Testimony before the Subcommittee on 

Housing and Community Opportunity, 

Committee on Financial Services, House 

of Representatives

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Thursday, April 14, 2005 NATIONAL FLOOD 

INSURANCE PROGRAM 

Oversight of Policy Issuance 

and Claims 

Statement of William O. Jenkins, Jr., Director, 

Homeland Security and Justice Issues 

GAO-05-532T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-532T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William O. 

Jenkins Jr. at (202) 512-8757 or 

jenkinswo@gao.gov.. 

Highlights of GAO-05-532T, a testimony 

before the Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, House of 

Representatives 

April 2005

NATIONAL FLOOD INSURANCE 

PROGRAM 

Oversight of Policy Issuance and Claims 

As a result of policy limits, restrictions, and exclusions, insurance payments 

to claimants for flood damage may not cover all of the costs of repairing or 

replacing damaged property. Some limitations are embedded in statute and 

others have been promulgated by FEMA pursuant to its statutory authority. 

FEMA officials said that the coverage limitations are necessary to keep the 

NFIP self-supporting and actuarially sound. Thus, the program is designed to 

strike a balance between premium prices and coverage. For example, 

homeowners may choose not to insure personal property under the program.

If they do elect to have this coverage, the value of personal property is 

depreciated. Basement coverage does not include payment to repair or 

replace finished walls and floors. 

The work of selling, servicing, and adjusting claims on NFIP policies is 

carried out by thousands of private sector insurance agents and adjusters 

under the regulation, management, and oversight of about 40 FEMA 

employees assisted by about 170 contractor employees. Agents are the main 

point of contact for policyholders. Four private sector NFIP managers we 

interviewed said that the agents have varying levels of NFIP knowledge. 

While training and support are available, historically neither FEMA nor the 

insurance companies have required completion of training or demonstration 

of basic program knowledge. Flood-certified adjusters are responsible for 

assessing damage and estimating losses when flooding occurs. Unlike 

agents, adjusters have mandatory training requirements. FEMA has oversight 

mechanisms in place to review the operations of the insurance companies 

and the work of adjusters. The private sector NFIP managers GAO 

interviewed were generally supportive of the program. However, they said 

that FEMA should find ways to make it less complex than and more similar 

to other property insurance programs. 

FEMA has taken steps to address its mandates in the Flood Insurance 

Reform Act, but it did not meet the 6-month timeframe specified. For 

example, to establish an insurance agent training requirement, an official 

said FEMA is discussing options but has not developed an action plan. To 

meet the requirement to provide “simple and complete information” to NFIP 

policyholders, FEMA has drafted materials explaining coverage, deductibles, 

and claim- and appeals-related procedures that it expects to have finalized 

by October 2005. 

According to the National Flood 

Insurance Program (NFIP), 

90 percent of all natural disasters in 

the United States involve flooding. 

Because of the catastrophic and 

unpredictable nature of floods, 

private insurance companies do not 

typically cover flood losses. 

Congress established the NFIP in 

1968 to provide an insurance 

alternative to disaster assistance in 

response to the escalating costs of 

repairing flood damage. 

During congressional hearings on 

provisions of the Flood Insurance 

Reform Act of 2004, several 

legislators testified on NFIP 

shortcomings, as reported by 

constituents whose properties had 

been flooded by Hurricane Isabel in 

September 2003. The act required 

GAO to study coverage provided 

under the NFIP. It also required the 

Federal Emergency Management 

Agency (FEMA), the administrator 

of the NFIP, to take steps to 

address concerns about coverage 

and claims procedures. 

Today’s testimony is based on 

work in progress to address this 

mandate. It provides preliminary 

information on (1) the types of 

coverage limits, restrictions, and 

exclusions under the NFIP; (2) how 

FEMA, in partnership with private 

insurers, manages and oversees the 

NFIP and the views of selected 

private sector program managers 

on how the program is working; 

and (3) the status of FEMA’s efforts 

to comply with provisions of the 

Flood Insurance Reform Act. 
Page 1 GAO-05-532T 

Mr. Chairman and Members of the Subcommittee: 

I appreciate the opportunity to participate in today’s hearing to discuss the 

National Flood Insurance Program (NFIP) and the Federal Emergency 

Management Agency’s (FEMA) role in overseeing processes for issuing 

policies and adjusting claims after floods occur.1 My testimony is based on 

preliminary results to date of our ongoing review of the NFIP, as mandated 

by the Flood Insurance Reform Act of 2004.2

According to NFIP statistics, 90 percent of all natural disasters in the 

United States involve flooding. However, flooding is generally excluded 

from homeowner policies that typically cover damage from losses 

including wind, fire, and theft. Because of the catastrophic nature of 

flooding and the inability to adequately predict flood risks, private 

insurance companies are largely unwilling to underwrite and bear the risk 

of flood insurance. 

Under the National Flood Insurance Act of 1968,3

 Congress established the 

NFIP to provide an insurance alternative to disaster assistance in response 

to the escalating costs of repairing flood damage. In creating the NFIP, 

Congress found that “a program of flood insurance with large-scale 

participation of the federal government and carried out to the maximum 

extent practicable by the private insurance industry is feasible and can be 

initiated.”4

 Under the NFIP, homeowners with mortgages insured by 

federal lenders on property in communities identified to be in special highrisk flood hazard areas are required to purchase flood insurance on their 

dwellings, up to a maximum of $250,000 in coverage for single-family 

homes. Optional, lower-cost coverage is also available under the NFIP to 

protect homes in areas of low to moderate risk. To insure furniture and 

 1

FEMA, the agency responsible for coordinating the federal response to disasters, manages 

and oversees the NFIP. In March 2003, FEMA and its approximately 2,500 staff became part 

of the Department of Homeland Security (DHS). Most of FEMA—including its Federal 

Insurance and Mitigation Administration, which is responsible for administering the 

NFIP—is now part of the department’s Emergency Preparedness and Response 

Directorate. However, FEMA has retained its name and individual identity within the 

department. 

2

P.L. 108-264 (June 30, 2004). 

3

42 U.S.C. 4001, et seq. 

4

42 U.S.C. 4001(b). 
Page 2 GAO-05-532T 

other contents against flood, property owners must purchase separate 

NFIP personal property coverage for up to $100,000. 

FEMA, the agency responsible for coordinating the federal response to 

disasters, administers the NFIP. FEMA has been generally successful in 

keeping the NFIP on sound financial footing. FEMA reports that the NFIP 

is self-supporting for the average historical loss year, which means that 

operating expenses and flood insurance claims are not paid for by the 

taxpayer, but through premiums collected on flood insurance policies. 

FEMA has exercised its authority to borrow from the Treasury three times 

in the last decade when losses were heavy. However, it has repaid all 

borrowed funds with interest. 

By 2005, the NFIP is projected to have approximately 4.7 million 

policyholders in the nearly 19,000 participating communities, with 

$699 billion of insurance in force. Since its inception, the program has paid 

about $12 billion in insurance claims, primarily from policyholder 

premiums that otherwise would have been paid through taxpayer-funded 

disaster relief or been borne by the home and business owners themselves. 

During congressional hearings held last year on the Flood Insurance 

Reform Act of 2004, several legislators testified on NFIP concerns as 

reported by constituents whose properties had been flooded by Hurricane 

Isabel in September 2003. Problems they reported included inadequate 

payments and unclear policies and procedures for filing and adjusting 

damage claims. According to NFIP statistical data, NFIP policyholders 

filed about 23,770 claims for $454.2 million for flood damage as a result of 

this storm, primarily in Maryland, Virginia, and North Carolina. 

Several months later, the hurricane season that began in August 2004 

struck hard in Florida and other East and Gulf Coast states. In Florida 

alone, more than one in five homes suffered wind, rain, flood, or other 

damage from the hurricanes, according to FEMA. According to NFIP data, 

the combined impact of Hurricanes Charley, Frances, Ivan, and Jeanne in 

August and September 2004 made them the most costly catastrophes in 

U.S. history, surpassing the costs of Hurricane Andrew in 1992 and the 

World Trade Center and Pentagon terrorist attacks in 2001. FEMA 

reported that these storms resulted in 59,125 NFIP claims for more than 

$1.3 billion in payments as of March 2005 on claims that have been closed. 

To meet our legislative mandate, as modified and expanded to include 

information on the 2004 hurricane season, and as discussed with your 

committee and the Senate Committee on Banking, Housing, and Urban 
Page 3 GAO-05-532T 

Affairs, we are reviewing several issues related to NFIP claims and 

FEMA’s oversight role. Today, we are prepared to provide preliminary 

information on (1) the types of limits, restrictions, and exclusions to 

coverage that exist under the NFIP; (2) how FEMA, in partnership with 

private insurers, manages and oversees the NFIP, and the views of 

selected private sector NFIP program managers on how the program is 

working; and (3) the current status of FEMA’s efforts to comply with 

provisions of the Flood Insurance Reform Act that mandate it establish 

insurance agent education and training requirements, new processes for 

explaining coverage to policyholders when they purchase and renew 

policies, and an appeals process for claimants.5

 In addition, appendix I 

presents data on policies in force and payments claimants received under 

the NFIP for flood events over the life of the program through 2004. 

To address these issues, we collected data from the NFIP management 

information system, examined program documentation, and interviewed 

officials of FEMA and its program contractor. We also interviewed four 

private sector NFIP program managers for insurance companies and 

managers at one vendor—a company that subcontracts with insurance 

companies to handle all or part of their flood business. Using a 

semistructured interview instrument, we asked these managers how their 

operations are managed and reviewed, how they believe the program is 

working, and what suggestions they have for improvements. In 

consultation with FEMA officials, we selected the interviewees because 

they are among the largest private sector partners for the NFIP. We 

observed FEMA-sponsored training of insurance agents and adjusters and 

a FEMA oversight review of the management of a private insurance 

company’s NFIP business. 

Our work that forms the basis of the preliminary observations presented in 

our testimony today is still in progress. For example, we have not yet 

completed our review of the NFIP program and the claims made after 

Hurricane Isabel and the 2004 hurricane season. Among the ongoing work 

to be completed prior to issuing our report later this year are (1) an 

assessment of the reliability of FEMA’s management information system, 

(2) interviews with the general adjusters who supervised claims 

adjustments in Maryland after Hurricane Isabel and in Florida during the 

2004 hurricane season, (3) observations of FEMA’s monitoring and 

oversight activities, and (4) a review of the operational reviews FEMA has 

 5

See P.L. 108-264, Sections 202-205, 207. 
Page 4 GAO-05-532T 

done over the last several years. Our work is being done in accordance 

with generally accepted government auditing standards.6

In summary, we found: 

• The NFIP is not designed to cover all flood losses. Some limitations are 

embedded in statute and others have been promulgated by FEMA 

pursuant to its statutory authority to keep the program self-supporting and 

actuarially sound. For example, the limited coverage allowed for 

basements does not include payment to repair or replace finished walls, 

floors, furniture, and other personal property. 

• The work of selling, servicing, and adjusting claims on NFIP policies is 

carried out by thousands of private sector insurance agents, adjusters, and 

other employees. The private sector effort is regulated, managed, and 

overseen by about 40 FEMA employees with the assistance of about 

170 contractor employees. The private sector program managers we 

interviewed said that the NFIP has many positive aspects, but its 

implementation is complex for policyholders, agents, and adjusters. Each 

of the four interviewees, when asked how the NFIP could be improved, 

said that FEMA should look for ways to make the program less complex 

and more similar to other property insurance programs. 

• Although its 6-month deadline elapsed in December 2004, FEMA continues 

its efforts to comply with mandates of the Flood Insurance Reform Act 

that it establish (1) insurance agent education and training requirements, 

(2) new processes for explaining coverage to policyholders when they 

purchase and renew policies, and (3) an appeals process for claimants 

who are dissatisfied with the settlement of their claims. FEMA officials 

said that the rule-making process required for two of the initiatives takes 

more than 6 months to complete. On the third initiative, FEMA is awaiting 

DHS approval of materials it has prepared to explain coverage to 

policyholders. A FEMA official estimated that it would be after October 

2005 before it has fully complied with the mandates. 

 6

We plan to issue a final report in September 2005 on the issues we discuss today and the 

results of our examination of actions taken by FEMA on a representative sample of 

Hurricane Isabel claims for which claimants requested reviews of initial determinations. 
Page 5 GAO-05-532T 

As a result of coverage limits, restrictions, and exclusions in NFIP policies, 

insurance payments for flood damage may not pay all of the costs of 

repairing or replacing flood-damaged property. Certain NFIP limitations 

are embedded in statute; others have been promulgated by FEMA 

pursuant to its statutory authority. FEMA officials said that the coverage 

limitations are necessary to keep the NFIP self-supporting and actuarially 

sound. Thus, the program is designed to strike a balance between 

premium prices and coverage. 

The following are several examples of NFIP coverage limitations, 

restrictions, and exclusions that affect the premium and amount a 

claimant could expect to receive for flood damage: 

• Homeowners are required to insure their homes for the amount of their 

federally backed mortgages. If a home is insured for less than 80 percent 

of its full replacement cost or the maximum coverage amount of $250,000, 

or it is not a primary residence, NFIP will pay the actual cash value for the 

damage. The actual cash value represents the original cost of the structure 

less depreciation and, in most cases, will not cover the full cost to repair 

damage to or replace the dwelling. The value of physical depreciation is 

based on the age and condition of the item. 

• If a home is insured for 80 percent or more of its full replacement cost or 

the maximum coverage amount of $250,000 and is a primary residence, 

NFIP will pay replacement costs for damage to the dwelling. The policy 

defines replacement cost as coverage to replace the damaged part of the 

dwelling with materials of like kind and quality to what was damaged. The 

policy will pay the amount actually spent for this repair or replacement up 

to its limit. 

• A homeowner may choose not to insure personal property under the 

program. 

• A deductible amount is applied against claims for dwellings and personal 

property. 

• Basements, which are defined as building areas below grade level on all 

sides, have limited coverage that does not include payment to repair or 

replace finished walls, floors, furniture, and other personal property. 

• The personal property limit paid for jewelry, artwork, and home business 

equipment is $2,500 for all items combined. No coverage is provided on 

these items if they are located in a basement. 

NFIP Is Not Designed 

to Cover All Flood 

Losses 
Page 6 GAO-05-532T 

• Actual cash value, not replacement value, is paid on all covered furniture 

and other personal property. Thus, personal property is also depreciated. 

• A detached garage is covered by the dwelling policy only if it is used solely 

for vehicles and storage. If the garage is improved (e.g., a sink is installed), 

flood damage to the structure is not covered under the NFIP. 

In a hypothetical property adjustment we developed with the assistance of 

FEMA’s director of claims, a poorly maintained 30-year-old home located 

in a designated flood zone had flood damage when a nearby river 

overflowed. The property was valued at $60,000. It was insured under the 

NFIP for $30,000. Although a contractor estimated it would cost $40,000 to 

repair damages to the structure and personal property losses totaled 

another $10,000, a NFIP adjuster determined that payment on the claim 

was $8,000. 

The following circumstances reduced the amount of coverage: 

• The homeowner had chosen not to insure his personal property. 

• Because the homeowner did not insure the structure for at least 80 percent 

of its value, actual cash value will be paid for repairs or replacement of 

damage to the dwelling. Since the condition is poor, the actual cash value 

will be low. 

• A $1,000 deductible will be applied. 

• The adjuster determined that some problems that needed to be addressed 

had not been caused by the flood (e.g., leaking pipes in the bathroom and 

preexisting mold in the basement). 

• Only limited coverage is allowed in the basement of the home, where the 

largest amount of damage occurred. 

The work of selling, servicing, and adjusting claims on NFIP policies is 

carried out by thousands of private sector insurance agents and adjusters 

who work independently or are employed by insurance companies or 

vendors under subcontract to insurance companies to handle their flood 

business. In contrast, according to a FEMA official, about 40 FEMA 

employees are responsible for regulating, managing, and overseeing the 

program, which is expected to grow to about 4.7 million policies in 2005. 

FEMA is assisted in this effort by about 170 contractor employees. 

Private Insurers Sell, 

Service, and Adjust 

Claims under FEMA 

Management and 

Oversight 
Page 7 GAO-05-532T 

According to FEMA, about 95 percent of the NFIP policies in force are 

written by agents who work for or represent 94 private insurance 

companies that issue policies and adjust flood claims in their own names. 

The companies, called write-your-own companies, receive an expense 

allowance from FEMA of about one-third of the premium amounts for 

their services and are required to remit premium income in excess of this 

allowance to the National Flood Insurance Fund.7

 The insurance 

companies share the FEMA expense allowance with the agent selling and 

servicing the policy and a vendor, if the company has subcontracted with 

one to handle all or part of its flood insurance business. 

Flood program managers for each of the four write-your-own companies 

we visited said that insurance agents were the main point of contact for 

policyholders and those seeking to purchase flood insurance. The 

managers we interviewed noted that agents had varying levels of 

knowledge about the NFIP. For example, one flood manager noted: 

It is clear that some agents do not understand the program. It is very complex and different 

from the other lines of insurance. Flood insurance is much more complex than automobile 

and homeowners insurance. Some items of specific concern are definitions of elevated 

buildings and basements. 

Officials at FEMA, the four insurance companies, and the vendor said that 

they offered support to the insurance agents who sell and service NFIP 

policies. Reported support included training, help from telephone hotline 

customer service representatives, development of rate quotes, and Web 

sites with NFIP information. However, other than requiring that agents 

meet basic state insurance licensing requirements, neither FEMA nor the 

four insurance companies have historically required that agents complete 

training or demonstrate a basic level of knowledge of the NFIP to sell 

flood policies. 

When losses occur, flood adjusters employed by insurance companies or 

independent contractors become the eyes and ears of the NFIP. Claims 

adjusters are assigned to policyholders by their insurance companies after 

the policyholders have notified their agents of a flood loss and the agents 

 7

The other 5 percent of policies are sold and serviced by state-licensed insurance agents 

and brokers who deal directly with FEMA. 

Independent Agents Are 

the Main Point of Contact 

for Policyholders 

Adjusters Are the Eyes and 

Ears of the NFIP 
Page 8 GAO-05-532T 

have written loss reports. Adjusters are responsible for assessing damage; 

estimating losses; and submitting required reports, work sheets, and 

photographs to the claimants’ insurance company, where the claim is 

reviewed and, if approved, processed for payment. They work under the 

coordination of a general adjuster assigned to manage claims adjustments 

for the flood event. 

Unlike agents who sell flood insurance policies, adjusters must be certified 

by FEMA to work on NFIP claims. To be approved to adjust residential 

flood losses, an adjuster must have at least 4 consecutive years of full-time 

property loss adjusting experience and have attended an adjuster 

workshop, among other requirements. To keep their certifications current, 

adjusters are required to take a 1-day refresher workshop each year and 

pass a written examination testing their knowledge each year. 

FEMA’s program contractor maintains a database of independent 

adjusters who are qualified to adjust flood claims. A FEMA official said 

that 4,844 flood-certified adjusters are registered in the database, as of 

April 2005. A NFIP official noted that the adjuster community is stretched 

thin when a major flood event occurs. 

Adjusters and insurance companies are paid for claims settlements from 

the National Flood Insurance Fund based on the size of the losses they 

settle. The write-your-own company receives about 3.3 percent of the 

incurred loss, according to FEMA’s NFIP claims director. Adjusters are to 

be paid at the time claims are settled based on a standard fee schedule. 

For example, an adjuster receives $1,000 for a claim of between $25,000 

and $35,000. 

FEMA’s primary method of overseeing the work of write-your-own 

companies is to conduct an operational review of every participating 

company at least every 3 years. In addition, FEMA relies on about 

10 general adjusters8

 employed by its program contractor to check the 

 8

According to the FEMA director of NFIP claims, general adjusters are experienced 

property adjusters who operate in the manner of supervisory adjusters. Resident general 

adjusters are responsible for surveying an area that has flooded either immediately before 

or after a flood event to estimate the number of claims that will be made. General adjusters 

coordinate claims adjustment activities at disaster locations, do adjuster training, and 

respond to questions from adjusters in addition to their oversight roles. 

FEMA Oversees Work of 

Insurance Companies and 

Adjusters 
Page 9 GAO-05-532T 

work of claims adjusters9 in reinspections of a sample of adjustments done 

after every flood event. 

According to the FEMA director of NFIP claims, one or two employees 

from FEMA’s NFIP Claims and Underwriting sections go on-site to review 

the operations of write-your-own companies at least every 3 years. They 

do reviews more frequently, if necessary, to follow up on any findings 

from a previous visit.10 The auditors are to request that a random sample of 

100 files be pulled for them to review. Files that are closed without 

payment and those with particularly large settlements are to be included in 

the sample of files reviewed. Auditors are to check the files for 

completeness and accuracy. For example, they must make sure that there 

are photographs to document damage. Auditors are also to look at internal 

controls in place at the company. 

If a write-your-own company does not pass an operational review, FEMA 

requires that it develop an action plan to correct the problems and 

schedules a follow-up review in 6 months to determine whether progress 

has been made, according to the NFIP director of claims. If the company 

continues to have problems and fails to implement an action plan, it can 

ultimately be withdrawn from the NFIP. According to FEMA officials, a 

company has been asked to withdraw from the NFIP once in the program’s 

history. About 3 years ago, a write-your-own company was withdrawn 

from the NFIP in part because of issues raised in operational reviews and 

in part to other financial problems. 

Three of the four flood program managers for write-your-own companies 

whom we interviewed thought operational reviews were an effective way 

for FEMA to ensure that the NFIP is run according to established 

legislation and regulation. The fourth manager said that he had no opinion 

one way or the other. Interviewees noted that the reviews caught 

problems, and while FEMA had a small audit staff, the auditors were 

knowledgeable and provided about the right level of review. Two of the 

four flood program managers said that recent operational reviews had 

identified problems on policies they had recently purchased from other 

 9

In addition, financial reviews of the write-your-own companies are done and data 

submitted for payment and statistical reporting are edited. 

10Some operational reviews are done at vendor locations rather than at the write-your-own 

company. 
Page 10 GAO-05-532T 

companies and that they were working to rewrite some policies and 

address other oversight issues. 

General adjusters are to do reinspections of open claims. FEMA chooses a 

random sample of about 4 percent of the claims for every flood event to 

reinspect, according to the NFIP claims director. If the general adjuster 

determines that a company paid for an expense that should not have been 

covered, FEMA is to be reimbursed by the write-your-own company. If a 

general adjuster finds that an adjuster missed an item in the original 

inspection, the general adjuster is to add it back into the claims report so 

that the policyholder will be compensated for it. 

The instructors at an adjuster refresher training session we attended noted 

the following as common errors identified in reinspections of claims: 

• improper measurement of room dimensions; 

• improper allocation of damage between wind and flood (homeowners’ 

policies cover wind damage, while the NFIP covers flood losses); 

• poor communication with homeowners on the process they are following 

to inspect the property and settle the claim. 

The flood program managers for the write-your-own companies and the 

vendor managers we interviewed were generally supportive of the NFIP 

and found many positive aspects to the program. One write-your-own 

company program manager said: 

“I am in the flood insurance business because I believe in the program. It does a lot of 

good. Floods are horrible occurrences. A homeowner sees the water coming but can do 

nothing to stop it. The smell is horrible. Whole communities are affected, and the emotional 

toll is tremendous. I have seen the NFIP do great good for many people.” 

Each of the interviewees, when asked how the NFIP could be improved, 

said that FEMA should look for ways to make the program less complex 

and more similar to other property insurance programs. For example, a 

vendor manager noted, “if the customers, the agents, and the adjusters all 

have difficulty understanding the program, it is too complicated.” 

A flood program manager said: 

Stakeholders Said the 

NFIP Has Many Positive 

Aspects but 

Implementation Is 

Complex 
Page 11 GAO-05-532T 

“As FEMA has tried to make the flood program more actuarily sound, it has made it more 

complex. FEMA has required of us more information, more forms, and more photos to be 

scanned into files. Those requirements cost money to implement. As an industry, we are 

looking at how the flood line might be more compatible with other lines of insurance 

business to be more cost-efficient. Now the flood business is so unique that it requires 

special handling.” 

FEMA officials said that some documentation (i.e., elevation certificates) 

is required because the NFIP is part of FEMA’s broader flood plain 

management strategy that combines insurance protection with hazard 

mitigation to reduce future flood damage to homes. The officials noted 

that, while the NFIP has different requirements than homeowners 

insurance, it is not necessarily more complex and that the more familiar 

agents become with the requirements of the NFIP, the easier it becomes 

for them to routinely handle documentation requirements. 

Congress mandated that within 6 months of the enactment of the Flood 

Insurance Reform Act, FEMA establish (1) insurance agent education and 

training requirements, (2) new processes for explaining coverage to 

policyholders when they purchase and renew policies, and (3) an appeals 

process for claimants who are dissatisfied with the settlement of their 

claims. The 6-month mandated deadline elapsed on December 30, 2004, 

but FEMA is still working to complete these mandated efforts. According 

to FEMA officials, in order to address the requirements to establish 

insurance agent education and training and for explaining coverage to 

policyholders, the agency must go through the rule-making process. FEMA 

officials also said to address the requirement for explaining policy 

coverage, they are waiting for DHS approval before finalizing the draft 

materials that will accompany the flood insurance policy. When DHS 

approves the draft materials, they will be published in the Federal Register

as part of the rule-making process. Regarding the requirement for an 

appeals process, the agency must initiate and complete formal rule 

making. FEMA officials said that this process takes more than 6 months 

and could not be completed within the mandated time frame. 

To address the requirement in the Flood Insurance Reform Act of 2004 to 

establish insurance agent education and training requirements, FEMA is 

working with state insurance commissions. An official said FEMA is still in 

the planning stages of meeting the requirement and is discussing options 

with state insurance commissions, but has not yet developed an action 

plan. 

FEMA Continues 

Efforts to Comply 

with Legislative 

Mandates 

FEMA Is Coordinating 

with the States to 

Establish Training and 

Education Requirements 
Page 12 GAO-05-532T 

When a customer purchases a flood insurance policy, the main document 

he or she is to receive from the insurance agent is the policy. A 

congressional report accompanying the Flood Insurance Reform Act 

stated that the NFIP did not provide “simple” forms or claims guidelines 

for flood victims to follow, making access to information about flood 

insurance policies difficult to obtain.11 To address this concern, the act 

requires FEMA to provide simplified forms and a flood insurance claims 

handbook to policyholders at the time of purchase or renewal and at the 

time of flood loss.12 FEMA has drafted new materials that would be 

provided to the policyholder at the time of purchase or renewal of the 

flood insurance policy. The draft material includes: 

• a supplemental form that would explain the policy, such as the amount of 

deductibles, the exact coverage being purchased, exclusions from 

coverage, and an explanation of how lost items and damages will be 

valued under the policy at the time of loss; 

• a flood insurance handbook to describe procedures to be followed to file a 

claim and provide detailed information on an appeals process that FEMA 

is to develop; and 

• an acknowledgment form that the policyholder has received the flood 

insurance policy and that the policy only covers building property for the 

dwelling and does not provide coverage for contents or personal property. 

Before the materials are finalized, FEMA must go through rule making and 

publish them in the Federal Register. FEMA expects to have these forms 

and handbook finalized by October 2005. 

If a policyholder has a grievance about a flood insurance claim, proof of 

loss, or loss estimate, he or she may informally appeal to the insurance 

agent, to the insurance adjustor’s supervisor, or to a hotline where a 

customer representative is to provide assistance. There is currently no 

official recourse for the policyholder. To provide official recourse to 

policyholders, section 205 of the Flood Insurance Reform Act requires that 

FEMA establish a formal appeals process through which policyholders 

may appeal decisions on their claims. FEMA is developing a formal 

 11Senate Report No. 108-262 (2004). 

12See P.L. 108-264, Sections 202-204 (June 30, 2004). 

FEMA Has Drafted New 

Materials on Consumer 

Policy Information 

FEMA Is Establishing a 

Formal Appeals Process to 

Address Consumer 

Complaints 
Page 13 GAO-05-532T 

appeals process for a policyholder to follow if he or she has a grievance. 

The proposed new appeals process must go through the rule-making 

process with publication of a draft and a final set of procedures in the 

Federal Register. A FEMA official was uncertain when the process would 

be completed, but said that it would be after October 2005. 

Mr. Chairman and Members of the Committee, this concludes my prepared 

statement. I would be pleased to answer any questions you and the 

Committee members may have. 

For further information about this statement, please contact William O. 

Jenkins, Jr. Director, Homeland Security and Justice Issues, on (202) 

512-8777 or jenkinswo@gao.gov or Christopher Keisling, Assistant 

Director, Homeland Security and Justice, on (404) 679-1917 or at 

keislingc@gao.gov. 

Major contributors to this testimony included Christine Davis, Pawnee 

Davis, and Deborah Knorr. 

Contacts and Staff 

Acknowledgments 
Page 14 GAO-05-532T 

Figure 1: Total NFIP Payments to Claimants, 1972-2004 

Note: Data compiled and available as of February 28, 2005. 

Appendix I: NFIP Payments Made to 

Claimants and Policies in Force, 1972-2004 

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

1972-1976

Total payments made (dollars in millions)

Source: NFIP.

Calendar year
Page 15 GAO-05-532T 

Figure 2: Policies In Force, 1978-2004 

Note: Data compiled and available as of December 31, 2004. 

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Policies in force 

Source: NFIP.

Calendar year
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER