[Federal Register Volume 61, Number 140 (Friday, July 19, 1996)]
[Rules and Regulations]
[Pages 37687-37693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18352]


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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC26


National Flood Insurance Program; Assistance to Private Sector 
Property Insurers

AGENCY: Federal Insurance Administration (FIA), Federal Emergency 
Management Agency (FEMA).

ACTION: Final rule.

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SUMMARY: This final rule amends National Flood Insurance Program (NFIP) 
regulations establishing the Financial Assistance/Subsidy Arrangement 
that may be entered into by and between the Administrator and private 
sector insurers under the Write Your Own (WYO) program. The amendments: 
(1) Simplify the Arrangement by streamlining the format; (2) reflect 
recent policy changes regarding loss adjustment and financial operation 
of the private insurers in the WYO program; and (3) delete references 
to obsolete operating manuals and handbooks. The amendments also 
improve the flexibility of the Arrangement and provide information to 
permit WYO participants to discharge their responsibilities for 
underwriting, claims adjustment, and financial control procedures 
established by the Federal Insurance Administration.

EFFECTIVE DATE: October 1, 1996.

FOR FURTHER INFORMATION CONTACT: Edward T. Pasterick, Federal Emergency 
Management Agency, Federal Insurance Administration, 500 C Street SW., 
Washington, DC 20472, (202) 646-3443.

SUPPLEMENTARY INFORMATION: On April 3, 1996, FEMA published in the 
Federal Register, 61 FR 14709, a proposed rule to amend NFIP 
regulations establishing the Financial Assistance/Subsidy Arrangement 
that may be entered into by and between the Administrator and private 
sector insurers under the WYO program.
    FEMA received two sets of written comments on the proposed rule. 
The comments were submitted by two separate Write Your Own companies.
    One company expressed concerns over seven (7) issues in the 
Arrangement. The first concern questioned the Arrangement's incentive 
system, i.e., adjusting the percentage of retained premium relative to 
the Company's performance in achieving production goals. The proposed 
Arrangement provides a minimum of 30.6% of premium income to be 
retained by a WYO Company for operating and administrative expenses, 
including marketing expenses. When a WYO company achieves its 
production or marketing goals, the amount of retained premium income 
increases from the minimum of 30.6% up to a maximum of 32.6%. The 
commenter felt that such a provision was punitive and amounted to a 
retroactive penalty since the marketing goals are tied to the retention 
of current policies as well as the production of new business.
    First of all, the amount of premium income retained by a WYO 
company (32.6%) includes allowances for marketing activities. 
Therefore, it is not unreasonable to condition a portion of the 
retained premium on the success of such marketing activities. Secondly, 
the unprecedented growth in the number of flood insurance policies 
during the last two years as a result of this very incentive system is 
a compelling reason to continue it under the Arrangement. Thirdly, the 
marketing goals are tied to retention of current policies only to the 
extent that such policies leave the NFIP entirely. If they go from one 
WYO company to another, the loss does not adversely affect the first 
company's goals. Furthermore, policy retention is a commonly accepted 
component of marketing strategies. In sum, the principle of relating 
financial incentives to performance is simply a sound business practice 
and has been retained in the Arrangement.
    The commenter expressed a related concern that a standard 
percentage is unfair to larger companies that carry more policies on 
their book of business. FEMA has retained the same percentage for all 
companies participating in the WYO program for the current Arrangement 
believing that a consistent

[[Page 37688]]

standard is the most equitable approach for all participants since it 
is applied uniformly, regardless of a company's size. However, in 
calculating goal accomplishment, we will employ a formula that will 
recognize not only the percentage increase in the numbers of policies 
but also absolute numbers of new policies. This will be explained 
further in the offer letter for the Arrangement.
    The overall issues of growth goals for companies in the WYO 
program, the appropriate level of the expense allowance, and the 
relationship between the two, all warrant a detailed review by the FIA. 
For the current Arrangement, however, the levels of retained premium 
reflected in the April 3, 1996 proposed rule remain in effect.
    The second concern raised by this WYO company focused on the 
appropriate roles with respect to risk bearing by the Federal 
Government and the insurance companies participating in the 
Arrangement. (The heading in the company's submission reads 
``Continuing Shift of Risk-Bearing.'') The commenter expressed concern 
that if Congressional authorization or appropriation for the program is 
ever withdrawn the WYO company would still be liable for its policies 
in force that are allowed to run their term under the Arrangement. The 
company recommended that the purpose statement be revised to emphasize 
the Federal Government's continuing financial assistance role--
regardless of circumstances. The same company also recommended that 
Article V.E. should reaffirm that the FIA will reimburse expenses and 
ultimately be responsible for claim payment for the duration of the 
Arrangement even though financial assistance under the Arrangement is 
canceled for any new or renewal business. In the absence of that, the 
company recommended that a WYO company be permitted to cancel all 
policies in force with 45 days notice should financial assistance be 
terminated for any reason.
    First, the Arrangement may not obligate the Federal Government in 
any way beyond Congressional authorization. Congress has built into the 
Act, however, a number of safeguards for policyholders--the ultimate 
beneficiaries of the National Flood Insurance Program--and private 
insurance companies that participate in the NFIP. One of the major 
safeguards for consumers and private insurance companies is FEMA's 
borrowing authority for the National Flood Insurance Fund which 
operates independently of fiscal year authorization. Furthermore, the 
WYO program has operated for thirteen years and all have benefited--the 
consumer, the taxpayer, and participating WYO companies that have not 
had to absorb or share losses even in recent heavy loss years in spite 
of their active involvement in the NFIP. While FIA cannot speak for 
Congress relative to the authorization for the NFIP, FIA has recognized 
the commenter's concern by revising the purpose statement of Article I 
to emphasize that all flood policies issued are done so under 
prescribed conditions pursuant to the Arrangement and authorization 
granted by Congress for the program.
    The same commenter also expressed concern over certain details in 
the Arrangement for the single adjuster program for catastrophic losses 
such as hurricanes when property owners suffer combined wind and flood 
losses but have separate insurance carriers for these perils. 
Specifically, Article II.C.3.0 of the proposed Arrangement requires 
using a single adjuster when the flood coverage is provided by the WYO 
company and the wind coverage is provided by another WYO company. 
Article II.C.4.0 requires the use of a single adjuster when the flood 
coverage is by the WYO company, the wind coverage is by another 
property insurer, and the State Insurance Regulator deems it in the 
interests of the policyholder that a single adjuster be used to handle 
both losses.
    FIA finds some merit in the commenter's concerns relative to: 1. 
Article II.C.3.0, such as the potential exposure of a WYO company's 
proprietary information through the use of a single adjuster. 
Consequently, the Arrangement has been revised by deleting Article 
II.C.3.0. Article II. C.4.0, which requires the use of a single 
adjuster when the State Insurance Regulator requires one, has been 
retained in the Arrangement and renumbered as Article II.C.3.0. FIA 
believes strongly that at the heart of the single adjuster approach is 
an overriding public benefit since claims on the same property 
involving separate perils are adjusted in a coordinated manner. 
Therefore, whenever a State Insurance Regulator deems it in the 
interest of the public that a single adjuster be used for an event 
involving wind and flood, the program will support the Regulator's 
decision and require the use of a single adjuster by participating WYO 
companies.
    The company also expressed concern that it no longer has an 
understanding with one Joint Underwriting Association and would run the 
risk in Article II.C.2.0 of breach of contract or misrepresentation 
since Joint Underwriting Associations are one of the wind carriers that 
would require the use of a single adjuster. The commenter indicated 
that Article II.C.2.0 represented only a small percentage of its 
business, and Joint Underwriting Associations are in fact only one of a 
number of property insurance mechanisms listed in Article II.C.2.0. 
While the company may no longer act as a servicing agent for a 
particular State Joint Underwriting Association, this would certainly 
not preclude the use of a single adjuster when the coverage for flood 
is offered by the company and the wind coverage is offered by the 
underwriting association. Accordingly, Article II.C.2.0 of the 
Arrangement has not been revised.
    The same company also recommended that State premium tax surcharges 
for flood insurance and guaranty fund assessments be excluded from 
liability from a participating Company. The company believed that the 
wording in the proposed Arrangement could be an impediment to 
marketing. FIA agrees with this comment, and Article III.A. has been 
revised to read, ``The Company shall be liable for operating, 
administrative and production expenses, including any State premium 
taxes, dividends, agent's commissions or any other expense of whatever 
nature incurred by the Company in the performance of its obligations 
under the Arrangement, but excluding surcharges on flood insurance 
premium and guaranty fund assessments.''
    The first commenter also objected that the percentage (3.3%) paid 
to WYO companies for unallocated loss adjustment expenses is 
inadequate--one that has not changed since the inception of the 
program. While loss adjustment expenses, as the commenter mentioned, 
will on the average be higher for catastrophic events than for smaller 
events, the 3.3% contained in the Arrangement is an average percentage 
for all loss adjustment scenarios, including catastrophic disasters as 
well as moderate and small events where allocated loss expenses are 
lower. FEMA has determined that the current 3.3% should be retained in 
the current Arrangement. The matter however warrants review, and any 
modification to the loss adjustment expense will be considered at the 
end of the current Arrangement year.
    The commenter also objected to the removal of the adjuster fee 
schedule from the Arrangement and recommended that the fee schedule be 
modified to reflect higher limits of coverage. FEMA agrees that 
additional changes need to be made to the fee

[[Page 37689]]

schedule; however, in the interest of expedition and flexibility, FEMA 
believes that any changes to the fee schedule should be made outside 
the rule making process in close coordination with the participating 
WYO companies. Therefore, the fee schedule has not been included in the 
final Arrangement.
    This commenter's final recommendation involved offering greater 
flexibility in the Arrangement regarding cash management procedures and 
oversight. The commenter recommended that Article VII.B. be revised to 
read ``The Company shall remit all funds, including interest, not 
required to meet current expenditures to the United States Treasury, in 
accordance with the provisions of the WYO Accounting Procedures Manual 
or procedures approved by the FIA.'' FEMA agrees with that 
recommendation provided that FIA's approval of accounting procedures is 
in writing. The purpose underlying the revisions in the latest 
Arrangement is to streamline the document and to achieve greater 
flexibility in managing the program without sacrificing essential 
operational and financial controls. We have modified the Arrangement to 
reflect the company's recommendation.
    A second WYO company objected also to the fixed percentage of 32.6% 
of retained premium only when companies achieve their marketing or 
production goals and to the limitation of 30.6% when that goal is not 
achieved. The company cited its extensive service and outreach programs 
to its agents in an effort to achieve the growth goals for the National 
Flood Insurance Program. In spite of this effort, the company indicated 
that increased competition from the independent agency system has 
prevented the company from achieving its goals. FEMA concludes however 
that the experience of the WYO program as a whole, with these 
percentages in place, has been responsible in large part for the 
unprecedented growth of the program. As explained above, the percentage 
rates of 30.6% (the minimum amount of premium that a company may 
retain) and 32.6% (the amount of premium retained by a company when it 
achieves its marketing goals) have been retained in this Arrangement 
but will be reviewed by FIA for future Arrangements.

National Environmental Policy Act

    This final rule is categorically excluded from the requirements of 
44 CFR Part 10, Environmental Consideration. No environmental impact 
assessment has been prepared.

Executive Order 12866, Regulatory Planning and Review

    This final rule is not a significant regulatory action as defined 
under Executive Order 12866 of September 30, 1993, Regulatory Planning 
and Review, 58 FR 51735, October 4, 1993. To the extent possible, this 
rule adheres to the principles of regulation as set forth in Executive 
Order 12866. This rule has not been reviewed by the Office of 
Management and Budget under the provisions of Executive Order 12866.

Paperwork Reduction Act

    This final rule does not contain a collection of information and is 
therefore not subject to the provisions of the Paperwork Reduction Act 
of 1995.

Executive Order 12612, Federalism

    This final rule involves no policies that have federalism 
implications under Executive Order 12612, Federalism, dated October 26, 
1987.

Executive Order 12778, Civil Justice Reform

    This final rule meets the applicable standards of section 2(b)(2) 
of Executive Order 12778.

List of Subjects in 44 CFR Part 62

    Claims, Flood insurance.

    Accordingly, 44 CFR part 62 is amended as follows:

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

    1. The authority citation for Part 62 continues to read as follows:

    Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of 
1978, 43 FR 41943, 3 CFR 1978 Comp., p. 329; E.O. 12127 of Mar. 31, 
1979, 44 FR 19367, 3 CFR, 1979 Comp., p. 376.

    2. Appendix A of part 62 is revised to read as follows:

Appendix A of Part 62--Federal Emergency Management Agency, Federal 
Insurance Administration, Financial Assistance/Subsidy Arrangement

    Purpose: To assist the company in underwriting flood insurance 
using the Standard Flood Insurance Policy.
    Accounting Data: Pursuant to Section 1310 of the Act, a Letter of 
Credit shall be issued for payment as provided for herein from the 
National Flood Insurance Fund.
    Effective Date: October 1, 1996.
    Issued By: Federal Emergency Management Agency, Federal Insurance 
Administration, Washington, DC 20472.

Article I--Findings, Purpose, and Authority

    Whereas, the Congress in its ``Finding and Declaration of Purpose'' 
in the National Flood Insurance Act of 1968, as amended, (``the Act'') 
recognized the benefit of having the National Flood Insurance Program 
(the Program) ``carried out to the maximum extent practicable by the 
private insurance industry''; and
    Whereas, the Federal Insurance Administration (FIA) recognizes this 
Arrangement as coming under the provisions of Section 1345 of the Act; 
and
    Whereas, the goal of the FIA is to develop a program with the 
insurance industry where, over time, some risk-bearing role for the 
industry will evolve as intended by the Congress (Section 1304 of the 
Act); and
    Whereas, the insurer (hereinafter the ``Company'') under this 
Arrangement shall charge rates established by the FIA; and
    Whereas, this Arrangement will subsidize all flood policy losses by 
the Company; and
    Whereas, this Financial Assistance/Subsidy Arrangement has been 
developed to enable any interested qualified insurer to write flood 
insurance under its own name; and
    Whereas, one of the primary objectives of the Program is to provide 
coverage to the maximum number of structures at risk and because the 
insurance industry has marketing access through its existing facilities 
not directly available to the FIA, it has been concluded that coverage 
will be extended to those who would not otherwise be insured under the 
Program; and
    Whereas, flood insurance policies issued subject to this 
Arrangement shall be only that insurance written by the Company in its 
own name under prescribed policy conditions and pursuant to this 
Arrangement and the Act; and
    Whereas, over time, the Program is designed to increase industry 
participation, and, accordingly, reduce or eliminate Government as the 
principal vehicle for delivering flood insurance to the public; and
    Whereas, the direct beneficiaries of this Arrangement will be those 
Company policyholders and applicants for flood insurance who otherwise 
would not be covered against the peril of flood.
    Now, therefore, the parties hereto mutually undertake the 
following: 

[[Page 37690]]

Article II--Undertakings of the Company

    A. In order to be eligible for assistance under this Arrangement 
the Company shall be responsible for:

    1.0  Policy Administration, including:
    1.1  Community Eligibility/Rating Criteria.
    1.2  Policyholder Eligibility Determination.
    1.3  Policy Issuance.
    1.4  Policy Endorsements.
    1.5  Policy Cancellations.
    1.6  Policy Correspondence.
    1.7  Payment of Agents' Commissions.
    The receipt, recording, control, timely deposit and disbursement of 
funds in connection with all the foregoing, and correspondence relating 
to the above in accordance with the Financial Control Plan 
requirements.
    2.0  Claims processing in accordance with general Company standards 
and the Financial Control Plan. Other technical and policy material 
published by FEMA and FIA will also provide guidance to the Company.
    3.0  Reports.
    3.1  Monthly Financial Reporting and Statistical Transaction 
Reporting shall be in accordance with the requirements of National 
Flood Insurance Program Transaction Record Reporting and Processing 
Plan for the Write Your Own (WYO) Program and the Financial Control 
Plan for business written under the WYO Program. These data shall be 
validated/edited/audited in detail and shall be compared and balanced 
against Company financial reports.
    3.2  Monthly financial reporting shall be prepared in accordance 
with the WYO Accounting Procedures.
    B.  The Company shall use the following time standards of 
performance as a guide:
    1.0  Application Processing--15 days (Note: If the policy cannot be 
mailed due to insufficient or erroneous information or insufficient 
funds, a request for correction or added monies shall be mailed within 
10 days);
    1.1  Renewal Processing--7 days;
    1.2  Endorsement Processing--15 days;
    1.3  Cancellation Processing--15 days;
    1.4  Claims Draft Processing--7 days from completion of file 
examination;
    1.5  Claims Adjustment--45 days average from receipt of Notice of 
Loss (or equivalent) through completion of examination.
    1.6  For the elements of work enumerated above, the elapsed time 
shown is from the date of receipt through the date of mail out. Days 
means working days, not calendar days.
    In addition to the standards for timely performance set forth 
above, all functions performed by the Company shall be in accordance 
with the highest reasonably attainable quality standards generally 
utilized in the insurance and data processing industries.
    These standards are for guidance. Although no immediate remedy for 
failure to meet them is provided under this Arrangement, nevertheless, 
performance under these standards and the marketing guidelines provided 
for in Section G. below can be a factor considered by the Federal 
Insurance Administrator (the Administrator) in requiring corrective 
action by the Company, in determining the continuing participation of 
the Company in the Program, or in taking other action, e.g., limiting 
the Company's authority to write new business.
    C. To ensure maximum responsiveness to the National Flood Insurance 
Program's (NFIP) policyholders following a catastrophic event, e.g., a 
hurricane, involving insured wind and flood damage to policyholders, 
the Company shall agree to the adjustment of the combined flood and 
wind losses utilizing one adjuster under an NFIP-approved Single 
Adjuster Program in the following cases and under procedures issued by 
the Administrator:
    1.0  Where the flood and wind coverage is provided by the Company;
    2.0  Where the flood coverage is provided by the Company and the 
wind coverage is provided by a participating State Property Insurance 
Plan, Windpool Association, Beach Plan, Joint Underwriting Association, 
FAIR Plan, or similar property insurance mechanism; and
    3.0  Where the flood coverage is provided by the Company and the 
wind coverage is provided by another property insurer and the State 
Insurance Regulator has determined that such property insurer shall, in 
the interest of consumers, facilitate the adjustment of its wind loss 
by the adjuster engaged to adjust the flood loss of the Company.
    D. Policy Issuance.
    1.0  The flood insurance subject to this Arrangement shall be only 
that insurance written by the Company in its own name pursuant to the 
Act.
    2.0  The Company shall issue policies under the regulations 
prescribed by the Administrator in accordance with the Act;
    3.0  All such policies of insurance shall conform to the 
regulations prescribed by the Administrator pursuant to the Act, and be 
issued on a form approved by the Administrator;
    4.0  All policies shall be issued in consideration of such premiums 
and upon such terms and conditions and in such States or areas or 
subdivisions thereof as may be designated by the Administrator and only 
where the Company is licensed by State law to engage in the property 
insurance business;
    5.0  The Administrator may require the Company to discontinue 
issuing policies subject to this Arrangement immediately in the event 
Congressional authorization or appropriation for the National Flood 
Insurance Program is withdrawn.
    E. The Company shall separate Federal flood insurance funds from 
all other Company accounts, at a bank or banks of its choosing for the 
collection, retention and disbursement of Federal funds relating to its 
obligation under this Arrangement, less the Company's expenses as set 
forth in Article III, and the operation of the Letter of Credit 
established pursuant to Article IV. All funds not required to meet 
current expenditures shall be remitted to the United States Treasury, 
in accordance with the provisions of the WYO Accounting Procedures 
Manual.
    F. The Company shall investigate, adjust, settle and defend all 
claims or losses arising from policies issued under this Arrangement. 
Payment of flood insurance claims by the Company shall be binding upon 
the FIA.
    G. The Company shall market flood insurance policies in a manner 
consistent with the marketing guidelines established by the Federal 
Insurance Administration.

Article III--Loss Costs, Expenses, Expense Reimbursement, and Premium 
Refunds

    A. The Company shall be liable for operating, administrative and 
production expenses, including any State premium taxes, dividends, 
agent's commissions or any other expense of whatever nature incurred by 
the Company in the performance of its obligations under this 
Arrangement but excluding surcharges on flood insurance premium and 
guaranty fund assessments.
    B. The Company shall be entitled to withhold, on a provisional 
basis, as operating and administrative expenses, including agents' or 
brokers' commissions, an amount from the Company's written premium on 
the policies covered by this Arrangement in reimbursement of all of the 
Company's marketing, operating and administrative

[[Page 37691]]

expenses, except for allocated and unallocated loss adjustment expenses 
described in Section C. of this Article, which amount shall be 32.6% of 
the Company's written premium on the policies covered by this 
Arrangement. The final amount retained by the Company shall be 
determined by an increase or decrease depending on the extent to which 
the Company meets the marketing goals for the 1996-1997 Arrangement 
year contained in marketing guidelines established pursuant to Article 
II. G.
    The adjustment in the amount retained by the Company shall be made 
after the end of the 1996-1997 Arrangement year. Any decrease from 
32.6% made as a result of a Company not meeting its marketing goals 
shall be directly related to the extent to which the Company's goal was 
not achieved, but shall not exceed two (2) percentage points (providing 
for a minimum of 30.6%).
    The increase, which shall be distributed among the Companies 
exceeding their marketing goals, shall be drawn from a pool composed of 
the difference between 32.6% of all WYO Companies' written premium in 
Arrangement year 1996-1997 and the total amount, prior to the increase, 
provided to the Companies on the basis of the extent to which they have 
met their marketing goals. A distribution formula will be developed and 
distributed to WYO Companies that will consider the extent to which the 
Company has exceeded its goal and the size of the Company's book of 
business in relation to the total number of WYO policies. The amount of 
any increase shall be paid promptly to the Company after the end of the 
1996-1997 Arrangement year.
    The Company, with the consent of the Administrator as to terms and 
costs, shall be entitled to utilize the services of a national rating 
organization, licensed under state law, to assist the FIA in 
undertaking and carrying out such studies and investigations on a 
community or individual risk basis, and in determining more equitable 
and accurate estimates of flood insurance risk premium rates as 
authorized under the National Flood Insurance Act of 1968, as amended. 
The Company shall be reimbursed in accordance with the provisions of 
the WYO Accounting Procedures Manual for the charges or fees for such 
services.
    C. Loss Adjustment Expenses shall be reimbursed as follows:
    1. Unallocated loss adjustment shall be an expense reimbursement of 
3.3% of the incurred loss (except that it does not include ``incurred 
but not reported'').
    2. Allocated loss adjustment expense shall be reimbursed to the 
Company pursuant to a ``Fee Schedule'' coordinated with the Company and 
provided by the Administrator.
    3. Special allocated loss expenses shall be reimbursed to the 
Company in accordance with guidelines issued by the Administrator.
    D.1. Loss payments under policies of flood insurance shall be made 
by the Company from funds retained in the bank account(s) established 
under Article II, Section E and, if such funds are depleted, from funds 
derived by drawing against the Letter of Credit established pursuant to 
Article IV.
    2. Loss payments will include payments as a result of awards or 
judgments for damages arising under the scope of this Arrangement, 
policies of flood insurance issued pursuant to this Arrangement, and 
the claims processing standards and guides set forth at Article II, 
Section A, 2.0 of this Arrangement. Prompt notice of any claim for 
damages as to claims processing or other matters arising outside the 
scope of this section (D)(2) shall be sent to the Administrator along 
with a copy of any material pertinent to the claim for damages arising 
outside of the scope of the matters set forth in this section (D)(2).
    Following receipt of notice of such claim, the General Counsel 
(OGC), FEMA, shall review the cause and make a recommendation to FIA as 
to whether the claim is grounded in actions by the Company that are 
significantly outside the provisions of this section (D)(2). After 
reviewing the General Counsel's recommendation, the Administrator will 
make his/her decision and the Company will be notified, in writing, 
within thirty (30) days of the General Counsel's recommendation, if the 
decision is that any award or judgment for damages arising out of such 
actions will not be recognized under Article III of this Arrangement as 
a reimbursable loss cost, expense or expense reimbursement. In the 
event that the Company wishes to petition for reconsideration of the 
notification that it will not be reimbursed for the award or judgment 
made under the above circumstances, it may do so by mailing, within 
thirty days of the notice declining to recognize any such award or 
judgment as reimbursable under Article III, a written petition to the 
Chairman of the WYO Standards Committee established under the Financial 
Control Plan. The WYO Standards Committee will, then, consider the 
petition at its next regularly scheduled meeting or at a special 
meeting called for that purpose by the Chairman and issue a written 
recommendation to the Administrator, within thirty days of the meeting. 
The Administrator's final determination will be made, in writing, to 
the Company within thirty days of the recommendation made by the WYO 
Standards Committee.
    E. Premium refunds to applicants and policyholders required 
pursuant to rules contained in the National Flood Insurance Program 
(NFIP) ``Flood Insurance Manual'' shall be made by the Company from 
Federal flood insurance funds referred to in Article II, Section E. 
and, if such funds are depleted, from funds derived by drawing against 
the Letter of Credit established pursuant to Article IV.

Article IV--Undertakings of the Government

    A. Letter(s) of Credit shall be established by the Federal 
Emergency Management Agency (FEMA) against which the Company may 
withdraw funds daily, if needed, pursuant to prescribed procedures 
implemented by FEMA. The amounts of the authorizations will be 
increased as necessary to meet the obligations of the Company under 
Article III, Sections C, D, and E. Request for funds shall be made only 
when net premium income has been depleted. The timing and amount of 
cash advances shall be as close as is administratively feasible to the 
actual disbursements by the recipient organization for allowable Letter 
of Credit expenses.
    Request for payment on Letters of Credit shall not ordinarily be 
drawn more frequently than daily nor in amounts less than $5,000, and 
in no case more than $5,000,000 unless so stated on the Letter of 
Credit. This Letter of Credit may be drawn by the Company for any of 
the following reasons:
    1. Payment of claim as described in Article III, Section D;
    2. Refunds to applicants and policyholders for insurance premium 
overpayment, or if the application for insurance is rejected or when 
cancellation or endorsement of a policy results in a premium refund as 
described in Article III, Section E; and
    3. Allocated and unallocated Loss Adjustment Expenses as described 
in Article III, Section C.
    B. The FIA shall provide technical assistance to the Company as 
follows:
    1. The FIA's policy and history concerning underwriting and claims 
handling.
    2. A mechanism to assist in clarification of coverage and claims 
questions.
    3. Other assistance as needed.

[[Page 37692]]

Article V--Commencement and Termination

    A. Upon signature of authorized officials for both the Company and 
the FIA, this Arrangement shall be effective for the period October 1 
through September 30. The FIA shall provide financial assistance only 
for policy applications and endorsements accepted by the Company during 
this period pursuant to the Program's effective date, underwriting and 
eligibility rules.
    B. By June 1, of each year, the FIA shall publish in the Federal 
Register and make available to the Company the terms for the re-
subscription of this Financial Assistance/Subsidy Arrangement. In the 
event the Company chooses not to re-subscribe, it shall notify the FIA 
to that effect by the following July 1.
    C. In the event the Company elects not to participate in the 
Program in any subsequent fiscal year, or the FIA chooses not to renew 
the Company's participation, the FIA, at its option, may require (1) 
the continued performance of this entire Arrangement for a period not 
to exceed one (1) year following the original term of this Arrangement, 
or any renewal thereof, or (2) the transfer to the FIA of:
    1. All data received, produced, and maintained through the life of 
the Company's participation in the Program, including certain data, as 
determined by FIA, in a standard format and medium; and
    2. A plan for the orderly transfer to the FIA of any continuing 
responsibilities in administering the policies issued by the Company 
under the Program including provisions for coordination assistance; and
    3. All claims and policy files, including those pertaining to 
receipts and disbursements that have occurred during the life of each 
policy. In the event of a transfer of the services provided, the 
Company shall provide the FIA with a report showing, on a policy basis, 
any amounts due from or payable to insureds, agents, brokers, and 
others as of the transition date.
    D. Financial assistance under this Arrangement may be cancelled by 
the FIA in its entirety upon 30 days written notice to the Company by 
certified mail stating one of the following reasons for such 
cancellation: (1) Fraud or misrepresentation by the Company subsequent 
to the inception of the contract, or (2) nonpayment to the FIA of any 
amount due the FIA. Under these very specific conditions, the FIA may 
require the transfer of data as shown in Section C., above. If transfer 
is required, the unearned expenses retained by the Company shall be 
remitted to the FIA. In such event the Government will assume all 
obligations and liabilities owed to policyholders under such policies 
arising before and after the date of transfer.
    E. In the event the Act is amended, or repealed, or expires, or if 
the FIA is otherwise without authority to continue the Program, 
financial assistance under this Arrangement may be cancelled for any 
new or renewal business, but the Arrangement shall continue for 
policies in force that shall be allowed to run their term under the 
Arrangement.
    F. In the event that the Company is unable to, or otherwise fails 
to, carry out its obligations under this Arrangement by reason of any 
order or directive duly issued by the Department of Insurance of any 
Jurisdiction to which the Company is subject, the Company agrees to 
transfer, and the Government will accept, any and all WYO policies 
issued by the Company and in force as of the date of such inability or 
failure to perform. In such event the Government will assume all 
obligations and liabilities owed to policyholders under such policies 
arising before and after the date of transfer and the Company will 
immediately transfer to the Government all funds in its possession with 
respect to all such policies transferred and the unearned portion of 
the Company expenses for operating, administrative and loss adjustment 
on all such policies.

Article VI--Information and Annual Statements

    The Company shall furnish to FEMA such summaries and analyses of 
information including claim file information in its records as may be 
necessary to carry out the purposes of the National Flood Insurance Act 
of 1968, as amended, in such form as the FIA, in cooperation with the 
Company, shall prescribe. The Company shall be a property/casualty 
insurer domiciled in a State or territory of the United States. Upon 
request, the Company shall file with the FIA a true and correct copy of 
the Company's Fire and Casualty Annual Statement, and Insurance Expense 
Exhibit or amendments thereof, as filed with the State Insurance 
Authority of the Company's domiciliary State.

Article VII--Cash Management and Accounting

    A. FEMA shall make available to the Company during the entire term 
of this Arrangement and any continuation period required by FIA 
pursuant to Article V, Section C., the Letter of Credit provided for in 
Article IV drawn on a repository bank within the Federal Reserve System 
upon which the Company may draw for reimbursement of its expenses as 
set forth in Article IV that exceed net written premiums collected by 
the Company from the effective date of this Arrangement or continuation 
period to the date of the draw.
    B. The Company shall remit all funds, including interest, not 
required to meet current expenditures to the United States Treasury, in 
accordance with the provisions of the WYO Accounting Procedures Manual 
or procedures approved in writing by the FIA.
    C. In the event the Company elects not to participate in the 
Program in any subsequent fiscal year, the Company and FIA shall make a 
provisional settlement of all amounts due or owing within three months 
of the termination of this Arrangement. This settlement shall include 
net premiums collected, funds drawn on the Letter of Credit, and 
reserves for outstanding claims. The Company and FIA agree to make a 
final settlement of accounts for all obligations arising from this 
Arrangement within 18 months of its expiration or termination, except 
for contingent liabilities that shall be listed by the Company. At the 
time of final settlement, the balance, if any, due the FIA or the 
Company shall be remitted by the other immediately and the operating 
year under this Arrangement shall be closed.

Article VIII--Arbitration

    A. If any misunderstanding or dispute arises between the Company 
and the FIA with reference to any factual issue under any provisions of 
this Arrangement or with respect to the FIA's non-renewal of the 
Company's participation, other than as to legal liability under or 
interpretation of the standard flood insurance policy, such 
misunderstanding or dispute may be submitted to arbitration for a 
determination that shall be binding upon approval by the FIA. The 
Company and the FIA may agree on and appoint an arbitrator who shall 
investigate the subject of the misunderstanding or dispute and make a 
determination. If the Company and the FIA cannot agree on the 
appointment of an arbitrator, then two arbitrators shall be appointed, 
one to be chosen by the Company and one by the FIA.
    The two arbitrators so chosen, if they are unable to reach an 
agreement, shall select a third arbitrator who shall act as umpire, and 
such umpire's determination shall become final only upon approval by 
the FIA.
    The Company and the FIA shall bear in equal shares all expenses of 
the arbitration. Findings, proposed awards,

[[Page 37693]]

and determinations resulting from arbitration proceedings carried out 
under this section, upon objection by FIA or the Company, shall be 
inadmissible as evidence in any subsequent proceedings in any court of 
competent jurisdiction.
    This Article shall indefinitely succeed the term of this 
Arrangement.

Article IX--Errors and Omissions

    The parties shall not be liable to each other for damages caused by 
ordinary negligence arising out of any transaction or other performance 
under this Arrangement, nor for any inadvertent delay, error, or 
omission made in connection with any transaction under this 
Arrangement, provided that such delay, error, or omission is rectified 
by the responsible party as soon as possible after discovery.
    However, in the event that the Company has made a claim payment to 
an insured without including a mortgagee (or trustee) of which the 
Company had actual notice prior to making payment, and subsequently 
determines that the mortgagee (or trustee) is also entitled to any part 
of said claim payment, any additional payment shall not be paid by the 
Company from any portion of the premium and any funds derived from any 
Federal Letter of Credit deposited in the bank account described in 
Article II, section E. In addition, the Company agrees to hold the 
Federal Government harmless against any claim asserted against the 
Federal Government by any such mortgagee (or trustee), as described in 
the preceding sentence, by reason of any claim payment made to any 
insured under the circumstances described above.

Article X--Officials Not to Benefit

    No Member or Delegate to Congress, or Resident Commissioner, shall 
be admitted to any share or part of this Arrangement, or to any benefit 
that may arise therefrom; but this provision shall not be construed to 
extend to this Arrangement if made with a corporation for its general 
benefit.

Article XI--Offset

    At the settlement of accounts the Company and the FIA shall have, 
and may exercise, the right to offset any balance or balances, whether 
on account of premiums, commissions, losses, loss adjustment expenses, 
salvage, or otherwise due one party to the other, its successors or 
assigns, hereunder or under any other Arrangements heretofore or 
hereafter entered into between the Company and the FIA. This right of 
offset shall not be affected or diminished because of insolvency of the 
Company.
    All debts or credits of the same class, whether liquidated or 
unliquidated, in favor of or against either party to this Arrangement 
on the date of entry, or any order of conservation, receivership, or 
liquidation, shall be deemed to be mutual debts and credits and shall 
be offset with the balance only to be allowed or paid. No offset shall 
be allowed where a conservator, receiver, or liquidator has been 
appointed and where an obligation was purchased by or transferred to a 
party hereunder to be used as an offset.
    Although a claim on the part of either party against the other may 
be unliquidated or undetermined in amount on the date of the entry of 
the order, such claim will be regarded as being in existence as of the 
date of such order and any credits or claims of the same class then in 
existence and held by the other party may be offset against it.

Article XII--Equal Opportunity

    The Company shall not discriminate against any applicant for 
insurance because of race, color, religion, sex, age, handicap, marital 
status, or national origin.

Article XIII--Restriction on Other Flood Insurance

    As a condition of entering into this Arrangement, the Company 
agrees that in any area in which the Administrator authorizes the 
purchase of flood insurance pursuant to the Program, all flood 
insurance offered and sold by the Company to persons eligible to buy 
pursuant to the Program for coverages available under the Program shall 
be written pursuant to this Arrangement.
    However, this restriction applies solely to policies providing only 
flood insurance. It does not apply to policies provided by the Company 
of which flood is one of the several perils covered, or where the flood 
insurance coverage amount is over and above the limits of liability 
available to the insured under the Program.

Article XIV--Access to Books and Records

    The FIA and the Comptroller General of the United States, or their 
duly authorized representatives, for the purpose of investigation, 
audit, and examination shall have access to any books, documents, 
papers and records of the Company that are pertinent to this 
Arrangement. The Company shall keep records that fully disclose all 
matters pertinent to this Arrangement, including premiums and claims 
paid or payable under policies issued pursuant to this Arrangement.
    Records of accounts and records relating to financial assistance 
shall be retained and available for three (3) years after final 
settlement of accounts, and to financial assistance, three (3) years 
after final adjustment of such claims. The FIA shall have access to 
policyholder and claim records at all times for purposes of the review, 
defense, examination, adjustment, or investigation of any claim under a 
flood insurance policy subject to this Arrangement.

Article XV--Compliance With Act and Regulations

    This Arrangement and all policies of insurance issued pursuant 
thereto shall be subject to the provisions of the National Flood 
Insurance Act of 1968, as amended, the Flood Disaster Protection Act of 
1973, as amended, the National Flood Insurance Reform Act of 1994, and 
Regulations issued pursuant thereto and all Regulations affecting the 
work that are issued pursuant thereto, during the term hereof.

Article XVI--Relationship Between the Parties (Federal Government 
and Company) and the Insured

    Inasmuch as the Federal Government is a guarantor hereunder, the 
primary relationship between the Company and the Federal Government is 
one of a fiduciary nature, i.e., to assure that any taxpayer funds are 
accounted for and appropriately expended.
    The Company is not the agent of the Federal Government. The Company 
is solely responsible for its obligations to its insured under any 
flood policy issued pursuant hereto.

(Catalog of Federal Domestic Assistance No. 83.100, ``Flood 
Insurance'').

    Dated: July 12, 1996.
Harvey G. Ryland,
Deputy Director.
[FR Doc. 96-18352 Filed 7-18-96; 8:45 am]
BILLING CODE 6718-03-P