[Federal Register Volume 68, Number 198 (Tuesday, October 14, 2003)]
[Proposed Rules]
[Pages 59146-59151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-25905]


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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

44 CFR Parts 61 and 62

RIN 1660-AA28


National Flood Insurance Program (NFIP); Assistance to Private 
Sector Property Insurers

AGENCY: Federal Emergency Management Agency (FEMA), Emergency 
Preparedness and Response Directorate, Department of Homeland Security.

ACTION: Proposed rule.

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SUMMARY: FEMA is proposing to amend the Federal Insurance 
Administration, Financial Assistance/Subsidy Arrangement 
(``Arrangement'') and related regulations regarding issues of Federal 
jurisdiction and Federal law for lawsuits involving Write-Your-Own 
(WYO) Companies and the rules for reimbursing WYO Companies for the 
cost of litigation, including issues of agent negligence and the 
relationship of the agent to the WYO Company. Additionally, FEMA is 
amending procedures for companies seeking to become and ceasing to be 
WYO Companies.
    On September 5, 2003, FEMA published an interim final rule that 
amends FEMA's Arrangement. The purpose of that rule was to extend the 
current Arrangement for 3 months to allow FEMA to make the changes 
proposed in this rulemaking.

DATES: FEMA invites comments on this proposed rule, which should be 
received on or before November 13, 2003.

ADDRESSES: Please send your comments to the Rules Docket Clerk, Office 
of the General Counsel, FEMA, 500 C Street, SW., Room 840, Washington, 
DC 20472, (facsimile) 202-646-4536, or (email) [email protected].

FOR FURTHER INFORMATION CONTACT: Charles Plaxico, FEMA, 500 C Street, 
SW., Washington, DC 20472, (phone) 202-646-3422, (facsimile) 202-646-
4327, or (email) [email protected].

SUPPLEMENTARY INFORMATION: Under the Arrangement, approximately 100 
private sector property insurers issue flood insurance policies and 
adjust flood insurance claims under their own names, based on an 
arrangement with the Federal Insurance Administration (FIA) (44 CFR 
Part 62, Appendix A). The WYO insurers receive an expense allowance and 
remit the remaining premium to the Federal Government. The Federal 
Government pays WYO insurers for flood losses and pays loss adjustment 
expenses based on a fee schedule. Litigation costs, including court 
costs, attorney fees, judgments, and settlements, are paid by FIA based 
on submitted documentation. The Arrangement provides that under certain 
circumstances reimbursement for litigation costs will not be made. FEMA 
proposes several changes to the Arrangement and related regulations.
    FEMA proposes to clarify 44 CFR 61.5 by creating a new Section f 
from the current text of Section e. FEMA proposes to add 44 CFR 61.5(f) 
to provide that agents utilized by a WYO

[[Page 59147]]

Company, like agents utilized by FEMA, act for the insured and are not 
agents of the WYO Company.
    FEMA proposes to amend 44 CFR 62.22(a) to clarify that its 
provisions for Federal jurisdiction include WYO Companies.
    FEMA proposes to amend 44 CFR 62.23(g) to recognize WYO Companies 
as fiscal agents of the Federal Government. This is based on section 
1340(a)(1) of the National Flood Insurance Act of 1968, as amended. 
FEMA believes this change will clarify matters of jurisdiction and 
choice of law for WYO Companies. However, WYO Companies are not 
recognized as general agents of the Federal Government. The proposed 
amendment also provides that the Federal Government is not a proper 
party defendant in any lawsuit arising out of a WYO policy.
    The remaining proposed amendments apply to Appendix A to Part 62--
Federal Emergency Management Agency, Federal Insurance Administration, 
Financial Assistance/Subsidy Arrangement.
    In Article I, FEMA proposes to amend the fifth paragraph to refer 
to the Federal Treasury, to clarify that WYO Companies are responsible 
for Federal funds. A companion proposed amendment to Article III, 
Section D.1, also refers to Federal funds. FEMA proposes to add two new 
paragraph clauses to Article I to emphasize the Federal nature of the 
WYO Companies' activities under the Arrangement, and support the 
application of Federal law in Federal Court to lawsuits arising under 
the Arrangement.
    FEMA proposes to delete the tenth paragraph as currently drafted in 
Article I to clarify that policyholders and applicants are not direct 
beneficiaries of the Arrangement.
    FEMA proposes to amend Article II, Section G to clarify the WYO 
Company's duty to comply with written standards, procedures, and 
guidance issued by FEMA or FIA.
    FEMA proposes to amend Article III, Section B to delete the word 
``their'' before the phrase ``insurance agents'' to be consistent with 
the proposed amendment to 44 CFR 61.5(e), as discussed above, that 
provides that the WYO agent is not the agent of the WYO Company.
    FEMA proposes to amend Article III, Section D.2 to provide that 
failure to meet these requirements may result in no reimbursement, 
which is similar to a statement in the deleted Article III, Section 
D.3. The reference to Article IX in Article III, Section D.2 would be 
deleted in light of FEMA's proposed amendment of Article IX to restrict 
it to matters not in litigation. FEMA proposes to delete Article III, 
Section D.3 because its litigation documentation and notification 
requirements have been established by FEMA outside the Arrangement.
    FEMA proposes to amend Article III, Section D.4 (now renumbered as 
Article III, Section D.3), concerning reimbursement for WYO Company 
litigation costs, to delete the reference to insurer negligence and the 
cross-reference to Article IX. The issue of insurer negligence for 
matters in litigation will be dealt with in the context of the other 
standards in the new Article III, Section D.3. Article IX would now 
only apply to insurer negligence that has not resulted in litigation. 
The existing ``significantly outside the scope'' standard will be left 
in the new Article III, Section D.3. A provision will be added relating 
to a pattern of errors found in operation reviews, audits, or a review 
after litigation has been filed.
    Agent negligence would continue to be grounds for non-reimbursement 
of litigation costs. FEMA would continue to evaluate whether a WYO 
Company would be reimbursed for costs, fees, and settlement payments 
(when appropriate) when agent negligence is alleged against that WYO 
Company for which they could be held financially responsible. Where 
FEMA determines that there is no agent negligence, the WYO Company 
would be reimbursed for the litigation costs of defending itself 
against the possibility that it could be held financially responsible 
for agent negligence; where FEMA determines that there is agent 
negligence, the WYO Company may still be reimbursed for litigation 
costs for the defense of policy provisions and for its own negligence. 
FEMA has not changed the general rule that litigation costs are not 
reimbursable if they relate to actions that are significantly outside 
the scope of the Arrangement.
    FEMA proposes to expressly recognize that a part of litigation 
could be ``significantly outside the scope'' of the Arrangement while 
part is within the scope. In such a case, reimbursement would be based 
on the appropriate division of responsibility, if possible. 
Reimbursement for legal expenses (``costs to defend such litigation'') 
will now be explicitly treated the same way as reimbursement for awards 
or judgments. A WYO Company can now petition the Federal Insurance 
Administrator, (``Administrator'') instead of the Standards Committee, 
for reconsideration of a decision not to reimburse for litigation. The 
Administrator could then seek the advice of the Standards Committee. 
There will no longer be a deadline for a decision.
    FEMA proposes to amend Article III, Section E to clarify that WYO 
Companies must follow the refund rules established by FIA since flood 
insurance premiums are funds of the Federal Government.
    FEMA proposes to amend Article V to clarify the procedures for a 
company to become, or to cease to be, a WYO Company. Companies will 
also be required to inform FEMA of their intent to continue in or leave 
the program within 30 days of the offer.
    In Article V, Section C, the time during which the WYO Company can 
be required to continue performance while it exits the program by 
running off or transferring its business will be extended from 1 year 
to 18 months. Notice and billing cycles make the one-year limit 
impractical. The proposed amendment will also require a WYO Company to 
tell FEMA if it plans to leave the program during the Arrangement year.
    FEMA proposes to amend Article V, Section C.1.a to set out the 
requirements when the business is to be transferred to FIA. The 
proposed amendment also would establish in Article V, Section C.2 the 
requirement for FIA approval of transfer of the business to another WYO 
Company.
    FEMA proposes to amend Article V, Section D to formalize the 
possibility of non-renewal of the Arrangement by FIA for material 
failure of the WYO Company to comply with the Arrangement or to take 
corrective action required by the FIA, and to offer the alternative of 
permitting the transfer by sale, subject to FIA approval, as in Article 
V, Section C.2.
    FEMA proposes to re-designate Article V, Section F (cancellation of 
the Arrangement resulting from an order or directive issued by a 
Department of Insurance) to Section E so that it immediately follows 
Section D (cancellation of the Arrangement by FIA) because these two 
sections are parallel in purpose and construction and should be placed 
together. This results in existing Section E being re-designated as 
Section F. The new Section E allows the possibility of the sale of the 
book of business, subject to FIA approval, similar to the proposed 
revision to Section D.
    FEMA proposes to amend Article VII, Section C to make its 
provisions regarding settlement of accounts when the WYO Company's 
participation ends applicable to situations where the WYO Company is 
unable to or not permitted

[[Page 59148]]

to participate, as well as where the WYO Company elects not to 
participate. In addition, the final settlement will now be made subject 
to audit.
    FEMA proposes to amend Article IX to address only matters not in 
litigation. Its provisions regarding reimbursement of the WYO Company 
are consistent with the new Article III, Section D.3, which addresses 
matters in litigation. To be consistent with Article III, Section D.3, 
FEMA amends the existing Article IX language, ``error or omission,'' to 
``negligence.'' It provides that there will be no reimbursement for 
claims against the WYO Company grounded in actions ``significantly 
outside the scope.''
    FEMA proposes to amend Article XVI to reflect the proposed changes 
to 44 CFR 62.23(g), as discussed above.
    On September 5, 2003, FEMA published an interim final rule, 68 FR 
52700, that amends the Arrangement. The purpose of that rule was to 
extend the current Arrangement for three months to allow FEMA to make 
the changes proposed in this rulemaking.

National Environmental Policy Act

    This proposed rule falls within the exclusion category 44 CFR part 
10.8(d)(2)(ii), which addresses the preparation, revision, and adoption 
of regulations, directives, manuals, and other guidance documents 
related to actions that qualify for categorical exclusions. Because no 
other extraordinary circumstances have been identified, this proposed 
rule will not require the preparation of either an environmental 
assessment or an environmental impact statement as defined by the 
National Environmental Policy Act.

Executive Order 12866, Regulatory Planning and Review

    We have prepared and reviewed this proposed rule under the 
provisions of Executive Order 12866, Regulatory Planning and Review. 
Under Executive Order 12866, 58 FR 51735, Oct. 4, 1993, a significant 
regulatory action is subject to review by the Office of Management and 
Budget (``OMB'') and the requirements of the Executive Order. The 
Executive Order defines ``significant regulatory action'' as one that 
is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
th[e] Executive [O]rder.
    For the reasons that follow, FEMA has concluded that this proposed 
rule is neither a significant regulatory action nor an economically 
significant rule under the Executive Order. This proposed rule amends 
the Arrangement and related regulations to clarify issues of Federal 
jurisdiction and Federal law for disputes involving WYO Companies and 
the rules for reimbursing WYO Companies for the cost of litigation. It 
will not have an annual effect on the economy of $100 million or more 
or adversely affect in a material way the economy, the insurance 
sector, competition, or other sectors of the economy. It will create no 
serious inconsistency or otherwise interfere with an action taken or 
planned by another agency. It will not materially alter the budgetary 
impact of entitlements, grants, user fees, or loan programs or the 
rights and obligations of recipients thereof. Finally, it does not 
raise novel legal or policy issues arising out of legal mandates, the 
President's priorities, or the principles set forth in the Executive 
Order.
    OMB has not reviewed this rule under the principles of Executive 
Order 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 of 1995 (44 U.S.C. 3501-3520).

Regulatory Flexibility Act

    Under the Regulatory Flexibility Act, agencies must consider the 
impact of their rulemakings on ``small entities'' (small businesses, 
small organizations and local governments). When 5 U.S.C. 553 requires 
an agency to publish a notice of proposed rulemaking, the Act requires 
a regulatory flexibility analysis for both the proposed rule and the 
final rule if the rulemaking could ``have a significant economic impact 
on a substantial number of small entities.'' The Act also provides that 
if a regulatory flexibility analysis is not required, the agency must 
certify in the rulemaking document that the rulemaking will not ``have 
a significant economic impact on a substantial number of small 
entities.''
    A regulatory flexibility analysis is not required for this proposed 
rule because it would not have a significant economic impact on a 
substantial number of small entities.

Executive Order 13132, Federalism

    Executive Order 13132, Federalism, dated August 4, 1999, sets forth 
principles and criteria to which agencies must adhere in formulating 
and implementing policies that have federalism implications; that is, 
regulations that have substantial direct effects on the States, or on 
the distribution of power and responsibilities among the various levels 
of government. Federal agencies must closely examine the statutory 
authority supporting any action that would limit the policymaking 
discretion of the States, and must consult with State and local 
officials before implementing any such action to the extent 
practicable.
    FEMA has reviewed this proposed rule under Executive Order 13132 
and concludes that the proposed rule has no federalism implications as 
defined by the Executive Order. FEMA has determined that the rule does 
not significantly affect the rights, roles, and responsibilities of 
States, involves no preemption of State law and does not limit State 
policymaking discretion.

Executive Order 12778, Civil Justice Reform

    This proposed rule meets the applicable standards of Sec.  2(b)(2) 
of Executive Order 12778.

List of Subjects in 44 CFR Parts 61 and 62

    Claims, Flood insurance.

    Accordingly, we propose to amend 44 CFR parts 61 and 62 as follows:

PART 61--INSURANCE COVERAGE AND RATES

    1. The authority citation for part 61 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. Amend Sec.  61.5 by revising paragraph (e) and add a new 
paragraph (f) to read as follows:


Sec.  61.5  Special terms and conditions.

* * * * *
    (e) The standard flood insurance policy is authorized only under 
the terms and conditions established by Federal statute, the program's 
regulations, the Administrator's

[[Page 59149]]

interpretations, and the express terms of the policy itself. Any 
representations regarding the extent and scope of coverage which are 
not consistent with the National Flood Insurance Act of 1968, as 
amended, or the Program's regulations are void.
    (f) Any duly licensed property or casualty agent selling and 
servicing NFIP policies acts for the insured, and does not act as agent 
for the Federal Government, the Federal Emergency Management Agency, 
the Federal Insurance Administration, the servicing agent, or the 
Write-Your-Own Company.

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

    3. 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.

    4. Amend Sec.  62.22 by revising paragraph (a) to read as follows:


Sec.  62.22  Judicial review.

    (a) Upon the disallowance by the Federal Insurance Administration, 
a participating Write-Your-Own Company, or the servicing agent of any 
claim on grounds other than failure to file a proof of loss, or upon 
the refusal of the claimant to accept the amount allowed upon any claim 
after appraisal pursuant to policy provisions, the claimant within one 
year after the date of mailing by the Federal Insurance Administration, 
the participating Write-Your-Own Company, or the servicing agent of the 
notice of disallowance or partial disallowance of the claim may, 
pursuant to 42 U.S.C. 4072, institute an action on such claim against 
the insurer only in the U.S. District Court for the district in which 
the insured property or the major portion thereof shall have been 
situated, without regard to the amount in controversy.
* * * * *
    5. Amend Sec.  62.23 by revising paragraph (g) to read as follows:


Sec.  62.23  WYO Companies authorized.

* * * * *
    (g) A WYO Company shall act as a fiscal agent of the Federal 
Government, but not as its general agent. WYO Companies are solely 
responsible for their obligations to their insured under any flood 
insurance policies issued under agreements entered into with the 
Administrator, such that the Federal Government is not a proper party 
defendant in any lawsuit arising out of such policies.
* * * * *
    6. In Appendix A to part 62, revise the Effective Date to read as 
follows:

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

* * * * *
    Effective Date: January 1, 2004.
* * * * *
    7. In Appendix A to part 62, revise Article I to read as follows:

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

* * * * *
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'' 
or ``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 
(42 U.S.C. 4081); 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 (42 U.S.C. 4011)); and
    Whereas, the insurer (hereinafter the ``Company'') under this 
Arrangement shall charge rates established by the FIA; and
    Whereas, FIA has promulgated regulations and guidance implementing 
the Act and the Write-Your-Own Program whereby participating private 
insurance companies act in a fiduciary capacity utilizing Federal funds 
to sell and administer the Standard Flood Insurance Policies, and has 
extensively regulated the participating companies' activities when 
selling or administering the Standard Flood Insurance Policies; and
    Whereas, any litigation resulting from, related to, or arising from 
the Company's compliance with the written standards, procedures, and 
guidance issued by FEMA or FIA arises under the Act, regulations, or 
FIA guidance, and legal issues thereunder raise a Federal question; and
    Whereas, through this Arrangement, the Federal Treasury will 
subsidize all flood policy claim payments by the Company; and
    Whereas, this 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.
    Now, therefore, the parties hereto mutually undertake the 
following:
    8. In Appendix A to part 62, revise Article II, section G to read 
as follows:
Article II--Undertaking of the Company
* * * * *
    G. Compliance with Agency Standard and Guidelines.
    1. The Company shall comply with written standards, procedures, and 
guidance issued by FEMA or FIA relating to the NFIP and applicable to 
the Company.
    2. The Company shall market flood insurance policies in a manner 
consistent with marketing guidelines established by FIA.
    9. In Appendix A to part 62 amend Article III to revise the second 
paragraph of section B; revise section D; and add a sentence to the end 
of section E to read as follows:
Article III--Loss Costs, Expenses, Expense Reimbursement, and Premium 
Refunds
* * * * *
    B. * * *
* * * * *
    The Company may retain fifteen percent (15%) of the Company's 
written premium on the policies covered by this Arrangement as the 
commission allowance to meet commissions or

[[Page 59150]]

salaries of insurance agents, brokers, or other entities producing 
qualified flood insurance applications and other related expenses.
* * * * *
    D. Loss Payments.
    1. Loss payments under policies of flood insurance shall be made by 
the Company from Federal funds retained in the bank account(s) 
established under Article II, section E and, if such funds are 
depleted, from Federal funds derived by drawing against the Letter of 
Credit established pursuant to Article IV.
    2. Loss payments include payments as a result of litigation that 
arises under the scope of this Arrangement, and the Authorities set 
forth herein. All such loss payments and related expenses must meet the 
documentation requirements of the Financial Control Plan and of this 
Arrangement, and the Company must comply with the litigation 
documentation and notification requirements established by FEMA. 
Failure to meet these requirements may result in the Administrator's 
decision not to provide reimbursement.
    3. Limitation on Litigation Costs.
    a. Following receipt of notice of such litigation, the FEMA Office 
of the General Counsel (``OGC'') shall review the information 
submitted. If the FEMA OGC finds that the litigation is grounded in 
actions by the Company that are significantly outside the scope of this 
Arrangement, and/or involves issues of agent negligence, then the FEMA 
OGC shall make a recommendation to the Administrator regarding whether 
all or part of the litigation is significantly outside the scope of the 
Arrangement.
    b. If the Administrator makes a determination that an Operation 
Review or audit conducted pursuant to the WYO Financial Control Plan, 
44 CFR part 62, appendix B, or an audit conducted by the Department of 
Homeland Security Office of Inspector General, or a review of the 
Company's business after a lawsuit has been filed against the Company 
reveals that the Company has a pattern of errors, and an error of that 
type has resulted in litigation, that litigation will be considered 
significantly outside the scope of the Arrangement.
    c. In the event the Administrator agrees with the determination of 
the FEMA OGC under Article III, section D.3.a, or makes the 
determination regarding a pattern of errors under Article III, section 
D.3.b, the Company will be notified in writing within thirty (30) days 
of the Administrator's decision that any award or judgment for damages 
and any costs to defend such litigation will not be recognized under 
Article III as a reimbursable loss cost, expense or expense 
reimbursement.
    d. In the event a question arises whether only part of a litigation 
is reimbursable, the FEMA OGC shall make a recommendation to the 
Administrator about the appropriate division of responsibility, if 
possible.
    e. In the event that the Company wishes to petition for 
reconsideration of the determination that it will not be reimbursed for 
any part of the award or judgment or any part of the costs expended to 
defend such litigation made under Article III, section D.3.a-d, it may 
do so by mailing, within thirty (30) days of the notice that 
reimbursement will not be made, a written petition to the 
Administrator, who may request the advice of the WYO Standards 
Committee established under the WYO Financial Control Plan. The WYO 
Standards Committee will consider the request 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. 
The Administrator's final determination, after advisement from the 
Standards Committee (if sought), will be made in writing to the 
Company.
    E. * * * As fiscal agent, the Company shall not refund any premium 
to applicants or policyholders in any manner other than as specified in 
the NFIP's ``Flood Insurance Manual'' since flood insurance premiums 
are funds of the Federal Government.
    10. In Appendix A to part 62, revise Article V to read as follows:
Article V--Commencement and Termination
    A. The initial period of this Arrangement is from January 1, 2004 
through September 30, 2004. Thereafter the Arrangement will be 
effective on an annual basis 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. Each year, the FIA shall publish in the Federal Register and 
make available to the Company the terms for subscription or re-
subscription to this Financial Assistance/Subsidy Arrangement. The 
Company shall notify the FIA of its intent to re-subscribe or not re-
subscribe within thirty days of publication.
    C. In order to assure uninterrupted service to policyholders, the 
Company shall promptly notify the FIA in the event the Company elects 
not to participate in the Program during the Arrangement year. If so 
notified, or if the FIA chooses not to renew the Company's 
participation, the FIA, at its option, may require the continued 
performance of all or selected elements of this Arrangement for the 
period required for orderly transfer or cessation of business and 
settlement of accounts, not to exceed 18 months, and may either require 
Article V.C.1 or allow Article V.C.2:
    1. The delivery to the FIA of:
    a. 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
    b. 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
    c. 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; and
    d. All funds in its possession with respect to any policies 
transferred to FIA for administration and the unearned expenses 
retained by the Company.
    2. Submission of plans for the renewal of the business by another 
WYO Company or Companies or the submission of detailed plans for 
another WYO Company to assume responsibility for the Company's NFIP 
policies. Such plans shall assure uninterrupted service to 
policyholders and shall be accompanied by a formal request for FIA 
approval of such transfers.
    D. Financial assistance under this Arrangement may be canceled by 
the FIA in its entirety upon thirty (30) days written notice to the 
Company by certified mail stating one of the following reasons for such 
cancellation: (i) Fraud or misrepresentation by the Company subsequent 
to the inception of the Arrangement; or (ii) Nonpayment to the FIA of 
any amount due the FIA; or (iii) Material failure to comply with the 
requirements of this Arrangement or with the written standards, 
procedures, or guidance issued by FEMA or FIA relating to the NFIP and 
applicable to the Company. Under these specific

[[Page 59151]]

conditions, the FIA may require the transfer of administrative 
responsibilities and the transfer of data and records as provided in 
Article V, section C.1.a through d. 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. The FIA, at its option, may 
alternatively consider proposals and plans for the assumption of 
responsibilities by another WYO Company as provided in Article V, 
section C.2.
    E. In the event that the Company is unable 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 within the scope of the Arrangement owed to 
policyholders arising before and after the date of transfer, and the 
Company will immediately transfer to the Government all needed records 
and data and all funds in its possession with respect to all such 
policies transferred and the unearned expenses retained by the Company. 
The FIA, at its option, may alternatively consider proposals for the 
assumption of responsibilities by another WYO Company as provided by 
Article V, section C.2.
    F. 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.
    11. In Appendix A, part 62, revise Article VII section C. to read 
as follows:
Article VII--Cash Management and Accounting
* * * * *
    C. In the event the Company elects not to participate in the 
Program in this or any subsequent fiscal year, or is otherwise unable 
or not permitted to participate, the Company and FIA shall make a 
provisional settlement of all amounts due or owing within three months 
of the expiration or 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, subject to audit, 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.
    12. In Appendix A to part 62, revise the first paragraph of Article 
IX to read as follows:
Article IX--Errors and Omissions
    In the event of negligence by the Company that has not resulted in 
litigation but has resulted in a claim against the Company, FEMA will 
not consider reimbursement of the Company for costs incurred due to 
that negligence unless the Company takes all reasonable actions to 
rectify the negligence and to mitigate any such costs as soon as 
possible after discovery of the negligence. Further, (i) if the claim 
against the Company is grounded in actions significantly outside the 
scope of this Arrangement, (ii) if there is negligence by the agent, or 
(iii) if there is an error that is the type of error for which there 
has been a determination by the Administrator of a pattern of errors as 
described in Article III, section D.3.b, FEMA will not reimburse any 
costs incurred due to that negligence or error. The Company will be 
notified in writing within thirty (30) days of a decision not to 
reimburse. In the event the Company wishes to petition for 
reconsideration of the decision not to reimburse, the procedure in 
Article III, section D.3.e shall apply.
* * * * *
    13. In Appendix A to part 62, revise Article XVI to read as 
follows:
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 a fiscal agent 
of the Federal Government, but is not a general agent of the Federal 
Government. The Company is solely responsible for its obligations to 
its insured under any policy issued pursuant hereto, such that the 
Federal Government is not a proper party to any lawsuit arising out of 
such policies.

    Dated: October 7, 2003.
Michael D. Brown,
Under Secretary, Emergency Preparedness and Response, Department of 
Homeland Security.
[FR Doc. 03-25905 Filed 10-10-03; 8:45 am]
BILLING CODE 6718-03-P