[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Rules and Regulations]
[Pages 45607-45612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17358]


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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

44 CFR Part 62

RIN 1660-AA28


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

AGENCY: Federal Emergency Management Agency (FEMA),

[[Page 45608]]

Emergency Preparedness and Response Directorate, Department of Homeland 
Security.

ACTION: Interim final rule.

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SUMMARY: FEMA is amending the Federal Insurance Administration, 
Financial Assistance/Subsidy Arrangement (``Arrangement'') and related 
regulations regarding issues of Federal jurisdiction and applicability 
of Federal law for lawsuits involving Write-Your-Own (WYO) Companies 
and of reimbursement to WYO Companies for the cost of litigation. 
Additionally, FEMA is amending procedures for companies seeking to 
become, and ceasing to be, WYO Companies.

DATES: This interim final rule takes effect on October 1, 2004. FEMA 
invites comments on this interim final rule, which should be received 
on or before September 28, 2004.

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 (e-mail) [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: Approximately 100 private sector property 
insurers issue flood insurance policies and adjust flood insurance 
claims under their own names, based on the 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 for flood losses 
incurred through WYO insurers 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. On 
October 14, 2003, FEMA published a proposed rule (68 FR 59146) that 
would make several changes to the Arrangement and related regulations.
    During the comment period, FEMA received comments from two 
insurance agent trade associations, one insurance company trade 
association, two WYO Companies, and a committee of WYO Company 
representatives with whom FEMA regularly consults on WYO matters. The 
two insurance agent trade associations requested an opportunity to 
present oral comments during the comment period, and pursuant to 44 CFR 
1.6, FEMA arranged for such a session, which was held on November 6, 
2003. Also in attendance with an opportunity to comment were WYO 
Company representatives, an attorney representing the committee of WYO 
representatives, and representatives from an insurance company trade 
association.
    The two insurance agent associations in their oral and written 
comments opposed FEMA's proposal to clarify 44 CFR 61.5 by creating a 
new Subsection f from the current text of Subsection e to provide that 
agents selling Standard Flood Insurance Policies issued by a WYO 
Company, like agents selling the policies issued directly by FEMA, act 
for the insured and are not agents of the WYO Company. The committee of 
WYO representatives supported the change in its oral and written 
comments and urged that the proposed changes in their entirety be made 
final. One WYO Company also urged that the proposed changes in their 
entirety be made final. Because of the issues raised, FEMA believes 
this proposed change warrants further comment and review. Therefore, 
FEMA is publishing this interim final rule without the change to 44 CFR 
61.5. Comments on whether changes to 44 CFR 61.5 should be added to the 
regulations are invited in response to this interim final rule. FEMA 
will consider making changes to 61.5 in the final rule after reviewing 
any further comments. FEMA is also specifically seeking comments on 
whether this provision has a significant economic impact on a 
substantial number of small entities. FEMA hopes to publish the final 
rule in 2004.
    One of the insurance trade associations, in opposing the change to 
44 CFR 61.5, also opposed the change to 44 CFR 62.22 without 
explanation. That change codifies the understanding of FEMA and 
numerous court rulings and specifically provides that Federal 
jurisdiction under 42 U.S.C. 4072 encompasses lawsuits against WYO 
Companies. The association said it supports jurisdiction in Federal 
Courts, but opposes Federal preemption of State law as it applies to 
lawsuits between WYO Companies and independent agents and agencies. It 
did not identify which portions of the proposed rule are related to 
this concern. We have looked at the concerns raised but do not 
understand how section 62.22 applies nor do we understand the concern 
about preemption. Therefore we did not make any changes to this interim 
final rule based on these comments. Rather we invite further comments, 
which we will consider prior to publishing a final rule.
    The remaining amendments in the proposed rule related to Appendix A 
to Part 62--Federal Emergency Management Agency, Federal Insurance 
Administration, Financial Assistance/Subsidy Arrangement.
    The insurance company trade association opposed only allowing, at 
the discretion of the Administrator, an appeal to the WYO Standards 
Committee of a decision by the Administrator not to reimburse for 
litigation. It also suggested that the Administrator be required to act 
within 30 days, with a 30-day extension at the Administrator's 
discretion. (See Article III.D.3.d.) The committee of WYO Company 
representatives also expressed concern about this change, but said it 
accepted it as part of the complete set of changes in the proposed 
rule. FEMA believes the Administrator should have the discretion to 
refer appeals to the WYO Standards Committee, so the interim final rule 
does not change this provision. The 30-day deadline for the 
Administrator to act has not been added. FEMA believes that a 
reasonable time to act is implied, so a deadline is not necessary. 
However, we have clarified that the Administrator must act within a 
reasonable time.
    Also, the committee of WYO Company representatives expressed 
concern about the ``pattern of errors'' basis for not reimbursing for 
litigation, but said it accepted it as part of the complete set of 
changes in the proposed rule. One of the WYO Companies opposed the 
``pattern of errors'' (Article III.D.3.b) provision as lacking 
``definition and statutory authority.'' It also contended that ``at a 
bare minimum to pass constitutional muster, the federal government, not 
the auditor, must provide advance written notice and an opportunity to 
challenge the alleged ``pattern of errors''.'' While FEMA does not 
agree with the comment and continues to believe that it has broad 
statutory authority to set the rules for the administration of the 
NFIP, and further believes that the right to appeal any denial of 
reimbursement for litigation in the Arrangement is sufficient safeguard 
for the WYO Companies, FEMA is withdrawing the ``pattern of errors'' 
portion of the proposed rule. Rather FEMA will continue to rely on the 
``significantly outside the scope of the Arrangement'' standard for 
reimbursement decisions including those decisions related to a pattern 
of errors.
    One of the WYO Companies suggested clarifying a provision in 
Article I that the WYO Companies and the Federal

[[Page 45609]]

Government are the sole parties under the Arrangement. FEMA agrees and 
has made that change in the interim final rule.
    This WYO Company suggested several other changes. One was to 
clarify that, under the proposed revision to the procedures for a WYO 
Company that is ceasing participation (Article V.C and V.E), 
transferring the flood insurance book of business to another WYO 
Company is an option for the company and will not be required by FIA. 
This was FEMA's intent. FEMA believes that the revision to Article V.C 
is clear that this is an option for the company but that it will not be 
required by FIA. In light of the WYO Company's comment, FEMA has 
changed Article V.E to clarify any ambiguity. Article V.D has a 
provision similar to the one in V.E and has been likewise clarified.
    Another suggested change was to make the 2004 Arrangement run 
concurrently with Congressional reauthorization. In the past, the 
reauthorization dates have been October 1 and January 1. The NFIP was 
recently reauthorized by Congress through September 30, 2008 (Public 
Law 108-264). In light of this reauthorization, the concern that 
prompted this comment appears to have been addressed for a number of 
years.
    Finally, the proposed rule did not contain any change in the 
reimbursement for unallocated loss adjustment expense (ULAE), which is 
in Article III.C.1. However, a WYO Company proposed to increase the 
reimbursement for ULAE from 3.3% to 6.0%. FEMA had been reviewing this 
issue prior to the proposed rule and had requested that the WYO 
Companies furnish data. However, the data received was not sufficient 
to make a decision, so the proposed rule did not contain any change 
regarding reimbursement for ULAE. Now, FEMA plans to make a detailed 
data call to the WYO Companies, and after reviewing the responses, will 
make a decision as to whether and to what extent it believes a change 
is justified. Any change will require another rulemaking action. FEMA 
does not believe that it will be practical to make any change effective 
for the Arrangement year beginning October 1, 2004, so any change would 
likely be effective October 1, 2005.
    In addition to the changes discussed above, FEMA has made a few 
editorial changes.
    During July 2004, FEMA will send a copy of the offer for the 2004-
2005 Arrangement year, together with related materials and submission 
instructions, to all private insurance companies participating under 
the current 2002-2004 Arrangement. Any private insurance company not 
currently participating in the WYO Program but wishing to consider 
FEMA's offer for 2004-2005 may request a copy by writing: Federal 
Emergency Management Agency, Mitigation Division, Attn: WYO Program, 
Washington, DC 20472, (facsimile) 202-646-3445, or (e-mail) 
[email protected].

Executive Order 12866, Regulatory Planning and Review

    We have prepared and reviewed this interim final 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 
the Executive Order.
    In determining whether we should move forward with this rule, we 
considered three alternatives. The First Alternative was to take no 
action and to allow the WYO Arrangement to expire as a result. 44 CFR 
62.23 would become inoperative, the appendixes to Part 62 would expire, 
and effective October 1, 2004 the companies no longer would have a 
relationship with FEMA except for the runoff of existing policies and 
the sale and administration of the Standard Flood Insurance Policies by 
the participating private WYO Companies would cease. This alternative 
would have the following adverse impact on the number of NFIP policies-
in-force, future Disaster Assistance, and on those individuals who as a 
result are not insured at the time of their next flood loss.
    The number of policies-in-force can be expected to drop following 
the expiration of the WYO Arrangement because insurance agents would 
lose their vehicle for renewing the existing policies. These agents 
would be required to establish a relationship with our Direct-side 
contractor and then renew their existing policyholders through that 
contractor. Many agents would not make this transition. Even for those 
who would make this transition, there would be a delay in completing 
this change of relationship, which would result in a delayed renewal 
for many policies. Any losses suffered by those policyholders in the 
interim would be uninsured, causing significant economic loss to them.
    The net effect once all agents who intend to continue writing flood 
insurance have established the proper Direct-side relationship will be 
a greatly reduced NFIP policyholder base. Any quantification of that 
drop is speculative at this point, but FEMA's informed judgment is up 
to a 5 percent decrease in the number of policyholders (which is about 
250,000 policies). Such a decline in flood insurance policies would 
create more uninsured flood victims with (1) a corresponding increase 
in Disaster Assistance, (2) more individuals facing large monthly 
payments as they repay their Disaster Loans, and (3) victims without 
available Federal Assistance when no Presidential Disaster Declaration 
is declared. Since average annual NFIP losses currently exceed $800 
million, this would mean an expected reduction of NFIP losses of 
between $10 million to $40 million--an amount that would be either 
directly borne by the property owner, or partially shouldered by the 
taxpayers through Disaster Assistance or loans.
    If the Arrangement were to be implemented again in the future, it 
would be unrealistic to expect that the drop in NFIP policies-in-force 
would be restored quickly, and there likely would be an overall long-
term negative influence on policies in force. There also would be a 
moderate to serious long-term impact on the favorable working 
relationship FEMA has developed with the WYO Companies.
    A Second Alternative would be to extend the current WYO Arrangement 
and to delay further or eliminate the changes to the WYO Arrangement 
included in this rule. Although the consequences would not be as 
significant as the First Alternative, delaying the rule leaves the 
Program subject to the following possible adverse developments:
    The rule will clarify our current understanding and would ensure 
that future NFIP litigation will be properly brought in Federal courts. 
If the rule is delayed, the Program and insureds will

[[Page 45610]]

incur increased costs related to cases improperly brought in State 
courts, and there is a risk of inconsistent application of laws and 
inappropriate application of State law to this Federal Program.
    Certain provisions of the proposed rule are intended to reduce the 
litigation exposure throughout the Program. For example, the limitation 
on situations where premium refunds are allowed should restrict the 
number of future lawsuits on this issue. Therefore, a delay in this 
rule could result in unexpected litigation costs to the WYO Companies 
and FEMA.
    The Third Alternative is to amend the Arrangement as outlined in 
this interim final rule. We believe that doing so would prevent the 
cost shifting to the Federal taxpayers outlined in the first two 
alternatives. In addition, by clarifying the rule to comport with our 
understanding of jurisdiction, we will ensure that cases are brought in 
the appropriate Federal courts, and the provision limiting litigation 
exposure to the Program and its participants would minimize unnecessary 
proceedings (including those in State courts), protect the Federal 
Treasury, and further the purposes of the Program. We further believe 
that the clarity that this interim final rule brings to the NFIP would 
make it easier for companies and agents to sell NFIP policies thereby 
further transferring the costs of floods from the taxpayers to this 
premium funded Program.
    OMB has reviewed this rule under the principles of Executive Order 
12866. This rule is a significant rule as defined under Executive Order 
12866.

National Environmental Policy Act

    This interim final rule falls within the exclusion category of 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 
interim final rule will not require the preparation of either an 
environmental assessment or an environmental impact statement as 
defined by the National Environmental Policy Act.

Paperwork Reduction Act

    This interim final 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.''
    We believe that this rule does not have a significant economic 
impact on a substantial number of small entities, and as a result at 
the time of the proposed rule we issued a certification that the rule 
did not.
    We received a comment that indicated that the proposed change to 44 
CFR 61.5 would have a significant impact on a substantial number of 
small entities. In light of that comment, we have decided not to 
include that provision in this interim final rule. Rather, we are 
requesting additional comments on the proposed change to 44 CFR 61.5, 
as outlined in the proposed rule, and in particular on whether it would 
have a significant impact on a substantial number of small entities. We 
request that comments on this issue be as specific as possible when 
commenting on the type and scope of the impact and to provide as much 
quantitative information as possible to assist us in understanding the 
issue. If, after our own further evaluation and review of any 
additional comments that we receive, we believe the change to 44 CFR 
61.5 is still warranted and think that it may have an impact, we will 
prepare an Initial Regulatory Flexibly Analysis (IFRA). If we prepare 
an IFRA we will publish it and seek public comment prior to publication 
of a final rule on 44 CFR 61.5.

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 interim final rule under Executive Order 
13132 and concludes that the interim final 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 additional preemption of State 
law, and does not limit State policymaking discretion.

List of Subjects in 44 CFR Part 62

    Flood insurance.

0
Accordingly, we amend 44 CFR Part 62 as follows:

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

0
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.


0
2. 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.
* * * * *

0
3. 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

[[Page 45611]]

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.
* * * * *

0
4. 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: October 1, 2004.
* * * * *

0
5. 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) within the 
Mitigation Division 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 
back 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; 
and
    Whereas, the sole parties under this Arrangement are the WYO 
Companies and the Federal Government.
    Now, therefore, the parties hereto mutually undertake the 
following:

0
6. 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.

0
7. 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 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. In the event the Administrator agrees with the determination 
of the FEMA OGC under Article III, Section D.3.a then 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.
    c. 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.
    d. 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-c, 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 advice on other than legal 
matters 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 will be made in writing within a reasonable time 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.
    8. 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 October 1, 
2004 through September 30, 2005. 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

[[Page 45612]]

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 
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. As an alternative to transfer 
of the policies to the Government, the FIA will consider a proposal, 
if it is made by the Company, 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. As an alternative to transfer of the policies to the 
Government, the FIA will consider a proposal, if it is made by the 
Company, 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.

0
9. 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.

0
10. 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 or (ii) if there is negligence 
by the agent, FEMA will not reimburse any costs incurred due to that 
negligence. 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.d shall apply.
* * * * *

0
11. 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: July 27, 2004.
Michael D. Brown,
Under Secretary, Emergency Preparedness and Response, Department of 
Homeland Security.
[FR Doc. 04-17358 Filed 7-29-04; 8:45 am]
BILLING CODE 9110-12-P