National Flood Insurance Program: Preliminary Views on FEMA's	 
Ability to Ensure Accurate Payments on Hurricane-Damaged	 
Properties (12-JUN-07, GAO-07-991T).				 
                                                                 
Disputes between policyholders and property-casualty insurers	 
over coverage from the 2005 hurricane season highlight challenges
in determining the appropriateness of claims for multiple-peril  
events. In particular, events such as hurricanes that can cause  
both wind and flood damages raise questions about the adequacy of
steps taken by the Federal Emergency Management Agency (FEMA) to 
ensure that claims paid by the National Flood Insurance Program  
(NFIP) covered only damages caused by flooding. As a result, the 
Subcommittees asked GAO to provide preliminary views on (1) the  
information available to and obtained by NFIP through its claims 
process in determining flood damages for properties that	 
sustained both wind and flood damages, and (2) the information	 
collected by FEMA as part of the NFIP claims reinspection	 
process. GAO collected data from FEMA, reviewed reinspection	 
reports, reviewed relevant policies and procedures, and 	 
interviewed agency officials and others knowledgeable about NFIP.
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-991T					        
    ACCNO:   A70688						        
  TITLE:     National Flood Insurance Program: Preliminary Views on   
FEMA's Ability to Ensure Accurate Payments on Hurricane-Damaged  
Properties							 
     DATE:   06/12/2007 
  SUBJECT:   Claims processing					 
	     Claims settlement					 
	     Damage claims					 
	     Flood insurance					 
	     Hurricane Katrina					 
	     Hurricanes 					 
	     Insurance claims					 
	     Property						 
	     Property damage claims				 
	     Property damages					 
	     Federal Emergency Management Agency		 
	     FEMA National Flood Insurance Program		 

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GAO-07-991T

   

     * [1]Background
     * [2]NFIP Does Not Systematically Collect and Analyze Data on Rel
     * [3]FEMA's Reinspection Program Has Limited Ability to Validate
     * [4]Contacts and Acknowledgments
     * [5]GAO's Mission
     * [6]Obtaining Copies of GAO Reports and Testimony

          * [7]Order by Mail or Phone

     * [8]To Report Fraud, Waste, and Abuse in Federal Programs
     * [9]Congressional Relations
     * [10]Public Affairs

Testimony

Before the Subcommittee on Oversight and Investigations, Committee on
Financial Services, and the Subcommittee on Management, Investigations,
and Oversight, Committee on Homeland Security, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 2:30 p.m. EDT
Tuesday, June 12, 2007

NATIONAL FLOOD INSURANCE PROGRAM

Preliminary Views on FEMA's Ability to Ensure Accurate Payments on
Hurricane-Damaged Properties

Statement of Orice M. Williams, Director
Financial Markets and Community Investment

GAO-07-991T

Mr. Chairmen and Members of the Subcommittees:

I am pleased to be here today to discuss our preliminary views on the
National Flood Insurance Program (NFIP) and its access to the data needed
to assess flood claims on properties damaged by both high winds and
flooding in the aftermath of hurricanes. As we begin the 2007 hurricane
season, disputes over coverage between policyholders and property-casualty
insurers from the 2005 hurricane season continue to highlight the
challenges of determining the appropriateness of claims for multiple-peril
events. While these disputes center on the extent to which homeowners'
insurance policies covered damages that resulted from wind, flooding, or
some degree of both, they also bring to light the issues NFIP faces in
servicing and validating flood claims from disasters such as hurricanes
that may involve both flood and wind damages.

Key concerns raised from the 2005 hurricane season include whether or not
some property-casualty insurance claims for wind-related damages were
improperly shifted to NFIP at the expense of taxpayers. For properties
subjected to both high winds and flooding, determinations must be made to
assess the damages caused by wind, which may be covered through a
property-casualty homeowners policy, and the damages caused by flooding,
which may be covered by NFIP. The property-casualty insurer, NFIP, and the
consumer all have a financial stake in the outcome of these
determinations. Under NFIP, most flood damage claims are adjusted by
private property-casualty insurers, known as the write-your-own (WYO)
insurers, which sell and service flood insurance policies on the program's
behalf.^1 Concerns over the processing of these flood claims are
heightened when the same insurance company serves as both NFIP's WYO
insurer and the property-casualty (wind) insurer for a given property. In
such cases, the same company is responsible for determining damages and
losses to itself and to NFIP, creating a potential conflict of interest.

Accordingly, questions have been raised about the information NFIP
collects or has access to in these types of claims that would allow it to
understand and validate the extent of damages caused by wind and flooding
as a way to ensure that the allocation of damages and, as a result, the
claims paid for flooding are accurate. As I indicated, knowing how both
wind and flooding contributed to damages is particularly important in
addressing the potential conflict of interest that can arise when the same
company is determining the wind and flood damages for itself and for NFIP,
respectively. My remarks today focus on two aspects of the NFIP claims
process. First, I will discuss the information available to and obtained
by NFIP through its claims process in determining flood damages for
properties subjected to both high winds and flooding. Second, I will
discuss the information collected by the Federal Emergency Management
Agency (FEMA) as part of the NFIP claims reinspection process.

^1NFIP contracts with private insurers to sell and administer flood
insurance policies through the WYO arrangement, allowing the insurers to
write flood policies backed by the federal government.

My remarks today are based on our preliminary review of hurricane-related
claims data systematically collected by NFIP for flood losses and by state
insurance regulators for losses reported by property-casualty insurers for
the 2005 hurricane season. Due to broad-based interest, the work
supporting this statement is being done under the authority of the
Comptroller General and is part of a larger effort being completed for the
Ranking Member of the House Financial Services Committee. Our ongoing work
addresses insurance issues related to wind versus flood damages and
includes a review of how such determinations are made, who is making these
determinations and how they are regulated, and the accuracy of claims
payments based on the wind and flood damage determinations.

To complete our work, we have identified and reviewed the specific data
elements and level of geographic detail available to NFIP on hurricane
claims payments. In addition, we reviewed a statistically valid sample of
files of reinspections that NFIP conducted on selected properties. We have
also discussed information and issues associated with claims processing
activities with NFIP, state insurance regulators, the National Association
of Insurance Commissioners (NAIC), property-casualty insurers,
state-sponsored wind insurers, insurance agents, claims adjusters, and
industry associations. We conducted our work in accordance with generally
accepted government auditing standards.

In summary:

Limited information is collected by NFIP to understand both the wind and
flood damage determinations made for hurricane-damaged properties,
limiting NFIP's ability to know whether claims paid under the flood policy
were always limited to only flood damages. For a given hurricane-damaged
property, because NFIP does not know how much of the damages were caused
by wind and how much were caused by flooding, NFIP cannot determine
whether the amount it paid accurately represents payment only for flood
damage. This information is lacking even when the same property-casualty
insurance company serves as both the NFIP WYO insurer and the wind
insurer. For properties experiencing both wind and flood damages, NFIP
does not consistently collect information that would enable it to
determine, either at the time the NFIP claim was paid or later, whether
the amount paid on a flood damage claim reflects only the damages caused
by flooding. Claims data collected by NFIP from WYO insurers, including
those that sell and service both the wind and the flood policies, do not
include information on total damages to the property from all perils--that
is, they do not report the existence of wind damage nor the amount of
damage caused by wind when servicing a flood claim on the same property.
FEMA states that "claims paid by a WYO company that do not involve flood
insurance proceeds (and the data related thereto) are not accessible by
FEMA." Hence, NFIP does not systematically collect data on wind damages
for properties for which a flood claim has been received. As a result, for
hurricane-damaged properties subjected to both high winds and flooding,
NFIP may not have all the information it needs to ensure that its claims
payments were limited to only flood damages.

We found that the lack of both flood and wind damage data also limited the
usefulness of FEMA's quality assurance reinspection program on NFIP flood
claims when wind damage was also a factor. Specifically, the FEMA
reinspection program did not incorporate a means for collecting and
analyzing both the flood and wind damage data together in a systematic
fashion to reevaluate the extent to which wind and flooding were deemed to
have contributed toward damages to the property. We also explored whether
the wind damage claims data that were collectively gathered by state
insurance regulators after the 2005 hurricane season could provide
information useful to NFIP to reevaluate damage assessments made and how
they were apportioned between wind and flooding. We found that such data
were not collected in sufficient geographic detail to match with
corresponding flood claims data for a particular property, or even a
neighborhood or city. Without the ability to examine damages caused by
both wind and flooding, the reinspection program is limited in its
usefulness as a tool to assess whether NFIP paid only for losses caused by
flooding.

Background

Property owners in certain coastal regions subject to hurricanes and
flooding may have to purchase at least two, and sometimes more, different
types of insurance policies. Flood insurance is offered by NFIP, while
insurance for wind-related damages is generally offered by private
insurance companies or state-sponsored insurers. NFIP was established in
1968 in part to provide some insurance protection for flood victims
because the private insurers were and still are largely unwilling to
insure for flood risks. The National Flood Insurance Act of 1968, as
amended, allows homeowners to purchase up to $250,000 of NFIP coverage on
their dwellings and up to an additional $100,000 for personal property
such as furniture and electronics. Business owners may purchase up to
$500,000 of coverage for dwellings and $500,000 on the contents.
Exclusions under the flood policy include damages caused by wind or a
windstorm. FEMA, which administers NFIP, is responsible for the management
and oversight of NFIP and is assisted in performing these functions by a
program contractor.

While NFIP provides the flood insurance policy and holds the risk, private
property-casualty insurers, known as WYO insurers, sell and service
approximately 95 percent of NFIP's flood policies. WYO insurers retain a
portion of the premium for selling flood policies and receive fees for
performing other administrative services for NFIP, but do not have any
exposure to claims losses. A WYO insurer may or may not also provide
coverage for wind-related risks on the same property. ^2 After an event
occurs, policyholders normally contact a WYO insurer to initiate a flood
damage claim. If the claimant also has a policy for wind damage from the
same WYO insurer, the company generally adjusts losses pertaining to both
types of damages, those caused by wind and those caused by flooding. In
such cases, the WYO insurer must determine and apportion the damages
caused by wind that it insures, along with those caused by flooding,
insured by NFIP.

To settle flood claims, insurance companies work with certified flood
adjusters. When flood losses are reported, the WYO insurers assign flood
adjusters to assess damages. The WYO insurers may use their own staff
adjusters or contract with independent adjusters or adjusting firms to
perform the flood adjustments. These adjusters are responsible for
assessing damage, estimating losses, and submitting required reports, work
sheets, and photographs to the insurance company, where the claim is
reviewed and, if approved, processed for payment.

Both the insurance industry and NFIP incurred unprecedented storm losses
from the 2005 hurricane season. State insurance regulators estimated that
property-casualty insurers had paid out approximately $22.4 billion in
claims tied to Hurricane Katrina (excluding flood), as of December 31,
2006.^3 However, industry observers estimate that insured losses tied to
Hurricane Katrina alone (other than flood) could total more than $40
billion, depending on the outcome of outstanding claims and ongoing
litigation. NFIP estimated that it had paid approximately $15.7 billion in
flood insurance claims as of January 31, 2007, encompassing approximately
99 percent of all flood claims received.

^2NFIP program contractors stated that they did not know how often the
same WYO company also insured the property for wind damage because they
did not systematically collect that information. However, a FEMA official
we contacted stated that such a circumstance likely occurs in the majority
of cases.

NFIP Does Not Systematically Collect and Analyze Data on Related Wind Damages
When Collecting Flood Claims Data

For hurricane-damaged properties, NFIP does not know whether both wind and
flooding contributed toward damages nor the apportionment of damages
between them, limiting its ability to monitor the accuracy of flood
payments and address potential conflicts of interest that may arise in
certain damage scenarios. Based on our preliminary review, we found that
NFIP did not systematically collect and analyze data on wind-related
damage when collecting flood claims data on properties subjected to both
high winds and flooding, such as those damaged in the aftermath of
Hurricanes Katrina and Rita. Further, such information is not sought even
when the same insurance company serves as both the NFIP WYO insurer and
the insurer for wind-related risks, posing a potential conflict in certain
damage scenarios where properties are subjected to both types of perils.
Without information on both wind and flood damages to the property, NFIP
may not know on certain hurricane-damaged properties whether the amount it
paid for a claim was limited to flood damage.

As mentioned earlier, NFIP's WYO insurer may also insure the same property
for wind-related damages. In this situation, a potential conflict of
interest can materialize because the WYO insurer has a financial interest
in the outcome of the claims adjustment it performs on behalf of NFIP.
Conversely, if the policy for wind-related risks were issued by another
insurer, the same potential conflict of interest would not exist because
the flood and wind damages would be assessed and determined separately by
different insurers.

WYO insurers are required to submit flood damage claims data in accordance
with NFIP's Transaction Record Reporting and Processing (TRRP) Plan, for
inclusion into NFIP's claims database.^4 In our review of data elements in
NFIP's claims database, we found that NFIP does not require WYO insurers,
which are responsible for adjusting the flood claim, to report information
on property damages in a manner that could allow NFIP to differentiate how
these damages (to the building or its contents) were divided between wind
and flooding, even when the WYO insurer is also the wind insurer for the
property.

^3Claims paid as reported to NAIC by property-casualty insurers as of
December 31, 2007, for multiple lines of business, including fire and
allied lines, farm owners, homeowners, mobile homeowners, commercial
multi-peril, commercial auto physical damage, private passenger auto
physical damage, ocean marine, and other lines (excluding flood).

Specifically, the TRRP Plan for WYO insurers instructs them to include
only flood-related damages in the data fields on "Total Building Damages"
and "Total Damage to Contents." Further, the "Cause of Loss" data field
does not incorporate an option to explicitly identify property damages
caused by wind or partially caused by wind (e.g. combined wind and flood,
hurricane, windstorm, etc.). As a result, WYO insurers do not report total
property damages in a manner that 1) identifies the existence of wind
damage or 2) discerns how damages were divided between wind versus
flooding for properties that were subjected to a combination of both
perils. Further, NFIP program contractors stated that they do not
systematically track whether the WYO insurer processing a flood claim on a
property is also the wind insurer for that property. This lack of
transparency over both the wind and flood damages on hurricane-damaged
properties limits NFIP's ability to verify that damages paid for under the
flood policy were caused only by the covered loss of flooding.

NFIP's normal claims processing activities, which do not incorporate a
means to systematically collect information on wind-related damages, were
further stressed during the 2005 hurricane season. For both Hurricanes
Katrina and Rita, FEMA estimates that it has paid approximately $16.2
billion in claims, with average payments of over $95,000 and $47,000,
respectively. As we reported in December of 2006, in an effort to assist
policyholders, NFIP approved expedited claims processing methods that were
unique to Hurricanes Katrina and Rita.^5 Some expedited methods included
the use of aerial and satellite photography and flood depth data in place
of a site visit by a claims adjuster for properties where it was likely
that covered damages exceeded policy limits. Under other expedited
methods, FEMA also authorized claims adjustments without site visits where
only foundations were left and square foot measurements of the dwellings
were known.^6 Such expedited procedures facilitated the prompt processing
of flood claims payments to policyholders following the unprecedented
damage of the 2005 hurricanes. However, once these flood claims were
processed, as was the case for other flood claims on hurricane-damaged
properties, NFIP did not systematically collect wind damage claims data
tied to flood-damaged properties on an after-the-fact basis. Hence, NFIP
does not know the extent to which wind contributed to total property
damages.

^4NFIP requires each WYO company to meet the requirements of the WYO
Transaction Record Reporting and Processing Plan and to submit monthly
financial and statistical reports as required in FEMA regulation 44C.F.R.,
part 62, Appendices A and B.

^5GAO, National Flood Insurance Program: New Processes Aided Hurricane
Katrina Claims Handling, but FEMA's Oversight Should Be Improved,
[11]GAO-07-169 (Washington, D.C.: Dec. 15, 2006).

FEMA officials stated that they do not have access to wind damage claims
data from the WYO insurers. Specifically, a letter from FEMA to GAO stated
that:

"FEMA's opinion is that, where flood insurance payments have been made,
FEMA is permitted to review the background claims data in order to ensure
that insurance claims payments are appropriately allocated to flood losses
as opposed to wind-related losses. Such data may include the adjuster's
report(s) and any engineering reports that support (or fail to support)
the allocation of loss to flood versus wind damage. FEMA may request
summaries and analyses of this information at any time to ensure proper
processing of flood claims. Conversely, claims paid by a WYO company that
do not involve flood insurance proceeds (and the data related thereto) are
not accessible by FEMA, and indeed, do not need to be, as there would have
been no improper allocation of flood insurance proceeds for wind losses.
Moreover, the attempt to access this unrelated data may be found to
violate various privacy protections."

Hence, NFIP does not systematically collect data on wind damages for
properties for which a flood claim has been received. As a result, for
hurricane damaged properties subjected to both high winds and flooding,
NFIP may not have all the information it needs to ensure that its claims
payment was limited to only flood damage.

^6Approximately 11 percent of all Hurricane Katrina claims were adjusted
using expedited procedures, according to the FEMA director of NFIP claims.

FEMA's Reinspection Program Has Limited Ability to Validate the Accuracy of
Payments on Hurricane-Damaged Properties

FEMA's reinspection program, which helps validate the adjustment process
and flood payments made, provides limited information that could enable
FEMA to better validate the claims payments it makes for flood damage when
wind is also a factor. Based on our preliminary review, the reinspection
program does not systematically evaluate the apportionment of damages
between wind and flooding, even when a potential conflict of interest may
arise with the WYO insurer. Along with flood claims data collected from
WYO insurers that service flood policies, FEMA, through its program
contractor, operates a reinspection program to monitor and oversee claims
adjustments and address concerns about flood payments. The stated purpose
of the reinspection program is to reevaluate the flood adjustment and
claim payment made on a given property to determine whether or not NFIP
paid the correct amount for flood-related damages. This is accomplished
through on-site reinspections and reevaluations of a sample of flood claim
adjustments. However, we found that FEMA's reinspection program did not
systematically incorporate a means for identifying whether nor the extent
to which wind-related damages contributed to the losses. Without the
ability to examine damages caused by both wind and flooding, the
reinspection program is limited in its ability to assess whether NFIP paid
only the portion of damages it was obligated to pay under the flood
policy.

During our study, we reviewed hundreds of reinspection files for
properties with flood claims tied to Hurricanes Katrina and Rita. We found
that the reinspection files did not confirm that the claim paid actually
reflected only the damage covered by the flood insurance policy versus
damage caused by other, uncovered damages, such as wind. Rather, the
reinspection files generally contained limited and inconsistent
documentation concerning the presence or extent of wind-related damages on
properties without additional documentation that would enable FEMA to
evaluate both the wind and flood damage information together.

Specifically, the reinspection files reviewed did not consistently
document whether or not damages were caused by a combination of both wind
and flooding. The reinspection activities focused on reevaluating the
extent to which building and content damages were caused by flooding.
While some of the reinspection files included documentation as to whether
or not damage was caused by a combination of wind and flooding, most did
not. Information reviewed from 740 reinspection files revealed that nearly
two-thirds of these reinspection reports did not include documentation to
indicate whether damages were caused by a combination of both wind and
flooding or only flooding. We found that approximately 26 percent included
documentation indicating damage was caused only by flooding, while
approximately 8 percent of the reinspection files included documentation
that damages were caused by a combination of wind and flooding. In cases
where reinspectors indicated that damages were caused by a combination of
wind and flooding, insufficient data existed to assess the extent that
wind contributed to the damages. That is, information about the wind
damage during the reinspection process was not documented or analyzed in a
systematic fashion. Hence, the reinspection activities did not
systematically document or validate the presence or extent of wind damage
in combination with flood damage in order to verify that flood payments
were limited to flood damage. Moreover, as we have previously reported,
FEMA does not choose a statistically valid sample for its reinspection
process. Therefore, the results could not be projected to the universe of
properties for which flood claims were made.^7

We also noted that on-site reinspections of properties with flood claims
tied to Hurricanes Katrina and Rita were generally conducted several
months after the event. Such delays, while understandable considering the
scope and magnitude of devastation resulting from these hurricanes in
2005, further limited NFIP's ability to reevaluate the quality and
accuracy of the initial damage determination, given the ongoing natural
and manmade events that continued to alter the damage scene.

Finally, we explored whether NFIP could use data collectively gathered by
state insurance regulators on property-casualty claims resulting from the
2005 hurricane season to match with NFIP flood claims data. We found that
while Florida, Mississippi, Louisiana, Alabama, and Texas collected some
aggregate information about claims from the property-casualty insurers,
such data would have been of limited value to NFIP to evaluate the
accuracy of its flood claims payments in any systematic way. Except for
Florida, which had previously collected aggregate claim data from
property-casualty insurers for major hurricane events, the other states
used a special data call, based on Florida's system, to collect this
aggregate claims data from the property-casualty insurers. However, the
information collected was not in sufficient geographic detail to allow a
meaningful evaluation of wind versus flood damage assessments and
apportionments made by insurers.^8 That is, claims data reported by
property-casualty insurers through this mechanism were either reported on
a statewide or county/parish-level basis that did not allow it to be
matched with corresponding flood claims data on a community-level (e.g.
zip code) or a property-level basis.

^7GAO, Federal Emergency Management Agency: Improvements Needed to Enhance
Oversight and Management of the National Flood Insurance Program,
[12]GAO-06-119 (Washington, D.C.: Oct.18, 2005).

In summary, based on our preliminary review, NFIP does not collect the
information it needs to help evaluate whether it has paid only what it is
obligated to pay under the flood policy for properties subjected to both
high winds and flooding, such as those damaged by hurricanes Katrina and
Rita. For these properties, NFIP did not systematically collect enough
information to know whether there was wind damage, much less enough to
understand how much of the damage was determined to have been caused by
wind and how much was caused by flooding. Without the ability to collect
information that documents both the flood and wind damage, NFIP's capacity
to evaluate the accuracy of its payments is limited. As mentioned earlier,
this is particularly important in situations where the WYO insurer also
insures the property for wind damages. This creates a potential conflict
of interest when the same insurer makes both the wind and flood damage
assessments, because the insurer is effectively apportioning losses
between itself and NFIP. Obtaining both the flood and wind adjustment
claims data, whether from the same WYO insurer that services both or from
different insurers, would be necessary to NFIP to verify the accuracy of
the payments made for flood claims.

Information collected and assessed through FEMA's claims reinspection
program is also of limited usefulness in confirming or validating the
accuracy of flood payments made by NFIP on properties damaged by both wind
and flooding. Without the additional information about wind damage on
properties for which flood claims were also filed, NFIP may not be certain
whether it has paid only for the flood damages to these properties.
Finally, we determined that using hurricane claims data collected by state
insurance regulators would not have provided data on a property- or
community-level basis to help NFIP determine how much damage was caused by
wind versus flooding, and how these damages were apportioned between the
two perils. The lack of both wind and flood claims data limits NFIP's
ability to assess whether payments made on flood claims from the 2005
hurricane season were accurate.

^8In the aftermath of Hurricanes Katrina and Rita, state insurance
regulators in Mississippi, Louisiana, Alabama, Texas, and Florida jointly
established a data call mechanism to collect aggregate claims data tied to
the storms reported by property-casualty insurers. These states
collectively referred to the entire data call mechanism as the Insurance
Disaster Reporting System (IDRS). It enabled regulators to better
understand the total number of claims tied to the storms, the type of
claims, the extent of losses, and the number of claims considered closed
by property-casualty insurers. In general, the aggregate claims data were
collected either at a state or county (parish) level depending on the
phase of reporting. The IDRS data capture mechanism was originally
developed by the state of Florida and was undergoing a redevelopment when
Hurricanes Katrina and Rita hit. State insurance regulators, with the
assistance of NAIC staff, decided to use this data capture mechanism
because it was readily available, even recognizing its limitations. IDRS
was not designed to monitor damages on a property-by-property basis.

Mr. Chairmen, this concludes my prepared statement. I would be pleased to
respond to any questions that you or other members of the Subcommittees
may have.

Contacts and Acknowledgments

For additional information about this testimony please contact Orice M.
Williams on (202) 512-8678 or at [13][email protected] . Contact points
for our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement. Individuals making key contributions
to this testimony include Lawrence D. Cluff, Assistant Director; Tania
Calhoun; Emily Chalmers; Rudy Chatlos; Chir-Jen Huang; Barry Kirby; and
Melvin Thomas.

(250346)

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Highlights of GAO-07-991T, a testimony before the Subcommittee on
Oversight and Investigations, Committee on Financial Services, and the
Subcommittee on Management, Investigations, and Oversight, Committee on
Homeland Security, House of Representatives

June 2007

NATIONAL FLOOD INSURANCE PROGRAM

Preliminary Views on FEMA's Ability to Ensure Accurate Payments on
Hurricane-Damaged Properties

Disputes between policyholders and property-casualty insurers over
coverage from the 2005 hurricane season highlight challenges in
determining the appropriateness of claims for multiple-peril events. In
particular, events such as hurricanes that can cause both wind and flood
damages raise questions about the adequacy of steps taken by the Federal
Emergency Management Agency (FEMA) to ensure that claims paid by the
National Flood Insurance Program (NFIP) covered only damages caused by
flooding.

As a result, the Subcommittees asked GAO to provide preliminary views on
(1) the information available to and obtained by NFIP through its claims
process in determining flood damages for properties that sustained both
wind and flood damages, and (2) the information collected by FEMA as part
of the NFIP claims reinspection process.

GAO collected data from FEMA, reviewed reinspection reports, reviewed
relevant policies and procedures, and interviewed agency officials and
others knowledgeable about NFIP.

[21]What GAO Recommends

This testimony is based on an ongoing engagement and, therefore, includes
no recommendations. GAO anticipates making recommendations in its final
report.

NFIP does not collect and analyze both wind and flood damage claims data
in a systematic fashion, which may limit FEMA's ability to assess whether
flood payments on hurricane-damaged properties are accurate. Instead, NFIP
focuses only on the flood claims data to determine whether the amount
actually paid on a claim reflects the damages caused by flooding. Flood
claims data, collected by NFIP through the write-your-own (WYO)
insurers--including those that sell and service both the wind and flood
policies--do not include information on total damages to the property from
all perils. That is, NFIP does not systematically collect information on
wind damages from the WYO insurer when a flood claim is received. FEMA
officials state that they do not have authority to collect wind damage
claims data from WYO insurers, even when the insurer services both the
wind and flood policies on the same property. As a result, for
hurricane-damaged properties, such as those damaged by Hurricanes Katrina
and Rita, NFIP does not have all the information it needs to ensure that
its claims payments were limited to damage caused by flooding. Concerns
over the processing of these flood claims are heightened when the same
insurance company serves as both NFIP's WYO insurer and the
property-casualty (wind) insurer for a given property. In such cases, the
same company is responsible for determining damages and losses to itself
and to NFIP, creating a potential conflict of interest.

The lack of both flood and wind damage data also limits the usefulness of
FEMA's quality assurance reinspection program for NFIP flood claims. GAO
found that the NFIP reinspection program did not incorporate a means for
collecting and analyzing both the flood and wind damage data together in a
systematic fashion to reevaluate the extent to which wind and flooding
were deemed to have contributed toward damages to the property. Further,
we explored whether the wind-related claims data collectively gathered by
state insurance regulators would be useful to NFIP to reevaluate damage
assessments. We determined that this information would be of limited value
to NFIP in reevaluating wind versus flood damage determinations made
because such data is not collected in enough geographic detail to match
with the corresponding flood claims data on a property- or community-level
basis. Without the ability to examine damages caused by both wind and
flooding, the reinspection program is limited in its ability to confirm
whether NFIP paid only for losses caused by flooding.

References

Visible links
  11. http://www.gao.gov/cgi-bin/getrpt?GAO-07-169
  12. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
  13. mailto:[email protected]
  14. http://www.gao.gov/
  15. http://www.gao.gov/
  16. http://www.gao.gov/fraudnet/fraudnet.htm
  17. mailto:[email protected]
  18. mailto:[email protected]
  19. mailto:[email protected]
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-GAO-07-991T
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