[Federal Register Volume 62, Number 142 (Thursday, July 24, 1997)]
[Rules and Regulations]
[Pages 39908-39914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19497]



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Part III





Federal Emergency Management Agency





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44 CFR Part 62



National Flood Insurance Program; Assistance to Private Sector Property 
Insurers; Final Rule

  Federal Register / Vol. 62, No. 142 / Thursday, July 24, 1997 / Rules 
and Regulations  

[[Page 39908]]


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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: Final rule.

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SUMMARY: This rule amends 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 
amendments to the Arrangement: reduce the range between the minimum and 
maximum amount of premium income a company may retain as an expense 
allowance as a result of its marketing performance; restructure the 
Arrangement so that under no circumstance would a company have to 
return any portion of the expense allowance; reformat the Arrangement 
to make it easier to read; standardize references throughout the 
document, and add details to clarify responsibilities of private sector 
insurers under the Arrangement with regard to reporting requirements, 
litigation, and ``errors and omissions.''

EFFECTIVE DATE: October 1, 1997.

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 May 1, 1997, FEMA published in the 
Federal Register, 62 FR 23736, a proposed rule to amend the 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. FEMA received 
five sets of comments on the proposed rule.
    One WYO company considered the reference to WYO companies as 
insurers to be ``ambiguous.'' The commenter added that this perceived 
ambiguity potentially transfers risk to the WYO companies. As FEMA 
responded last year on this issue, the Arrangement is a financial 
assistance/subsidy agreement that FEMA shall honor with its industry 
partners as it has for the past fourteen years--within the scope of 
Congressional authorization and the safeguards built into the enabling 
legislation to facilitate continued operation of the NFIP. Those 
safeguards include: 1. the agency's borrowing authority for the 
National Flood Insurance Fund which operates independently of fiscal 
year authorization, and 2. financial assistance of the Federal 
Government for the WYO companies as spelled out in the Arrangement. In 
addition to those safeguards and the Federal financial backing of the 
private insurers participating in the Arrangement, the quid pro quo of 
sound mitigation in return for public backing of flood insurance is at 
the very foundation of the NFIP. It was the express wish of Congress 
that in time the private sector would assume more of a share of the 
risk, as the NFIP's mitigation programs and activities reduce the 
exposure of properties to flood loss. In FEMA's view, the references in 
Article I to the evolution of risk-sharing by participating companies 
are appropriate in the light of both the Congressional intent for the 
program and FEMA's continuing success in partnership with State and 
local governments in achieving more effective flood hazard mitigation. 
To place these concerns in clearer perspective, FEMA and the companies 
understand that participation on the part of private insurers in the 
program is voluntary, and, as with any risk venture, the insurer will 
weigh the advantages of the WYO program against any uncertainties--
regardless of how remote--before making an informed decision to 
participate.
    Three companies expressed concern that the marketing guidelines are 
not in the Arrangement and are only referred to in Article II. G. One 
of the commenters believed that, since companies do not know until the 
Arrangement is published as a final rule what the marketing guidelines 
are, this absence could affect a company's decision to enter into the 
Arrangement. In a related concern about Article III, the same commenter 
said ``without knowing the ``marketing goal'' for 1998, it's impossible 
to know whether we can earn more than the minimum expense allowance. 
Such uncertainty is patently unfair, a violation of the insurer's due 
process and not suitable for either party to the Arrangement.''
    FEMA acknowledges the concern but does not agree with the 
commenter's conclusions concerning due process or fairness. 
Simultaneous with the publication of this rule, marketing goals will be 
distributed by FEMA. Hence, a company will have approximately two 
months to make an informed decision whether it wishes to sign the 
Arrangement for the coming year. Historically, providing marketing 
guidelines after publication of the final Arrangement for the coming 
year has given companies enough time and has not proved to be an 
obstacle for participation in the WYO program. Companies for this year, 
as in the past, will continue to have complete information on marketing 
guidelines--the basis for the amount of premium income a company may 
retain--before being asked to sign the Arrangement. FEMA does not 
foresee any problems developing on this score.
    Another company that expressed concerns about the program's 
marketing goals recommended that a company's marketing efforts and 
expenditures should be analyzed and considered by FIA in addition to 
the company's actual growth results as the basis for determining the 
percentage of premium income to be retained by the company. FEMA 
acknowledges that in order to achieve marketing goals a company will 
have to invest its own resources; however, unlike accomplishments, 
which can be measured, there is no way to measure effort or activity 
per se. FEMA believes however that the increase in the expense 
allowance that a company may retain under this year's Arrangement takes 
into account any increased efforts that companies will make to market 
flood insurance. Hence, the Arrangement for this year will continue to 
tie a WYO company's retention of premium income to performance, i.e., 
actual growth in flood insurance policies. FEMA will however review any 
relevant data during the 1997-8 Arrangement year that would warrant 
further adjustment to the percentages of retained premium income for 
subsequent Arrangements.
    The third company commenting on the marketing goals recommended 
that under ``Article III--Loss Costs, Expenses, Expense Reimbursement, 
and Premium Refunds'' of the Arrangement, the maximum expense allowance 
a company may retain be increased from 32.9 percent to 33.6 percent. 
This company claimed that ``having a maximum recovery of 32.9 percent 
is just too low to justify the expense involved achieving the necessary 
new policy growth targets'' and recommended 33.6 percent as the maximum 
expense allowance a company may retain based on its performance.
    FEMA disagrees with this recommendation. The minimum level of 
premium income a company may retain for the 1997-8 Arrangement year has 
been increased from 30.6 percent to 31.6

[[Page 39909]]

percent while the maximum earning of 32.9 percent of retained premium 
also represents a substantial increase. It should be emphasized that 
under former Arrangements, the maximum a company in the WYO program 
could earn was equivalent to the average 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 ``Best's'' 
average for this year is 31.9 percent. Hence, the maximum earning for 
companies participating in the WYO program for the 1997-8 Arrangement 
year--32.9 percent--is one percent above the ``Best's'' average--the 
former maximum WYO companies could earn under the NFIP.
    FEMA believes therefore that the increases in the percentage of 
premium a WYO company may retain in connection with its performance 
proposed for this year's Arrangement are appropriate and have been 
retained in the final rule. FEMA plans to revisit the expense allowance 
percentages vis-a-vis performance prior to the Arrangement Year for 
1998-9.
    The issue of surcharges on flood insurance premium and guaranty 
fund assessments was raised in several comments. A change was made in 
last year's Arrangement regarding surcharges on flood insurance premium 
and guaranty fund assessments. That provision has been retained. FIA 
will review the issue during the next Arrangement year and propose any 
further adjustments regarding such surcharges during the rulemaking 
process in connection with the 1998-9 Arrangement.
    One commenter objected that the percentage (3.3 percent) paid to 
WYO companies for unallocated loss adjustment expenses is inadequate--
one that has not changed since the program's inception. As FEMA 
indicated in the publication of last year's Arrangement, ``the matter * 
* * warrants review, and any modification to the loss adjustment 
expense will be considered at the end of the current Arrangement 
year.'' FEMA has been reviewing this matter, and we expect to have a 
final determination on this issue before the 1998-9 Arrangement year. 
The 3.3 percent for unallocated loss adjustment expense has been 
retained in this year's Arrangement until our review is complete.
    One commenter recommended that the fee schedule be restored as 
Exhibit A to the Arrangement. The fee schedule was removed last year 
from the Arrangement in the interest of flexibility and expedition. 
Since any change to the fee schedule will be closely coordinated with 
participating WYO companies, the decision to remove the fee schedule 
from last year's Arrangement will be followed this year as well.
    One commenter cited an inconsistency in ``Article II.B. Time 
Standards'' in which the standards are referred to as both ``guidance'' 
and ``requirements.'' We agree that there is an inconsistency and have 
deleted the reference to ``guidance'' from ``Article II. Time 
Standards.''
    Two companies asked whether the impact of claims for loss under 
Increased Cost of Compliance (ICC) coverage on company's adhering to 
time standards has been taken into consideration. It should be noted 
that the claim under ICC coverage is a separate claim from the claim 
for direct physical loss from flood under the policy and is usually 
filed after the insured has done some preliminary coordination with 
local officials and contractors. The ``clock'' for ICC claims will not 
begin until the loss is reported by the insured. Also, a WYO company 
will not be penalized because of any inaction or delays by the insured 
or the local government. However, since ICC is a new product, FEMA will 
evaluate the program's experience with ICC claims during the 1997-8 
Arrangement year and propose any appropriate changes to the time 
standards before the next Arrangement year.
    One commenter expressed concern that the reference to ``litigation 
and/or claim'' in Article III.D.3. is confusing and should be changed 
to ``notice of claim in litigation'' or ``claim in litigation.'' FEMA 
agrees and has changed the phrase in the last sentence of the first 
paragraph of Article III.D.3 to read, ``claim in litigation.''
    Another company expressed concern over the requirement for the 
company to notify both the FIA Administrator and FEMA's OGC of claims 
in litigation. The company recommends that the reporting requirements 
of claims in litigation be limited to the FIA Administrator. The reason 
for the Arrangement's dual reporting requirement is that the 
notification to the FIA Administrator is for the purpose of prompt 
payment of bills to the company assuming that all required information 
has been submitted. The reason for a separate notification of FEMA's 
Office of General Counsel, however, is to ensure that FEMA's Office of 
General Counsel will be involved in the review of any litigation as 
soon as possible should assistance be requested or needed by the 
company. FEMA agrees that it would be more appropriate for the company 
to submit notice of litigation in duplicate to the FIA Administrator 
who will then ensure that the Office of General Counsel receive its 
copy. The language of the second paragraph of Article III. D. 3 has 
been changed to read, ``Prompt notice, in duplicate, 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. The Administrator shall furnish one copy 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.''
    This change does not prevent a company, if it so chooses, in the 
interest of expedition, to follow the procedure as proposed in the May 
1, 1997 proposed rule and submit notices of claims in litigation 
simultaneously to both the FIA Administrator as well as the FEMA's 
Office of General Counsel.
    The same company also claimed that revised language in ``Article 
IX--Errors and Omissions'' could be construed ``as an ambiguity 
allowing for a challenge to the doctrine of federal preemption for the 
National Flood Insurance Program.'' The following language was cited by 
the company as the cause for ambiguity and concern. ``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 parties shall bear all liability attached to that delay, 
error, or omission to the extent permissible by law.'' This change to 
the text does not affect the policy regarding errors and omissions nor 
will it affect the doctrine of Federal preemption to the extent Federal 
preemption would be applied to a particular issue. The change clarifies 
that a party will not be held responsible for inadvertent errors and 
omissions until those errors became known to that party and are ignored 
and that party or parties do not take steps to rectify the situation. 
Furthermore, the party at fault will bear liability only to the extent 
permissible by law.

[[Page 39910]]

    In addition to the comments submitted by WYO companies, one 
commenter asked three specific questions about the WYO Arrangement. The 
correspondent asked whether the 32.6 percent expense allowance includes 
reimbursement for insurers' loss adjustment expenses. Unallocated loss 
adjustment expenses are not included in the 32.6 percent expense 
allowance and are in addition to that expense allowance. The same 
correspondent asked if there is a separate provision to reimburse for 
loss adjustment expenses. There is such a provision at Article III. C, 
titled ``Loss Adjustment Expenses.'' For unallocated loss adjustment 
expenses, the fee is 3.3 percent. For unallocated loss adjustment 
expenses, there is a separate fee schedule which is distributed 
separately to the private companies participating in the WYO program. 
Those not participating in the WYO program may receive a copy of the 
fee schedule for allocated loss adjustments upon written request to the 
FIA Administrator, 500 C Street SW., Washington, DC 20472.
    The FIA received two inquiries regarding the language of Article 
III--Loss, Costs, Expenses, Expense Reimbursement, and Premium Refunds.
    One Write Your Own Company requested clarification regarding the 
determination by FEMA under Article III, D., 4. that a case in 
litigation is ``grounded in actions by the company that are 
significantly outside the scope of this Arrangement.'' Article III D. 
4. of the Arrangement provides that such a determination means that 
``any award or judgement for damages arising out of such actions will 
not be recognized under Article III of this arrangement as a 
reimbursable loss cost expense reimbursement.''
    Any determination that a case in litigation is ``grounded in 
actions by the company that are significantly outside the scope of this 
Arrangement'' would be made on a case-by-case basis based on sufficient 
information to make a reasonable determination and would also involve 
an examination of typical business practices in the insurance industry. 
What is considered sufficient information and typical business 
practices will depend on the case in question.
    Another Write Your Own Company requested a ``time standard 
guideline'' for FEMA to make this determination. FEMA is committed to 
make such a determination as promptly as possible after receipt of 
sufficient information to make an informed decision.
    Finally, in the proposed rule, the ``Effective Date'' was 
incorrectly listed as October 1, 1996. The ``Effective Date'' in the 
final rule has been corrected to read October 1, 1997.

National Environmental Policy Act

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

Executive Order 12778, Civil Justice Reform

    This 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

    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 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, 1997.
    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

[[Page 39911]]

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 Issuances 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 CFR part 
62, appendix 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. 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 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, 
agents' 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

[[Page 39912]]

reimbursement of costs expended to defend a claim in litigation 
against the Company, the Company must promptly notify FIA.
    Prompt notice, in duplicate, of any such claim in litigation 
within the scope of this section (D) shall be sent to the FIA along 
with a copy of any material pertinent to the claim in litigation. 
FIA shall forward one copy of all such claims to the Associate 
General Counsel for Litigation, FEMA OGC, to ensure that the FEMA 
OGC is aware of all pending litigation. Following the initial notice 
of claims in litigation, to ensure expeditious reimbursement, the 
company must submit all pertinent material and billing documentation 
as it becomes available. Within 60 days of the receipt of a notice 
of claim in litigation by the Company, the Company must submit an 
initial case analysis and legal fee estimate for billing support. 
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 CFR 
chapter 1, subchapter B, 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 
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

[[Page 39913]]

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

    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.
    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 
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

[[Page 39914]]

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 18, 1997.
Spence W. Perry,
Executive Administrator, Federal Insurance Administration.
[FR Doc. 97-19497 Filed 7-23-97; 8:45 am]
BILLING CODE 6718-03-P