Flood insurance overpays more than it underpays, report finds

By Evan Lehmann | 06/24/2015 08:15 AM EDT

There’s no evidence that the federal government is methodically underpaying flood victims through its public insurance program, investigators with a Senate committee said yesterday.

There’s no evidence that the federal government is methodically underpaying flood victims through its public insurance program, investigators with a Senate committee said yesterday.

The assertion challenges the assertions of some senators and homeowners following the near-record number of claims filed with the National Flood Insurance Program after Superstorm Sandy affected more than 144,000 policyholders in October 2012. Of those, over 2,000 property owners are suing the program for allegedly lowballing their payments.

The storm’s toll has roiled the Federal Emergency Management Agency, which administers the program, over allegations that engineering firms committed fraud by doctoring reports to hide damage caused by floodwater (ClimateWire, Oct. 16, 2014). New York Attorney General Eric Schneiderman
(D) is pursuing a criminal investigation into those claims.


In response, FEMA announced in March that it would review all 144,000 Sandy claims. At the same time, Sen. Charles Schumer
(D-N.Y.) and other lawmakers accused private insurance companies working on behalf of the program of encouraging low payments. Roughly 80 companies, known as "Write Your Own," or WYO, pay claims with public money and ascertain the amount of damage for FEMA. The controversy also led to the resignation of David Miller
, who ran the flood program.

The assertions made yesterday in a report by investigators on the Republican staff of the Senate Banking, Housing and Urban Affairs Committee methodically downplays the idea that there are incentives within the insurance program to lowball homeowners. Still, it strongly criticized the program for faulty record keeping, for a flawed appeals process and for filling an unmet demand for inspectors after Sandy with "warm bodies."

"While we cannot discount the possibility that certain adjusters performed subpar assessments of some Sandy claims or even engaged in outright fraud, we found no evidence to support the theory that adjusters have a systematic incentive to downplay flood damage," the report says.

‘Something’s wrong’

The team of investigators led by Christopher Ford
, a member of Sen. Richard Shelby’s
(R-Ala.) committee staff, said it found underpayments amounting to $6,297 between 2003 and 2014 when reviewing FEMA documents. In contrast, the investigators pointed to several incentives that could promote overpayments, which amounted to $748,375 over the same period.

Schumer immediately rejected the findings. He previously claimed that private attorneys handling the lawsuits on behalf of the flood program might be prolonging the court cases to increase their legal fees, which are paid by FEMA. In some cases, the attorneys’ fees could eclipse the cost of settling the claims, according to lawyers representing the homeowners (ClimateWire, Aug. 6, 2014).

"I would disagree with those findings," Schumer said of the report during a Banking Committee hearing yesterday. "The data supplied by WYOs is probably incomplete and may have had a bias showing the right data."

Schumer called the program a "circus."

Shelby, chairman of the committee, promised additional action to correct the program’s failures after Sandy.

"There are 2,000 cases, I believe, ending in fraud," Shelby said. "That’s too many, and something’s wrong."

Fees to private insurers may have encouraged overpayments

Yesterday’s 80-page report did not examine individual fraud cases. Instead, it found multiple breakdowns, like shoddy record keeping to track under- and overpayments, an appeals process for homeowners who feel they were undercompensated that fails to provide additional money, and a lack of planning before a storm to ensure qualified adjusters and engineers are ready to help.

Rafael Lemaitre
, FEMA’s director of public affairs, said the agency is reviewing the report and couldn’t comment on its specific findings. But he apologetically referred to FEMA’s missteps after Sandy.

"There should not be a single policyholder who receives anything less than what they are legitimately owed under their policy," Lemaitre said in an email. "We’re going to continue moving forward to reform the National Flood Insurance Program regardless of whether underpayments were systemic or not."

The committee report also suggested several times that the flood program could pose conflicts of interest that encourage overpayments. That was a recurring theme after Hurricane Katrina, when lawmakers and other critics indicated that private insurers handling the program’s claims overstated flood damage to reduce the amount of compensation for wind-related losses, which the companies pay themselves.

"If anything, it is probably possible for a WYO to make more money by systematically overpaying on NFIP claims, though we do not draw this conclusion," the report says.

It notes that private insurers receive fees totaling 1.5 percent of all the claims they manage for FEMA. By October 2014, the flood program had paid out $3.9 billion in Sandy claims. That means private insurers received $58.5 million in fees, the report says.

"In other words, this percentage-based compensation system gives both WYOs and adjusters some financial incentive to find as much flood damage as they can," it says.

Click here to read the report.