National Flood Insurance Program: Greater Transparency and	 
Oversight of Wind and Flood Damage Determinations Are Needed	 
(28-DEC-07, GAO-08-28). 					 
                                                                 
Disputes between policyholders and insurers after the 2005	 
hurricane season highlight the challenges in understanding the	 
cause and extent of damages when properties are subjected to both
high winds and flooding. Questions remain over the adequacy of	 
steps taken by the Federal Emergency Management Agency (FEMA) to 
ensure that claims paid by the National Flood Insurance Program  
(NFIP) cover only those damages caused by flooding. GAO was asked
to evaluate (1) issues that arise when multiple insurance	 
policies provide coverage for losses from a single event, (2)	 
state regulators' oversight of loss adjusters, and (3)		 
information that NFIP collects to assess the accuracy of damage  
determinations and payments. GAO collected data from FEMA,	 
reviewed reinspection reports and relevant policies and 	 
procedures, and interviewed state regulatory officials and others
about adjuster oversight and NFIP.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-28						        
    ACCNO:   A79248						        
  TITLE:     National Flood Insurance Program: Greater Transparency   
and Oversight of Wind and Flood Damage Determinations Are Needed 
     DATE:   12/28/2007 
  SUBJECT:   Damage claims					 
	     Federal/state relations				 
	     Flood insurance					 
	     Floods						 
	     Hurricane Katrina					 
	     Hurricane Rita					 
	     Hurricanes 					 
	     Insurance claims					 
	     Policy evaluation					 
	     Program management 				 
	     Policies and procedures				 
	     Transparency					 
	     FEMA National Flood Insurance Program		 

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GAO-08-28

   

     * [1]Results in Brief
     * [2]Background
     * [3]Potential Coverage Gaps and Claims Uncertainties Can Arise W

          * [4]Covering Hurricane Damages Often Requires Two or More Polici
          * [5]Insurance Coverage Gaps, Claims Adjustment Uncertainties, an
          * [6]Legal Disputes Involving Policy Coverage Have Arisen Since t

     * [7]Lack of Uniformity in Licensing and Training Requirements am

          * [8]States' Licensing and Training Requirements for Claims Adjus
          * [9]States May Waive Requirements for Adjusters During Emergenci

     * [10]Lack of Relevant Claims Data Limits FEMA's Ability to Overse

          * [11]NFIP Generally Lacks Needed Data on Wind Damage Claims for P
          * [12]FEMA's Reinspection Program Has Limited Ability to Validate

     * [13]Conclusions
     * [14]Matters for Congressional Consideration
     * [15]Recommendation for Action
     * [16]Agency Comments and Our Evaluation
     * [17]GAO Contact
     * [18]Staff Acknowledgments
     * [19]GAO's Mission
     * [20]Obtaining Copies of GAO Reports and Testimony

          * [21]Order by Mail or Phone

     * [22]To Report Fraud, Waste, and Abuse in Federal Programs
     * [23]Congressional Relations
     * [24]Public Affairs

Report to the Ranking Member, Committee on Financial Services, House of
Representatives

United States Government Accountability Office

GAO

December 2007

NATIONAL FLOOD INSURANCE PROGRAM

Greater Transparency and Oversight of Wind and Flood Damage Determinations
Are Needed

GAO-08-28

Contents

Letter 1

Results in Brief 2
Background 6
Potential Coverage Gaps and Claims Uncertainties Can Arise When Homeowners
Have Multiple Policies That Cover Different Perils 10
Lack of Uniformity in Licensing and Training Requirements among States
Creates Uncertainties about Some Adjusters' Qualifications 14
Lack of Relevant Claims Data Limits FEMA's Ability to Oversee Hurricane
Damage Assessments 19
Conclusions 25
Matters for Congressional Consideration 27
Recommendation for Action 27
Agency Comments and Our Evaluation 27
Appendix I Objectives, Scope, and Methodology 30
Appendix II Comments from the Department of Homeland Security 32
Appendix III GAO Contact and Staff Acknowledgments 35

Figures

Figure 1: Key Flood Insurance Claims Processing Steps on Flood-Damaged
Properties 8
Figure 2: Licensing and Training Requirements for Adjusters in Selected
Coastal States as of 2007 15

Abbreviations

FEMA Federal Emergency Management Agency
NAIC National Association of Insurance Commissioners
NFIP National Flood Insurance Program
TRRP Transaction Record Reporting and Processing
WYO write-your-own

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wish to reproduce this material separately.

United States Government Accountability Office
Washington, DC 20548

December 28, 2007

The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives

Dear Mr. Bachus:

Hurricanes pose unique challenges for insurers and property owners because
damages caused by these storms can result from multiple perils. Among
these are high winds and flooding, the combination of which caused
unprecedented damage during Hurricane Katrina. After such an event, a
necessary and challenging task is determining the extent of the damage
caused by each peril, as wind and flood damages are generally covered
under different types of insurance policies. Private property-casualty
insurance policies generally exclude flood damage, which is covered by
federally backed flood insurance under the National Flood Insurance
Program (NFIP). Since 1968, the federal government has offered flood
insurance policies through NFIP, a program now administered by the Federal
Emergency Management Agency (FEMA), U.S. Department of Homeland
Security.^11 However, private property-casualty insurers may sell both
types of policies--their own property-casualty insurance and flood
insurance on behalf of NFIP--and thus be responsible for determining
whether property damages were caused by wind or flooding after hurricanes.
Since the devastating 2005 hurricane season, questions have been raised
about how damage determinations are made, the oversight of such
activities, and the accuracy of the resulting claims payments. Hurricanes
pose unique challenges for insurers and property owners because damages
caused by these storms can result from multiple perils. Among these are
high winds and flooding, the combination of which caused unprecedented
damage during Hurricane Katrina. After such an event, a necessary and
challenging task is determining the extent of the damage caused by each
peril, as wind and flood damages are generally covered under different
types of insurance policies. Private property-casualty insurance policies
generally exclude flood damage, which is covered by federally backed flood
insurance under the National Flood Insurance Program (NFIP). Since 1968,
the federal government has offered flood insurance policies through NFIP,
a program now administered by the Federal Emergency Management Agency
(FEMA), U.S. Department of Homeland Security. However, private
property-casualty insurers may sell both types of policies--their own
property-casualty insurance and flood insurance on behalf of NFIP--and
thus be responsible for determining whether property damages were caused
by wind or flooding after hurricanes. Since the devastating 2005 hurricane
season, questions have been raised about how damage determinations are
made, the oversight of such activities, and the accuracy of the resulting
claims payments.

The unprecedented scope of the damage from Hurricane Katrina created
special challenges for insurers and their insurance claims adjusters, who
were responsible for determining the cause and extent of damages. The
scope of the damages meant that many more adjusters were needed than were
available, creating delays in the adjustment process. At the same time,
adjusters had difficulty reaching properties because of the extent of the
devastation. Evidence at the damage scenes was often limited or The
unprecedented scope of the damage from Hurricane Katrina created special
challenges for insurers and their insurance claims adjusters, who were
responsible for determining the cause and extent of damages. The scope of
the damages meant that many more adjusters were needed than were
available, creating delays in the adjustment process. At the same time,
adjusters had difficulty reaching properties because of the extent of the
devastation. Evidence at the damage scenes was often limited or
compromised, making assessments and apportionments of damages more
difficult. These challenges further contributed to the concerns,
controversies, and disputes over the damage determinations made by
insurance adjusters.

^1The NFIP was established under the authority of the National Flood
Insurance Act of 1968, 42 U.S.C. SS 4001 et seq., as a subsidized program
sponsored by the federal government.

In response to these issues and other concerns, you asked us to evaluate
(1) the issues that can arise for homeowners when multiple insurance
policies provide coverage for losses from a single event, (2) state
insurance regulators' oversight of the licensing and performance of loss
adjusters, and (3) the information that NFIP collects and analyzes in
order to determine whether damage determinations and flood claims payments
accurately reflect the actual distribution of losses between wind and
flooding.

To accomplish our work, we discussed information and issues associated
with insurance coverage and claims processing activities with FEMA, NFIP
program contractors, state insurance regulators, the National Association
of Insurance Commissioners (NAIC), property-casualty insurers,
state-sponsored wind insurers, insurance agents, claims adjusters,
industry associations, and mediators. We also obtained licensing and
training requirements for claims adjusters from state insurance regulators
and industry representatives. Further, we 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 (740) of reinspections that NFIP conducted for selected
properties. Appendix I provides additional information concerning the
scope and methodology of our work. We conducted our work between May 2006
and November 2007 in Florida, Illinois, Louisiana, Mississippi, North
Carolina, Pennsylvania, South Carolina, and Texas in accordance with
generally accepted government auditing standards.

Results in Brief

With coverage divided among multiple insurance policies, potential gaps in
coverage and difficulties in settling claims can arise from hurricane
events. Insurance coverage for hurricane damage generally requires the
purchase of multiple insurance policies because property-casualty policies
for buildings and their contents generally exclude coverage for damage
caused by flooding. However, the limits and extent of coverage offered by
NFIP's flood insurance policies differ from those of private
property-casualty policies. For example, a property owner cannot purchase
flood insurance coverage through NFIP for building damages over $250,000
or for additional living expenses. Such coverage for other types of
damages--for instance, those caused by wind--may be available under a
homeowners policy. Therefore, prior to a hurricane event, a property owner
cannot be certain of the damages or the expenses that will be covered
because the extent of coverage depends on the cause of the damages, as
determined during the claims adjustment process, and how the damages will
be covered by the various policies. As a result, homeowners whose
properties incur what is determined to be flood rather than wind damage
may find themselves without the funds they need to repair or replace their
homes if they lack sufficient flood insurance. The claims adjustment
process can become more difficult when the damaged or destroyed property
is subjected to a combination of high winds and flooding. Finally, an
inherent conflict of interest exists when the same insurance company is
responsible for determining the extent of the flood damage that NFIP must
pay and the extent of the wind damage that is the responsibility of the
company itself. Disputes between property-casualty insurers and
policyholders continue over the damage determinations made after Hurricane
Katrina and the interpretation of policy language concerning coverage on
properties subjected to a combination of high winds and flooding.

Although the role of insurance claims adjusters is crucial after a major
catastrophe, licensing and training requirements for adjusters vary
considerably among states, creating uncertainties about adjusters'
qualifications. Some states have no requirements for insurance claims
adjusters, while others have licensing and training requirements for most
types of adjusters operating in the state. Many states have licensing and
training requirements for some types of adjusters, but not for other
claims adjusters that may also be called upon after a catastrophe.
Further, licensing and training requirements may be temporarily relaxed
after a catastrophe, meaning that adjusters entering a state may not have
met the normal requirements needed to work there. As a result, the
qualifications and training of adjusters who assess damages following a
catastrophic event may vary significantly. State insurance regulators told
us that they generally relied on the insurance companies to ensure the
quality of their adjusters and adjustment processes, though states may
also choose to conduct reviews of claims already processed through market
conduct examinations.^2 In order to adjust flood insurance claims,
adjusters are to be trained and certified by NFIP, in addition to the
state requirements. Following Hurricane Katrina, some states that lacked
licensing requirements for adjusters passed laws to raise the level of
oversight for adjusters. Several states affected by recent hurricanes have
also initiated market conduct examinations to evaluate insurers' claims
adjustment processes, in part because of consumer complaints about the
handling of hurricane-related claims.

^2State insurance regulators periodically perform market conduct
examinations on insurance companies to review their market practices,
including sales, underwriting, and claims processing and payment
activities.

We found that the claims information NFIP collects may not always allow
FEMA to effectively oversee damage determinations and apportionments after
hurricane events in order to ensure the accuracy of NFIP claims. NFIP, the
repository for flood claims information, has collected and analyzed data
on flood insurance claims submitted by insurance companies that service
NFIP policies. However, the data do not include information on total
damages caused by all perils, including wind, which could be useful in
some cases. Rather, the data are focused on the damage deemed to have been
caused by flooding, even when the write-your-own (WYO) insurer making the
flood damage determination is also the wind insurer on the same property.
This lack of data also adversely affects the ability of FEMA's
reinspection program to assess the accuracy of certain NFIP claims
adjustments and payments.^3 FEMA officials and NFIP program contractors
state that they do not have the authority to access data or information
from WYO insurers on wind claims associated with properties for which a
flood claim has been received or the policies, procedures, or instructions
developed by the WYO insurer that instruct adjusters how to discern wind
versus flood damage when properties may have been subjected to both
perils.^4 Consequently, for a given property, FEMA's ability to assess the
accuracy of payments for damage caused only by flooding is limited because
NFIP does not know what portion of the total damages was caused by wind
and what portion was caused by flooding. Without the ability to obtain
this information in a systematic fashion for certain properties, FEMA is
limited in its ability to monitor or reevaluate the accuracy of payments
made for hurricane-damaged properties that are severely damaged and
subjected to a combination of high winds and flooding. Following the 2005
hurricane season, state insurance regulators collected, analyzed, and
aggregated data on hurricane damage claims for wind-related losses
reported by property-casualty insurers. We attempted to use this
information to supplement FEMA's data, but because it was collected to
monitor the claims processing activities of insurers related to the
timeliness of claims payments and their impact on insurer solvency, and
was not intended to assess wind versus flood damage determinations, it did
not provide sufficient geographic detail to match with corresponding flood
claims data for a particular community or property.

^3Through its program contractor, FEMA operates a reinspection program to
monitor and oversee claims adjustments and address concerns about flood
payments by reevaluating a sample of flood claims.

^4FEMA states that it has statutory authority to obtain certain additional
claims data but that its access is limited to the purposes of audit and
examination and not for initial claims processing. Specifically, the
National Flood Insurance Act gives FEMA access, for the purpose of audit
and examination, to any books, documents, papers, and records of the WYO
companies that are "pertinent to the costs of the program undertaken or
the services being rendered." 42 U.S.C. S 4084. The Act requires WYO
companies to keep such records as FEMA prescribes, including "records
which fully disclose the total costs of the program undertaken or the
services being rendered, and such other records as will facilitate an
effective audit." Id.

This report includes two matters for congressional consideration aimed at
improving FEMA's oversight of flood claims when properties are subjected
to both high winds and flooding and a recommendation for state insurance
regulators to improve the oversight of claims adjustment activities.
Congress should consider providing FEMA clear authority to obtain 1) wind
damage claims information from WYO insurers, as appropriate, and 2) the
policies, procedures, and instructions used by WYO insurers for
determining wind damage versus flood damage when properties are subjected
to both perils. Such authority would enhance FEMA's ability to monitor and
reevaluate the accuracy of NFIP flood damage payments that result from the
wind and flood damage apportionments and its controls over the inherent
conflict of interest involving WYO insurers that sell and service both
wind and flood policies. For state insurance regulators, in conjunction
with NAIC, we recommend taking action to enhance the quality and
consistency of standards and oversight for all types of claims adjusters.

We requested comments on a draft of this report from FEMA and NAIC. The
Department of Homeland Security provided written comments on a draft of
this report that are reprinted in appendix II. It concurred with our
recommendation to strengthen licensing requirements for adjusters but
disagreed with the matters for congressional consideration regarding
expanding FEMA's statutory authority to obtain available wind damage
claims information from WYO insurers and to access the WYO insurers'
claims adjustment guidance. The letter notes that having such authority
would place "unneeded burden and costs" on NFIP, given its current
oversight of the WYO insurers. We disagree; such authority is a necessary
control given the potential federal exposure to flood losses and the
inherent conflict of interest that exists when the same insurance company
is responsible for determining the extent of the flood damage that NFIP
must pay and the extent of the wind damage that is the responsibility of
the company itself. Likewise, FEMA should be able to access the policies,
procedures, and instructions used by WYO insurers and their adjusters for
both flood and wind damage claims to assess and validate claims adjustment
practices and damage apportionments when properties have been subjected to
both perils. As we note in the report, FEMA would not have to collect such
information on all claims; rather, this authority would enable the agency
to request such information on an as-needed basis when uncertainties
exist, such as when the physical evidence has been compromised or limited
physical evidence remains. The Department of Homeland Security's written
comments and our responses are discussed in more detail at the end of this
letter. NAIC did not provided written comments but orally expressed
general agreement with the draft's findings and recommendations. FEMA and
NAIC provided technical comments that we have incorporated as appropriate.

Background

The federal government has long been a participant in addressing risks
that private property-casualty insurers have been unable or unwilling to
insure. One of these risks is damage due to flooding. While NFIP backs the
flood insurance policy, it generally contracts the sale and servicing of
the policies out to private property-casualty insurers, known as WYO
insurance companies.^5 About 96 percent of NFIP's policies are sold and
serviced by WYO insurers. For a given property, the WYO insurer writing
and administering the flood insurance policy on behalf of NFIP may also
provide coverage for wind-related risks on the same property.

Through its program contractor, FEMA operates a reinspection program to
monitor and oversee claims adjustments and address concerns about flood
payments. The reinspection program's activities encompass reevaluating the
flood adjustments and claims payments made on damaged property to
determine whether NFIP paid the proper amount for flood-related damages.
The program conducts on-site reinspections and reevaluations of a sample
of flood claim adjustments.

^5NFIP 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.

Determining the cause and extent of damages is primarily the job of
insurance adjusters, who are either employed or contracted by insurance
companies and generally licensed by the states. Adjusters assess damage;
estimate losses; and submit required reports, work sheets, and photographs
to the insurance company, which reviews the claims and approves them for
payment. In general, insurance adjusters are paid on a percentage basis or
fee schedule tied to the amount of damages. These adjusters can fall into
several categories:

           o Staff (or company) adjusters are employees of insurance
           companies who determine the amount of damages payable on claims
           under a contract of insurance.

           o Independent adjusters and adjuster firms are contractors that
           insurance companies hire to assess damages and determine claims
           losses.

           o Emergency adjusters are sometimes allowed by states to operate
           on a temporary basis to further augment the force of adjusters
           following a catastrophe.

           o Public adjusters are hired by and work on behalf of property
           owners to assess damages and help prepare claims.

           Insurance adjusters are regulated by the states, which have been
           granted authority by Congress to oversee insurance activities. The
           federal government retains the authority to regulate insurance,
           giving primary responsibility for insurance regulation to the
           states in accordance with the McCarran-Ferguson Act of 1945.^6
           State insurance regulators' oversight includes requirements
           pertaining to the licensing and training of insurance adjusters.
           In addition, adjusters that have been licensed or allowed to
           operate by a state can also be certified as flood adjusters by
           NFIP to assess flood damages on properties.

           A property owner who has experienced hurricane damages can
           initiate a flood insurance claim by contacting the insurance agent
           of the WYO insurer that sold the NFIP flood policy. The agent
           relays the claim information to the WYO insurer, which assigns a
           flood claims adjuster to the case. The adjuster will then inspect
           the property to determine the damage caused by flooding and the
           extent to which that damage is covered under the flood policy. To
           help carry out this work, insurance adjusters commonly use
           software that organizes the damage information and estimates the
           repair or replacement costs for such damages. Factors utilized in
           determining loss estimates include the square footage of the
           building; the type of building materials; and the cost of
           materials and repairs at the market rate, which is subject to
           change. Once the assessment of a damaged property is complete, the
           adjuster files a report with the WYO insurance company, which
           reviews the claim and approves or denies it for payment to the
           policyholder (see fig. 1).

^6McCarran-Ferguson Act of 1945, Pub. L. No. 79-5, ch. 20, 59 Stat. 33
(1945), codified as amended at 15 U.S.C. SS 1011-1015. See also GAO,
Ultimate Effects of McCarran-Ferguson Federal Antitrust Exemption on
Insurance Activity Are Unclear, [25]GAO-05-81R (Washington, D.C.: July 28,
2005).

Figure 1: Key Flood Insurance Claims Processing Steps on Flood-Damaged
Properties

^aThe insurance adjuster that assesses flood damages must be an
NFIP-certified flood adjuster.

^bInsurance companies may also decide to hire an engineer to assess the
cause(s) of damages, depending on the damage scenario.

Likewise, for wind-related damage claims on hurricane-damaged properties,
property owners can contact the insurance agent or company that sold them
their property-casualty policy to start the claims process. For some
property owners, their property-casualty insurer for wind-related risks is
the same company that serves as NFIP's WYO insurer. In such cases, both
the wind and flood insurance policies will be processed by the same
insurer.^7 In other cases, where the property-casualty insurer is a
different company than the WYO insurer, claims for wind and flood damages
will be processed separately by different insurers.

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.^8 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. FEMA estimated that NFIP had paid over $15.7 billion in flood
insurance claims from Hurricane Katrina as of August 31, 2007,
encompassing approximately 99 percent of all flood claims received.

As of September 2007, FEMA had about 68 employees, assisted by about 170
contractor employees, to manage and oversee the NFIP and the National
Flood Insurance Fund, into which premiums are deposited and claims and
expenses are paid. Their management responsibilities include establishing
and updating NFIP regulations, analyzing data to determine flood insurance
rates, and offering training to insurance agents and adjusters. In
addition, FEMA and its program contractor are responsible for monitoring
and overseeing the quality of the performance of the WYO insurance
companies to assure that NFIP is administered properly.

We have recently completed related work highlighting concerns with payment
formulas for services rendered by WYO insurers.^9 We are also engaged in
other ongoing work focused on reviewing various aspects of the oversight
of WYO insurers.

^7NFIP program contractors stated that they did not know how often the
same WYO company also insured a 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.

^8This amount represents claims reported to NAIC by property-casualty
insurers 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).

^9GAO, National Flood Insurance Program: FEMA's Management and Oversight
of Payments for Insurance Company Services Should Be Improved,
[26]GAO-07-1078 (Washington D.C.: Sept. 5, 2007).

Potential Coverage Gaps and Claims Uncertainties Can Arise When Homeowners Have
Multiple Policies That Cover Different Perils

Insurance coverage for hurricane damages commonly requires the purchase of
multiple insurance policies--a general homeowners policy, an NFIP policy,
and in some areas, a special policy for wind damage. But even with these
policies, homeowners cannot be certain that all damage resulting from a
hurricane will be covered because the areas and limits of coverage differ
across policies. Further, because both homeowners and NFIP policies can be
serviced by a single WYO insurer, a conflict of interest exists during the
adjustment process. Since Hurricane Katrina, legal disputes have been
ongoing between property-casualty insurers and policyholders over damage
determinations and the interpretation of policy language concerning
coverage for damages that may have resulted from both wind and flooding.

Covering Hurricane Damages Often Requires Two or More Policies with Different
Limits and Coverage

Property owners cannot currently purchase a single insurance policy for
all hurricane-related damages because policies offered by
property-casualty insurers generally exclude coverage for flood damage and
sometimes may exclude coverage for wind-related damage. Property owners in
flood-prone areas frequently have at least two insurance policies--for
example, a homeowners policy from a private insurer and a flood insurance
policy backed by NFIP. Additionally, on certain properties in coastal
areas, private insurers sometimes exclude from homeowners policies
coverage for wind-related damage, requiring policyholders to either pay an
additional premium for wind-related risks on their primary policy or to
purchase a separate supplemental policy for wind-related damages. In such
cases, this supplemental coverage is typically provided by a
state-sponsored wind insurance pool that has been created to address
shortages in the availability of insurance for wind-related risks.
Moreover, some property owners may also have excess flood insurance if the
value of their home exceeds the coverage limits offered by NFIP.

Private property-casualty insurance policies differ from the
government-sponsored flood insurance policy in several ways. For example,
key differences exist between the level of coverage offered by NFIP and
that offered under common homeowners policies. Available coverage for
damages under an NFIP policy is limited by law to $250,000 for the
structure and $100,000 for contents, although the replacement cost value
of some homes exceeds such limits.^10 Generally, private homeowners
policies can cover the replacement cost value of the house, and coverage
may be obtained to insure personal property, including outside property
and personal belongings (e.g., trees, plants, decks, and fences), in
contrast to an NFIP policy. Further, while homeowners policies often
provide coverage for additional living expenses if a house is rendered
uninhabitable, NFIP does not insure policyholders for such coverage,
although such expenses may be offset through other disaster assistance
provided by FEMA.^11

^10Replacement cost value is the cost to replace property with the same
kind of material and construction (without deduction for depreciation).
Excess flood insurance is also available in the private insurance market.

Insurance Coverage Gaps, Claims Adjustment Uncertainties, and Conflicts of
Interest Can Materialize When Two or More Policies Cover One Event

Property owners do not know in advance whether their insurance policies
will cover all damages from a hurricane, because the payments ultimately
will depend on the extent to which each policy will cover the
damages--that is, whether the damages are determined to be the result of
hurricane winds, flooding, or some combination of both. Even property
owners that purchase the maximum amount of flood insurance available
through NFIP, along with other private insurance for wind-related risks,
do not know whether they are completely covered until the insurers' claims
adjusters determine what caused the damage. Given the differences between
the coverage offered under flood insurance and the coverage offered by
private property-casualty insurance, the damage determinations can be
crucial. For example, a homeowner whose house is worth $450,000 may have
both a flood insurance policy and wind coverage, but flood insurance
covers only up to $250,000 in damages. If damages to the policyholder's
house are severe, and all of it is determined to be from flooding, the
property owner may not receive enough compensation to fully rebuild and
pay for temporary housing under the terms of the NFIP flood policy.^12 But
if all of the damages are determined to have been caused by wind, the
homeowner may be able to fully recoup their losses and additional living
expenses. Hence, insurance coverage uncertainties can arise when hurricane
damages occur.

^11FEMA provides limited reimbursement for living expenses incurred during
evacuations. To be eligible for such assistance, the home must be the
primary residence of those seeking assistance. In addition, the home must
either have been damaged by the disaster, or those impacted must have been
prohibited from returning to it when the general evacuation order was
lifted. FEMA states that the agency reviews requests for such assistance
on a case-by-case basis.

^12Excess flood insurance policies are available in the private sector and
provide coverage above the NFIP limits.

Claims adjustment uncertainties include challenges that can arise in
assessing and adjusting damages due to wind and flooding when the evidence
of damage at the damage scene is limited or compromised. As a result of
the magnitude and severity of damage from Hurricanes Katrina and Rita,
evidence of the damaged structures was often limited or compromised. In
some cases, buildings were completely destroyed, leaving little except the
foundations. Insurance claims adjusters and industry participants we spoke
with acknowledged that assessing the cause and extent of damages was more
problematic when little evidence of the structure was left. Exacerbating
such difficulties was the fact that adjusters commonly arrived on the
damage site several weeks after Hurricane Katrina occurred, given the
scope of damage. During the time between Hurricane Katrina and the arrival
of the adjusters, the remaining evidence at damage scenes may have been
further compromised by subsequent natural and man-made events (such as the
clearing of debris from streets and roadways).

Finally, there is an inherent conflict of interest when the same insurer
is responsible for assessing damages for its own property-casualty policy,
as well as for the NFIP policy, each covering different perils on the same
property. As part of the WYO arrangement, private property-casualty
insurers are responsible for selling and servicing NFIP policies,
including performing the claims adjustment activities to assess the cause
and extent of damages.^13 When the WYO insurer writes and services its own
policy, along with the NFIP policy for the same property, the insurer is
responsible for determining the cause of damages and, in turn, how much of
the damages it will pay for and how much NFIP will cover. In certain
damage scenarios, the WYO insurer that covers a policyholder for wind
losses can have a vested economic interest in the outcome of the damage
determination that it performs when the property is subjected to a
combination of high winds and flooding. In such cases, a conflict of
interest exists with the WYO insurer as it determines which damages were
caused by wind, to be paid by itself, and which damages were caused by
flooding, to be paid by NFIP. Moreover, the amount WYO insurers are
compensated for servicing a flood claim also increases as the amount of
flood damage on a claim increases--an allowance of 3.3 percent of each
claim settlement amount.

^13The WYO insurer, using either its own staff adjusters or contracted
adjusters, is responsible for performing the claims adjustment functions.
Additionally, insurers may contract to obtain additional engineering
expertise to assess the cause of damages.

Legal Disputes Involving Policy Coverage Have Arisen Since the 2005 Hurricane
Season

In the aftermath of the 2005 hurricane season, legal disputes emerged
between policyholders and insurers that centered largely on the extent to
which damages would be covered under a homeowners policy, as distinct from
an NFIP policy, when both high winds and flooding occurred. Such disputes
have been and continue to be argued and resolved though state and federal
courts, as well as through mediation programs.

Many of these cases have concerned the interpretation and/or
enforceability of certain property-casualty policy language in the context
of challenging the cause of the damages or losses. For example, some
disputes have raised the question of whether a policy's flood exclusion
language clearly excluded the water-related event, such as storm surge,
that caused the damages at issue. Other cases have challenged the
enforceability of a property-casualty policy's anti-concurrent causation
clause. Such a clause generally provides that coverage is precluded for
damage caused directly or indirectly by an excluded cause of loss (for
example, flood), regardless of any other cause (for example, wind) that
contributes concurrently to or in any sequence with the loss. Many of
these cases are still working their way through the judicial trial and
appeals processes and will eventually be resolved based on the particular
language of the policy, the evidence presented by both the policyholders
and the insurers, and the governing state law.

State mediation efforts have been initiated to help address the backlog of
unresolved claims between policyholders and insurance companies on private
homeowners policies.^14 These programs, particularly in Louisiana and
Mississippi, have played a major role in facilitating many settlements of
residential property insurance claims arising out of Hurricanes Katrina
and Rita. Established after the 2005 hurricane season, these programs
offer policyholders and insurers a nonbinding, alternative dispute
resolution procedure to resolve claims and avoid the delays, expenses, and
uncertainties of resolving the disputes through the courts. On the whole,
state insurance regulators in Mississippi and Louisiana report that the
majority of cases brought to mediation have been resolved.

^14NFIP does not participate in these mediation programs to settle flood
claims with policyholders.

Lack of Uniformity in Licensing and Training Requirements among States Creates
Uncertainties about Some Adjusters' Qualifications

In spite of the importance of the insurance claims adjuster to
policyholders after a national catastrophe, licensing and training
requirements for adjusters vary considerably by state. Some states have no
requirements for insurance claims adjusters, others have them for most
types of adjusters, and many states have them for some types of adjusters
but not for others. This lack of uniformity results in uncertainties over
the qualifications and training of claims adjusters. Further, states may
temporarily relax these requirements after a catastrophe. Claims adjusters
who adjust flood insurance claims, however, must be trained and certified
by NFIP. Following Hurricane Katrina, some states that lacked licensing
requirements for adjusters passed laws to raise the level of oversight for
adjusters.

States' Licensing and Training Requirements for Claims Adjusters Vary Widely

During our review, we found that adjuster licensing and training
requirements varied considerably among states, including those along the
Gulf Coast. Of the eight coastal states we contacted, most had varying
degrees of licensing and training requirements for different types of
adjusters during the 2005 hurricane season (Florida, Georgia, Mississippi,
North Carolina, South Carolina, and Texas), while two states (Louisiana
and Alabama) had no examination or continuing education requirements for
claims adjusters at that time. Some of the coastal states had also
instituted some common licensing requirements for staff adjusters,
independent adjusters, and public adjusters, while others had varying
requirements for different types of adjusters. Similarly, information
gathered from industry representatives showed that licensing and training
requirements varied substantially among the states nationwide. Figure 2
summarizes the varying level of requirements for claims adjusters among
several coastal states, as well as recent legislation enacted in some of
the coastal states impacted by Hurricane Katrina to strengthen their
requirements.

Figure 2: Licensing and Training Requirements for Adjusters in Selected
Coastal States as of 2007

^aIn 2006, Louisiana enacted both The Louisiana Claims Adjuster Act (Acts
2006, No. 783) and The Louisiana Public Adjuster Act (Acts 2006, No. 806).
Beginning June 30, 2007, these Acts generally require licensure, along
with a licensing examination, for staff/company adjusters, independent
adjusters, and public adjusters, respectively. The latter Act prohibits
public adjusters from being paid a fee contingent on or a percentage of a
claim amount.

^bIn 2007, Mississippi enacted House Bill No. 1524, which provided, among
other things, for the licensure and regulation of public adjusters.

^cRequirements were established after the 2005 hurricane season.

^dAlabama law prohibits public adjusters from operating independently and
considers such activities as the unauthorized practice of law.

For coastal states with licensing and training requirements for claims
adjusters, a state licensing examination has been the principal oversight
tool used to regulate the entry of adjusters into the marketplace.
According to insurance regulators, the state licensing exam typically
includes questions on insurance regulation, adjusting practices, and
different kinds of insurance policies. Some states also require a certain
level of continuing education before a license can be renewed, while
others do not.

Continuing education requirements also vary among states for different
types of adjusters. For the states we contacted, continuing education
requirements were mixed, with some of the states requiring a certain level
of continuing education for some types of adjusters, while other states
did not have continuing education requirements. For example, during the
2005 hurricane season, staff and independent adjusters employed in Florida
and Texas were required to take at least 24 hours of continuing education
every 2 years, while other coastal states had no continuing education
requirements for some types of adjusters.

Motivated largely by concerns about the adjustment process, some states
that were impacted by the 2005 hurricanes enacted legislation to raise
their level of oversight for adjusters. When Hurricane Katrina hit,
Louisiana did not regulate any types of adjusters, and adjusters were able
to conduct business there without a license.^15 In 2006, the Louisiana
State Legislature passed, and the governor signed, The Louisiana Claims
Adjuster Act, which required that staff and independent adjusters become
licensed beginning on June 30, 2007. Like other states, the Louisiana
Department of Insurance will issue nonresident adjusters a reciprocal
license as long as they are currently licensed in their home states.

In Mississippi, legislative proposals were also introduced for additional
oversight requirements for public adjusters. After Hurricane Katrina, the
state of Mississippi allowed public adjusters to work in the state under
an emergency provision approved by the Insurance Commissioner. In 2007,
the Mississippi State Legislature passed, and the governor signed, a bill
to allow public insurance adjusters to operate in the state permanently
and have their practices regulated, a change that requires these adjusters
to get certifications, licenses, and continuing education.

^15In the aftermath of Hurricane Katrina, the Louisiana Department of
Insurance requested insurance companies provide the names and Social
Security numbers of adjusters to the department.

In addition to licensing and training requirements, some state regulators
we contacted also said they relied on insurance companies' quality control
measures to help ensure the quality of adjusters. Insurance companies and
adjuster firms generally provide some degree of in-house or external
training for their adjusters, according to industry participants. However,
insurance companies and adjuster firms we contacted generally declined to
share company-specific instructions and manuals for their insurance claims
adjusters, citing proprietary concerns.

In contrast to the varying requirements for claims adjusters among the
states, NFIP conducts limited but uniform mandatory training to certify
individuals as flood adjusters. Flood adjusters must be trained and
certified annually. In addition, FEMA provides ongoing oversight of NFIP
claims adjustments through its claims reinspection program. However,
because independent claims adjusters must be licensed by a state to be
certified as a flood adjuster, the underlying qualifications and training
for adjusters that seek to become flood adjusters remain varied, as they
depend on the state. In the absence of uniform state standards for claims
adjusters, neither NFIP, state insurance regulators, nor policyholders can
be certain of the minimum qualifications held by a claims adjuster
assigned to a particular property, increasing the possibility of
inconsistent claims adjustments and payments for similarly damaged
properties.

States May Waive Requirements for Adjusters During Emergencies, Potentially
Magnifying the Impacts of Varied State Standards

Given the lack of uniformity for adjuster licensing and training
requirements among states, the qualifications and level of training of the
adjusters called upon in catastrophe situations can vary considerably. A
state's normal oversight requirements for claims adjusters can be weakened
by nonresident licensed adjusters that are allowed to operate from states
with less stringent requirements. Further, while most states have some
adjuster licensing and training requirements that are applicable to some
types of adjusters, these oversight measures can be waived in emergency
situations, as they were in the aftermath of Hurricane Katrina.

The majority of states allow nonresident adjusters to operate within state
borders as long as the adjusters are licensed in other states.^16 However,
differences in the qualifications and training of adjusters allowed to
operate in a state can materialize when this practice of reciprocity
occurs in the absence of uniform regulatory requirements. In most of the
coastal states we reviewed, nonresident adjusters were exempted from
taking the licensing exams if they were licensed in their home state.
Although some states have similar licensing examination requirements,
oversight of adjusters, nevertheless, lacks uniformity. Issues related to
the quality and consistency of regulatory requirements for insurance
claims adjusters across states also exist in other aspects of insurance
regulation. For other regulatory functions--such as the licensing of
insurance agents--many states accept licenses from other states as long as
those states reciprocate. As we have reported in other work, success with
state reciprocity of licensing functions depends on the adequacy and
uniformity of requirements among states.^17 In the absence of adequate and
consistent licensing requirements, reciprocity can reduce one state's
level of oversight to the more limited standards of another.

^16This information is summarized from state adjuster licensing
requirements compiled by the Property Casualty Insurers Association of
America.

Additionally, all of the coastal states we contacted had provisions for
allowing "emergency adjusters" to augment the normal force of adjusters by
waiving the normal licensing and training requirements for adjusters, if
warranted by the scope of damage. Accordingly, coastal states most
impacted by Hurricane Katrina invoked emergency procedures to allow
additional adjusters to operate in their states without having to meet the
normal licensing and training requirements. However, a state's oversight
requirements for claims adjusters may be weakened when nonresident
licensed adjusters from states with less stringent requirements are
allowed to operate in states with higher standards. During our review,
insurance regulatory officials and industry participants and observers
acknowledged possible inconsistencies and errors in adjustments that
arose, given the shortage of adjusters and the varying qualifications of
those that worked in the aftermath of Hurricane Katrina.

Some states have attempted to address concerns and uncertainties over the
qualifications of emergency adjusters with other varied approaches. For
example, Florida, Mississippi, North Carolina, and Texas require that work
performed by emergency adjusters be reviewed and certified by a sponsoring
licensed adjuster or insurance company. North Carolina has set minimum
guidelines for certifying adjusters on an emergency basis that take into
account, for instance, their level of experience. South Carolina requires
that emergency adjusters file an adjuster licensing application, while
Louisiana, which had no oversight requirements for emergency adjusters
during the 2005 hurricane season, now requires emergency adjusters to
register their name and employment contact information but imposes no
other requirements.

^17GAO, Regulatory Initiatives of the National Association of Insurance
Commissioners, [27]GAO-01-885R (Washington D.C.: July 6, 2001).

State insurance regulators can also use market conduct examinations to
further scrutinize a company's claims adjustment processes. As we have
reported in previous work, state practices for market conduct exams vary
widely and are not always performed on a routine basis by most insurance
departments.^18 However, most states can initiate targeted examinations to
assess certain company activities if they receive consumer complaints
suggesting a potential issue. The types of consumer complaints received by
state insurance regulators include those related to the denial of claims,
the untimely processing of claims, and the misrepresentation of coverage.
Some states had initiated market conduct examinations on selected
companies to assess their claims handling activities tied to the 2005
hurricane season and subsequent consumer complaints. For example, state
insurance regulators in Louisiana conducted several market conduct
examinations on various insurers. However, according to state regulators,
these examinations were focused on evaluating the timeliness of claims
payments in accordance with state statutes, rather than examinations on
the wind versus flood issue. In Mississippi, state regulators mentioned
that market conduct examinations pertaining to claims processing
activities following Hurricane Katrina were still ongoing.

Lack of Relevant Claims Data Limits FEMA's Ability to Oversee Hurricane Damage
Assessments

Limited data are available for evaluating the damage assessments and
claims payments when properties are subjected to both high winds and
flooding and the extent of damage caused by each peril is difficult to
determine. Data collected by NFIP from WYO insurers--including those that
serviced both NFIP flood policies along with their own policies for
wind-related risks on the same properties--include only information on
damage deemed by the WYO insurers to have been caused by flooding. This
limited information prevents NFIP from knowing how each peril contributed
to the total damages in order to verify that flood insurance claims
payments were accurate. The lack of data also limits FEMA's reinspection
program because the wind damage information is relevant to understanding
how all perils contributed to damages when certain properties were
subjected to both high winds and flooding. Further, the lack of
transparency over the extent of wind damage deemed to have contributed to
total damages limits FEMA's ability to address conflicts of interest that
arise if the WYO insurer is also the wind insurer on the property. FEMA
and NFIP program officials have stated that they do not have the authority
to access data on wind claims for NFIP-insured properties. NFIP program
contractors also stated they cannot access WYO insurers' policies,
procedures, or instructions describing to adjusters how wind damage should
be determined in conjunction with flood damage when properties are
subjected to both perils.

^18GAO, Insurance Regulation: Common Standards and Improved Coordination
Needed to Strengthen Market Regulation, [28]GAO-03-433 (Washington D.C.:
Sept. 30, 2003).

NFIP Generally Lacks Needed Data on Wind Damage Claims for Properties That It
Insures

NFIP does 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, NFIP has not sought such information
even when the same insurance company serves as both the NFIP WYO insurer
and the insurer for wind-related risks. WYO insurers are required to
submit flood damage claims data in accordance with NFIP's Transaction
Record Reporting and Processing (TRRP) Plan for inclusion in the NFIP's
claims database.^19 In our review of data elements in NFIP's claims
database, we found that NFIP does not require WYO insurers that are
responsible for adjusting flood claims 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.

Specifically, the TRRP Plan for WYO insurers instructs them to include
only flood-related damage 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 or partially caused by wind. 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 whether damages were divided between wind
and flooding for properties that were subjected to a combination of both
perils. Further, NFIP program contractors stated that they did not
systematically track whether the WYO insurer processing a flood claim on a
property was also the wind insurer for that property. This lack of
information limits FEMA's ability to adequately oversee the WYO insurers
and verify that damage paid for under the flood policy was caused only by
the covered loss of flooding. In past years, the determination over the
cause of damages has been an issue. For example, as we reported in 2005,
following Hurricane Isabel, one of the reasons that claims for additional
losses were not paid was because damage was not due to flooding, but
wind-driven rain.^20

^19NFIP requires each WYO company to meet the requirements of the WYO TRRP
Plan (identifying claims data to be reported to NFIP) and to submit
monthly financial and statistical reports. 44 C.F.R. Part 62, Appendices A
and B.

NFIP's normal claims processing activities were stressed during the 2005
hurricane season. For both Hurricanes Katrina and Rita, FEMA estimates
that NFIP has paid approximately $16.2 billion in claims, with average
payments exceeding $95,000 and $47,000, respectively.^21 As we reported in
December 2006, in an effort to assist policyholders, FEMA approved
expedited NFIP claims processing methods that were unique to Hurricanes
Katrina and Rita.^22 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 that likely had covered damages exceeding
policy limits. Under other expedited methods, FEMA also authorized claims
adjustments without site visits if only foundations were left and the
square-foot measurements of the dwellings were known. Such expedited
procedures facilitated the prompt processing of flood claims payments to
policyholders, but once these flood claims--and others--were processed,
NFIP did not systematically collect corresponding wind damage claims data
on an after-the-fact basis. Without information on both wind and flood
damages to certain properties subjected to both perils, NFIP has reduced
assurances that the amounts it paid for flood claims were actually limited
to flood damage.

FEMA officials stated that they do not have access to wind damage claims
data from the WYO insurers. Accordingly, NFIP does not systematically
collect data on wind damage for properties for which a flood claim has
been received. Rather, FEMA officials maintain that they review the
quality of claims adjustments through their reinspection program and
periodic operational reviews of companies. FEMA officials that we
contacted expressed different opinions concerning the need for the
authority to obtain wind-related data. While some FEMA and NFIP contract
officials stated that having the authority to obtain and analyze
wind-related claims information would be helpful in reviewing claims,
other senior FEMA officials questioned the usefulness of such information,
maintaining that existing oversight activities are generally sufficient
without an additional review of wind-related claims data.

^20GAO, Federal Emergency Management Agency: Improvements Needed to
Enhance Oversight and Management of the National Flood Insurance Program,
[29]GAO-06-119 (Washington, D.C.: Oct. 18, 2005).

^21FEMA estimates that Hurricane Katrina alone accounts for over $15.7
billion in flood insurance claims.

^22GAO, National Flood Insurance Program: New Processes Aided Hurricane
Katrina Claims Handling, but FEMA's Oversight Should Be Improved,
[30]GAO-07-169  (Washington, D.C.: Dec. 15, 2006).

Without analyzing wind-related claims information, however, FEMA's
oversight process is limited for determining whether the inherent conflict
of interest that exists when a WYO insurer services its own policy and the
flood insurance policy on the same property is adversely affecting claims
determinations. This concern has also been noted in a Department of
Homeland Security's Office of Inspector General's interim report, which
stated, "NFIP oversight focused primarily on whether the flood claim was
correctly adjudicated with little or no consideration for wind damage as a
contributing factor."^23 The work being performed by the Office of
Inspector General also includes subpoenaing wind claims information from
WYO insurers to reevaluate wind versus flood determinations. This work was
ongoing as of the time this report was being completed.

FEMA's Reinspection Program Has Limited Ability to Validate the Accuracy of
Payments on Certain Hurricane-Damaged Properties Given the Lack of Information
Available on Wind-Related Damage Claims

FEMA's reinspection program, which reevaluates the adjustment process and
flood payments made, does not collect information that could help enable
FEMA to validate the claims payments on certain hurricane-damaged
properties. The reinspection program does not systematically evaluate the
apportionment of damages between wind and flooding, even when a conflict
of interest exists with a WYO insurer. For example, the program does not
have a means of identifying whether wind-related damage contributed to
losses on the properties it evaluates or the extent of such losses.
Without the ability to examine damages caused by both wind and flooding in
some cases, 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.

^23Department of Homeland Security, Office of Inspector General, Interim
Report - Hurricane Katrina: A Review of Wind Versus Flood Issues,
OIG-07-62 (July 2007).

During our study, we reviewed 740 reinspection files for properties with
flood claims associated with Hurricanes Katrina and Rita. We found that
most of these files did not document a determination of whether or not
damages were caused by a combination of wind and flooding and did not
adequately document whether 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 files contained limited and
inconsistent documentation concerning the presence or extent of
wind-related damage on properties and lacked the documentation that would
have enabled NFIP to verify that damages paid for under the flood policy
were caused only by the covered loss of flooding.

Specifically, the reinspection activities focused on reevaluating the
extent to which building and content damages were caused by flooding in
the absence of information concerning wind-related damage. While some of
the files documented damages that had been caused by a combination of wind
and flooding, most did not. Around two-thirds of the 740 reinspection
files did not indicate whether the damages had been caused only by
flooding or by a combination of wind and flooding and did not include
enough documentation for a reviewer to make such a determination.
Approximately 26 percent of the files indicated that the damages were
caused only by flooding, and 8 percent indicated that the damages were
caused by a combination of wind and flooding. When NFIP program
contractors conducting the reinspections did indicate that damages were
caused by a combination of wind and flooding, insufficient documentation
existed to determine the extent to which the wind damage contributed to
total property damages and, hence, the accuracy of the flood damage claim.

Concerning the lack of wind damage claims data available to NFIP, we found
that hurricane claims data gathered separately by state insurance
regulators were of limited value for understanding how wind and flooding
contributed to property damages. In the aftermath of Hurricanes Katrina
and Rita, state insurance regulators in Alabama, Florida, Louisiana,
Mississippi, and Texas jointly established a data call mechanism to
collect aggregate claims data associated with the storms reported by
property-casualty insurers.^24 But such data were of limited value for
assessing how wind and flooding contributed to damages because this
information lacked sufficient geographic detail to be matched with
corresponding flood claims data on a community-level (e.g., zip-code) or
property-level basis. Rather, claims data reported by property-casualty
insurers were reported on a statewide and county- or parish-level basis
for different elements. As a result, the hurricane claims data
collectively gathered by state insurance regulators would have been of
limited benefit to NFIP to understand how both wind and flooding
contributed to property damages. State insurance regulators, through NAIC,
are currently developing specifications and exploring the feasibility of
collecting more geographically detailed information for an updated
disaster reporting system based on lessons learned from recent hurricanes
and comments from interested parties about monitoring insurance claims
following a natural disaster.

In the aftermath of the 2005 hurricane season, the NFIP reinspection
process was also challenged by the severity and scope of the damages. Many
properties were completely destroyed, making damage determinations and
reevaluations of such determinations difficult. The on-site reinspections
of properties with flood claims associated with Hurricanes Katrina and
Rita were generally conducted several months after the event--delays that
were to some extent understandable, considering the magnitude of the
devastation. But the delays further limited FEMA's ability to reevaluate
the quality and accuracy of the initial damage determinations, given the
ongoing natural and man-made events that continued to alter the damage
scenes.

Additionally, we have previously reported that FEMA did not choose
statistically valid random samples of the universe of all closed claims
for its reinspection process. Therefore, the results of the reinspections
could not be projected to the universe of properties for which flood
claims were made.^25 Accordingly, we have previously recommended that FEMA
select a statistically valid sample of reinspections for its reinspection
program. FEMA has agreed to implement this recommendation.

^24This data call mechanism, the Insurance Disaster Reporting System
(IDRS), 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 insurers. Components of the IDRS
data call mechanism were primarily developed by the state of Florida.
State insurance regulators decided to use Florida's data collection
application, since it was readily available. Regulators implemented the
data call in three phases. Generally, the Phase I data were used to track
the total number of claims and amount of losses tied to a storm. Phase II
data further broke out the claims data by the type of damage that caused
the losses. Phase III data were used to collect and track information on
how many of the claims the private insurers considered closed.

Finally, NFIP program contractors responsible for administering the
reinspection program also mentioned that they do not have access to WYO
companies' adjusting policies, procedures, and instructions to assess the
guidance provided to their adjusters (company staff or contracted) for
discerning and quantifying the damages caused by wind versus flooding. The
lack of information on the specific methodologies and instructions
conveyed by WYO insurers to their force of adjusters diminishes the
transparency over how damages were discerned between wind and flooding on
hurricane-damaged properties and the extent to which these instructions
are consistent with or at odds with FEMA's instructions to adjusters.
Absent such information along with the wind-related claims data, FEMA's
oversight of the NFIP WYO insurers to assess the accuracy of flood claims
payments is limited, particularly in cases where the WYO insurer is also
the wind insurer on the same property.

Conclusions

Resolving the unique insurance issues posed by hurricanes requires actions
to address numerous uncertainties. The NFIP must balance pressures to
quickly pay claims to policyholders with ensuring that it is enforcing the
terms of the flood policy. Uncertainties involved in this process begin
with the extent of covered damages from multiple policies, contingent on
the damage scenario, and continue with the claims adjustment and
regulatory oversight activities that follow. As we have seen,
policyholders do not know in advance of a hurricane the extent to which
damages will be covered because the amount of insured losses depends on
whether it is a multiperil event, how much of the damages are caused by
wind and how much by flooding, and how policy language will be interpreted
in accordance with relevant state laws. Other concerns can also
materialize when the WYO insurer determines not only the damage caused by
flooding that is covered by the flood policy, but also the damage caused
by wind that is covered under its own property-casualty policy, creating
an inherent conflict of interest that must be managed or mitigated. In the
aftermath of Katrina, policyholders and insurance companies were and
continue to be uncertain as to how current language on property-casualty
insurance policies will be interpreted, and numerous lawsuits continue to
make their way through federal and state courts.

^25 [31]GAO-06-119.

Once an event has occurred, other uncertainties arise concerning the
qualifications and training of claims adjusters. State licensing and
training requirements vary considerably, and standards that do exist may
be relaxed or eliminated after a major catastrophe, depending on the scope
of damage. Additionally, uncertainties remain over the probability of
accurately discerning the extent to which damages were caused by wind
versus flooding on certain hurricane-damaged properties. The difficulty in
performing this task can increase when evidence remaining at the damage
scene is limited or compromised. Not surprisingly, the variations in
adjusters' qualifications, coupled with limited or compromised evidence at
damage scenes, foster debate and uncertainty over the way damage
determinations are made, the consistency of adjustments for similarly
damaged properties, and how losses are apportioned between flood and wind
insurers. In the absence of uniform state standards for claims adjusters,
state insurance regulators, as well as policyholders, cannot be certain of
the minimum qualifications or level of professional training of a claims
adjuster assigned to a particular property, increasing the possibility of
inconsistent claims adjustments and payments for similarly damaged
properties.

Uncertainties are also present in the oversight of claims adjustment
processes, given the lack of information concerning both wind and flood
damage claims for certain hurricane-damaged properties. FEMA cannot be
certain of the quality of NFIP claims adjustments allocating damage to
flooding in cases where damages may have been caused by a combination of
wind and flooding because NFIP does not systematically collect and analyze
both types of damage claims data together on a property-level basis.
Although FEMA officials believe they can verify the accuracy of flood
claim payments without the wind data, there are situations where
additional information is warranted. Without information on the wind
damage claims adjustments prepared by WYO insurers at the time they submit
flood claims on hurricane-damaged properties, FEMA lacks controls to
independently assess whether or not the apportionments between flood and
wind damage appear reasonable. FEMA officials have determined that they
currently lack the authority to access the WYO insurers' claims data and
guidance to adjusters for wind-related claims to evaluate the
reasonableness of the flood claims for properties that were also subject
to damage from high winds. Hence, for a given property, NFIP does not know
how each peril contributed to the total property damages or how adjusters
working for the WYO insurers made such determinations. As a result, FEMA
cannot be certain whether NFIP has paid only for damage caused by flooding
when insurers with a financial interest in apportioning damages between
wind and flooding are responsible for making such apportionments.

Matters for Congressional Consideration

To strengthen and clarify FEMA's oversight of WYO insurers, particularly
those that service both wind and flood damage claims on the same property,
we recommend the Congress consider giving FEMA clear statutory access to:

           o both wind and flood damage claims information available from
           NFIP's WYO insurers in cases in which it is likely that both wind
           and flooding contributed to any damage or loss to covered
           properties, enabling NFIP to match and analyze the wind and flood
           damage apportionments made on hurricane-damaged properties in a
           systematic fashion, as appropriate; and

           o the policies, procedures, and instructions used by WYO insurers
           and their adjusters for both flood and wind claims to assess and
           validate insurers' claims adjustment practices for identifying,
           apportioning, and quantifying damages in cases where there are
           combined perils.
			  
			  Recommendation for Action

           We recommend that state insurance commissioners, acting through
           NAIC, enhance the quality and consistency of standards and
           oversight for all types of claims adjusters among states through
           more stringent and consistent licensing and training requirements
           for adjusters, including, in those states where appropriate,
           training to assess and apportion damages due to wind, flooding, or
           both.
			  
			  Agency Comments and Our Evaluation

           We requested comments on a draft of this report from FEMA and
           NAIC. The Department of Homeland Security provided written
           comments on a draft of this report, which have been reprinted in
           appendix II. FEMA concurred with our recommendation to strengthen
           licensing requirements for adjusters but disagreed with the
           matters for congressional consideration to give FEMA clear
           statutory authority to obtain 1) wind damage claims information
           available from WYO insurers and 2) the policies, procedures, and
           instructions used for determining wind damage versus flood damage
           when properties are subjected to both perils. In oral comments,
           NAIC expressed general agreement with the draft's findings and
           recommendations. In addition, both FEMA and NAIC provided
           technical comments, which we have incorporated as appropriate.

           FEMA stated that it believed existing oversight measures for NFIP
           and WYO insurers were sufficient and that statutory access to wind
           and flood damage claims information from NFIP WYO insurers would
           place an unneeded burden and cost on NFIP. FEMA also stated that
           it did not believe NFIP needs the wind estimate or data to
           determine the amount of flood damage that occurred. It also noted
           that additional unnecessary costs would be incurred to access and
           analyze wind damage claims information from WYO insurers. We
           disagree. Because of the inherent conflict of interest that exists
           when WYO insurers are the property-casualty insurers for wind
           claims and are also responsible for servicing the flood claims on
           the same properties, FEMA must ensure that its internal controls
           are sufficient to minimize the potential adverse impacts of this
           conflict on the accuracy of damage determinations and flood claims
           payments. Accurately determining claims payments is particularly
           important, given the likely eventuality that FEMA would need to
           draw on the U.S. Treasury to pay flood losses that exceed the
           funds available from premiums.

           We do not suggest that FEMA collect and analyze wind claims data
           for each claim or even each flood event. Rather, we recommend that
           FEMA have the ability to access wind damage claims information
           when it is available from the WYO insurer--that is, in
           circumstances when the WYO insurer is responsible for servicing
           both the wind and flood policies on the same property and when
           uncertainties exist, such as when the physical evidence has been
           compromised or limited physical evidence remains. Obtaining wind
           damage claims information that is already available from WYO
           insurers establishes proper transparency over the adjustment
           process when both wind and flooding contribute to damages without
           an unreasonable or costly burden. As long as a conflict of
           interest exists with a WYO insurer that services its own policy
           for wind-related risks along with the NFIP flood policy on the
           same property, additional controls are warranted. When properties
           are subjected to both wind and flood perils, particularly in cases
           where uncertainties exist due to limited or compromised evidence
           at the damage scene, collecting enough information to understand
           whether or not the WYO insurer is also the wind insurer for the
           same property and, if so, the extent of damage it determined to be
           caused by wind versus flooding, is key to maintaining transparency
           over the adjustment process. Furthermore, when the same insurance
           company has already determined the amount of damage caused by wind
           and flooding for a given property, obtaining and assessing this
           available information should not be cost prohibitive for FEMA or
           WYO insurers. The authority to access policies, procedures, and
           guidance used for determining wind versus flood damage would
           enable FEMA to have a more complete understanding about how
           concurrent damages are handled by the WYO insurers. Such
           information would strengthen FEMA's oversight and ability to
           identify abuses and better ensure the accuracy of flood payments
           made.

           As agreed with your office, unless you publicly announce the
           contents of this report earlier, we plan no further distribution
           until 30 days from the report date. At that time, we will send
           copies to the Administrator of FEMA; the Chief Executive Officer
           of NAIC; the Chairman of the House Committee on Financial
           Services; the Chairman and Ranking Member of the Senate Committee
           on Banking, Housing, and Urban Affairs; the Chairman and Ranking
           Member of the House Committee on Homeland Security; the Chairman
           and Ranking Member of the Senate Committee on Homeland Security
           and Governmental Affairs; and other interested committees and
           parties. We will also make copies available to others on request.
           In addition, the report will be available at no charge on the GAO
           Web site at http://www.gao.gov.

           If you or your staff have any questions about this report, please
           contact me at (202) 512-8678 or [32][email protected] . Contact
           points for our Offices of Congressional Relations and Public
           Affairs may be found on the last page of this report. GAO staff
           who made major contributions to this report are listed in appendix
           III.

           Sincerely yours,

           Orice M. Williams
			  Director, Financial Markets and Community
           Investment
			  
			  Appendix I: Objectives, Scope, and Methodology

           To evaluate how key insurance coverage issues can arise when
           multiple insurance plans are tied to a hurricane-damaged property,
           we contacted and collected information from the Federal Emergency
           Management Agency (FEMA), National Flood Insurance Program (NFIP)
           contractors, state insurance regulators, the National Association
           of Insurance Commissioners (NAIC), property-casualty insurers,
           state-sponsored wind insurers, insurance agents, claims adjusters,
           industry associations, and mediators. This work encompassed
           reviewing key areas and limits of coverage from insurance policies
           offered through NFIP and property-casualty insurers to identify
           potential gaps in coverage that can arise based on the terms of
           such policies and the nature of the damage. Additionally, we
           reviewed the roles and responsibilities of write-your-own (WYO)
           insurers that service NFIP policies to identify whether a conflict
           of interest exists with a WYO insurer in certain circumstances.

           To evaluate state insurance regulators' oversight of the licensing
           and performance of loss adjusters, we contacted and collected
           information from state insurance regulators, NAIC,
           property-casualty insurers, state-sponsored wind insurers, claims
           adjusters, and industry associations. We collected and compared
           licensing and training requirements for claims adjusters provided
           by state insurance regulators in several coastal states,
           incorporating information on requirements that existed prior to
           the 2005 hurricane season, as well as subsequent legislation
           enacted by some coastal states to strengthen oversight
           requirements for adjusters. We also discussed the activities,
           challenges, and damage scenarios encountered by claims adjusters
           in the aftermath of recent hurricanes with state regulators, FEMA
           and NFIP program officials, and industry participants. We also
           requested information from some property-casualty insurers and
           claims adjustment firms on their guidance (policies, procedures,
           manuals, and instructions) to claims adjusters on how to discern
           and quantify wind versus flood damages when properties are
           subjected to both perils. Industry participants declined to
           provide such information, citing proprietary concerns and ongoing
           litigation. This work included on-site fieldwork in Florida,
           Illinois, Louisiana, Mississippi, North Carolina, Pennsylvania,
           South Carolina, and Texas.

           To evaluate the completeness of the information that NFIP collects
           and analyzes in order to determine whether damage determinations
           and flood payments made accurately reflect the actual distribution
           of losses between wind and flooding, we reviewed claims
           information collected by NFIP from WYO insurers serving the flood
           claims. This work included reviewing the type of information
           routinely collected from WYO insurers through NFIP's Transaction
           Record Reporting and Processing (TRRP) Plan. In addition, we
           obtained information on FEMA's reinspection program that is used
           to reevaluate the quality of NFIP claims that have been processed.
           We assessed the type of information used by NFIP to validate the
           damage determinations made by WYO insurers, reviewing a
           statistically valid sample of files (740) of reinspections that
           NFIP conducted on selected properties from Hurricanes Katrina and
           Rita. We also reviewed hurricane claims data collectively gathered
           by several state insurance regulators to ascertain the extent to
           which such information would be useful for assessing wind versus
           flood damage determinations made on properties. We conducted our
           review between May 2006 and November 2007 in accordance with
           generally accepted government auditing standards.
			  
			  Appendix II: Comments from the Department of Homeland Security
			  
			  Appendix III: GAO Contact and Staff Acknowledgments
			  
			  GAO Contact

           Orice M. Williams, (202) 512-8678 or [33][email protected]
			  
			  Staff Acknowledgments

           In addition to the contact named above, Lawrence D. Cluff,
           Assistant Director; Tania Calhoun; Emily Chalmers; Rudy Chatlos;
           Chir-Jen Huang; Barry Kirby; Kristopher Natoli (intern); and
           Melvin Thomas made key contributions to this report.
			  
			  GAO's Mission

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(250287)

To view the full product, including the scope
and methodology, click on [40]GAO-08-28 . For
more information, contact Orice M. Williams at (202) 512-8678 or
[email protected].

Highlights of [41]GAO-08-28 , a report to Ranking Member, Committee on
Financial Services, House of Representatives

December 2007

NATIONAL FLOOD INSURANCE PROGRAM

Greater Transparency and Oversight of Wind and Flood Damage Determinations
Are Needed

Disputes between policyholders and insurers after the 2005 hurricane
season highlight the challenges in understanding the cause and extent of
damages when properties are subjected to both high winds and flooding.
Questions remain over the adequacy of steps taken by the Federal Emergency
Management Agency (FEMA) to ensure that claims paid by the National Flood
Insurance Program (NFIP) cover only those damages caused by flooding. GAO
was asked to evaluate (1) issues that arise when multiple insurance
policies provide coverage for losses from a single event, (2) state
regulators' oversight of loss adjusters, and (3) information that NFIP
collects to assess the accuracy of damage determinations and payments. GAO
collected data from FEMA, reviewed reinspection reports and relevant
policies and procedures, and interviewed state regulatory officials and
others about adjuster oversight and NFIP.

[42]What GAO Recommends

GAO recommends granting FEMA authority to obtain available WYO insurer
wind damage claims data for properties subjected to both high winds and
flooding and WYO insurers' guidance to adjusters for making such damage
determinations. Further, GAO recommends that states enhance the quality
and consistency of adjuster oversight. FEMA agreed with GAO's
recommendation to enhance adjuster oversight but did not agree that
Congress should grant it enhanced authority to access WYO insurers' wind
claims data and adjuster guidance.

Insurance coverage gaps and claims uncertainties can arise when
coveragefor hurricane damage is divided among multiple insurance policies.
Coverage for hurricanes generally requires more than one policy because
private homeowners policies generally exclude flood damage. But the extent
of coverage under each policy depends on the cause of the damages, as
determined through the claims adjustment process and the policy terms that
cover a particular type of damage. This process is further complicated
when the damaged property is subjected to a combination of high winds and
flooding and evidence at the damage scene is limited. Other claims
concerns can arise on such properties when the same insurer serves as both
NFIP's write-your-own (WYO) insurer and the property-casualty (wind)
insurer. In such cases, the same company is responsible for determining
damages and losses to itself and to NFIP, creating an inherent conflict of
interest.

Differences in licensing and training requirements for insurance claims
adjusters among states also create uncertainties about adjusters'
qualifications. Prior to the 2005 hurricane season, some coastal states
had few or no requirements, while others had requirements for most types
of adjusters. Further, states can waive their normal oversight
requirements after a catastrophic event to help address demand, as they
did after Hurricane Katrina. As a result, significant variations can exist
in the qualifications of claims adjusters available after a catastrophic
event. Strengthened and more uniform state requirements for adjusters
could enhance the qualifications of the adjuster force in future
catastrophes and improve the quality and consistency of claims
adjustments.

NFIP does not systematically collect and analyze both wind and flood
damage claims data, limiting FEMA's ability to assess the accuracy of
flood payments on hurricane-damaged properties. The claims data collected
by NFIP through the WYO insurers--including those that sell and service
both wind and flood policies on a property--do not include information on
whether wind contributed to total damages or the extent of wind damage as
determined by the WYO insurer. The lack of this data also limits the
usefulness of FEMA's quality assurance reinspection program to reevaluate
the accuracy of payments. In addition, the aggregate claims data that
state insurance regulators collectively gathered after Hurricanes Katrina
and Rita were not intended to be used to assess wind and flood damage
claims together on a property- or community-level basis. Further, FEMA
program contractors do not have access to WYO insurers' policies,
procedures, and instructions that describe to adjusters how wind and flood
damages are to be determined when properties are subjected to both perils.
FEMA officials stated that they did not have the authority to collect wind
damage claims data from insurers. But without the ability to examine
claims adjustment information for both the wind and flood damages, NFIP
cannot always determine the extent to which each peril contributed to
total property damages and the accuracy of the claims paid for losses
caused by flooding.

References

Visible links
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-81R
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1078
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-01-885R
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-03-433
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-169
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
  32. mailto:[email protected]
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  36. http://www.gao.gov/fraudnet/fraudnet.htm
  37. mailto:[email protected]
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  40. http://www.gao.gov/cgi-bin/getrpt?GAO-08-28
  41. http://www.gao.gov/cgi-bin/getrpt?GAO-08-28
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