[Federal Register Volume 62, Number 84 (Thursday, May 1, 1997)]
[Proposed Rules]
[Pages 23736-23740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11318]


=======================================================================
-----------------------------------------------------------------------

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC62


National Flood Insurance Program; Assistance to Private Sector 
Property Insurers

AGENCY: Federal Insurance Administration, (FEMA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would amend the National Flood Insurance 
Program (NFIP) regulations establishing the Financial Assistance/
Subsidy Arrangement. This Arrangement may be entered into by and 
between the Administrator and private sector insurers under the Write 
Your Own (WYO) program. The proposed amendments would: (1) Reduce the 
range between the minimum and maximum amount of premium income a 
company may retain as a servicing fee as a result of its marketing 
performance; (2) restructure the Arrangement so that under no 
circumstance would a company have to return any portion of the expense 
allowance; (3) reformat the Arrangement to make it easier to read; (4) 
standardize references throughout the document, and (5) add details to 
clarify responsibilities of private sector insurers under the 
Arrangement with regard to reporting requirements, litigation, and 
``errors and omissions.''

DATES: All comments received on or before June 16, 1997 will be 
considered before final action is taken on the proposed rule.

ADDRESSES: Please submit any written comments to the Rules Docket 
Clerk, Office of the General Counsel, Federal Emergency Management 
Agency, 500 C Street, SW., room 840, Washington, DC 20472, (facsimile) 
202-646-4536.

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: The Write Your Own (WYO) program has 
operated for fourteen years as a cooperative venture between the 
Federal Government and private insurance companies in order to make it 
easier for the public to obtain flood insurance coverage. The duties 
and responsibilities of the Federal Government and the private insurers 
participating in the WYO program are spelled out each year in the 
Financial Assistance/Subsidy Arrangement (the ``Arrangement'').
    Prior to the 1994-95 Arrangement Year, the amount of premium which 
the Company retained as a servicing fee or expense allowance was 
adjusted based on the average of expense ratios for ``Other Acq.,'' 
``General Exp.,'' and ``Taxes'' as published in the latest available 
``Best's'' Aggregates and Averages: Property Casualty Insurance 
Underwriting-- by Lines for Fire, Allied Lines, Farmowners Multiple 
Peril, Homeowners Multiple Peril combined. The average for the 1993-94 
Arrangement Year was 32.6 percent, and the expense allowance has not 
been adjusted for the last three years. This rule proposes an expense 
allowance range between 31.6 percent and 32.9 percent depending on a 
company's reaching certain policy growth goals, with 31.9 percent, the 
current industry average, corresponding to a four percent growth, the 
current annual growth of flood insurance under the Write Your Own 
program. FIA also plans, after the implementation of the Arrangement 
for 1997-98, to continue discussions with the WYO companies on the best 
way to maintain in future years financial incentives for companies to 
market flood insurance while minimizing financial uncertainties from 
one year to the next for participating companies.
    This rule proposes in ``B. Time Standards'' of Article II, 
``Undertaking of the Company'' adding specific provisions regarding 
``continual failure'' of a participating company to meet the time 
standards of the Arrangement.
    Additionally, this rule proposes adding under ``Article III-Loss 
Costs, Expenses, Expense Reimbursement, and Premium Refunds'': 1. 
Specific reporting requirements regarding litigation, 2. specific 
criteria for reporting litigation, and 3. Authority to withhold 
reimbursement for companies failing to meet the Arrangement's reporting 
requirements for litigation. Also added in Article III and Article IX, 
``Errors and Omissions,'' is proposed language that clarifies the 
responsibilities of participating companies in connection with ``errors 
and omissions.''
    Finally, this rule proposes other changes that would reformat the 
Arrangement by modifying the outline format and rearranging text in 
order to make the document clearer and easier to read. These proposed 
changes would be consistent with the changes made to the Arrangement 
last year for the express purpose of making the Arrangement more 
serviceable for FIA and its insurance industry partners.

National Environmental Policy Act

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

Executive Order 12898, Environmental Justice

    The socioeconomic conditions to this proposed rule were reviewed 
and a finding was made that no disproportionately high and adverse 
effect on minority or low income populations would result from this 
final rule.

Executive Order 12866, Regulatory Planning and Review

    This proposed rule is not a significant regulatory action within 
the meaning of sec. 2(f) of E.O. 12866 of September 30, 1993, 58 FR 
51735, and has not been reviewed by the Office of Management and 
Budget. Nevertheless, this final rule adheres to the regulatory 
principles set forth in E.O. 12866.

Paperwork Reduction Act

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

Executive Order 12612, Federalism

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

Executive Order 12778, Civil Justice Reform

    This proposed 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 proposed to be 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 would be revised to read as follows:

[[Page 23737]]

Appendix A to 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'' or ``NFIP'') ``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, overtime, 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:

Article II--Undertaking of the Company

    A. Eligibility Requirements for Participation in the NFIP:
    1. Policy Administration. All fund receipt, recording, control, 
timely deposit requirements, and disbursement in connection with all 
Policy Administration and any other related activities or 
correspondences, must meet all requirements of the Financial Control 
Plan. The Company shall be responsible for:
    a. Compliance with the Community Eligibility/Rating Criteria
    b. Making Policyholder Eligibility Determinations
    c. Policy Issuance
    d. Policy Endorsements
    e. Policy Cancellations
    f. Policy Correspondence
    g. Payment of Agents' Commissions
    2. Claims Processing. All claims processing must be processed in 
accordance with the processing of all the companies' insurance 
policies and with the Financial Control Plan. Companies will also be 
required to comply with FIA Policy Issuance's and other guidance 
authorized by FIA or the Federal Emergency Management Agency 
(``FEMA'').
    3. Reports a. Monthly Financial Reporting and Statistical 
Transaction reporting requirements. All monthly financial reporting 
and statistical transaction reporting shall be in accordance with 
the requirements of the NFIP Transaction Record Reporting and 
processing plan for the Company Program and the Financial Control 
Plan for business written under the WYO (Write Your Own) Program. 44 
C.F.R. Part 62, App. (B). These data shall be validated/edited/
audited in detail and shall be compared and balanced against Company 
reports.
    b. Monthly financial reporting procedure shall be in accordance 
with the WYO Accounting Procedures.
    B. Time Standards. These time standards are for guidance. Time 
will be measured from the date of receipt through the date mailed 
out. All dates referenced are working days, not calendar days. In 
addition to the standards set forth below, 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 field. Continual failure to meet these requirements 
may result in limitations on the company's authority to write new 
business or the removal of the Company from the program. Applicable 
time standards are:
    1. 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 moneys shall 
be mailed within 10 days);
    2. Renewal Processing--7 days
    3. Endorsement Processing--15 days
    4. Cancellation Processing--15 days
    5. Claims Draft Processing--7 days from completion of file 
examination
    6. Claims Adjustment--45 days average from the receipt of Notice 
of Loss (or equivalent) through completion of examination.
    C. Single Adjuster Program. To ensure the maximum responsiveness 
to the NFIP policy holders 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 using procedures issued by the Administrator. The 
Single Adjuster procedure shall be followed in the following cases:
    1. Where the flood and wind coverage is provided by the Company;
    2. 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. 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. 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. The Company shall issue policies under the regulations 
prescribed by the Administrator in accordance with the Act.
    3. 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. 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. 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 FlA.
    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

[[Page 23738]]

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 other taxes or fees, such as surcharges on flood 
insurance premium and guaranty fund assessments.
    B. The Company shall be entitled to withhold, 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 expenses, except for 
allocated and unallocated loss adjustment expenses described in 
Section C. of this Article, which amount shall be a minimum of 31.6% 
of the Company's written premium on the policies covered by this 
Arrangement.
    The amount of expense allowance retained by the company may be 
increased to a maximum of 32.9%, depending on the extent to which 
the company meets the marketing goals for the 1997-1998 Arrangement 
year contained in marketing guidelines established pursuant to 
Article II. G. The amount of any increase shall be paid to the 
company after the end of the 1997-1998 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. Loss Payments. 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 include payments as a result of litigation which 
arises under the scope of this Arrangement, and the Authorities set 
forth above. All such loss payments must meet the documentation 
requirements of the Financial Control Plan and of this Arrangement. The 
Company will be reimbursed for errors and omissions only as set forth 
at Article IX of this Arrangement.
    3. Notification of claims in litigation against the company. To 
ensure reimbursement of costs expended to defend a claim in litigation 
against the Company, the Company must promptly notify FIA and the FEMA 
Office of General Counsel (OGC) of all pending and active litigation 
upon receipt of notice of that litigation and/or claim.
    Prompt notice of any such claim for damages within the scope of 
this section (D) shall be sent to the Administrator along with a copy 
of any material pertinent to the claim for damages. At the same time as 
notice is sent to the Administrator, the Company must submit written 
notice of all such claims to the Associate General Counsel for 
Litigation, FEMA OGC, 500 C St. SW, Washington, DC 20472. Following the 
initial notice of claims in litigation, the company must submit all 
pertinent material and billing documentation as it becomes available. 
Within 60 days of the receipt of a claim in litigation by the Company, 
the company must submit an initial case analysis and legal fee 
estimate. Failure to meet these notice requirements may result in the 
Administrator's decision not to reimburse expenses for which FIA and 
the FEMA OGC have not been notified in a timely manner.
    4. Limitation on Litigation Costs. Following receipt of notice of 
such claim, the Office of General Counsel (OGC), FEMA, shall review the 
information submitted. If it is determined that the claim is grounded 
in actions by the Company that are outside the scope of this 
Arrangement, the National Flood Insurance Act, and 44 C.F.R. Part 59, 
et seq., and/or involve issues of insurer/agent negligence as discussed 
in Article IX of this Arrangement, the OGC shall make a recommendation 
to the Administrator as to whether the claim is grounded in actions by 
the Company that are significantly outside the scope of this 
Arrangement. In the event the Administrator determines that the claim 
is grounded in actions by the Company that are significantly outside 
the scope of this Arrangement, the Company will be notified, in 
writing, within thirty (30) days of the Administrator's decision, 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 the determination 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

[[Page 23739]]

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.

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 canceled 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 canceled 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, and property address, 
location, and/or site 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

    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

    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, 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.

[[Page 23740]]

    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 inadvertent delay, error, or omission made in connection with any 
transaction under this Arrangement. In the event of such actions, 
the responsible party must attempt to rectify that error as soon as 
possible after discovery of the error and act to mitigate any costs 
incurred due to that error. In the event that steps are not taken to 
rectify the situation and such action leads to claims against the 
company, the NFIP, or other related entities, the responsible party 
shall bear all liability attached to that delay, error or omission 
to the extent permissible by law.
    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 
FlA. 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: April 24, 1997.
Roland E. Holland,
Acting Executive Administrator, Federal Insurance Administration.
[FR Doc. 97-11318 Filed 4-30-97; 8:45 am]
BILLING CODE 6718-03-P