, among other things, recommendations on
how to improve the quality of flood maps. An annual
recommendations report will be produced each year until the
TMAC is stood down. The TMAC is comprised of members and
representatives of various Federal, State, and local
governments. This includes representatives from the USGS,
National Oceanic and Atmospheric Administration (NOAA), the
U.S. Army Corps of Engineers (USACE), and other
representatives. In addition, the TMAC includes members of
recognized associations or organizations, such as the American
Society of Civil Engineers and the Association of State Flood
Plain Managers.
The Agency has been working with other Federal agencies to
conduct sea level rise proof of concept studies in conjunction
with organizing and standing up the TMAC. The studies are being
conducted for parts of San Francisco County, CA, and portions
of Pinellas and Hillsborough Counties, FL. The objectives of
the studies are to test methods for incorporating sea level
rise data into FEMA's flood maps, as well as develop a product
(sea level rise tool) that could actually be used by these
Counties for informational nonregulatory purposes. The sea
level rise tool will be similar to (but improved upon to
consider differences in Pacific coast versus Atlantic coast
methodologies) that developed by the cooperative effort of
FEMA, USACE, NOAA, and the U.S. Global Change Research Program
(USGCRP) for the coastal Counties/Boroughs of New Jersey and
New York that were impacted by Hurricane Sandy. FEMA is working
closely with NOAA, USACE, and the USGCRP in the development of
these newer tools. Finally, it should be noted that the TMAC
will be briefed on the findings (some preliminary) of these sea
level rise efforts so that the information and data can be used
in formulating recommendations on how to mitigate and
understand flood risk for the short and long-term.
Q.2. One reason there is less confidence in flood maps is that
so many maps have not been updated in years, decades in some
cases. When they are updated, they can seem abrupt and
arbitrary to the public. In Rhode Island we've only recently
seen updates for coastal maps that go back to the 1970s and
1980s. There are other maps in the State that are still that
old. According to the Association of State Floodplain Managers,
it would cost about $275 million per year simply to maintain
proper maps on a 5 year interval. That figure does not include
the fact that many flood risk maps have not yet been updated
with new engineering and hydrologic data, and some lower risk
areas have never been mapped. Unfortunately, the
Administration's request for discretionary funding for flood
mapping and risk analysis has declined sharply in the last few
years. This year, the budget request cuts mapping yet again.
I'm pleased that Chairman Landrieu has increased this funding
be increased to $100 million in the Senate Homeland Security
Appropriations bill. But even if we hold that number, it would
be less than a quarter of the authorized level. I know that you
have many priorities to address in the budget request, but
assuming the State Floodplain Managers are correct, how will we
get to the point where maps are updated and accurate with the
level of funding that FEMA is currently dedicating to this
mission?
A.2. The budget for Flood Hazard Mapping and Risk Analysis has
experienced reductions in the last several years. Increases in
flood insurance fee income have partially offset this
reduction. The available budget has allowed FEMA to moderately
maintain the Nation's flood hazard maps: however, it has
limited FEMA's ability to advance and/or develop new analyses
in many areas. FEMA is exploring efficiencies and innovations,
internally and in partnership with the private sector, that may
impact mapping operations (i.e. factors that drive improvements
to technology, processes, or map production). Additionally,
FEMA is looking to leverage State, local, and tribal data and
resources along with other Federal Agencies' data to advance
the mapping program. Through these potential efficiencies and
innovations, FEMA is seeking ways to make more progress on
mapping within the existing budget; however, we anticipate that
these efficiencies could only further offset budget reductions,
but wouldn't be enough to return our Flood Hazard Mapping and
Risk Analysis activities to historical performance levels when
available resources were higher.
Q.3. The Homeowner Flood Insurance Affordability Act included a
study I authored on the feasibility of establishing community-
based flood insurance options. The idea being that such
policies might give communities a way to increase
participation, encourage mitigation, and reduce premiums. Along
with the affordability study authorized under the Biggert-
Waters Act, this will help inform the conversation for the next
NFIP reauthorization in just a few of years (2017). Can you
give a sense of FEMA's timing to complete this study?
A.3. FEMA is working diligently to complete each of the studies
and reports required by both the Biggert-Waters Flood Insurance
Reform Act of 2012 and the Homeowner Flood Insurance
Affordability Act of 2014. The contract for this study is
expected to be executed by the end of September 2014, with a
completion date of August 2015. FEMA will make every effort to
perform all interval reviews quickly in order to provide the
report to congress by the September 2015 due date.
Q.4. States with federally declared disasters typically are
eligible for HMGP grants equal to 15 percent of the total
Individual Assistance and Public Assistance that FEMA provides
following a Presidentially declared disaster. In following the
experience of Rhode Island, my impression is that FEMA's rules
make it hard for States to use their HMGP funds in the limited
amount of time they are available. In fact, States,
particularly those that have little familiarity with HMGP, may
wind up returning portions of their grants because they cannot
execute projects quickly enough.
Is it your experience that States wind up returning a
portion of their HMGP funds? If so, what percentage of HMGP
funds is returned? What steps can and should be taken to make
sure that States are able to use their full HMGP allotments on
good, effective projects?
A.4. Since 1988, FEMA has awarded approximately $12.3 billion
Hazard Mitigation Grant Program (HMGP) grants for 928 separate
declarations. Overall, approximately $8.6 billion of the $12.3
billion has been obligated.
States are required to submit applications for HMGP
consideration within 12 months of the declaration. By
regulation, this time limit is extendable with justification
for up to 6 months. In rare situations FEMA has allowed
additional time for States to solicit, develop and submit
applications. The period of performance begins with the opening
of the application period (i.e., the date of the declaration)
and ends no later than 36 months from the close of the
application period. At the State's request, the period of
performance can be extended for up to 12 months with
justification. The grantee is expected to complete all grant
activities and to incur costs during the period of performance.
To date, $145.3 million of $1.26 billion has been obligated
for Sandy declarations. The States of New York and New Jersey
still have open application periods. They have not yet
submitted projects for all available funding, although
approximately $500 million worth of HMGP projects are in
process.
A State may choose to take one or more actions below to
ensure full use of HMGP funds.
States and local communities are encouraged to
develop viable preevent mitigation plans that clearly
identify at risk, or vulnerable target structures or
areas so that they can reduce time developing projects
after an event. These Hazard Mitigation Plans are
required in order to receive HMGP project grants. FEMA
is working to provide additional guidance and support
to improve the quality of the planning process, which
includes an interagency effort with the Partnership for
Sustainable Communities to ensure that appropriate data
and tools for risk assessments are made available and
to promote better alignment of related programs to
ensure more coordinated planning support. Local plans
can address actions to address climate change and adapt
to changing risk environments. Examples are identifying
at-risk structures, obtaining current elevation data
and prioritizing actions that include freeboard as a
way to account for future risk. Areas affected by
wildfire may have increased flooding risk due to the
loss of ground cover. Local plans can be adjusted to
assess changing risks and to prioritize high value
mitigation opportunities. FEMA encourages communities
to develop local plans that work best for their
hazards. The minimum regulatory requirements for
acceptable plans may meet the needs of a community,
while another may prefer to add detail, technical data
and prioritization preferences. FEMA provides technical
assistance and training to States and communities to
promote a planning process that is inclusive across
disciplines and results in a plan with clearly
implementable actions.
States may submit applications for Advance
Assistance. FEMA is conducting a pilot program that
provides up to 25 percent of the total HMGP ceiling, up
to $10 million for States to collect data, assist
communities developing projects, and set up program
management processes.
States that are unable to submit complete, eligible
applications may request application period extensions.
States may request technical assistance to develop
projects and/or determine cost-effectiveness, or to
implement cost share options that may reduce local or
individual cost shares. FEMA provides technical
assistance to States and local applicants--at the
State's request.
States may request training in the areas of
application development and review, and for determining
cost effectiveness, and other program requirements.
FEMA provides training at State's request for State
staff, as well as local community officials that may
have program roles. Understanding FEMA program
requirements sets a firm base for States and local
communities as they implement post disaster recovery
and mitigation plans and initiatives.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHUMER
FROM CRAIG FUGATE
Q.1. In March Congress passed the Homeowner Flood Insurance
Affordability Act and the legislation contained language that
would allow for homeowners to receive credit for alternative
forms of mitigation done to their homes when traditional
mitigation efforts such as elevation may be impractical. In New
York, we currently have homeowners in the process of rebuilding
both in the existing and in the soon-to-be mapped floodplain
and it is important for them to know what actions they can or
should take to help make their homes safe and keep premiums
low.
So, can you give us an update on how these provisions of
the law are being implemented, how these alternative forms of
mitigation will be taken into account in the calculation of
risk premium rates, and what homeowners should know in order to
take advantage of these alternative mitigation options?
A.1. As directed by the law, FEMA is currently studying how
homeowners might receive credit for alternative forms of
mitigation. This study is under contract, with an expected
completion date of February 2015. The report is due to Congress
by March 15, 2015.
FEMA is currently working to identify potential alternative
mitigation measures as required under Sec. 26 of the HFIAA of
2014. Examples of the types of alternative mitigation measures
under consideration include use of hydrostatic openings,
elevating all building utilities, floodproofing all building
utilities, use of flood-damage resistant materials, use of
floodwall without gates, abandoning the lowest floor, and
elevating lowest interior floor. FEMA is conducting a
comprehensive review of many alternative mitigation measures to
determine their initial feasibility for both flood protection
and potential flood insurance premium discounts.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM CRAIG FUGATE
Q.1. Once FEMA determines that digital mapping technology is an
effective and accurate flood mapping tool, how long do you
anticipate it would take for FEMA to implement the widespread
use of digital mapping technology?
A.1. FEMA began implementing digital mapping technologies
around 2000. Over the course of the next 10 years, FEMA's flood
mapping program:
Eliminated 95 percent of paper map distribution
Transitioned from printing presses and a paper
inventory to an all-digital mapping inventory
Provided modernized geospatial data and maps for 92
percent of the Nation (of which all were aligned with
the best available topographic data and approximately
half of the stream miles were validated, provided with
new engineering study, or updated with new engineering
analysis)
In 1999, FEMA was distributing 2.5 million paper maps each
year. FEMA began the transition to digital regulatory products
by scanning the entire map inventory and creating an easy-to-
use tool online to view and print official copies of a portion
of the standard flood maps. These customized products were
called FIRMettes. Downloading and printing FIRMettes soon
replaced much of the demand for paper maps.
By 2003, paper map demand stabilized below 1 million maps
per year, and FEMA was initiating the Flood Map Modernization
Program. The Flood Map Modernization Program republished flood
maps for 65 percent of the land area of the United States,
covering 92 percent of the Nation's population as digital
geospatial FIRM databases, static digital map images, and paper
maps. The Bunning-Bereuter-Blumenauer Flood Insurance Reform
Act of 2004 (Pub. L. No. 108-264) (commonly referred to as the
Flood Insurance Program Reform Act of 2004) added a provision
allowing FEMA to treat digital geospatial data as official,
equivalent to the paper maps. FEMA developed policy to
implement this change, which was published in 2007. At the same
time, FEMA introduced the National Flood Hazard Layer (NFHL).
The NFHL is a digital geospatial data product composed of all
FIRM databases available nationally and updated daily as
revisions to flood maps are processed. The NFHL is available
live via the Web through open Web mapping service interfaces.
In 2008, FEMA announced it would discontinue nearly all
distribution of paper maps, beginning with maps finalized in
October 2009. FEMA focused on reorienting internal production
processes to emphasize the FIRM database as the primary
product, instead of the static digital and paper flood maps.
This was critical to the flood determination industry
transition from paper to digital products. Beginning October 1,
2009, FEMA eliminated all paper distribution of flood maps,
except a single paper copy when revised to affected communities
to support the incorporation of the flood maps into local land
use ordinances. This reduced the annual distribution of paper
maps to fewer than 100,000 units annually.
Similarly, FEMA has been encouraging the adoption of LIDAR
technology for flood mapping since the 1990s. FEMA published
one of the first LIDAR specifications in 1999 which became the
industry standard for a number of years. FEMA has worked
actively with the USGS and other Federal Agencies on LIDAR
acquisition and standards through the National Digital
Elevation Program. In 2010 FEMA adopted new accuracy standards
for all flood map updates and requiring all new elevation data
purchased to follow the current USGS LIDAR specification. This
year, FEMA is working very closely with USGS to help launch the
3D Elevation Program (3DEP) as a strategy to acquire updated
digital elevation for the Nation cooperatively at a lower cost.
The 3DEP is designed as an 8 year plan to achieve national
coverage.
Q.2. What steps is FEMA taking to educate the public and
broaden the base of the flood insurance program to nonrequired
homeowners?
Are there additional steps that Congress or the agencies
should take to would encourage nonrequired homeowners to
participate in the program?
How would expanded participation of nonrequired homeowners
impact the solvency of the flood insurance program?
A.2. The National Flood Insurance Program has a decade-long
public education campaign--FloodSmart--which seeks to explain
the benefits of protecting yourself financially from flood
damage. FloodSmart is a multifaceted campaign which includes
paid advertising through a variety of media (television, radio,
print, billboards, Web) as well as direct mail, advanced Web
tools for determining flood risk and policy information at
http://www.FloodSmart.gov, public service announcements, earned
media through public relations and other activities designed
specifically to reach the general public. FloodSmart provides
extensive resources in the aftermath of disasters to assist
those impacted by the disaster file their insurance claims, but
also to reach those in areas nearby, but not directly impacted,
to educate them about flood risk and protection when it is
uppermost in their minds.
The FloodSmart program has intentionally mixed its
investments in paid media outreach in communities with a high
propensity to purchase (usually those at elevated risk of
flooding) along with communities where overall flood
probability may be lower, but flood consequences will be high
when waters do rise. Unfortunately, we have found that without
a recent flood history or floods making headlines elsewhere,
interest in flood insurance coverage is generally low. As the
economy rebounds though, and family funds become more
available, the National Flood Insurance Program (NFIP) is
seeing an uptick in interest in flood insurance.
All FloodSmart materials directed to the public go through
a rigorous six-step review process to ensure they are
completely accurate and are as easy to read and digest as
possible. Likewise, many materials are available in Spanish and
other languages as well as being 508 compliant for those with
sight or hearing impairments.
As part of our ongoing efforts within Mitigation and the
NFIP, FEMA has established strong partnerships with numerous
professional organizations and associations. These partnerships
include the Association of State Floodplain Managers (ASFPM),
the National Association of Flood and Stormwater Management
Agencies (NAFSMA), the National Association of Counties (NaCo),
as well as numerous insurance associations, the National
Association of Realtors (NAR), the Mortgage Bankers Association
of America (MBA), the American Bankers Association (ABA) and
other groups at the State and local levels. NFIP
representatives also meet quarterly with Federal regulatory
agencies with oversight for the lending industry and federally
secured loans.
Since May 2013, FEMA has trained more than 19,000 insurance
agents and 45,500 total insurance professionals (lenders,
adjusters, realtors, others) on the flood insurance program and
ways to reduce flood risk.
In May 2014, the NFIP released a series of Public Service
Announcements aimed directly at understanding flood risk. The
wildly popular ``Protect What Matters'' campaign, which can be
viewed at https://www.floodsmart.gov/, is already being widely
shown in Tier 1 and Tier 2 markets in Florida, the Gulf Coast,
Hawaii, and other areas and has already earned more than $1
million in free advertising airtime in its first 8 weeks.
FEMA, through its Risk Mapping, Assessment, and Planning
(Risk MAP) program, releases new flood maps and data as
available, giving communities across America access to helpful,
authoritative data that they can use to make decisions about
flood risk. The Risk MAP program assists communities nationwide
to assess flood risks and encourages mitigation planning and
actions to avoid or minimize damage in the face of future
disasters. Through more precise flood maps, risk assessment
tools, and outreach support, Risk MAP strengthens local
communities' ability to make informed decisions about reducing
risk. A key element of Risk MAP is engaging local officials and
other community leaders throughout the process, to discuss the
community's flood risk and identify mitigation strategies and
actions to reduce that risk. Throughout the flood mapping
process, FEMA and community leaders host events to inform
residents of their community's risk to flooding.
In July 2014, FEMA redesigned the Flood Map Service Center
(MSC), the public portal to access flood mapping products. The
MSC Web site and supporting help information make it simpler
for homeowners and professionals to access important flood risk
information and tools. National Flood Determination Association
(NFDA) and Risk MAP's public-facing customer service
representatives provided design input to increase the site's
usability. In addition to regulatory products, nonregulatory
flood risk maps and data are available on the MSC and provide
an alternative means to help understand risk.
FEMA's Risk MAP managers meet regularly throughout the year
with ASFPM and NAFSMA to share information and ideas. As
another example of our collaboration with professional
organizations and associations, Risk MAP conducted a workshop
at the National Association of Counties (NaCo) annual
conference in New Orleans, Louisiana, last month to demonstrate
how to access and use Risk MAP tools to help inform their
communities about flood risk.
The NFIP has a long history of working with Congress and
other agencies to promote flood awareness generally and flood
insurance specifically. Any actions taken by Congress or other
agencies to help spread the message of protecting oneself from
the financial ruin floods can bring is an additional step in
the right direction. The NFIP stands ready to assist Congress
or other agencies in partnering on disseminating these
messages.
There is no doubt that increasing the number of properties
insured--especially in lower risk areas--will spread the
liability of the flood insurance program across a much larger
pool of policyholders. It is a basic tenet of insurance:
spreading risk across multiple policies is much safer
financially than concentrating risk across a few. Additional
policies would definitely bolster the NFIP's financial ability
to withstand a major flood event, as well as pay off debt more
quickly and increase the Reserve Fund more quickly.
While FEMA continues to make modest headway into increasing
flood coverage in low- to moderate-risk areas, dramatic
increases are unlikely due to several factors including
awareness of the availability of flood insurance in lower-risk
areas, limited acceptance of flood risk outside of SFHAs, and
the cost of insurance. Possible solutions include:
expanding mandatory purchase of flood insurance for
federally regulated mortgages in the 0.2 percent (500
year) flood risk zone,
expanding mandatory purchase for all properties
financed through a federally regulated lender,
increased emphasis on non-SFHA participation in
Community Rating System communities,
consider implementing incentives identified in the
Affordability study currently being conducted as part
of HFIAA,
encouraging State insurance regulators/legislators
to place greater value and emphasis on flood insurance
training for agents.