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NATIONAL FLOOD INSURANCE PROGRAM:

ISSUES EXPOSED BY THE 2005 HURRICANES

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

AND THE

SUBCOMMITTEE ON MANAGEMENT, 

INVESTIGATIONS, AND OVERSIGHT

OF THE

COMMITTEE ON HOMELAND SECURITY

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 12, 2007

Printed for the use of the Committee on Financial Services and the Committee 

on Homeland Security

Serial No. 110–39

(Committee on Financial Services)

Serial No. 110–46

(Committee on Homeland Security)

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

MELVIN L. WATT, North Carolina, Chairman

LUIS V. GUTIERREZ, Illinois 

MAXINE WATERS, California 

STEPHEN F. LYNCH, Massachusetts 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

CAROLYN MCCARTHY, New York 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ROBERT WEXLER, Florida 

GARY G. MILLER, California 

PATRICK T. MCHENRY, North Carolina 

EDWARD R. ROYCE, California 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

J. GRESHAM BARRETT, South Carolina 

TOM PRICE, Georgia 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

COMMITTEE ON HOMELAND SECURITY 

BENNIE G. THOMPSON, Mississippi, Chairman 

LORETTA SANCHEZ, California, 

EDWARD J. MARKEY, Massachusetts 

NORMAN D. DICKS, Washington 

JANE HARMAN, California 

PETER A. DEFAZIO, Oregon 

NITA M. LOWEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

ZOE LOFGREN, California 

SHEILA JACKSON-LEE, Texas 

DONNA M. CHRISTENSEN, U.S. Virgin 

Islands 

BOB ETHERIDGE, North Carolina 

JAMES R. LANGEVIN, Rhode Island 

HENRY CUELLAR, Texas 

CHRISTOPHER P. CARNEY, Pennsylvania 

YVETTE D. CLARKE, New York 

AL GREEN, Texas 

ED PERLMUTTER, Colorado 

VACANCY 

PETER T. KING, New York 

LAMAR SMITH, Texas 

CHRISTOPHER SHAYS, Connecticut 

MARK E. SOUDER, Indiana 

TOM DAVIS, Virginia 

DANIEL E. LUNGREN, California 

MIKE ROGERS, Alabama 

BOBBY JINDAL, Louisiana 

DAVID G. REICHERT, Washington 

MICHAEL T. MCCAUL, Texas 

CHARLES W. DENT, Pennsylvania 

GINNY BROWN-WAITE, Florida 

MARSHA BLACKBURN, Tennessee 

GUS M. BILIRAKIS, Florida 

DAVID DAVIS, Tennessee 

JESSICA HERRERA-FLANIGAN, Staff Director & General Counsel 

ROSALINE COHEN, Chief Counsel 

MICHAEL TWINCHEK, Chief Clerk 

ROBERT O’CONNOR, Minority Staff Director 

SUBCOMMITTEE ON MANAGEMENT, INVESTIGATIONS, AND OVERSIGHT 

CHRISTOPHER P. CARNEY, Pennsylvania, Chairman 

PETER A. DEFAZIO, Oregon 

YVETTE D. CLARKE, New York 

ED PERLMUTTER, Colorado 

VACANCY 

BENNIE G. THOMPSON, Mississippi (Ex 

Officio) 

MIKE ROGERS, Alabama 

TOM DAVIS, Virginia 

MICHAEL T. MCCAUL, Texas 

PETER T. KING, New York (Ex Officio) 

JEFF GREENE, Director & Counsel 

BRIAN TURBYFILL, Clerk 

MICHAEL RUSSELL, Senior Counsel 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 12, 2007 .................................................................................................... 1

Appendix: 

June 12, 2007 .................................................................................................... 35

WITNESSES 

TUESDAY, JUNE 12, 2007

Jadacki, Matt, Deputy Inspector General for Disaster Assistance Oversight, 

Office of the Inspector General, U.S. Department of Homeland Security ....... 14

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

Government Accountability Office ...................................................................... 16

APPENDIX 

Prepared statements: 

Miller, Hon. Gary G. ........................................................................................ 36

Jadacki, Matt .................................................................................................... 40

Williams, Orice M. ............................................................................................ 58

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Watt, Hon. Melvin: 

Editorial from the Times-Picayune ................................................................. 73

Letter to David M. Walker from Michael G. Oxley ....................................... 76

Language from appropriations bill .................................................................. 78

Copy of insurance company complaint ........................................................... 80

Taylor, Hon. Gene: 

Series of articles from the Times-Picayune .................................................... 98

Williams, Orice M.: 

Responses to questions submitted by Hon. Christopher P. Carney ............. 118

Responses to questions submitted by Hon. Mike Rogers .............................. 122

Responses to questions submitted by Hon. Melvin L. Watt ......................... 131

(1)

NATIONAL FLOOD INSURANCE PROGRAM: 

ISSUES EXPOSED BY THE 2005 HURRICANES 

Tuesday, June 12, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

AND SUBCOMMITTE ON MANAGEMENT, 

INVESTIGATIONS, AND OVERSIGHT, 

COMMITTEE ON HOMELAND SECURITY, 

Washington, D.C. 

The subcommittees met, pursuant to notice, at 3:11 p.m., in room 

2128, Rayburn House Office Building, Hon. Melvin Watt [chairman 

of the Subcommittee on Oversight & Investigations] presiding. 

Present from the Subcommittee on Oversight & Investigations: 

Representatives Watt, Klein, Wexler; Miller and Bachus [ex officio]. 

From the Subcommittee on Management, Investigations, and 

Oversight: Representatives Carney, Clarke, Perlmutter; and Rogers. 

Also present: Representatives Taylor, Scott, and Jindal. 

Chairman WATT. This joint hearing of the Committee on Financial Services Oversight and Investigations Subcommittee and the 

Committee on Homeland Security Management, Investigations, 

and Oversight Subcommittee will come to order. 

I will recognize myself for a brief opening statement. I apologize 

to everyone who has been so patiently waiting for us, but we were 

called for a series of votes, and got sidetracked in our schedule, so 

we’ll try to move along quickly. 

I recognize myself for a 5-minute opening statement, or less. 

It has been nearly 2 years since the devastation of Hurricanes 

Katrina and Rita. Gulf Coast residents are still trying to rebuild 

their homes, their lives, and their businesses. A potential roadblock 

to this recovery is the ongoing conflict over the insurance claims 

process in the Gulf Coast. 

This is the second in a series of hearings the Financial Services 

Subcommittee on Oversight and Investigations has held on the 

issue of insurance practices in the Gulf Coast in the wake of 

Katrina and Rita. 

The first hearing explored the overall insurance claims payment 

process in the Gulf Coast after the 2005 hurricanes. We heard testimony from FEMA representatives, the Mississippi attorney general, industry experts, and several Gulf Coast representatives who 

have been personally affected by the tragedy. 

2

Much of the controversy in the aftermath of the 2005 hurricanes 

has focused on the insurance claims payment process and the allegation that hurricane victims have not received adequate compensation because damage caused by wind, which is supposed to be 

paid by private insurers under homeowners policies have been improperly classified as flood damage and paid by the National Flood 

Insurance Program (NFIP). 

This question has spawned numerous lawsuits and at least one 

grand jury investigation. 

Rehashing the merits of the individual lawsuits is not our purpose today. Today, we move the debate forward by seeking to shed 

light on the actual data concerning flood and wind claims as a result of Katrina and Rita, including possible data limitations that 

may have hampered FEMA in its ability to provide proper oversight of the National Flood Insurance Program. 

We are pleased to have two Government witnesses, one from the 

Department of Homeland Security Inspector General’s Office, and 

the other from the Government Accountability Office, or GAO, both 

of whom have been investigating the related issues of the availability and quality of data concerning flood and wind claims and 

FEMA’s oversight of the National Flood Insurance Program. 

These investigations and evaluations have been done pursuant to 

two different requests, which I’m going to put in the record. 

One, the GAO study, I believe, was initiated at the request of the 

former chairman of the Financial Services Committee, Mike Oxley, 

in a letter dated January 24, 2006, and joined in by the current 

chairman of the Financial Services Committee, Representative Barney Frank. 

The second investigation was initiated pursuant to an appropriations bill which directed that the Inspector General investigate 

whether and to what extent in adjusting and settling claims resulting from Hurricane Katrina, insurers making flood insurance coverage available under the Write-Your-Own program pursuant to 

1345 of the National Flood Insurance Act improperly attributed 

damages from such hurricane to flooding. 

I will ask unanimous consent to submit former Chairman Oxley’s 

letter and the language which authorized the Inspector General 

study for the record. 

Without objection, it is so ordered. 

Both of these Agencies are preparing reports on these issues 

which should be released this year or early next year. 

Today, they will offer preliminary findings from these reports. 

We hope that their testimony will help provide transparency and 

accountability regarding the operation of the National Flood Insurance Program and the overall insurance claims payment process in 

the Gulf so that taxpayers, Gulf Coast residents, and the Members 

of Congress can have confidence that the National Flood Insurance 

Program and the private insurance market are each living up to 

their responsibility and that catastrophe victims are treated fairly. 

I now recognize the ranking member of the Financial Services 

Oversight Subcommittee, Mr. Gary Miller, for his opening statement. 

Mr. MILLER. Thank you, Mr. Chairman. 

3

I would like to ask unanimous consent that members of the full 

Committee on Financial Services and the Committee on Homeland 

Security be allowed to make opening statements at today’s subcommittee hearing to the extent that they are allotted time. 

With that, I grant myself 5 minutes. 

I thank the chairman for holding this hearing, and I’d like to 

welcome the Homeland Security Subcommittee on Management 

and Investigation here today, and also the witnesses; we are glad 

you are here with us. 

There is no question that the 2005 hurricane season resulted in 

significant strain to the NFIP. The claims resulting from the losses 

from the catastrophic hurricanes are unprecedented in the history 

of the program. 

Obviously, with almost $18 billion in flood claims being paid by 

the Treasury rather than the flood program itself, we must ensure 

that taxpayers are not footing the bill for inappropriate claim adjustments. 

Some have alleged that insurers shifted wind claims to the flood 

program so they could pay less for the wind portion of the hurricane loss. If this is true, it is an outrage that should be rectified 

immediately, and those engaged in such fraud should be strongly 

punished. 

Particularly in cases of property damage by both flooding and 

wind, strong oversight must be in place for the National Flood Insurance Program to ensure that it does not pay out more than it 

should. 

This is a difficult prospect. Flood and wind damage are supposed 

to be assessed separately, but in some cases they occur simultaneously. 

At our first hearing on this subject, we heard from the Mitigation 

Division Director and Federal Insurance Administrator for the Federal Emergency Management Agency, David Maurstad, who testified that the NFIP only paid for damage associated with flood and 

only up to the covered limits. 

According to Mr. Maurstad, there is a rigorous program of oversight in place to ensure that the NFIP only pays for damage caused 

by flooding. Mr. Maurstad testified that no claims from the 2005 

hurricanes have come to his attention that should not have been 

paid at the levels they were paid. 

I look forward to hearing from the witnesses today who have 

been given the difficult task of assessing whether FEMA has taken 

adequate steps to ensure that the NFIP’s flood claim payments are 

accurate and appropriate. 

As I said previously, this subcommittee was assured by FEMA at 

the last hearing that controls are in place to assure that the NFIP 

does not pay out more than is required under the terms of the flood 

policy. 

Today, we have the opportunity to hear the opinions of independent sources about whether they agree with FEMA’s assessment about its oversight process and its ability to ensure the accurate payment of claims. 

If the NFIP paid more than it should have after the 2005 hurricanes because insurance companies pushed wind losses to the flood 

4

program rather than paying for them under homeowners policies, 

then we must hold them accountable for their actions. 

But let me just say that there is a difference between the potential of wrongdoing and the finding of actual wrongdoing. This is an 

important distinction as we proceed today. 

I have reviewed the written statements of the witnesses today 

and I understand that misbehavior on the part of the insurance 

companies that write both flood and wind policies for the customers 

cannot be ruled out at this point in time of the investigation; they 

just haven’t completed the reviews yet. Let us not prejudge the 

findings of these important investigations, or vilify the entire insurance industry for claim shifting, without concrete evidence to prove 

such allegations of widespread wrongdoing occurred. 

In conclusion, I think we need to proceed cautiously today. We 

have all seen the anecdotal news reports and heard stories of our 

colleagues from the region about practices by some insurance companies that, if true, are very disturbing and must be addressed. 

I am also aware of examples of companies that use two separate 

adjusters for handling wind claims and water claims to avoid the 

potential for conflict, as has been alleged. Such adjusters have been 

kept separate. They did not communicate with one another, and 

they utilized completely different claim systems. 

Did insurance companies abuse the NFIP to protect their bottom 

lines? Was such abuse widespread? At this point we do not have 

the evidence to make a determination either way. We just don’t 

know, and we need to allow the GAO and DHS IG to complete 

their important work before rushing to judgment. 

We need to take the preliminary findings of these reports at face 

value and for the purpose of moving forward with the NFIP’s reform legislation. 

We should use this hearing to ask important questions about 

ways to avoid the potential for abuse in the future. For example, 

we should consider how we ensure that Write-Your-Own, WYO, insurance companies do not have the ability to defraud the NFIP 

when the structure endures wind and flood damage? 

Is it best to require more coordination between flood and wind 

damages or is it best to require absolute separation between the 

claims, including requiring different claims adjusters? 

Should the existing NFIP claims adjustment procedure be revisited to ensure any potential conflicts of interest are eliminated? 

Once the GAO and DHS IG complete their important studies, we 

will have a better sense of whether and to what extent damages 

from the 2005 hurricanes were improperly attributed to flood rather than wind. 

With that, I yield back. 

Chairman WATT. I thank the gentleman. 

I’m pleased to yield 5 minutes to the chairman of the Homeland 

Security Management, Investigations, and Oversight Subcommittee, Mr. Carney, from Pennsylvania. 

Mr. CARNEY. Thank you, Mr. Chairman. 

I’d like to thank Chairman Frank, of course, and you, Chairman 

Watt, for holding this joint hearing with my subcommittee regarding the NFIP. 

5

In the wake of any catastrophe, whether a natural disaster or a 

terrorist attack, government and the private sector have to do their 

part for the country to recover. If either fails to fulfill its responsibilities, recovery will at best be delayed and at worst be impossible. 

Nearly 2 years after Katrina and Rita struck the Gulf Coast, we 

are still trying to understand why this public-private partnership 

broke down and what it is going to take to fix it. 

In my own district, which is more than 1,200 miles from New Orleans, my neighbors have had their own struggles with flooding. In 

fact, some of my constituents are still living in FEMA trailers, 

nearly a year after 2006’s flooding. 

The NFIP and FEMA’s other flood-related programs must work 

better. We must find a happy medium, and that medium must include proper oversight. 

I am troubled, as I’m sure most of us here today are, by the news 

that private insurance companies may have manipulated FEMA to 

pay out claims for which FEMA should not be responsible. If that’s 

true, it is simply despicable. 

I recently took a trip down to the Gulf Coast to see how the recovery was going. The people down there aren’t looking for a handout, they are just looking for a hand up. They just want to rebuild 

and get on with their lives. And I hear the same sentiments from 

my neighbors, who are still waiting for their claims to be paid. 

That said, when insurance is using every legal loophole and tactic to avoid paying out on a claim they should be responsible for, 

the system is broken, and as far as I’m concerned, if that system 

is broken, it is a disservice to not only the citizens who have come 

to rely on it, but also the country as a whole. 

I know that Chairman Thompson, when he arrives, and Ranking 

Member Rogers also have a lot to say, so I won’t take up much 

more time. I just want to emphasize that this is only the beginning 

of a new chapter in the oversight of the NFIP. 

I’m looking forward to continued cooperation from the Financial 

Services Committee when it comes to examining the insurance 

meltdown that resulted from the 2005 hurricane season. 

Hopefully, any changes that we can help bring about will mitigate problems we’ve seen elsewhere across the country with NFIP 

payments. 

With that, I yield back, Mr. Chairman. 

Chairman WATT. I thank the gentleman for his statement, and 

I welcome the members of the Homeland Security Committee to 

our humble facility over here. Thank you for being here. 

I will now recognize Representative Rogers from Alabama for 5 

minutes. 

Mr. ROGERS. Thank you, Chairman Watt, and Chairman Carney, 

and I want to join you in thanking the witnesses for taking time 

to be here with us today. 

Let me say at the outset that it’s a special privilege to participate 

today with my good friend and colleague, Spencer Bachus, from 

Alabama, as well. 

The folks in Alabama are fortunate to have a member of their 

State’s congressional delegation serve as the highest ranking Republican on the Financial Services Committee. 

6

This joint subcommittee hearing will examine issues that came 

to light in the National Flood Insurance Program after Hurricanes 

Katrina and Rita. 

Just last week, our Management Subcommittee held a field hearing in the storm-ravaged area of Mississippi’s Gulf Coast. We saw 

firsthand some of the extent of devastation that was caused by 

Hurricane Katrina. 

Almost 22 months after Hurricane Katrina, many of the damaged homes remain gutted because of disputes over insurance coverage, and many lots remain vacant because folks can’t get affordable insurance to rebuild. 

In our meetings with State and local officials, we heard about 

some of the challenges folks along the Gulf Coast are facing within 

insurance claims. 

The insurance department in my home State of Alabama learned 

a number of lessons after Hurricane Ivan in 2004. Therefore, after 

Hurricane Katrina struck, the department set up operations at 

each of the FEMA disaster recovery centers and sent staff to shelters throughout the State. 

One of the main issues today affecting insurance coverage is 

whether damage to a private home was caused by wind or water. 

Homeowners insurance generally covers losses from wind and 

wind-driven rain, but not from flooding or flood-driven water. 

The Federal Government underwrites flood insurance through 

the National Flood Insurance Program. One of the problems we 

will hear about today is how the flood insurance program is seriously underfunded. Currently, the program is borrowing several 

billion dollars to cover losses from Hurricane Katrina that are estimated to be around $25 billion. 

Another problem is how gaps occur in the homeowners policies 

that result in lack of insurance coverage when damage occurs and 

problems exist in how the National Flood Insurance Program interacts with States. 

We look forward to hearing from our witnesses today about these 

and other problems that have arisen in the aftermath of the hurricanes in 2005, and what steps can be taken to fix them. 

Thank you, Chairman Watt, and I yield back. 

Chairman WATT. I thank the gentleman. 

I now recognize Representative Wexler from Florida for 5 minutes. 

Mr. WEXLER. Thank you, Mr. Chairman. I won’t take the full 5 

minutes. 

I just want to thank you, Mr. Chairman, for calling this hearing. 

Mr. Carney talked about an insurance meltdown, and while 

many States have their extraordinary stories, Florida has been 

struggling with the devastating consequences of particularly Hurricanes Katrina and Rita, and what this struggle and the ensuing insurance meltdown has established is that there is an essential role 

for the Federal Government to play. 

Congressman Klein, Congressman Mahoney, and I are working 

together with others in the Florida delegation to follow what our 

State legislature did, which was to eliminate certain things like 

cherry-picking and to undo some of the rate increases that happened after Katrina and Rita, but what it showed was that the reVerDate 0ct 09 2002 16:45 Oct 02, 2007 Jkt 037555 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\37555.TXT HFIN PsN: TERRIE
7

lief to Floridians was fairly limited, and the logical next step is for 

there to be a comprehensive national catastrophic insurance fund 

that is created, which increases the capital available to the private 

insurance market, which caps the liability of insurance companies 

in the context of a national disaster with an absolute requirement 

that it be homeowners that benefit from the changes and the reforms, and that it not simply be an opportunity for the insurance 

companies to gain more profits. 

Mr. Chairman, I again congratulate you for holding this hearing, 

and for those of us in Florida who have watched the insurance 

meltdown and it’s creating all sorts of negative economic ramifications in the context of real estate and so forth, we implore you and 

the rest of this committee to urgently consider a national catastrophic insurance fund. 

Thank you very much. 

Chairman WATT. I thank the gentleman for his opening statement. I now recognize for 5 minutes the gentleman from Alabama—who has already been raved about by his colleague from 

Alabama, and is no doubt basking in that raving—Mr. Bachus, the 

ranking member of the full Financial Services Committee. 

Mr. BACHUS. Thank you, Mr. Chairman. I want to commend you 

and Mr. Carney for convening this hearing, and I also want to recognize Ranking Members Miller and Rogers for the hearings they 

have held and for the bipartisan concern that the victims of these 

hurricanes are being treated fairly when their claims are being adjudicated by the insurance companies. 

Our focus after the hurricanes—Katrina, Rita, and Wilma—when 

we really saw a record number of losses, $60 billion in losses, our 

first priority was trying to get immediate relief to the victims, and 

this committee tried to act post-haste in that regard, and we 

passed several pieces of legislation. 

We also acted to commission a report by GAO to determine 

whether insurance claims and insurance adjusters were being properly regulated and overseen as they adjudicated these claims, and 

to also make recommendations for strengthening consumer protections with regard to future natural disasters when we begin to hear 

some disturbing reports about how citizens were being treated and 

their claims being handled. 

Congress also enacted legislation last year directing the Department of Homeland Security Inspector General to conduct a similar 

inquiry of Katrina-related flood claims as a parallel investigation 

to our GAO investigation, and today’s hearing, as the chairman 

said, was meant to focus on the preliminary findings of those two 

investigations. 

These initial reports that we’ve received from both GAO and 

Homeland Security Inspector General are troubling on a number of 

levels. 

While they say they haven’t discerned any pattern of abuse or illegal activities, it appears that neither they nor the State regulators have the information necessary to make this determination 

with any confidence. 

In fact, as late as our February oversight hearing on this matter, 

we were assured that the quality oversight had not been compromised, but the reports today call that into question. 

8

Following any disaster, the government and private sector must 

work together to adjust claims and remit compensation. This coordination is important to ensure that consumers are fully compensated and not subject to competing claims analysis that can potentially be doubly adverse and result in no payment or unfair payment. 

But coordination of claims adjustment can also create potential 

conflicts that must be carefully supervised. Members have heard 

allegations that entities may have improperly shifted costs or 

charged higher reimbursement rates to the Federal Government, 

and thus to the taxpayers. We expect and want companies to earn 

a profit, but not by shifting costs illegally to taxpayers. 

With tens of thousands of claims being processed, mistakes are 

inevitable, but if our investigations determine that there’s been a 

pattern of misbehavior, conscious wrongful behavior, or intent to 

defraud, the offenders must be held accountable and their behaviors corrected. 

Let me conclude by thanking our witnesses for being here today 

and for their willingness to provide additional information and insight. 

Chairman Watt, I particularly look forward to working with you 

in a balanced, bipartisan manner, and with the chairman and 

ranking member of Homeland Security, as well as Mr. Miller, as 

we continue our congressional followup to ensure that all parties, 

including victims and taxpayers, have been and will be treated fairly in the future. 

Chairman WATT. I thank the gentleman for his statement, and 

I am pleased to ask unanimous consent that members who do not 

serve on either the Financial Services Committee or the Homeland 

Security Committee be allowed to sit on the dais and join us for 

this hearing. 

Without objection, it is so ordered. 

And I’m pleased to welcome two members from the Gulf region 

and ask them to give us opening statements, also. 

I will now recognize the gentleman from Mississippi, Mr. Gene 

Taylor, for 5 minutes. 

Mr. TAYLOR. Thank you, Mr. Chairman, for your extraordinary 

courtesy. 

Mr. Chairman, in light of today’s hearing, I would hope several 

things that have come out both in the South Mississippi Sun Herald and the Times Picayune articles that have been published as 

recently as today call into mind apparently the widespread misuse 

of the National Flood Insurance Program. 

If you were to read the Sun Herald on a daily basis, you would 

hear horror stories of how individuals have been ruled in court to 

have been cheated out of their homeowners policies. 

If you were to read the Times Picayune, it leads to a slightly 

similar and slightly different conclusion, that in the course of telling individuals that your plan isn’t going to pay, that it’s all flood, 

that the taxpayers have been stuck with the tab for claims that 

should have been paid by the private sector. 

Mr. Chairman, in light of today’s article in the Times Picayune, 

I would ask that this committee subpoena records of a September 

7, 2005, meeting between the Administrator of the flood program, 

9

David Maurstad, and approximately 300 insurance agents, in 

which he outlined the National Flood Insurance Program’s attitude 

towards the whole wind versus water issue, because based on 

something that Mr. Maurstad said in this room, where he said, ‘‘I 

instructed them whenever there was wind and water to pay the 

flood claim in full,’’ I’m not sure he has the legal authority to do 

that. 

The way I read the United States Code, it says, and I’m reading 

44 CFR 62.23: 

‘‘The entire responsibility for providing a proper adjustment of 

combined wind and water claims and flood alone claims is the responsibility of the Write-Your-Own company, which is a private 

sector company, which has been hired to sell the policy and adjudicate the claim.’’ 

It is further complicated by a memo to the State Farm Insurance 

Company dated September 13, 2005, and I quote, where they say: 

‘‘Where wind acts concurrently with flooding to cause damage to 

the insured property, coverage for the loss exists only under flood 

coverage.’’ 

So on one hand, the United States Code gives them the responsibility to sell the policy and adjudicate the claim, and yet a State 

Farm memo to its agents tells them that whenever there’s wind 

and water, blame it all on the water. 

So that person who had a homeowners policy, they suddenly 

were not going to get paid on that homeowners policy. 

But for individuals or taxpayers who don’t live in the affected 

area, suddenly we see a circumstance where we feel like the Federal Government has been billed for claims that should have been 

paid by the private sector. 

I would also like to enter for the record a series of articles from 

the Times Picayune where it spells out that homes that had zero 

flood damage still billed the National Flood Insurance Program 

$80,000, $100,000, $150,000, whatever the private sector felt like 

they could stick the taxpayers with. 

Again, this leads to a series of troubling situations in which some 

attorneys in the Louisiana area have filed suit just last week under 

the Fraudulent Claims Act, claiming that possibly billions of dollars of claims that should have been paid by the private sector are 

being paid for by the National Flood Insurance Program. 

Mr. Chairman, as a representative of the coastal area, I am 

pleased that I didn’t have a single complaint from individual homeowners who felt like their flood insurance program wasn’t fair with 

them. I think that’s a good thing. 

On the flip side, I’ve had thousands of complaints from homeowners who said, ‘‘I built my house the way they told me to, I paid 

my premium, and when the day came to file my homeowners claim, 

I was told that because I couldn’t prove whether the wind got there 

first or the water got there first, that I would be receiving nothing 

on my homeowners policy.’’ 

In fact, one of the more interesting cases involves a doctor who 

lives 100 yards from me, who for years was an advocate of tort reform, who is now on a commercial calling for insurance reform, 

after his almost $900,000 policy was not paid by State Farm. 

10

So Mr. Chairman, I think there are some very interesting questions that involve individuals and their policies, that involve Americans collectively, and certainly something that, on behalf of the 52 

percent of all Americans who live in a coastal community, who if 

it hasn’t happened to them yet, could certainly happen to them 

next. These are the sort of questions that I would hope this committee and other committees in Congress can get an answer to. 

Thank you very much for letting me participate. 

Chairman WATT. I thank the gentleman for his opening statement, and I’ve been reminded that my unanimous consent request 

was less than articulate, which is not unusual, so let me state it 

again. 

Let me ask unanimous consent that, in addition to being allowed 

to sit on the dais, members, including Mr. Taylor and Mr. Jindal, 

who may not be members of either of the subcommittees, be allowed to make opening statements to the extent that the timeframe 

allows that to happen, and to be able to ask the witnesses questions at the end of the committee process. 

Hearing no objection, I will now recognize Mr. Jindal from Louisiana for 5 minutes, hopefully the last opening statement. 

Mr. JINDAL. Thank you, Mr. Chairman. 

I also want to thank the ranking members for allowing me to 

participate today and for having this hearing. 

It has been nearly 2 years since Hurricanes Katrina and Rita 

devastated the Gulf Coast, including large areas of my home State 

of Louisiana. 

We now know that Katrina was the single most significant natural or manmade disaster to affect our country. The combined effect of those 2005 storms—Katrina, Rita, and Wilma—caused nearly $60 billion in losses. 

Over half of our country’s population now lives along the coast 

in 673 counties and parishes. In areas such as these, many residents are required to purchase at least two insurance policies—the 

required flood insurance, in addition to a regular homeowners insurance policy that offers wind coverage. 

As most of us living in coastal areas know well, the National 

Flood Insurance Act allows homeowners to purchase up to $250,000 

of NFIP insurance coverage for residents, an additional $100,000 

for personal property. Exclusions under the flood policy include 

damages caused by wind or a windstorm. 

While FEMA is charged with management and oversight of the 

National Flood Insurance Program, it is our brand name insurance 

companies that sell and service the vast majority of these flood 

policies. These companies get premiums from selling the insurance, 

but they’re not responsible for actually paying out claims. 

Taxpayers like you and I collectively, the citizens, the taxpayers 

of our Nation are responsible for paying flood claims filed by NFIP 

policyholders. 

As it turns out, the amount each insurance company receives for 

selling a flood policy varies by company. 

Each is currently, ‘‘reimbursed’’—that’s the terminology the 

NFIP uses—at a basic rate of 30.8 percent for the expenses of selling, working with the NFIP to issue policies and settle claims. 

11

There are bonus percentages available in 1 percent increments 

for marketing and growth. 

Let me underscore what I’ve just said. Taxpayers, through the 

United States Treasury, are responsible for paying flood claims. 

That’s an important point in light of the following. 

In 2006, after the worst hurricane season ever recorded, insurance companies, even after all those damages, continued to have a 

very profitable year. 

We’re here in part to find out whether the American taxpayer 

improperly picked up the tab for insurance claims that should have 

been paid by these companies. 

We’ll hear from our witnesses from the GAO and others, we’ll 

hear about a potential weakness in the way that our flood insurance program is administered. 

For example, a property and casualty insurer is able to insure a 

single property for both wind and flood damage. 

Potential conflict of interest can arise when the insurer, who has 

a financial interest in minimizing claims paid by the company, also 

performs a claims analysis on behalf of the NFIP. 

In other words, a single company can determine and apportion 

the damages caused by the wind policy that it insures along with 

those caused by flooding, which is insured by the NFIP and paid 

for by the Federal Treasury. 

In the aftermath of an event as large as Katrina, it was certainly 

difficult at times to determine whether the source of damage was 

either wind destroyed the top of the roof and allowed a property 

to flood, or if the damage was caused by rising floodwaters and 

failed levees. 

Moreover, the NFIP does not collect the information it needs to 

help evaluate whether it has paid only what it is obligated under 

the flood policy. 

While we appreciate that after those hurricanes, the NFIP approved expedited claims processing to make sure that homeowners 

were not prevented from rebuilding by red tape, we must ensure, 

we must correct the fact that the NFIP’s normal claims processing 

activities did not incorporate a means to systematically collect information on wind versus flood-related damages. 

As we discover more about this crack in the system by which 

flood insurance is administered, we must have the strongest safeguards to prevent insurers from deliberately categorizing wind as 

water damage, therefore allowing them to potentially shift costs to 

the Federal Government without any oversight. 

I certainly hope, Mr. Chairman, as we have these hearings, we’ll 

also have the chance to discuss in a future hearing a bill that Mr. 

Taylor and I have offered, H.R. 920, the Multiple Peril Insurance 

Act. That bill would allow policyholders to get their wind and flood 

coverage combined, therefore avoiding the fight between the source 

of wind and flood coverage. 

I also want to echo the comment of my colleague from Florida 

calling for a hearing on national reinsurance, which I think is also 

called for. 

Mr. Chairman, again, I thank you for allowing me to participate, 

and I thank you for having this hearing, to make sure we’re protecting not only policyholders, but also taxpayers. 

12

Chairman WATT. I thank you for being here. 

It has been called to my attention that Mr. Jindal is a member 

of the Homeland Security Committee, so I misstated that, and I 

thank him for being here. 

Without objection, all members’ opening statements will be made 

a part of the record. 

Chairman WATT. Mr. Klein, did you want to make an opening 

statement? 

Mr. KLEIN. I do, yes. 

Chairman WATT. Okay. In that case, let me recognize Mr. Klein 

for 5 minutes. 

Mr. KLEIN. Thank you, Mr. Chairman, and thank you, chairs of 

both committees, for calling this meeting today. 

Those of us who live in States that have been hit by hurricanes 

over the last number of years also understand the history of the 

National Flood Insurance Program, because it’s something that impacts people all over the United States. 

And one of the original reasons for it was that the insurance industry was unwilling to, based on their view of the risk, underwrite 

that risk at that time, and because the capacity was too large, 

among other reasons, and that’s how the plan got to its place right 

now. 

I think there’s broad recognition that there needs to be updating 

of mapping and technology to make it more efficient, but I think 

one of the subjects we’re going to hear about a little more today is 

the efficiencies of how it administered the claims and how that operates vis-a-vis the private insurance that some of the folks in the 

areas that were impacted had. 

The problem we saw in Florida was very similar, and I won’t rehash what was already discussed. 

But suffice it to say what I believe is going on is that there is 

a narrowing of responsibility of the private insurance side of 

things. 

Insurance is a contract. The private insurance contract is one between a homeowner and between the company, and it’s obviously 

always subject to interpretation, but what we saw over the last few 

years in these major disasters where there was a wind versus 

water pointing of the fingers going both ways, it was something 

that everybody was trying to put the burden on someone else, 

which is obviously why we’re having a serious problem in dealing 

with general insurance, homeowners and property and casualty insurance, as well. 

So I certainly look forward to the opportunity of figuring out 

through the testimony today what can be improved upon in the National Flood Insurance Program, whether or not the history over 

the last number of years is one in which there could be things done 

differently so that, on a going forward basis, the floodplain does 

what it’s supposed to do. 

But I think this will hopefully also be helpful to us in understanding what is going on in the rest of the market of insurance 

so that we can put the proper burdens that are bargained for in 

an insurance contract on those that provide underwritten insurance. 

13

And to the extent that we see, whether it’s natural disasters such 

as earthquakes, hurricanes, tornadoes, or any number of other nonflood types of insurance arrangements, that there needs to be fairness. 

Consumers should be prepared to pay a fair price that’s actuarially based, but at the same time, insurance is a for-profit business. 

We understand that. But it’s not one in which they should be constantly looking for the other party or the homeowner, in many 

cases, to shoulder that burden. 

A bargain is a bargain, and we need to make sure that when 

that bargain is bargained for, it’s held. 

So Mr. Chairman, thank you for doing this today. Hopefully, this 

will help us evaluate what we need to do in this area, as well as 

a national risk catastrophe arrangement. 

Chairman WATT. I thank the gentleman for his opening statement. 

I’m pleased now to introduce the witnesses who have joined us 

for today. 

First, Mr. Matt Jadacki, who is the Deputy Inspector General for 

the Office of Disaster Assistance Oversight for the U.S. Department of Homeland Security. 

The Office of Disaster Assistance Oversight is tasked with 

proactively implementing internal control reviews and contract audits to ensure that disaster assistance funds are being spent wisely, 

and Mr. Jadacki is also responsible for coordinating the audit activities of other Federal Inspectors General who have an oversight 

responsibility for the funds transferred to their respective Departments and Agencies by FEMA to assist in the disaster relief efforts. 

Prior to taking this position, Mr. Jadacki was the Chief Financial 

Officer and Chief Administrative Officer of the National Weather 

Service, a component of the National Oceanic and Atmospheric Administration. And before that, he was the acting CFO of FEMA, 

managing 11 branches with over 200 employees. 

He holds a B.S. degree in business management from the University of Maryland at College Park, and we won’t hold that against 

him, even though I’m a Carolina graduate. 

Our second witness today will be Ms. Orice M. Williams. She has 

spent 16 years in civil service at the Government Accountability 

Office. She is currently a Director in the GAO’s Financial Markets 

and Community Investment team, and in this capacity, she is responsible for leading numerous teams that work on a variety of 

cost-cutting public policy issues in the financial services sector. 

Her portfolio of work is generally concentrated in securities and 

futures oversight, banking, insurance, and accounting policy, and 

she received an MBA with a concentration in finance from Virginia 

Tech in 1990, and a B.S. degree in business and finance from Virginia Commonwealth University in 1988. 

Mr. Jadacki and Ms. Williams, we thank you both for being here. 

Without objection, your written statements will be made a part of 

the record, and each of you will be recognized for a 5-minute summary of your testimony. 

There is a lighting system that’s in front of you, and a yellow 

light will come on when you have a minute to go, and then a red 

light will come on, so just kind of wrap up at that point. We won’t 

14

be too heavy handed about that, but be cognizant that the lighting 

system is alerting you to wrap up. 

Mr. Jadacki, you are recognized. 

STATEMENT OF MATT JADACKI, DEPUTY INSPECTOR GENERAL FOR DISASTER ASSISTANCE OVERSIGHT, OFFICE OF 

THE INSPECTOR GENERAL, U.S. DEPARTMENT OF HOMELAND SECURITY 

Mr. JADACKI. Thank you. Good afternoon, Chairman Watt, Chairman Carney, members of the subcommittee, and guests. 

As you may be aware, in the Department of Homeland Security 

2007 Appropriations Act, we, the Inspector General’s Office of the 

Department of Homeland Security, were directed to investigate 

whether and to what extent insurance companies participating in 

the National Flood Insurance Program, referred to as Write-YourOwn companies, improperly attributed damages from Hurricane 

Katrina to flooding rather than to windstorms covered under homeowner policies or wind insurance pools. 

First, let me give you a little background on the Write-Your-Own 

companies. Homeowner insurance policies typically cover wind, but 

not flood damage. Write-Your-Owns are private sector insurance 

companies authorized by the National Flood Insurance Program to 

sell insurance. 

The Write-Your-Own companies have no financial exposure when 

damage is caused by flood because the Federal Government, 

through the NFIP, reimburses the Write-Your-Owns for claims 

they pay. 

Although the NFIP does not have direct control over the WriteYour-Owns, the Write-Your-Owns agree each year to the terms and 

conditions with the Federal Emergency Management Agency on 

various compliance and business issues. This agreement provides, 

among other things, that the Write-Your-Owns will comply with 

the written standards, procedures, and guidance issued by FEMA. 

We reviewed a number of claims files in three Mississippi counties, analyzed the legal opinions, reinspection reports, and the 

NFIP complaint files. We also spoke with officials from FEMA, 

Mississippi Insurance Association representatives, insurance adjustors, Write-Your-Own officials, and other experts. 

It is important to note that we did not have the same access to 

the Write-Your-Own records of wind claims as we did to the flood 

claims that are funded by the Government. The wind claims are 

likely placed to find indications that the Write-Your-Owns may 

have attributed wind damage to flooding. 

We have, however, issued administrative subpoenas for those 

records. We will issue a final report after we have received and reviewed the Write-Your-Own records of wind claims. 

Storm surge flooding was the primary cause of damages sustained along the Mississippi coast, but high wind velocity before 

the surges and water also caused damage. 

The central question is whether the Write-Your-Own companies, 

in settling claims, may have improperly attributed damage caused 

by wind to flooding in order to avoid liability under the standard 

homeowners policy. The question is especially relevant in situaVerDate 0ct 09 2002 16:45 Oct 02, 2007 Jkt 037555 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\37555.TXT HFIN PsN: TERRIE
15

tions where the same Write-Your-Own held both the homeowner 

and flood policies for the insured property. 

To answer these questions, we analyzed flood claims, and we 

interviewed homeowners, flood adjustors, and representatives from 

insurance associations and Write-Your-Own companies. We discussed with FEMA officials, looked at quality controls, and we reviewed appeals and complaint files. 

Although nothing came to our attention from our work on solely 

the flood claims to indicate the Write-Your-Owns attributed wind 

damage to flooding, we cannot rule out the possibility that it occurred. 

Flood adjusters were professionals and based their determinations on the physical evidence they observed, however, there are 

several complicating factors that contributed to a perception that 

Write-Your-Owns may have attributed wind damage to flooding, 

such as difficulty in distinguishing wind and flood damage, especially when there was nothing left on the property except for a 

foundation, otherwise known as a slab. 

Language in homeowners insurance policies can exclude coverage 

if funding occurs concurrent with wind or other causes of damage. 

Adjusters are either working for the Write-Your-Own companies or 

for companies hired by Write-Your-Owns. This creates the perception of a conflict of interest and FEMA’s oversight of Write-YourOwn companies is limited and needs improvement. 

FEMA needs to increase oversight over damage claims that involve both wind and water on the same structure. Our review of 

the flood claims indicated that payouts on flood claims were timely 

and complied with the NFIP terms. However, there is little evidence in the flood claim files to determine whether flood payouts 

were fair and equitable for damages caused by both wind and 

water affecting the same structure. In addition, FEMA did not 

maintain documentation indicating the total damage to a structure 

and how much was attributable to flood and wind, nor is it required by the National Flood Insurance Program. 

As a result, NFIP oversight focused primarily on whether the 

flood claim was correctly adjudicated, with little or no consideration 

for wind damage as a contributing factor. Under the current process, it is difficult to determine whether the NFIP paid a higher percentage or the entire damage claim involving both perils. 

We will be issuing an interim report in the next couple of weeks, 

and we will have recommendations for the FEMA Administrator. 

The first recommendation: require Write-Your-Own insurance 

companies to document and make available to the NFIP the rationale and methodology for calculating flood and wind damage when 

there’s evidence that both perils contributed to the damage, and revise the NFIP claims adjustor manual to reflect these requirements. 

The second recommendation: expand the reinspection process to 

include review and determination that flood and wind damage on 

the same structure was settled in a fair and equitable manner to 

ensure that wind damage was not paid under the flood policy. 

Third: provide clear and concise guidance for adjusting total loss 

claims after catastrophic events when structures are completely destroyed by wind and water. 

16

As I stated earlier, we issued administrative subpoenas for the 

Write-Your-Own insurance company records, providing both wind 

and flood coverage. 

We plan to corroborate the documentation and assertions made 

in our review to determine whether and to what extent damages 

were improperly attributed to flooding rather than wind. We also 

plan to compare whether unit pricing for like materials paid under 

flood and wind claims were consistent and reasonable. We will 

issue our final report upon completion of our wind claim analysis. 

Chairman Watt, Chairman Carney, this concludes my prepared 

statement. I will be pleased to answer any questions you or other 

members of the subcommittee may have. 

[The prepared statement of Mr. Jadacki can be found on page 40 

of the appendix.] 

Chairman WATT. Thank you so much. 

Ms. Williams. 

STATEMENT OF ORICE M. WILLIAMS, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, GOVERNMENT 

ACCOUNTABILITY OFFICE 

Ms. WILLIAMS. Chairman Watt, Chairman Carney, and members 

of the subcommittees, I am pleased to be here this afternoon to discuss the National Flood Insurance Program, also known as NFIP, 

and FEMA’s oversight of flood claims paid following the 2005 hurricane season. 

As you well know, events such as hurricanes can pose particular 

challenges in determining damages caused by wind versus flooding. 

For the NFIP, this includes balancing its desire to make policyholders whole and ensuring that it pays for damages caused by 

flooding. 

Unlike past years, the 2005 hurricane season has placed increased scrutiny on the NFIP’s internal controls and FEMA’s oversight, given the more than $15 billion borrowed from Treasury to 

cover claims, and the likelihood that the NFIP will be unable to 

repay this debt. 

While our work in this area is ongoing, I would like to share a 

few preliminary observations. 

First, for properties experiencing both wind and flood damages, 

the NFIP did not consistently collect information that would enable 

it to determine, either at the time the NFIP claim was paid or 

later, whether the amount paid reflected only damages caused by 

flooding. 

Claims data collected from Write-Your-Own insurers, which are 

a network of property casualty insurance companies that sell and 

service flood policies on behalf of the NFIP, did not include information on total damages to the property from all perils, meaning 

they did not systematically report the existence of wind damage 

nor the amount of damage caused by wind when adjusting a flood 

claim, even when the Write-Your-Own insurer was also the wind 

insurer on the same property. 

Why, you ask. According to FEMA, claims paid by a Write-YourOwn insurance company that do not involve flood insurance proceeds and the related data are not accessible by FEMA. 

17

Simply put, for hurricane damaged properties subjected to both 

high winds and flooding, the NFIP may not have all the information it needs to ensure that it’s claims payments are limited to only 

flood damages. This is especially troublesome in cases where only 

foundations remained. 

Second, we found that this lack of wind data also limited the effectiveness of FEMA’s quality assurance reinspection program, an 

important part of FEMA’s oversight of the NFIP. 

Specifically, the FEMA quality reinspection program did not incorporate a means for collecting and analyzing both the flood and 

wind damage data together in a systematic way to determine how 

much wind and flooding contributed toward damages to a property. 

Without the ability to examine the damages caused by both wind 

and flooding, the reinspection program is limited in its usefulness 

as a tool to assess whether the NFIP paid only for losses caused 

by flooding. 

Before I conclude, I would also like to briefly discuss challenges 

we face obtaining key information and data from FEMA related to 

several ongoing engagements involving the NFIP. 

To date, we have faced extensive delays in obtaining requested 

documents and data from FEMA, which is impacting our ability to 

complete our work in a timely manner. 

Now, instead of program staff being able to provide requested information directly to us, it must be routed through a FEMA coordinator who shares it with general counsel and DHS reviewers before 

it can be sent to GAO. 

Given this elaborate review process, we have had to add several 

months to the length of our engagements, which is threatening our 

ability to provide timely information to our requestors and the Congress as it considers legislation that would directly impact the 

NFIP. 

In summary, we cannot assess whether the NFIP paid for claims 

that should have been paid by property-casualty insurers given the 

lack of information collected by the NFIP on wind-related damages. 

Moreover, we found the existing oversight structure did not allow 

FEMA to determine whether certain claims paid were accurate. 

While we are making no recommendations today, we do anticipate recommendations in our final report to be issued later this 

year. 

This concludes my oral statement, and I would be happy to answer any questions that you may have. 

Thank you. 

[The prepared statement of Ms. Williams can be found on page 

58 of the appendix.] 

Chairman WATT. Thank you, Ms. Williams. I thank both witnesses for their testimony, and I will recognize myself for 5 minutes for questioning. 

Let me ask unanimous consent first to submit for the record an 

editorial from the Times Picayune dated June 10, 2007, and ask 

unanimous consent to submit for the record a copy of the complaint 

that was filed in United States of America ex rel Branch Consultants v. Allstate Insurance Company and a number of other insurance companies. 

18

Mr. BACHUS. Mr. Chairman? Will members of the committees be 

supplied with a copy of— 

Chairman WATT. Yes, absolutely. 

Mr. BACHUS. I have no objection. 

Chairman WATT. Without objection, these documents will be submitted for the record. 

Chairman WATT. The first question is one I want to ask both witnesses. I submitted for the record, under a unanimous consent request, the appropriations language that authorized your study and 

the letter from Mr. Oxley which authorized one of the studies. One 

of the concerns I have is whether you have pursued the studies as 

aggressively as those documents give you the authority to pursue 

them. It appeared to me that most of what was done had to do with 

the internal records of FEMA and the flood insurance program, 

with the exception of the administrative subpoenas that have been 

issued. 

The question I want to ask is, to what extent have you gone outside the flood insurance program’s records to inquire about potential abuses of the program in this process? 

Mr. Jadacki? 

Mr. JADACKI. Okay. I mentioned before that the administrative 

subpoenas were issued because we did talk to different insurance 

companies to discuss their methodology, how they would determine 

if there were two perils involved, both flood and water, how would 

they make a determination of allocating the adjustment or the 

claims. 

When we asked for the files to corroborate what they said, we 

were told that we didn’t have access to those, and also there’s a 

legal opinion that FEMA put out that says that they do not have 

that. 

So we focused a lot of our work initially thinking we can get a 

lot of information out of the flood files, thinking there would be 

some documentation in the files that would indicate there was consideration of wind and other types of peril that occurred, but when 

we finished our work, it just wasn’t there. You may see a box that 

was checked for flood or something like that. 

So we talked to a number of the insurance companies, I think 15 

different insurance companies. We actually contacted 35 of the insured, if they were willing to talk to us, to see if they were satisfied 

with their settlement or not. 

We talked to insurance industries, we did talk to some of the 

State folks, and we did talk to some of the other folks involved in 

the insurance industry. 

We tried to look at every bit of information that was out there, 

but we were unable to get our hands on the homeowners policies 

from the insurance companies. 

So we have what we need on the flood side. It’s just that we need 

to corroborate with what they were saying, because in almost all 

cases, yes, we do pay, there is a methodology, there’s some—there’s 

a way of allocating those costs. We just haven’t been able to corroborate that yet. 

Chairman WATT. Ms. Williams? 

Ms. WILLIAMS. Our experience was similar. 

19

We followed a similar process. We talked to the NAIC and State 

insurance commissioners, among others. We also collected from the 

NAIC the information that had been collected by the Gulf Coast 

States through a special call involving the property-casualty claims 

that had been paid. 

But we found that information was collected on an aggregate 

basis, and we weren’t able to get to ZIP Code level information that 

would have helped us do any type of comparison. 

We also attempted to contact insurance companies and we found 

that the insurance companies were generally unwilling to meet 

with us or provide us information. 

Part of our larger study deals specifically with adjusters, including how the adjusters are overseen and regulated. We were able to 

collect that information from the States. 

But in terms of getting information from the insurance companies, such as how they actually apportion damages, we weren’t able 

to get information such as adjuster manuals. 

Chairman WATT. Mr. Jadacki, on Page 3 of your written testimony, you indicate that you interviewed 20 flood adjusters who did 

some of the damage investigations for the properties, and these adjusters were not involved in any wind damage assessments, felt 

that they were not under pressure from the Write-Your-Own program to attribute wind damage to flooding. 

If I take the Times Picayune article and the complaint which I’ve 

submitted for the record, there seems to be a completely different 

picture being painted here. 

Have you had the opportunity to talk to any of the adjusters who 

are plaintiffs in the lawsuit which alleges massive pressure and 

misallocation to the flood insurance program? 

Mr. JADACKI. We just got a copy, I think the lawsuit was sealed 

until about a week or two ago, so we just got a copy of the lawsuit, 

as well as some of the addresses, and we will be pursuing those. 

We have already asked the NFIP for copies of those files to find 

out what’s going on. 

Especially troubling is when it’s alleged that there’s no indication 

of any water being involved in some of those structures, and yet 

the claims were paid out, so it’s part of our process of reviewing 

some of the information on the additional claims files. We’ll probably also talk with the insurance companies about those files, too, 

and try to get to the bottom of that, also. 

Chairman WATT. Does the letter from former Chairman Oxley 

and the appropriations language give you sufficient authority in 

your opinion to get to the bottom of whether there was in fact an 

improper transfer of responsibility following the hurricanes? 

Mr. JADACKI. We can look at claims files and infer what happened, looking at the claims files, but it’s trying to get, attempting 

to get information from the insurance companies about the other 

half of the equation, if there was damage, both wind and water, 

has been problematic. We have not been able to get that information. 

As I said, we’ve issued subpoenas for that information, and we’ve 

received a couple, but I haven’t had a chance to analyze those yet. 

Chairman WATT. My time has expired, and I recognize the ranking member of the subcommittee, Mr. Miller, for 5 minutes. 

20

Mr. MILLER. Mr. Jadacki, following up on that, we heard from 

Director David Maurstad earlier in the year, as FEMA Director, 

and we were very specific in what we were talking about, and he 

said that they had reviewed thousands of files, basically reinspected those files to see what was in them, to see if there was any 

pattern of abuse by Write-Your-Own companies. And he was very 

specific at that point in time that there was not. Now, have you 

had an opportunity to review those same files that he reinspected? 

Mr. JADACKI. Yes. We reviewed a number of reinspection files, 

and for the most part, a lot of the reinspection focuses on documentation—was the documentation in the file, were proofs of loss 

filed, were the insured there, some of those types of things. 

I don’t think we found any cases—we found a couple of cases 

where some dollar amounts were disputed, but they were negligible 

amounts, a couple hundred dollars, and that was about it. 

But we found no cases where a reinspection, based on the reinspection report, an insurance company was challenged based on the 

payout, saying, based on our review, you should have paid wind, 

you shouldn’t have paid water, we found none of that. 

Mr. MILLER. Was there adequate information requested by the 

director of the insurance companies that was in those files to make 

a reasonable determination on whether the oversight was proper on 

the Write-Your-Own, or if it was improper? Did you— 

Mr. JADACKI. The inspection files focused solely on the flood payout. 

Was there a property here, looking at watermarks, was it correctly adjusted, again were the documents in the case, those types 

of things. 

We found no indications that it actually challenged, saying this 

appears to be a wind claim, why did you pay the flood claim? We 

came across none of those instances. 

Mr. MILLER. Did you find any inconsistencies within his finding 

as far as what FEMA did when they reinspected the NFIP’s 

claims? Were they adequately reviewed, the NFIP’s claims, do you 

believe? 

Mr. JADACKI. I believe they were—they probably used the checklist approach, just looking at a number of different documents and 

what to look for in the file and whether, again, whether there was 

documentation in the file, there were some pictures, and those 

types of things, but again, I think it was more of an administrative 

review versus reviewing or challenging the adjudication process. 

Mr. MILLER. Now, you’re just in the process of collecting information. How far into that process do you believe you actually are at 

this point? 

Mr. MILLER. Well, we’ve reviewed all the claims files from the 

flood insurance, so those files were readily available to us, because 

that’s under the purview of the Department of Homeland Security, 

and, you know, we’ve looked at a lot of those files. 

And there are indications in there, in some cases, looking at pictures that a tree may have fallen on a house or a roof may have 

been damaged, but we know what the flood payment was, but 

there’s literally nothing in some of the files that say, okay, in addition to the flood payment, there was a wind, something that was 

caused, damaged by the wind, whether it be a roof blowing off or 

21

a tree blowing on a roof, and those types of things. There’s just 

very little evidence in the files that actually occurred. 

As I mentioned in my testimony, I think the adjusters did a real 

good job of adjusting the flood claims, but it remains to be seen 

about what type of job they did when they were actually allocating 

the losses between flood and wind, if they even did that. 

Mr. MILLER. So looking at the flood issue, you’re pretty much in 

agreement with what FEMA’s conclusions were based on the work 

they did? 

Mr. JADACKI. Solely on the flood insurance. 

Mr. MILLER. How do we, through the process you’re undertaking, 

how do we ensure that Write-Your-Own insurance companies do 

not have the ability to defraud the NFIP when a structure endures 

wind and flooding at the same time? 

Is there going to be something you’re doing that you’re going to 

come back to us, and can you give us some kind of an idea when 

that conclusion is going to occur, how long the process is going to— 

Mr. JADACKI. We’re going to issue an interim report hopefully in 

the next couple of weeks, and I mentioned in my opening remarks— 

Mr. MILLER. In the next couple of weeks? 

Mr. JADACKI. In the next couple of weeks, an interim report, just 

based on the work on the flood insurance claims files, and then 

once we get the information from the insurance, we’ll issue a final 

report sometime later on this summer. 

Mr. MILLER. But as it applies to Write-Your-Own, to have—we’re 

looking for a complete report here— 

Mr. JADACKI. Right. 

Mr. MILLER.—on not only flood but one on wind, and the WriteYour-Owns, we want—how long do you think it will take you to 

have that conclusion on Write-Your-Owns also? 

Mr. JADACKI. It depends when the insurance companies deliver 

the documents. The due date was June 8th, although we haven’t 

received all of the documents, because they go through the mailing 

process at Homeland Security, and screening. 

It all depends on what’s in those files, you know. If we get a little 

bit of information, it could be pretty quick. If there are a lot more 

questions we have to go back on, it may be a little bit longer than 

that. 

The reason we’re issuing an interim report is that there are some 

issues that the NFIP needs to address immediately, and one of 

those issues is the fact that they need to consider if there’s more 

than—if there’s wind and water, they need to consider wind, at 

least put evidence in the file that both perils were considered and 

one wasn’t excluded just because, you know, because of causation 

clause and those types of things. So we think there needs to be evidence in the files to indicate that, yes, other perils were considered. 

Mr. MILLER. Will your report include aspects of existing NFIP 

claims adjustment procedures? Should we be revisiting those to ensure that the conflict of interest would be eliminated in the future, 

and will you give us some kind of an overview on how that might 

take place? 

Mr. JADACKI. I think in the final report we will be addressing 

that. In the interim report, I don’t think we can address it yet, beVerDate 0ct 09 2002 16:45 Oct 02, 2007 Jkt 037555 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\37555.TXT HFIN PsN: TERRIE
22

cause we don’t know until we look at the wind files, the homeowner 

files that we’ve subpoenaed, just what happened with that, whether they were adjusted in a fair and equitable manner or whether 

a lot of the costs were in fact shifted to the National Flood Insurance Program, and the reasons why. 

Mr. MILLER. Have you been receiving what you would consider 

a fair and reasonable response from Write-Your-Own insurance 

companies to get information? 

Mr. JADACKI. We had a number of phone calls, conference calls 

with them to explain what the process is. They all assured us that 

they had methodologies, they all assured us that there were multiple perils, that they were all considered. 

However, we have not had an opportunity to corroborate— 

Mr. MILLER. But you’re going to? 

Mr. JADACKI. We are going to. Right. 

We asked for a series of items, claims files, information regarding engineering reports and modeling and some of those types of 

things when there are two types of damage, two causes of damage 

to a structure. 

Mr. MILLER. It seems like they’re going in the right direction, 

and based on the responses I received, it seems like you’re going 

to do an accurate, complete overview of the process and give us recommendations if there is some failure in portions of it. 

Thank you very much, Mr. Chairman. 

Chairman WATT. Thank you. 

Mr. Carney is recognized for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. 

Before I begin my questions, I want to address my good friend 

from Mississippi, Mr. Taylor’s, concern about the September 7th 

meeting. I have directed my staff to investigate that already, and 

we are looking into that. 

Ms. Williams, in your testimony you quote a letter from FEMA 

in which they wrote that wind claims paid by Write-Your-Own 

companies are, ‘‘not accessible by FEMA and indeed do not need to 

be.’’ 

Ms. WILLIAMS. Yes. 

Mr. CARNEY. Can you explain what that means? 

In other words, what is FEMA’s basis for claiming that the wind 

side of the adjustment process is completely irrelevant? 

Ms. WILLIAMS. Well, this is an example of our inability to get information from FEMA. We met with them last week and attempted 

to address this issue specifically. Until you get to the ‘‘conversely,’’ 

the message seems fairly straightforward, but the ‘‘conversely’’ 

really changes things. 

We tried to find out exactly how they are able to determine the 

flood damages without having access to anything else from the 

Write-Your-Own companies if there is wind involved. This is something that we’re still trying to work through with FEMA to get an 

answer about how they’re able to do this without getting all of the 

information. 

Mr. CARNEY. And so far, no luck? 

Ms. WILLIAMS. Correct. 

Mr. CARNEY. Now, this is a process you described, that they are 

going through multiple channels before they answer you on this? 

23

Ms. WILLIAMS. Yes. 

Mr. CARNEY. Okay. 

Mr. Jadacki, in your prepared statement, you said that, ‘‘Nothing 

came to our attention during our limited review to indicate that 

Write-Your-Owns attribute wind damage to flooding,’’ but that you, 

‘‘cannot rule out the possibility that it occurred.’’ 

However, since you haven’t seen any claim files for wind damage, 

is it true that you have not yet reviewed the documents to show 

whether there was damage attributed to flooding or not? 

Mr. JADACKI. That’s correct, we have not—I mentioned towards 

the end of my testimony that we plan to corroborate. We have information from a structure, or a number of structures, that we reviewed, and we know what the flood claim payment was, okay, and 

there is some evidence, based on pictures and things like that, 

where, and also testimonial evidence, that the insurance companies 

said, ‘‘Yes, we did pay some wind claims on that structure.’’ 

However, we can’t corroborate that until we take a look at those 

files, so once we get the files in on those structures, we can match 

it up and say, okay, yes, there was some element of flood and there 

was an element of wind that was paid. 

The next step would be, was it fair and reasonable, based on the damages. If it’s, you know, if the flood pays $200,000 and the wind 

only comes up with $500, we’re going to question those types of 

things. So those are the types of things we’ll be looking at as we 

review our claims files for the wind damage. 

Mr. CARNEY. Okay. Thank you. No further questions. 

Chairman WATT. I thank the gentleman. 

Mr. Bachus is recognized for 5 minutes. 

Mr. BACHUS. Is there a natural conflict of interest when you have 

a Write-Your-Own company or an insurance company adjuster that 

is employed by the insurance adjuster, adjusting both the flood 

claim and the wind claim, when how he adjusts and computes and 

pro-rates that damage can either benefit his company or work to 

their detriment? When he is adjusting for both the Government 

and the flood insurance program, and his own company, is that a 

natural conflict of interest? 

Ms. WILLIAMS. Our position is that there is definitely the potential for a conflict of interest when that happens. 

Mr. BACHUS. Okay. Thank you. 

Mr. JADACKI. And I agree with that, too, especially if it’s an adjuster who works for the insurance company versus a catastrophic 

adjuster who works for an independent adjusting firm. But then 

again, the independent adjusters are also paid by the insurance 

company, which is reimbursed by the Federal Emergency Management Agency, through the NFIP. So yes, there is an inherent conflict that’s out there. 

Mr. BACHUS. Okay. 

Now, your initial report, and I think both of you really dealt with 

this, indicates that there’s a lack of coordination between FEMA 

and the Write-Your-Own companies, and that may have contributed to improper payment of claims by FEMA. 

There were actually wind claims which may have been the responsibility of the private sector. Is that what—I read your testimony to indicate that you at least have suspicion of that? 

24

Ms. WILLIAMS. About the oversight provided, the oversight of the 

Write-Your-Own companies by FEMA. 

Mr. BACHUS. Is that really insufficient to ensure that doesn’t 

happen, that costs aren’t shifted? 

Ms. WILLIAMS. Yes, in some situations. 

Mr. BACHUS. Okay. So if taxpayers have been asked to pay for 

non-flood-related damages, you really don’t have the information, 

because of the lack of coordination, to know whether that happened 

or not? 

Ms. WILLIAMS. Correct. We also looked at reinspection files and 

we found that, while there was definitely the foresight that there 

was a possibility of having combination claims, the information in 

the claims files was collected incompletely. 

For example, in two-thirds of the files we reviewed, we found 

that a question about whether or not the damage was combination 

damage went unanswered, or there were other cases where there 

was an indication that there was flood damage but there were pictures in the file that indicated wind damage. So there were lots of 

questions raised in the file review. Even though there was an opportunity to indicate whether or not wind was involved, there was 

no information recorded.. 

Mr. BACHUS. Mr. Jadacki. 

Mr. JADACKI. I think one of the things that’s absent from a flood 

insurance policy that’s common practice in the insurance industry 

is a coordination clause. They use it in medical insurance, they use 

it in other types of insurance, where there’s several insurance entities that provide insurance over another entity, there’s a coordination clause, where they would—and a good example is that recently 

the insurance companies settled on the World Trade Center. 

So they’re all talking about who is going to be paying what. You 

know, if they’re all going to pay the same amount and they’re going 

to, you know, get this big windfall, they all know. 

What is lacking in the National Flood Insurance Program is that 

they’re operating in a vacuum. They’re just looking at what the 

flood payment was for, and that’s it, and they’re not considering 

any other types of peril, whether they contributed or not. And once 

that flood payment is paid, they’ve met their contractual obligation, 

and that’s it. 

I think a coordination clause would go a long way, that we have 

to consider other types of insurance and insurance payments out 

there when adjudicating a claim. 

Mr. BACHUS. Let me ask you this. Congressman Taylor has proposed a multi-peril approach where both flood and wind are covered. If that’s not done, are there going to be some natural gaps 

in coverage or questions every time you have a loss of a home, in 

a case where there’s both a flood surge or wind? 

Mr. JADACKI. I believe under the current process, you’re always 

going to have that, especially, you know, there’s some cases where 

you have flooding but no wind, and other cases where you have 

wind but no flooding, but in this case, where you have extreme 

winds and extreme flooding, and in my written testimony, a lot of 

the homes on the Mississippi coast were subjected to hurricaneforce winds, you know, for 4 or 5 hours sustained before—so the 

question is, you know, were these structures significantly damaged 

25

before the water came in, but, you know, looking at some of the 

claims files, it seems like water was the primary cause in a lot of 

these homes, and I would question that. 

Mr. BACHUS. Could I have one more question, if the chairman 

will allow? 

Chairman WATT. Yes, sir. 

Mr. BACHUS. In many cases, even from the TV coverage of the 

hurricanes, you saw cases where wind damage from a storm started to blow a house apart, and then the flood or the surge caused 

by the storm finished the job. In those cases, at least there have 

been reports that I’ve read, by the press and some homeowners, 

that insurers denied coverage for the wind damage, and they did 

that through their anti-concurrent causation provisions or clauses. 

Are these clauses—it obviously allows them to escape a claim on 

certain cases, but would you comment on that, either one of you? 

Did you look at those anti-concurrent clauses? 

Mr. JADACKI. Yes, we actually looked at the concurrent causation, the anti-concurrent causation, the proximate cause, the efficient proximate cause. There’s all sorts of terminology that’s floating around out there, no pun intended, regarding, you know, how 

they’re settling these claims. 

I think some of the companies hid behind that anti-concurrent 

causation clause by saying that it is flood, and that’s going to be 

it, you’re denied wind claims, and I think that’s pretty prevalent. 

I think that’s a subject of many lawsuits that are out there. 

Mr. BACHUS. And you also saw evidence of that? 

Mr. JADACKI. We saw evidence of that, right. 

But again, we haven’t looked at the wind claim files to see if, in 

fact, they were denied, or whether they did in fact—I think if you 

asked me a year ago, when a lot of the wind claims were being denied, then yes, I think it was probably prevalent. In the past year 

or so, a lot of the insurance companies have been stepping up to 

the plate and paying the insured for wind damage. 

Again, once we get the wind files, we’ll be able to corroborate 

that, or say definitely that wasn’t the case. But it is out there, and 

I think it is a way that the insurance companies can protect themselves from multi-perils by saying the clause is in place and we’re 

only going to pay for flood, not wind. 

Mr. BACHUS. Okay. Ms. Williams, would you like to comment on 

that, or add anything? 

Ms. WILLIAMS. My only comment is that we are looking at the 

gaps from having multiple policies, so that will be part of the final 

report, but ultimately, this issue is going to be resolved by the 

courts. 

Mr. BACHUS. Thank you. 

Chairman WATT. The gentlelady from New York, Ms. Clarke, a 

member of the Homeland Security Committee, is recognized for 5 

minutes. 

Ms. CLARKE. Thank you very much, Mr. Chairman. And I want 

to thank both Mr. Jadacki and Ms. Williams for coming and sharing your insights with us. 

Since 1968, millions of Americans have depended on the National 

Flood Insurance Program to help them resume normal lives after 

the tragedy of a disaster. However, Hurricane Katrina and HurriVerDate 0ct 09 2002 16:45 Oct 02, 2007 Jkt 037555 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\37555.TXT HFIN PsN: TERRIE
26

cane Rita exposed problems with the system that have greatly retarded the recovery of many families still attempting to regain 

their footing nearly 2 years after the disasters. 

It is my hope that these reports will bring much-needed change 

to the NFIP, including the way it conducts oversight, and the way 

that it coordinates private insurance issuers. 

I’d like to ask you, Mr. Jadacki, FEMA has told committee staff 

that even when overwhelming evidence comes out that a home was 

destroyed by wind, and thus should have been covered by private 

homeowners policies, it will not attempt to recover a Federal flood 

insurance payment made by the WYO company that adjusted the 

flood claim and that holds the wind policy. 

Do you agree with this policy, and can you see any reason why 

FEMA should not try to recoup this payment? 

Mr. JADACKI. I believe that FEMA, if there’s evidence—I believe 

that if there’s evidence of several different perils, then I think it 

should be correctly allocated among those perils. 

It’s difficult, because people evacuate and nobody was there, it’s 

difficult to determine, but based on some engineering reports reviewed, based on some of the file evidence that we’ve seen from 

flood files, I think determinations can be made. 

It may not be an exact science, but I think determinations can 

be made, and I think that what needs to happen is that the correct 

allocation between wind and water needs to be made. 

Ms. CLARKE. And who would be ultimately responsible for making sure that is done? 

Mr. JADACKI. Well, it depends on who has the insurance. 

If the same Write-Your-Own company writes the flood insurance 

as well as the homeowner insurance, under the current process, it 

would be up to that insurance company to allocate that amount between flood and wind. 

If there is a different insurance company or the insured has 

taken a flood insurance program directly from the National Flood 

Insurance Program, which a small portion do, then that coordination clause I talked about earlier would have to come into effect 

where they have to actually sit down and get together and discuss 

what the correct allocation is going to be. 

Ms. CLARKE. So you are in favor of a coordination clause? 

Mr. JADACKI. Absolutely. 

Ms. CLARKE. Ms. Williams, I understand that GAO feels that 

FEMA does not reinspect a valid number of sample claims in conducting oversight. In your estimation, how short does FEMA fall, 

and does it have the resources to check adequate amounts to conduct the oversight? 

Ms. WILLIAMS. In terms of choosing the sample, FEMA’s approach is to go in and pull certain files based on certain characteristics. GAO’s recommendation is for FEMA to actually do a random 

sample so that they would be able to project the results to the universe. It’s unclear if it would actually involve FEMA having to pull 

more files. It’s just the methodology used to select the files to review. 

Ms. CLARKE. And so are you suggesting that there is a much 

more effective and efficient way of going about doing this; is that 

your finding? 

27

Ms. WILLIAMS. GAO’s position is that there is a more efficient 

way. I think what Katrina illustrated is that you are talking about 

a huge increase in the volume of claims that were actually processed, so if you are going to pull a random sample then, in years 

when you’re dealing with a catastrophe like a Katrina, it would involve sampling a higher volume of claims. But yes, we do think a 

random sample would be more efficient. 

Ms. CLARKE. Thank you very much, Mr. Chairman. Thank you, 

witnesses. 

Chairman WATT. I thank the gentlelady. 

The gentleman from Louisiana, Mr. Jindal, a member of the 

Homeland Security Committee. 

Mr. JINDAL. Thank you, Mr. Chairman. 

I have two questions. I’ll go ahead and ask both of them, to give 

Ms. Williams the chance to answer both. 

The first is that, immediately after Hurricane Katrina, the NFIP 

was, I think, appropriately lauded for trying to streamline its 

claims handling process so it could get claims checks in the hands 

of policyholders more quickly. 

This effort was greatly appreciated by policyholders throughout 

the Gulf Coast, who were desperate to rebuild. This process involved new procedures that allowed adjusters to rely on satellite 

photos to determine a property’s flood damage. 

However, I don’t think the process should have been streamlined 

at the expense of the integrity of the program or to jeopardize the 

taxpayers’ interest. 

My first question is, in your opinion, is the adoption of the GAO’s 

October 2005 recommendations that the NFIP select claims to be 

reinspected from a random sample of all closed claims, is that 

enough of a safeguard to allow the NFIP in the future to use an 

expedited claims process during another hurricane season if it becomes necessary? 

The second question is, and again I’ll give you both of them, 

there have been several examples after the storms where the 

NFIP’s lack of oversight allowed the insurance companies, or may 

have allowed the insurance companies to deny coverage to their 

own policyholders unless they could definitively prove the damage 

was caused by wind. One example, on the West Bank in Jefferson 

Parish, an insurance company paid $51,000 for 8 inches of water 

inside the home. The flood estimate, however, included costs that 

probably weren’t caused by flooding, such as $7,000 for roof damage, $18,000 for exterior finish, and $20,000 for framing. The same 

policyholder only got less than $6,000 for wind coverage. 

As I’m sure you’re aware, the branch consultants, former insurance adjusters, have inspected, reinspected 150 properties with 

both wind and flood damage. They actually think this particular 

homeowner may have suffered $95,000 of wind damage. 

I have a lengthier question. I guess my bottom line is, has the 

GAO undertaken a study or developed or analyzed safeguards that 

could be used to prevent insurers from shifting what is appropriately wind damage and classifying it as water damage? 

I’ll ask you to answer both of these questions in either order. 

28

Ms. WILLIAMS. Okay. In terms of sampling, is implementing our 

recommendation about sampling going to be enough, it will be a 

start. 

We are in the process of continuing to look at this issue and we 

do think that there are probably additional safeguards that will 

also need to be built into the program. Katrina really did change 

everything in terms of the level of internal controls needed and 

oversight required. 

Once the NFIP had to go to the Treasury to borrow the funds it 

borrowed, and given its unlikely ability to repay those, it elevates 

the level of oversight required. So we will be looking at this issue 

and we hope to have recommendations beyond sampling methodology. 

In terms of the second question, I think it ties into that. This is 

something that we’re looking at, and we do expect to have recommendations in our final report. 

Mr. JINDAL. In conclusion, I certainly want to applaud both witnesses. Thank you for your work. 

I mean, certainly I think we’ve covered a very important topic 

today about how do we safeguard taxpayers’ funding, and I would 

encourage you to continue. 

We have to find the right balance. We don’t want to see taxpayers’ dollars wasted. At the same time, we want to make sure, 

God forbid, if there’s another large catastrophe, we do have a way 

to expedite getting help to policyholders. 

Thank you. Thank you, Mr. Chairman. 

Chairman WATT. Thank you. 

The gentleman from Mississippi, Mr. Taylor, is recognized now, 

with the previously approved unanimous consent request, for 5 

minutes. 

Mr. TAYLOR. Thank you, Mr. Chairman. I do want to thank our 

witnesses for being here. 

I am troubled, Mr. Jadacki, that your Agency took so long to 

start looking into this. I mean, by the second week of September, 

checks for hundreds of thousands of dollars were being drawn on 

the Treasury. The cumulative effect of that is in the billions of dollars. But to the best of my knowledge, by June of 2006, your Agency wasn’t looking into whether this was handled properly. 

I, with the help of Chairman Oxley and Chairman Frank, was 

able to pass language through the House that said it ought to be 

looked into. By July of 2006, Senator Lott put an amendment on 

an appropriations bill for $3 million for this to be looked into. And 

quite frankly , I’m not so sure we have gotten our $3 million worth. 

I would like to ask, have you taken the time to look at the meeting that occurred on September 7, 2005, where apparently Director 

Maurstad sat down with hundreds of representatives from the insurance industry and outlined how this was to have been handled, 

and included in that a statement where he says he had already 

been in touch with the heads of the major insurance agencies. Is 

there a written record of this meeting anywhere, and have you seen 

it? 

Mr. JADACKI. No, we have not seen a written record of that meeting. We’ve seen guidance that was issued around the same time by 

Dave Maurstad, but we haven’t seen any record of that meeting. 

29

Mr. TAYLOR. The reason I ask this is, you know, there’s a part 

of me that wonders if quite possibly Mr. Maurstad did not 

misspeak, and the reason that no one in Homeland Security was 

looking to see if we were paying bills we shouldn’t have is because 

someone made a commitment, at the very top level of our Nation, 

that he shouldn’t have made. 

The second thing—and again, I’m trying to be fair with you, because I think you’ve been fair. I did notice that you mentioned that 

you have questions about the Write-Your-Own and that you admitted that there were 4 hours, up to 4 and 5 hours of wind before 

the water ever got there, and I’m sure in your capacity you understand then that at the end of 4 hours of hurricane winds, if a single 

two-by-four was still standing on a house, as far as the homeowner 

policy was concerned, if a wave knocked down that last two-by-four, 

that becomes a concurrent causation which means they’re not going 

to pay anything on the homeowner’s policy. On the flip side, it 

means that our Nation paid everything, when we should have just 

been paying for a two-by-four. 

And so going back to 44 CFR 62.23, the entire responsibility for 

providing a proper adjustment for both combined wind and water 

claims and the flood alone claims is the responsibility of the national Write-Your-Own company. 

Going back to the CFR, I’m a bit confused that when you asked 

the companies to justify having the taxpayer pay the whole bill 

rather than the wind paying some of that, that they weren’t willing 

to provide more evidence. 

That doesn’t sound to me like a fair adjustment of the claim. It 

sounds to me like they’re trying to hide something. 

And I would welcome your comments on that, because again, I 

do appreciate your looking into this. I think you’re kind of late. 

Quite frankly, I will use my own slab as an example. 

Mr. JADACKI. Right. 

Mr. TAYLOR. By the time you started looking into this, most of 

the lots in South Mississippi had already been cleaned. Most of the 

evidence had been destroyed. 

I would have had a great deal more confidence that our Nation 

was doing a fair keeping of its own books if these investigations 

had been taking place when the snapped trees were still standing 

there, when partial houses were still there. 

I wonder how good an investigation you could have done? 

Mr. JADACKI. Right. 

Mr. TAYLOR. The last thing I’d like you to comment on is that 

I’ve noticed there are actually more employees of Computer Science 

Corporation working for the National Flood Insurance Program 

than national flood insurance employees. 

Did anyone ever look to see if Computer Science Corporation also 

has contracts with State Farm, Allstate, or Nationwide? Are there 

additional conflicts of interest on top of the ones that we already 

are aware of today? 

Mr. JADACKI. Let me start with, our focus initially after Hurricane Katrina was on FEMA and some of the problems that FEMA 

was having in the Gulf area. 

We focused mostly—and I’m not using it as an excuse, I’m just 

telling you where the initial focus of the IG was, being on the 

30

ground with the individual assistance program, the housing, some 

of the things that we all have read about, we all are aware of. 

We really didn’t get any early indications that this was going on 

with the flood insurance program. We were aware of some of the 

issues that were going on with guidance going out to the different 

flood insurance programs. 

There was guidance that went out in September by FEMA that 

basically attributed or suggested that the storm surge was the primary cause of damage in the Gulf area, and I think based on that, 

based on a review of the flood claim files, that the insurance companies hung their hat on that, that guidance that was out there, 

and that the normal traditional type of adjudication procedures, 

going out, looking at, checking, you know, looking at various patterns on the ground, were ignored because the insurance companies 

had the option of looking at a picture from space, a satellite view, 

or based on square footage of a residence or a home or a structure, 

they can adjudicate the claim based on that. 

In some cases, the adjusters never even had to show up at a 

property, and were paid by FEMA, you know, depending on how 

they did it. So, you know, I think the door was opened when this 

guidance came out, saying it’s storm surge, and that’s going to be 

it. 

I think in a lot of cases, the wind never came into play, and I 

think a lot of the lawsuits that resulted questioned that, and I 

think because of that, a lot of these lawsuits are being settled. But 

I think that’s what happened back early on. 

Mr. TAYLOR. I’m curious—if I may, Mr. Chairman. 

Chairman WATT. I ask unanimous consent for 3 additional minutes for the gentleman. 

Mr. TAYLOR. My memory is certainly not perfect, but I know that 

in the fall of 2005, additional funds had to be appropriated through 

emergency supplementals to keep the National Flood Insurance 

Program from issuing worthless checks. 

So people had to know that the claims, I mean, going to the, 

again, the first, second week of September of 2005, it was common 

knowledge throughout our Nation that an enormous number of 

claims were being filed on the Federal flood insurance program 

that were going to add up to billions of dollars. 

Again, I ask the question, didn’t anyone in the Inspector General’s office of Homeland Security, which has the overall responsibility for this, wasn’t there anyone who was asking the question, 

‘‘Are we paying bills that we ought to be paying or are we getting 

stuck with bills that we shouldn’t be paying?’’ I’ll just use an example: If I were to sell a $150,000 boat to the 

Department of Homeland Security, I have to believe that somebody 

would come out and make sure that a boat was actually delivered. 

But the National Flood Insurance Program was writing $150,000, 

$200,000 checks on a daily basis— 

Mr. JADACKI. Right. 

Mr. TAYLOR.—that no one apparently was taking the time to see 

if it was a valid claim. 

And what I find particularly troubling, since our Nation has spent $3 million for your study, is that there are articles dated 

May 31st that say claims were paid where there was no flood damVerDate 0ct 09 2002 16:45 Oct 02, 2007 Jkt 037555 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\37555.TXT HFIN PsN: TERRIE
31

age, $95,000, in the Times Picayune; May 20th, where it says a 

family was paid—that Allstate filed a $135,000 claim on contents 

to a home when the family only asked for $38,000, so apparently 

they got $100,000 of taxpayer money that the family didn’t even 

ask for. 

Another article from May 20th, which outlines in just one instance with one family where the private insurance company was 

paying 76 cents per square foot to have sheetrock replaced, flood 

insurance was billed $3.31. Private sector insurance was paying 

$23.48 for carpet to be replaced in the exact same home upstairs, 

where downstairs they were paying $28.43 where it was attributed 

to flood. Paint upstairs, where they said the wind did it, 80 cents 

a square foot. Downstairs, where they said the flood did it, $1.15. 

I mean, if the Times Picayune can find this, I have to believe 

that the Department of Homeland Security ought to be able to find 

this. 

Mr. JADACKI. Right. And that’s one of the things, as I mentioned 

in my written testimony, that we will be looking at, prices for like 

kind types of things, things like drywall, things—replacement for 

carpet, and those types of things, to see if in fact that the flood insurance, as indicated in the newspaper articles, was paying 3 or 4 

times more than what the private sector insurance companies 

would pay. 

Right now, we don’t have access to that information, but once we 

get that, we’re going to corroborate, because we have the pricing 

lists, in most cases, for the flood insurance claims that were paid, 

and if there’s evidence of a wind claim payment, there should be 

a pricing list on that, too, and we’ll be able to identify those discrepancies. 

We’ve also had several meetings with the FEMA folks, based on 

those articles, and forwarded it to them, and said, ‘‘Please explain 

how this can happen,’’ and we have yet to hear back from them 

about the explanation of that, the various pricing levels, and also 

the cases where there is no apparent flooding in New Orleans, but 

yet the structures received significant amounts of flood insurance 

damage. 

Mr. TAYLOR. Do you need any additional legal authority to conduct your study? 

Mr. JADACKI. We believe we really don’t have oversight over the 

private sector insurance companies. 

If by law we can get that authority, that would certainly help our 

case, but I think it would help more if the National Flood Insurance Program, the authorities that they would have, which would 

require that if there are indications where there’s joint payments, 

that there would be evidence in the flood file to show that. I think 

that would go a long way. 

Quite frankly, we were caught off guard when we reviewed a lot 

of claims filed, because we thought for sure there would be evidence in there, and basically, there’s a box that says, ‘‘You got 

flooded and it’s going to be a flood claim,’’ and in very limited instances, unless you look at a picture, was there anything explaining that, yes, part of the structure is going to be paid through the 

flood insurance program and this part is going to be paid from the 

wind claims. 

32

We actually looked, we looked for roofs disappearing, we looked 

for contents that were paid on a second-story floor when there are 

8 or 12 inches of, you know, water in there, but we just could not 

tell from the flood files what was being paid and whether it was 

fair and equitable based on both wind and water. It just wasn’t 

there. 

Mr. TAYLOR. So under existing law, if State Farm says $200,000 

worth of damage, water did it all— 

Mr. JADACKI. Right. 

Mr. TAYLOR.—you have no legal authority to question that, you 

just issue a check? 

Mr. JADACKI. That’s the way it works. If there’s evidence supporting the $200,000 that was all caused by flood, that’s fine. 

That’s the way the process works. 

But if there is another $150,000 of damage because of wind, 

there’s no evidence right now in the flood files that would indicate 

that was the case, nor is there any evidence saying a $200,000 payment, $100,000 is attributable to flood, and $100,000 is going to be 

attributable to wind. There’s nothing in the files that would indicate that. 

Mr. TAYLOR. Thank you, Mr. Chairman. 

Chairman WATT. I thank the gentleman. 

Let me just do a couple of things. 

First of all, I ask unanimous consent that the newspaper articles 

that you’ve made reference to be made a part of the record, and if 

you would make sure we get a copy of them, we’ll put them in the 

record so that all of the members of the two subcommittees will 

have access to that information. 

Second, I would like to advise the gentleman that quite possibly 

at some point in the very near future, we’ll be coming face-to-face 

as a committee with the same dilemma that the Inspector General 

is in now, because the committee, the subcommittee has made a request under its investigation authority for a number of documents, 

which request is to be complied with by June 14th, so you have 

about 2 or 3 more days to find out whether the private carriers will 

be willing to provide information to the committee about this, and 

then we’ll make some assessment of what the consequences are if 

we don’t get the information. 

So that might be giving the Inspector General more authority, it 

might be taking more authority ourselves. We’ll have to assess 

that. 

But I want the gentleman to at least know that is coming right 

down the pike, because preliminarily, a number of the insurance 

companies have made some sounds about the prospect that they 

will object to providing certain information to the subcommittee 

that would allow us to make an evaluation. So we’re trying to figure out where that will come out as of the 14th of June. 

Now, with the ranking member’s permission, let me just ask two 

additional questions. 

First of all, can we get some reasonable, your best estimates of 

when you believe your final reports will be out based on what you 

know now? 

I’m not trying to hold you to that, because I know that you have 

some obstacles that you’re dealing with, but your best estimate 

33

that you’re able to give at this moment, of when your final reports 

will be out. 

Ms. Williams and Mr. Jadacki. 

Ms. WILLIAMS. We’re hoping October. 

Chairman WATT. Of 2008? 

Ms. WILLIAMS. Of this year. 

Chairman WATT. 2007? 

Ms. WILLIAMS. Yes, of 2007. 

Chairman WATT. Oh, okay. I didn’t want to give you an extra 

year. 

Mr. Jadacki? 

Mr. JADACKI. Okay. We, like I mentioned earlier, we plan to 

issue an interim report in the next couple of weeks, just based on 

the work of the flood insurance program. 

I’ll say within the next 30 to 60 days, we will probably get our 

final report out. 

The missing link is again getting the records from the insurance 

companies and matching them up. We’ve done tons of work in the 

flood area. We just need to corroborate some of the statements, 

some of the records, some of the file information that we got with 

the records from the insurance companies. 

Chairman WATT. And finally, from my perspective, I’ll give the 

ranking member and any other members who want to ask one or 

two additional questions that opportunity, but will the scope of 

your report, if you find that there were improper allocations between flood insurance and private insurance, will the scope of your 

report detail those and provide suggestions about what recourse is 

available to FEMA and/or the other Departments of the Federal 

Government to redress those improper allocations? 

Ms. WILLIAMS. Our report will focus on the oversight component 

of it, because we don’t have the information that the IG is going 

to be getting. We aren’t going to be in a position to identify specific 

cases. That will most likely be left to the IG. So we will be looking 

at the broader oversight issue. 

Chairman WATT. Mr. Jadacki, I think the ball has been punted 

to you. 

Mr. JADACKI. That’s fine. Thank you very much. If there are any 

indications that there were misallocations, we will certainly highlight those. If there are indications that it is as a result of a fraud 

or some sort of bigger scheme, we would have to probably consult 

with the Department of Justice, U.S. Attorney’s Office, who would 

most likely be handling those cases. 

So there are certain things, as you all know, that are ongoing, 

you know, investigations. We may not report those things. 

It all depends on what we find in those files. Again, if it’s just 

a simple misallocation or some formula that wasn’t used correctly, 

yes, we’ll probably talk about those types of things, and if we have 

to, we can talk in general terms, but certainly, yes, if we find any 

indications, we will be reporting those, because it is a concern of 

ours as a control problem, too. 

Chairman WATT. Does the ranking member have any additional 

questions? 

Mr. MILLER. My comment to the IG on the part of it being a complete report, I’m concerned that you have an adequate amount of 

34

time to prepare a complete report rather than just being rapid in 

your response to us. 

I would rather see, if you find information that’s coming to you 

that you think needs further investigation, that you just keep us 

abreast of that, and let us know what’s going on—I’m speaking for 

myself—so when you’re through, we have something that we can 

actually look at and that we feel is complete and we can act upon. 

Chairman WATT. If the gentleman will yield just briefly, I would 

say exactly the same thing from the Chair’s perspective. 

My question was not designed to put pressure on you to produce 

a speedy, incomplete report. It was just to get some estimate, or 

your best estimate at this point of when you projected that was 

coming. I fully concur with the ranking member that I would rather have a thorough, complete report than a quick, incomplete report. 

So I yield back to the gentleman. 

Mr. MILLER. I’m just concerned that, you know, you’re doing an 

investigation right now, and if information comes to you and becomes relevant, you might have to expand your investigation. 

I don’t know. Maybe you’ll get the information, it’s adequate, and 

you can prepare it in a, you know, rapid amount of time, but I 

would just emphasize that I think we’re both looking for something 

that’s adequate and complete. 

I yield back. 

Chairman WATT. Does the gentlelady from New York wish to be 

recognized again? 

In that case, the Chair notes that some members may have additional questions for this panel which they may wish to submit in 

writing. 

Without objection, the hearing record will remain open for 30 

days for members to submit written questions to these witnesses 

and to place their responses in the record, and we would ask the 

witnesses to respond as expeditiously as possible if that occurs. 

I believe that completes the hearing, and consequently, this hearing is adjourned. 

[Whereupon, at 4:55 p.m., the hearing was adjourned.] 

(35)

A P P E N D I X

June 12, 2007

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