Report to Congressional Committees

United States Government Accountability Office

GAO

October 2005 FEDERAL 

EMERGENCY 

MANAGEMENT 

AGENCY 

Improvements Needed 

to Enhance Oversight 

and Management of 

the National Flood 

Insurance Program 

GAO-06-119 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-119.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William O. 

Jenkins, Jr. at (202) 512-8777 or 

jenkinswo@gao.gov. 

Highlights of GAO-06-119, a report to 

congressional committees 

October 2005

FEDERAL EMERGENCY MANAGEMENT 

AGENCY 

Improvements Needed to Enhance 

Oversight and Management of the 

National Flood Insurance Program 

The amount of insurance coverage available to homeowners under the NFIP 

is limited by requirements set forth in statute and FEMA’s regulations, which 

include FEMA’s standard flood insurance policy. As a result of these 

limitations, insurance payments to claimants for flood damage may not 

cover all of the costs of repairing or replacing flood-damaged property. For 

example, homes that could sustain more than $250,000 in damage cannot be 

insured to their full replacement cost, thus limiting claims to this statutory 

ceiling. In addition, NFIP policies cover only direct physical loss by or from 

flood. Therefore, losses resulting primarily from a preexisting structural 

weakness in a home or losses resulting from events other than flood, such as 

windstorms, are not covered by NFIP policies. 

To meet its monitoring and oversight responsibilities, FEMA is to conduct 

periodic operational reviews of the 95 private insurance companies that 

participate in the NFIP, and FEMA’s program contractor is to check the 

accuracy of claims settlements by doing quality assurance reinspections of a 

sample of claims adjustments for every flood event. FEMA did not use a 

statistically valid method for sampling files to be reviewed in these 

monitoring and oversight activities. As a result, FEMA cannot project the 

results of these reviews to determine the overall accuracy of claims settled 

for specific flood events or assess the overall performance of insurance 

companies and their adjusters in fulfilling responsibilities for the NFIP—

actions necessary for FEMA to have reasonable assurance that program 

objectives are being achieved. 

In the months after Hurricane Isabel, FEMA took steps intended to address 

concerns that arose from that flood event. In April 2004, FEMA established a 

task force to review claims settlements from Hurricane Isabel claimants. As 

a result of task force reviews, almost half of the 2,294 policyholders who 

sought a review received additional payments. The additional payment 

amount averaged $3,300 more than the original settlement—for a total 

average settlement of about $32,400 per claimant. In most cases, the 

additional funds were for repairing or replacing buildings or property not 

included in the initial adjuster’s loss determination, or to cover additional 

material or labor costs. 

FEMA has not yet fully implemented provisions of the Flood Insurance 

Reform Act of 2004 requiring the agency to provide policyholders with a 

flood insurance claims handbook that meets statutory requirements, to 

establish a regulatory appeals process, and to ensure that insurance agents 

meet minimum NFIP education and training requirements. The statutory 

deadline for implementing these changes was December 30, 2004. Efforts to 

implement the provisions are under way, but have not yet been completed. 

FEMA has not developed plans with milestones for assigning accountability 

and projecting when program improvements will be made, so that 

improvements are in place to assist victims of future flood events. 

In the wake of Hurricane Isabel in 

2003, GAO was mandated by the 

Flood Insurance Reform Act of 

2004 to report on issues related to 

the National Flood Insurance 

Program (NFIP) and its oversight 

and management by the Federal 

Emergency Management Agency 

(FEMA). Private insurance 

companies sell NFIP policies and 

adjust claims, while a private 

program contractor helps FEMA 

administer the NFIP. 

 

To address this mandate, this 

report assesses (1) the statutory 

and regulatory limitations on 

coverage for homeowners under 

the NFIP; (2) FEMA’s role in 

monitoring and overseeing the 

NFIP; (3) FEMA’s response to 

concerns regarding NFIP payments 

for Hurricane Isabel claims; and (4) 

the status of FEMA’s 

implementation of provisions of the 

Flood Insurance Reform Act of 

2004. 

Although impacts from Hurricane 

Katrina were not part of the 

report’s scope, GAO recognizes 

that this disaster presents the NFIP 

with unprecedented challenges. 

What GAO Recommends

GAO is recommending that FEMA 

use a statistically valid method to 

select claims for review and 

establish milestones for meeting 

provisions of the Flood Insurance 

Reform Act. FEMA reviewed a 

draft of this report and expressed 

concerns about our findings related 

to NFIP program management. 
Page i GAO-06-119 Federal Emergency Management Agency 

Letter 1

Results in Brief 4 

Background 8 

Due to Statutory and Regulatory Limitations, NFIP Payments May 

Not Cover All Costs to Repair or Replace Flood-Damaged 

Property 16 

Monitoring and Oversight of NFIP Identifies Specific Problems, but 

Does Not Provide Comprehensive Information on Overall 

Program Performance 22 

FEMA Task Force Closed about Half of Hurricane Isabel Claims 

Reviewed with Additional Payments 28 

FEMA Has Not Fully Implemented NFIP Program Changes 

Mandated by the Flood Insurance Reform Act of 2004 32 

Conclusions 34 

Recommendations for Executive Action 35 

Agency Comments and Our Evaluation 35 

Appendix I Scope and Methodology 39 

Appendix II Comments from the Federal Emergency 

Management Agency 42 

Appendix III GAO Contact and Staff Acknowledgements 47 

Tables 

Table 1: NFIP Claims Payments on Flood Events in 2003 12 

Table 2: NFIP Claims Payments on Flood Events in 2004 12 

Table 3: Total Number of Operational Reviews of Write-Your-Own 

Companies Conducted by FEMA (January 2000 to August 

2005) 25 

Figures 

Figure 1: NFIP Policies in Force, 1978-2005 10 

Figure 2: Total NFIP Payments to Claimants, 1972-2004 11 

Contents 
Page ii GAO-06-119 Federal Emergency Management Agency 

Figure 3: Key Participants in the NFIP 14 

Figure 4: Disposition of Hurricane Isabel Claims Reviewed by the 

FEMA Task Force 29 

Figure 5: Comparison of Claims Settlement Amounts for Hurricane 

Isabel Claims Reviewed by the Task Force and All Claims 

Closed with Payment (2002-2004) 31 

Abbreviations 

FEMA Federal Emergency Management Agency 

NFIP National Flood Insurance Program 

OMB Office of Management and Budget 

SFIP Standard Flood Insurance Policy 

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Page 1 GAO-06-119 Federal Emergency Management Agency 

October 18, 2005 

The Honorable Richard Shelby 

Chairman 

The Honorable Paul Sarbanes 

Ranking Minority Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Michael Oxley 

Chairman 

The Honorable Barney Frank 

Ranking Minority Member 

Committee on Financial Services 

House of Representatives 

Ninety percent of all natural disasters in the United States involve 

flooding. Although homeowner insurance policies typically cover damage 

and losses from fire or theft and often from wind-driven rain, they do not 

cover flood damage because private insurance companies are largely 

unwilling to bear the economic risks associated with the potentially 

catastrophic impact of flooding. To provide some insurance protection for 

flood victims, as well as incentives for communities to adopt and enforce 

floodplain management regulations to reduce future flood damage, 

Congress established the National Flood Insurance Program (NFIP) in 

1968. NFIP coverage is available to owners and occupants of insurable 

property in flood-prone areas.1

 The Federal Emergency Management 

Agency (FEMA) within the Department of Homeland Security is 

 1

 Our report focuses on homeowners’ NFIP coverage; NFIP coverage is also available for 

other structures such as apartment buildings, schools, churches, businesses, cooperative 

associations, and condominium associations. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-06-119 Federal Emergency Management Agency 

responsible for, among other things, oversight and management of the 

NFIP.2

To implement the NFIP, FEMA principally relies on private insurance 

companies that sell flood insurance policies and adjust claims from 

policyholders after floods occur. FEMA is assisted in its management and 

oversight functions by a program contractor. As of August 2005, the NFIP 

had about 4.6 million policyholders in about 20,000 communities. As of 

August 2005, the program had paid a total of about $14.6 billion in 

insurance claims financed primarily by policyholder premiums. Without 

the NFIP, the costs to repair damage covered by these claims would 

otherwise have been paid through taxpayer-funded disaster relief or by the 

flood victims themselves. 

Policyholders’ concerns regarding the processing and payments of NFIP 

claims after Hurricane Isabel in 2003 focused congressional attention on 

the program. Specifically, some policyholders cited inadequate payments 

for flood damages they incurred and a lack of clarity regarding their 

insurance policies and the procedures for filing and adjusting claims for 

flood damage. 

The Flood Insurance Reform Act of 2004,3

 which mandated that FEMA 

implement new processes and requirements for selling NFIP policies and 

adjusting flood insurance claims, also mandated that we study and report 

on issues related to the processing of flood insurance claims and FEMA’s 

oversight and management of the program. To address this mandate, this 

report assesses (1) the statutory and regulatory limitations on 

homeowners’ coverage under the NFIP; (2) FEMA’s role in monitoring and 

overseeing the NFIP; (3) FEMA’s response to concerns regarding NFIP 

payments for claims related to Hurricane Isabel; and (4) the status of 

FEMA’s implementation of provisions of the Flood Insurance Reform Act 

of 2004. 

 2

 In March 2003, FEMA and its approximately 2,500 staff became part of the Department of 

Homeland Security (DHS). Most of FEMA—including its Mitigation Division, which is 

responsible for administering the NFIP—is now part of the department’s Emergency 

Preparedness and Response Directorate. However, FEMA has retained its name and 

individual identity within the department. The Secretary of DHS has proposed a 

reorganization of DHS in which FEMA would report directly to the Secretary and 

Undersecretary of DHS. 

3

 Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, 

118 Stat. 712 (2004). 
Page 3 GAO-06-119 Federal Emergency Management Agency 

As we finalized this report, the extent of the devastation from Hurricanes 

Katrina and Rita in August 2005 and September 2005 was not yet fully 

determined, as the nation struggled to respond to the immediate needs of 

populations of entire cities and towns for food, water, shelter, and basic 

health care. Although impacts from Hurricane Katrina and Rita were not 

part of our mandate for this report, clearly this disaster will challenge the 

NFIP with demands the program has never before faced in its more than 

30-year history. Already, a record number of flood insurance claims have 

been filed in 2005, and Congress has increased the program’s authority to 

borrow from the United States Treasury from $1.5 billion to $3.5 billion. 

To determine the statutory and regulatory limitations on homeowners’ 

coverage under the NFIP, we researched The National Flood Insurance 

Act of 1968, as amended,4

 its legislative history, and FEMA’s implementing 

regulations, which include FEMA’s “Standard Flood Insurance Policy” 

(SFIP). We also discussed the results of our analysis with officials of the 

DHS Office of General Counsel. To assess FEMA’s NFIP monitoring and 

oversight role, we examined program requirements and reports and 

observed NFIP training programs for insurance agents and adjusters. We 

also observed a FEMA review of an insurance company’s operations, and 

we analyzed reports of the results of all reviews of insurance operations 

and follow-up visits at insurance companies where FEMA identified 

critical errors over a 10-year period, from 1996 to April 2005—a total 

sample of 15 reports. We interviewed officials of FEMA and its program 

contractor about their oversight activities and discussed aspects of the 

process with private-sector insurance officials from four of the five largest 

insurance companies participating in the NFIP based on the number of 

claims filed in 2004. We also obtained documentation on how reviews of a 

sample of claims adjustments are done after flood events and talked with 

staff employed by FEMA’s contractor about how they reinspect the work 

of private-sector adjusters who prepare flood damage estimates and how 

they select properties to visit for these reviews. We interviewed them 

because they had performed quality reinspections of claims adjustments 

for damage from Hurricane Isabel, as well as from hurricanes in Florida in 

2004. 

To determine FEMA’s response to concerns about Hurricane Isabel claims 

payments, we discussed the actions FEMA took to address concerns of 

 4

 The National Flood Insurance Act of 1968, as amended, is codified at 42 U.S.C. 4001 to 

4129. 
Page 4 GAO-06-119 Federal Emergency Management Agency 

Hurricane Isabel claimants with FEMA officials, and we reviewed a 

statistically valid sample of 100 files from claimants in Maryland, Virginia, 

and North Carolina who were dissatisfied with their initial claims 

settlements resulting from Hurricane Isabel and who had their claims 

reviewed by a special FEMA task force. We based our analysis of these 

claims on the information in the files we reviewed; we did not 

independently verify the accuracy of the information in the claims files. To 

test the overall reliability of the NFIP database, we reviewed a statistically 

valid sample of 250 claims for all flood events that occurred in 2003 and 

2004. We conducted this reliability testing to assure ourselves that 

information from the NFIP database was sufficiently accurate for our 

reporting purposes. To determine the extent to which FEMA implemented 

provisions of the Flood Insurance Reform Act of 2004, we examined 

documentation of the agency’s efforts and interviewed officials. We 

conducted our work from December 2004 through August 2005 in 

accordance with generally accepted government auditing standards. Our 

scope and methodology are discussed in greater detail in appendix I. 

The amount of insurance coverage available to homeowners under the 

NFIP is limited by requirements set forth in statute and regulation. As a 

result of these limitations, insurance payments to claimants for flood 

damage may not cover all of the costs of repairing or replacing flooddamaged property. For example, there is a $250,000 statutory ceiling on 

the amount of flood insurance homeowners may purchase; thus, homes 

that might sustain more than $250,000 in damage cannot be insured to 

their full replacement cost. In addition, NFIP policies cover only direct 

physical loss by or from flood. Therefore, losses resulting primarily from a 

preexisting structural weakness defect in a home or prior water damage, 

and losses resulting from events other than flood, such as windstorms or 

earth movements, are not covered by the NFIP. Moreover, a homeowner’s 

personal property is covered, with certain limitations, only if the 

homeowner has separately purchased NFIP personal property insurance 

in addition to coverage for the building. Finally, the method of settling 

losses affects the amount recovered. For example, homes that qualify only 

for an actual cash value settlement—which represents the cost to replace 

damaged property, less the value of physical depreciation—would 

presumably receive payments that are less than homes that qualify for a 

replacement cost settlement, which does not deduct for depreciation. 

To meet its monitoring and oversight responsibilities, FEMA is to conduct 

periodic operational reviews of the 95 private insurance companies that 

participate in the NFIP. In addition, FEMA’s program contractor is to 

Results in Brief 
Page 5 GAO-06-119 Federal Emergency Management Agency 

check the accuracy of claims settlements by doing quality assurance 

reinspections of a sample of claims adjustments for every flood event. For 

operational reviews, FEMA examiners are to do a thorough review of the 

companies’ NFIP underwriting and claims settlement processes and 

internal controls, including checking a sample of claims and underwriting 

files to determine, for example, whether a violation of policy has occurred, 

an incorrect payment has been made, and if files contain all required 

documentation. Separately, FEMA’s program contractor is responsible for 

conducting quality assurance reinspections of a sample of claims 

adjustments for specific flood events in order to identify, for example, 

whether an insurer allowed an uncovered expense or missed a covered 

expense in the original adjustment. The operational reviews and follow-up 

visits to insurance companies that we analyzed followed FEMA’s internal 

control procedures for identifying and resolving specific problems that 

may occur in individual insurance companies’ processes for selling and 

renewing NFIP policies and adjusting claims. According to information 

provided by FEMA, the number of operational reviews completed between 

2000 and August 2005 were done at a pace that allows for a review of each 

participating insurance company at least once every 3 years, as FEMA 

procedures require. In addition, the processes FEMA had in place for 

operational reviews and quality assurance reinspections of claims 

adjustments met our internal control standard for monitoring federal 

programs. However, the process FEMA used to select a sample of claims 

files for operational reviews and the process its program contractor used 

to select a sample of adjustments for reinspections were not randomly 

chosen or statistically representative of all claims. We found that the 

selection processes used were, instead, based upon judgmental criteria 

including, among other items, the size and location of loss and complexity 

of claims. As a result of limitations in the sampling processes, FEMA 

cannot project the results of these monitoring and oversight activities to 

determine the overall accuracy of claims settled for specific flood events 

or assess the overall performance of insurance companies and their 

adjusters in fulfilling their responsibilities for the NFIP—actions necessary 

for FEMA meet our internal control standard that it have reasonable 

assurance that program objectives are being achieved and that its 

operations are effective and efficient. 

In the months after Hurricane Isabel, FEMA took steps intended to 

uniquely address concerns that arose from that flood event. In April 2004, 

FEMA established a task force to review claims settlements from 

Hurricane Isabel claimants. This was the first time in the history of the 

NFIP that a formal claims review process was established. As a result of 

task force reviews, almost half of the 2,294 policyholders who sought a 
Page 6 GAO-06-119 Federal Emergency Management Agency 

claims review received additional payments. The additional payment 

amount averaged $3,300 more than the original settlement—for a total 

average settlement of about $32,400 per claimant. In most cases, the 

additional funds were for repairing or replacing buildings or personal 

property not included in the initial adjuster’s loss determination; or to 

cover additional material or labor costs. For example, in one instance the 

original adjuster had not included coverage for a kitchen countertop and a 

cable television outlet that the task force added to the claims settlement. 

In other claims, reviewers allowed higher prices for paint, dry wall, 

insulation, and other building materials than had been allowed in the 

initial loss report. An NFIP manager said that the original pricing was not 

an error in many cases, but that the costs of the materials had increased 

between the time of the initial loss and the final settlement offer. Among 

reasons that claims reviewed by the task force were closed with no 

additional payment were that the reviewer agreed with the original 

determination that (1) flood damage to parts of a basement were not 

covered and that (2) damage was not due to flood but to wind-driven rain. 

As of September 2005, FEMA had not yet fully implemented provisions of 

the Flood Insurance Reform Act of 2004. The act requires FEMA to 

provide policyholders a flood insurance claims handbook and other new 

materials for explaining their coverage when they purchase and renew 

policies; to establish a regulatory appeals process for claimants; and to 

establish minimum education and training requirements for insurance 

agents who sell NFIP policies. The 6-month statutory deadline for 

implementing these changes was December 30, 2004. While FEMA advised 

us that it finalized statutorily required informational materials in 

September 2005, its flood insurance claims handbook does not yet fully 

comply with statutory requirements. The handbook contains information 

on anticipating, filing and appealing a claim, but does not include 

information regarding the appeals process that FEMA is statutorily 

required to establish through regulation. In its comments on our draft 

report, FEMA stated that it was offering claimants an informal appeals 

process pending the establishment of a regulatory process, and that the 

handbook describes this informal appeals process. However, by statute, 

the claims handbook must describe the regulatory process, which FEMA 

has yet to establish. With respect to this appeals process, FEMA has not 

stated how long rulemaking might take to establish the process by 

regulation, or how the process might work, such as filing requirements, 

time frames for considering appeals, and the composition of an appeals 

board. With respect to minimum training and education requirements for 

insurance agents who sell NFIP policies, FEMA published a Federal 

Register notice on September 1, 2005, which included an outline of 
Page 7 GAO-06-119 Federal Emergency Management Agency 

training course materials. In the notice, FEMA stated that, rather than 

establish separate and perhaps duplicative requirements from those that 

may already be in place in the states, it had chosen to work with the states 

to implement the NFIP requirements through already established state 

licensing schemes for insurance agents. The notice did not specify how or 

when states were to begin implementing the NFIP training and education 

requirements. Thus, it is too early to tell the extent to which insurance 

agents will meet FEMA’s minimum standards. FEMA officials said that, 

because changes to the program could have broad reaching and significant 

effects on policyholders and private-sector stakeholders upon whom 

FEMA relies to implement the program, the agency is taking a measured 

approach to addressing the changes mandated by Congress. Nonetheless, 

without plans with milestones for completing its efforts to address the 

provisions of the act, FEMA cannot hold responsible officials accountable 

or ensure that statutorily required improvements are in place to assist 

victims of future flood events. 

To strengthen and improve FEMA’s monitoring and oversight of the NFIP, 

we are recommending that FEMA use a methodologically valid approach 

for sampling files selected for operational reviews and quality assurance 

claims reinspections. To help ensure that actions are taken in a timely 

manner to address legislative requirements established in the Flood 

Insurance Reform Act of 2004, we are recommending that FEMA establish 

documented plans with milestones for completing its efforts and hold 

NFIP officials accountable for implementing these plans. 

In commenting on a draft of this report, FEMA expressed concerns about 

our findings related to NFIP program management and oversight. 

Specifically, FEMA was concerned that we did not directly address the 

issue of whether Congress intended the NFIP to restore flood-damaged 

properties to their pre-flood conditions. We believe we have addressed 

the issue consistent with our statutory mandate by explaining the statutory 

and regulatory provisions that affect both dollar ceilings and other 

coverage limitations. In other words, flood insurance policies can only 

restore victims to pre-flood conditions within, but not beyond, the dollar 

ceilings and other coverage limitations established by law and regulation. 

FEMA also questioned our characterization of its operational reviews and 

claims reinspection processes in the context of FEMA’s overall financial 

and management control efforts. However, our focus was on overall NFIP 

program management and oversight, not on FEMA’s fiduciary 

responsibilities or additional internal control measures. During our review, 

FEMA managers described the operational reviews and claims inspections 
Page 8 GAO-06-119 Federal Emergency Management Agency 

as the primary methods FEMA used for monitoring and overseeing the 

NFIP. 

FEMA also noted that its method of selecting its sample for operational 

reviews was more appropriate than the statisticall y random probability 

sample we recommended. We believe that, although FEMA’s current 

sampling strategy may provide an opportunity to focus on particular areas 

of risk, it does not provide management with the information needed to 

assess the overall performance of private insurance companies and 

adjusters participating in the program—information that FEMA needs to 

have reasonable assurance that program objectives are being achieved 

In addition, FEMA disagreed with our characterization of the extent to 

which FEMA has met provisions of the Flood Insurance Reform Act of 

2004. We believe that our description of those efforts and our 

recommendations with regard to implementing the Act’s provisions remain 

valid. FEMA’s comments are contained in appendix II. In addition, FEMA 

provided technical comments, which we incorporated into the report as 

appropriate. 

Nearly 20,000 communities across the United States and its territories 

participate in the NFIP by adopting and agreeing to enforce state and 

community floodplain management regulations to reduce future flood 

damage. In exchange, the NFIP makes federally backed flood insurance 

available to homeowners and other property owners in these 

communities. Homeowners with mortgages from federally regulated 

lenders on property in communities identified to be in special high-risk 

flood hazard areas are required to purchase flood insurance on their 

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

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

other personal property items against flood damage, homeowners must 

purchase separate NFIP personal property coverage. Although premium 

amounts vary according to the amount of coverage purchased and the 

location and characteristics of the property to be insured, the average 

yearly premium for a 1-year policy was $446, as of June 2005. 

The National Flood Insurance Act of 19685

 established the NFIP. Congress 

mandated that the NFIP was to be implemented “based on workable 

 5

 The National Flood Insurance Act of 1968, as amended, is codified at 42 U.S.C. 4001 to 

4129. 

Background 
Page 9 GAO-06-119 Federal Emergency Management Agency 

methods of pooling risks, minimizing costs, and distributing burdens 

equitably among those who will be protected by flood insurance and the 

general public.”6

 To make “flood insurance coverage available on 

reasonable terms and conditions to persons who have need for such 

protection,”7

 the NFIP strikes a balance between the scope of the coverage 

provided and the premium amounts required to provide that coverage. 

Coverage limitations arise from statute and regulation, including FEMA’s 

standard flood insurance policy (SFIP), which is incorporated in 

regulation and issued to policyholders when they purchase flood 

insurance. 

To the extent possible, the program is designed to pay operating expenses 

and flood insurance claims with premiums collected on flood insurance 

policies rather than by tax dollars. However, as we have reported, the 

program, by design, is not actuarially sound because Congress authorized 

subsidized insurance rates to be made available for policies covering 

certain structures to encourage communities to join the program. As a 

result, the program does not collect sufficient premium income to build 

reserves to meet the long-term future expected flood losses.8

 FEMA has 

statutory authority to borrow funds from the Treasury to keep the NFIP 

solvent.9

 Following Hurricane Katrina in August 2005, legislation was 

enacted that increased FEMA’s borrowing authority from a total of $1.5 

billion to $3.5 billion through fiscal year 2008.10 FEMA has exercised its 

borrowing authority four times in the last decade when losses exceeded 

available fund balances. For example, as of August 2005, FEMA had 

borrowed $300 million in 2005 to pay an estimated $1.8 billion on flood 

insurance claims resulting from the 2004 hurricane season. As it has done 

when it has borrowed in the past, FEMA intends to repay these funds with 

interest, according to agency officials, however, the officials had not yet 

estimated NFIP claims amounts anticipated for flood damage from 

Hurricane Katrina in August 2005. 

 6

 42 U.S.C. 4001(d). 

7 Id. 4001(a)(4). 

8

 GAO, Flood Insurance: Information on the Financial Condition of the National Flood 

Insurance Program, GAO-01-992T (Washington, D.C.: July 2001). 

9

 See 42 U.S.C. 4016. 

10 The National Flood Insurance Program Enhanced Borrowing Authority Act of 2005, Pub. 

L. No. 109-65 (Sept. 20, 2005). 
Page 10 GAO-06-119 Federal Emergency Management Agency 

As shown in figure 1, the number of NFIP policies in force has grown 

steadily over the past 27 years to a total of about 4.6 million policies in 

force as of May 31, 2005. 

Figure 1: NFIP Policies in Force, 1978-2005 

As shown in figure 2, NFIP claims payments have varied widely by year 

over the life of the program depending on the number and severity of flood 

events; however, as the number of policies in force increased (see fig. 1), 

the claims payments have trended upward. Claims paid in 2004 were the 

highest amount in the history of the NFIP—more than $1.9 billion for all 

flood events. 

Participation in the NFIP 

and Claims Payments Have 

Grown 

Policies in force

0

5,00,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

Calender year

Source: FEMA.

19781979

19801981

1982198319841985198619871988198919901991

1992199319941995

1996

19971998

199920002001

200220032004

2005
Page 11 GAO-06-119 Federal Emergency Management Agency 

Figure 2: Total NFIP Payments to Claimants, 1972-2004 

Tables 1 and 2 provide information on payments by flood event in 2003 

and 2004. In 2003, the NFIP paid about $478 million on more than 21,000 

claims from 5 named flood events and an additional $287 million on 15,232 

claims filed for damage from unnamed floods. Of those claims, more than 

half resulted from damage from Hurricane Isabel in six states and 

Washington, D.C. Hurricane Isabel was a category 5 hurricane at its peak 

with sustained winds in excess of 165 miles per hour. It made landfall on 

September 18, 2003, near Drum Inlet, North Carolina, as a category 2 

storm. As it traveled across Virginia, Maryland, and Pennsylvania, Isabel 

weakened to a tropical storm, but its heavy rains caused storm surge 

flooding. 

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

1972-1976

Total payments made (dollars in millions)

Source: FEMA.

Calendar year
Page 12 GAO-06-119 Federal Emergency Management Agency 

Table 1: NFIP Claims Payments on Flood Events in 2003 

Dollars in thousands 

Flood event/state(s) 

Number of 

paid losses Amount paid

Hurricane Isabel (Delaware, Maryland, 

North Carolina, Pennsylvania, South 

Carolina, Virginia, and Washington, D.C.) 

19,523 $455,869 

Delaware flooding (Delaware) 10 64 

Torrential rain (Puerto Rico) 261 1,366

Hurricane Claudette (Texas) 1,035 10,884

Tennessee flood (Tennessee) 309 9,759

Named flood event total 21,138 477,942

Unnamed flood total 15,232 287,317

Total 36,370 $765,259

Source: GAO analysis of FEMA data. 

For 2004 flood events, as of April 30, 2005, the NFIP paid more than $1.9 

billion on more than 52,785 NFIP claims from storms including Hurricanes 

Charley, Frances, Ivan, and Jeanne that caused major damage in Florida 

and other East Coast and Gulf Coast states. 

Table 2: NFIP Claims Payments on Flood Events in 2004 

Dollars in thousands 

Flood event/state(s) 

Number of 

 paid losses Amount paid

Kentucky Flood (Kentucky) 279 $5,717

Hurricane Alex (North Carolina) 249 2,436

Hurricane Charley (Florida and North 

Carolina) 

2,434 46,369

Hurricane Frances (Florida) 4,737 139,866

Hurricane Ivan (Alabama, Florida, Georgia, 

Louisiana, Mississippi, Ohio, Pennsylvania, 

Virginia, and West Virginia) 

25,558 1,233,964

Hurricane Jeanne (Florida and Puerto Rico) 3,994 78,355

Named flood event total 37,251 1,506,707

Unnamed flood total 15,534 442,678

Total 52,785 $1,949,385

Source: GAO analysis of FEMA data. 
Page 13 GAO-06-119 Federal Emergency Management Agency 

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

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

who work independently or are employed by insurance companies or their 

designated subcontractors. According to FEMA, about 95 percent of the 

NFIP policies in force are written by insurance agents who represent 95 

private insurance companies that issue policies and adjust flood claims in 

their own names.11 The companies, called write-your-own companies, 

receive an expense allowance from FEMA of about one-third of the 

premium amounts for their services and are required to remit premium 

income in excess of this allowance to the National Flood Insurance Fund.12

The write-your-own companies also receive a percentage fee—about 3.3 

percent of the incurred loss—for adjusting and settling claims. The 

insurance companies share the FEMA expense allowance and fee for 

claims settlements with insurance agents who sell and service the policies, 

a vendor, or subcontractor, if the company has subcontracted with one to 

handle all or part of its flood insurance business, and flood claims 

adjusters.13

Figure 3 shows the key participants in the process: a homeowner; an 

insurance agent, an insurance company, and, in many cases, a flood 

insurance vendor, or subcontractor, to assist with aspects of the NFIP 

business; and a flood adjuster. FEMA and its program contractor manage 

and oversee the NFIP and the National Flood Insurance Fund accounts 

into which premiums are deposited and claims and expenses paid. 

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

and brokers who deal directly with FEMA. 

12 The fund, which was established in the Treasury by the 1968 legislation authorizing the 

NFIP, is the account into which premiums are deposited and from which losses and 

operating and administrative costs are paid. See 42 U.S.C. 4017. 

13 For example, the flood program manager from one insurance company said that agents 

receive a commission of 15 percent of the policy amount as an incentive to write flood 

insurance and may receive other incentives during special flood marketing campaigns. 

Private Insurers Sell 

Policies and Adjust NFIP 

Claims under FEMA 

Oversight and 

Management 
Page 14 GAO-06-119 Federal Emergency Management Agency 

Figure 3: Key Participants in the NFIP 

Insurance agents under contract to one or more write-your-own insurance 

company are the main point of contact for most policyholders to purchase 

an NFIP policy, seek information on coverage, or file a claim. In order to 

sell flood insurance, agents must meet basic state insurance licensing 

requirements. Based on information the insurance agents submit, the 

insurance companies issue policies, collect premiums from policyholders, 

deduct an allowance for expenses from the premium, and remit the 

balance to the National Flood Insurance Fund. In some cases, insurance 

- Purchases NFIP policy

- Seeks information on coverage

- Files claim after flood event

- Underwrites policy

- Collects premiums

- Processes claims

- Sends in flood adjuster

- Manages the National Flood Insurance Fund

 - Reimburses write-your-own companies for claims paid 

 - Receives premium deposits

- Manages, regulates, and oversees NFIP

- Assesses damage

- Estimates losses

- Submits required reports to 

insurance companies

- Under contract to sell NFIP 

policies in the name of one 

or more write-your-own 

insurance companies

Homeowner

Write-your-own insurance 

company/flood insurance vendor

FEMA and its 

program contractor

Flood adjuster

Flood Event

Insurance agent

Source: GAO analysis of FEMA data.

Homeowner
Page 15 GAO-06-119 Federal Emergency Management Agency 

companies hire subcontractors—flood insurance vendors—to conduct 

some or all of the day-to-day processing and management of flood 

insurance policies. 

Insurance companies work with certified flood adjusters to settle NFIP 

claims. When flood losses occur, policyholders contact their insurance 

agents to report the loss. The agent then contacts the write-your-own 

company to report the loss and it assigns a flood adjuster to assess 

damages. Flood adjusters may be independentor employed by an 

insurance or adjusting company. These adjusters are responsible for 

assessing damage, estimating losses, and submitting required reports, 

work sheets, and photographs to the insurance company, where the claim 

is reviewed and, if approved, processed for payment. Adjusters determine 

prices for repairs by reviewing estimates of costs prepared by 

policyholders and their contractors, consulting pricing software and 

checking local prices for materials. Claims amounts may be adjusted after 

the initial settlement is paid if claimants submit documentation that some 

costs were higher than estimated. An adjuster must have a least 4 

consecutive years of full-time property loss adjusting experience and have 

attended an adjuster workshop, among other requirements, to be certified 

by FEMA to work on NFIP claims,. To keep their certifications current, 

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

pass a written examination testing their knowledge each year. 

Flood claims adjusters employed by write-your-own companies are paid 

salaries and sometimes bonuses for working long hours after major flood 

events from a percentage fee—about 3.3 percent of the incurred loss, 

which the NFIP pays write-your-own companies for settling claims, 

according to an NFIP official. Independent adjusters who work for 

multiple insurance companies are also paid based on a standard NFIP fee 

schedule that varies adjuster compensation according to the size of the 

claim. For example, the fee schedule pays $1,000 for a claim settlement of 

between $25,000 and $35,000. If the independent adjuster is registered with 

an independent adjusting firm, a portion of the fee goes to the adjusting 

firm. 

About 40 FEMA employees, assisted by about 170 contractor employees, 

are responsible for managing the NFIP. Management responsibilities 

include establishing and updating NFIP regulations, administering the 

National Flood Insurance Fund, analyzing data to actuarially determine 

flood insurance rates and premiums, and offering training to insurance 

agents and adjusters. In addition, FEMA and its program contractor are 

responsible for monitoring and overseeing the quality of the performance 
Page 16 GAO-06-119 Federal Emergency Management Agency 

of the write-your-own companies to assure that the NFIP is administered 

properly. 

The amount of insurance coverage available to homeowners under the 

NFIP is limited, based on requirements set forth in statute and regulation.14

First, by statute, there are limitations on the amount of insurance coverage 

homeowners may purchase for their dwellings and personal property. In 

addition, FEMA has further defined the general terms and conditions of 

flood insurance coverage pursuant to a broad grant of congressionally 

delegated authority, issuing regulations that include a SFIP. Because of 

these statutory and regulatory limitations, insurance payments to 

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

replacing damaged property. 

In terms of statutory limitations, there is a ceiling on the amount of 

insurance coverage available for single-family homes, which is $250,000.15

Because of this statutory ceiling, homes that could sustain more than 

$250,000 in damage cannot be insured to reflect full replacement costs. 

Furthermore, while homes whose full replacement cost is less than 

$250,000 may be fully insured, this is not statutorily required. There is a 

“mandatory purchase” requirement for homeowners in special high-risk 

flood hazard areas who hold mortgages from federally regulated lenders, 

but they are only required to insure their homes for the amount of their 

mortgages, which may be less than their homes’ full replacement cost.16

For homeowners in areas of low- to moderate-flood risk, the purchase and 

amount of insurance is optional, up to the $250,000 statutory maximum.17

As a result of the $250,000 ceiling and the “mandatory purchase” floor, 

insurance on a given home may be less than its full replacement cost. 

Homeowners may also separately elect to insure the contents of their 

homes under the NFIP, although they are not required to do so. As with 

the $250,000 cap on building coverage, there is also a statutory limit on the 

 14As with homeowners’ coverage, statutory and regulatory limitations apply to NFIP 

coverage for other types of property. See 44 C.F.R. Part 61, appendix A(1), “Standard Flood 

Insurance Policy Dwelling Form,” appendix A(2), “Standard Flood Insurance Policy 

General Property Form,” and appendix A(3), “Standard Flood Insurance Policy Residential 

Condominium Building Association Form.” 

15 42 U.S.C. 4013(b)(2). 

16 Id. 4012a(a), (b)(1). 

17 See id. 4012. 

Due to Statutory and 

Regulatory 

Limitations, NFIP 

Payments May Not 

Cover All Costs to 

Repair or Replace 

Flood-Damaged 

Property 
Page 17 GAO-06-119 Federal Emergency Management Agency 

amount of personal property coverage homeowners can buy. By statute, 

homeowners can purchase no more than $100,000 in personal property 

coverage, even if the value of their personal property exceeds this 

amount.18

In addition to the statutory limitations on coverage amounts, Congress 

also gave FEMA broad authority to issue regulations establishing “the 

general terms and conditions of insurability,” including the classes, types, 

and locations of properties that are eligible for flood insurance; the nature 

and limits of loss that may be covered; the classification, limitation, and 

rejection of any risks that FEMA considers advisable; and the amount of 

appropriate loss deductibles.19 Pursuant to this delegation of authority, 

FEMA has issued regulations, including a “Standard Flood Insurance 

Policy,” that further delineate the scope of coverage.20 All flood insurance 

made available under the NFIP is subject to the express terms and 

conditions of the statute and regulations, including the SFIP.21

The SFIP is a contractual document that contains the terms of coverage 

and is issued to homeowners when they purchase flood insurance. Some 

of the principal SFIP limitations concern whether particular events, losses, 

building property and personal property are covered, and what deductible 

amounts and loss settlement methods apply when an insured files a claim. 

While either FEMA or private write-your-own insurance companies may 

issue flood insurance policies, FEMA’s regulations prohibit any change to 

the SFIP provisions without the express written consent of the Federal 

Insurance Administrator, the FEMA official responsible for administering 

the NFIP.22 The Administrator is also charged with interpreting the scope 

of coverage under the SFIP.23

 18 Id. 4013(b)(3). 

19 Id. 4013(a). 

20 The insurance coverage regulations appear at 44 C.F.R. Part 61, and the SFIP is an 

appendix to these regulations, set forth at 44 C.F.R. Part 61, appendix A(1), “Standard 

Flood Insurance Policy Dwelling Form.” 

21 44 C.F.R. 61.4. 

22 Id. 61.13(d), (f). 

23 Id. 61.4(b), 61.14. 
Page 18 GAO-06-119 Federal Emergency Management Agency 

The SFIP covers only “direct physical loss by or from flood.”24 It does not 

cover losses resulting from events other than flood, such as windstorms or 

earth movements. Additionally, if the losses primarily result from 

conditions inherent to the dwelling or within the control of the insured, 

they are not covered by the SFIP.25 Nor does the SFIP provide coverage if 

the flood is already in progress when the policy begins or when the 

insured adds coverage. Finally, the SFIP only covers direct, physical flood 

losses, not indirect losses such as loss of revenue or profits, interruption 

of business, access to and use of the insured property, or living expenses 

incurred while property is uninhabitable.26

The SFIP limits what type of building property is covered, considering 

such things as the property’s use, permanence, and degree of enclosure. 

For coverage purposes, the SFIP defines a “building” as a manufactured 

home; a travel trailer affixed to a permanent foundation; or a “structure 

with two or more outside rigid walls and a fully secured roof, that is 

affixed to a permanent site.”27 A building under construction may be 

covered even if not yet walled or roofed if the construction is underway at 

the time the losses are incurred.28 Detached garages may be covered, but 

not if the garage is used for residential, business, or farming purposes,29 in 

which case it must be separately insured. Certain items of property are 

considered part of the building. In general, these are items built in or 

affixed to the building, for example, stoves, ovens, refrigerators, central air 

conditioners, and permanently installed cabinets and carpets. At the 

basement level, building coverage is more limited and does not extend to 

finishing materials. For example, whereas the SFIP covers permanently 

 24 The SFIP defines a flood as “[a] general and temporary condition of partial or complete 

inundation of two or more acres of normally dry land area or of two or more properties” 

caused by specified events such as the overflow of inland or tidal waters. SFIP section II, 

Definitions (“Flood”). 

25 SFIP section V, Exclusions. For example, the SFIP would not cover water damage that 

primarily resulted from a structural defect in the insured’s dwelling. 

26 SFIP section V, Exclusions. 

27 SFIP section II, Definitions (“Building”). 

28 SFIP section III, Property Covered (Coverage A – Building Property). However, if the 

building under construction does not have at least two walls and a roof, the deductible 

amount is twice that which would otherwise apply. SFIP section VI, Deductibles. 

29 SFIP section III, Property Covered (Coverage A – Building Property). Coverage for a 

detached garage is limited to no more than 10 percent of the building’s limit of liability. Use 

of this insurance is optional but reduces the building’s limit of liability. 
Page 19 GAO-06-119 Federal Emergency Management Agency 

installed paneling and wallpaper above the basement level, coverage in the 

basement is limited to unfinished drywall.30

The SFIP only insures for personal property if the homeowner purchases 

personal property coverage and the personal property is inside a building.31

Personal property includes movable items such as portable microwaves, 

window-type air conditioning units, and carpets that are not permanently 

installed. In a basement, coverage is limited to certain items installed in 

their functioning location and, if necessary for operation, connected to a 

power source, for example, portable air conditioning units and clothes 

washers and dryers. Certain types of personal property are specially 

limited to payment of no more that $2,500, regardless of the magnitude of 

the loss. These objects include artwork, collectibles, jewelry, furs, and 

property used in any business.32 Personal property coverage does not 

extend to such things as currency, postage, deeds, and other valuable 

papers.33

Certain types of property are wholly excluded from both building property 

and personal property coverage. The first type of excluded properties are 

those that are generally separate from the main dwelling, such as 

recreational vehicles; self-propelled vehicles and machines; land, plants, 

and animals; walkways, driveways, patios; and hot tubs and swimming 

pools. The second type of excluded properties are those with a close 

relationship with water or that are located below ground, including 

buildings and personal property located entirely, in, on, or over water; 

boathouses, wharves, piers, and docks; underground structures or 

equipment; and buildings and contents where more than 49 percent of the 

actual cash value of the building is below ground.34

The amount recoverable under the SFIP is limited to the amount that 

exceeds the applicable deductible.35 Applicable deductible amounts are not 

listed in the SFIP itself, but are shown on the Declarations Page, a 

 30 SFIP section III, Property Covered (Coverage A – Building Property). 

31 SFIP section III, Property Covered (Coverage B – Personal Property). 

32 SFIP section III, Property Covered (Coverage B – Personal Property). 

33 SFIP section IV, Property Not Covered. 

34 SFIP, section IV, Property Not Covered. 

35 SFIP section VI, Deductibles. 
Page 20 GAO-06-119 Federal Emergency Management Agency 

computer-generated summary of the information provided by the insured 

in the insured’s application. The Declarations Page is part of each 

insured’s flood insurance policy. 36

The final type of limitation found in the SFIP derives from the methods of 

settling losses. There are three loss settlement methods under the SFIP: 

(1) “replacement cost,” which homeowners may only purchase for singlefamily dwellings in which they principally reside; (2) “special loss 

settlement,” which only applies to large manufactured homes;37 and (3) 

“actual cash value,” which applies to any property that does not qualify for 

replacement cost or special loss settlement. 

The only difference between replacement cost and actual cash value is the 

significance attached to the property’s physical depreciation. An actual 

cash value loss settlement represents what it would cost to replace 

damaged property, less the value of its physical depreciation.38 Because of 

depreciation, actual cash value will presumably be less than the full cost to 

repair or replace the damage.39 A replacement cost loss settlement, on the 

other hand, does not deduct for physical depreciation. If replacement cost 

coverage applies, the policy will pay the actual amount spent to repair or 

replace the damage with materials of like kind and quality, subject to the 

applicable deductible and the building’s limit of liability.40

Homeowners can only obtain replacement cost coverage for their singlefamily dwellings, not for multi-family dwellings or items of personal 

property, which are subject to actual cash value coverage. In addition, not 

all single-family dwellings are eligible for replacement cost coverage. To 

 36 SFIP section II, Definitions (“Declarations Page”). 

37 “Special Loss Settlement” combines elements of replacement cost and actual cash value 

settlements. Under the “Special Loss” rules, totally destroyed dwellings receive either 

replacement cost coverage or 1.5 times the actual cash value, whichever is less, up to the 

dwelling’s limit of liability. Partially damaged dwellings are entitled to replacement cost 

coverage. 

38 SFIP section II, Definitions (“Actual Cash Value”). 

39 An actual cash settlement may be increased to reflect a greater proportion of the costs of 

repairing or replacing damaged property, without deduction for depreciation. The SFIP 

provides a formula for calculating the proportion of the repair or replacement costs an 

insured with actual cash coverage is eligible to receive. The SFIP will pay this proportional 

amount if it is greater than the actual cash settlement. 

40 SFIP section VII, General Conditions, subsection V, Loss Settlement. 
Page 21 GAO-06-119 Federal Emergency Management Agency 

qualify for such coverage, a home must be insured for 80 percent or more 

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

and it must a principal residence. If a home does not meet both criteria, 

the policy will pay the actual cash value for the covered damage. 

An additional limitation in replacement cost coverage applies when the 

full cost of repair or replacement is greater than $1,000 or 5 percent of the 

entire amount of insurance on the dwelling. In that case, the SFIP provides 

that it “will not be liable for any loss unless and until the actual repair or 

replacement is completed,” unless the insured foregoes a replacement cost 

settlement and makes a claim for actual cash instead.41 If the insured 

eventually spends more on the repair or replacement than the actual cash 

settlement, the individual may file a claim for additional replacement cost 

liability, provided he or she provides a notice of intent to do so within 180 

days after the date of loss. 42

We developed the following hypothetical property adjustment example 

with the assistance of FEMA’s director of NFIP claims to illustrate how 

applicable limitations could reduce coverage for claimants whose property 

is damaged by flood: 

Hypothetical: A poorly maintained 30-year-old home located in a 

designated flood zone was damaged when a nearby river overflowed. 

The home’s full replacement cost was $60,000. The homeowner 

purchased an NFIP policy for $30,000 in coverage. Although a 

contractor estimated it would cost $40,000 to repair damages to the 

structure and personal property losses totaled another $10,000, a NFIP 

adjuster determined that payment on the claim was $8,000 because: 

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

• The adjuster determined that some problems that needed to be 

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

the bathroom and preexisting mold in the basement). 

 41 SFIP section VII, General Conditions, subsection V, Loss Settlement. 

42 FEMA officials told us that the agency did not require Hurricane Isabel claimants to wait 

until after making repairs to obtain the full replacement cost. They also said that FEMA 

plans to amend its regulations to delete the requirement from the SFIP. 
Page 22 GAO-06-119 Federal Emergency Management Agency 

• The basement of the home, where the largest amount of damage 

occurred, was finished, and coverage was limited to drywall 

damage. 

• Actual cash value will be paid for repairs or replacement of damage 

to the dwelling because the homeowner did not insure the structure 

for at least 80 percent of its full replacement cost. Because the 

condition of the home before the flood was poor, the actual cash 

value was low. In this hypothetical case, the adjuster determined 

that the actual cash value of damaged property covered by the 

policy was $9,000. 

• A $1,000 deductible applied, reducing the $9,000 actual cash value 

payment to $8,000. 

FEMA’s primary method to monitor and oversee the NFIP is to conduct 

operational reviews of the 95 write-your-own insurance companies 

participating in the NFIP. In addition, FEMA’s program contractor is to 

reinspect a sample of claims adjustments for every flood event to identify 

errors, among other things. The operational reviews and follow-up visits 

we analyzed followed FEMA’s internal control procedures on the 

processes for examiners to follow in conducting the reviews and for doing 

the reviews at a pace that allows for a review of each write-your-own 

company on at least a triennial basis. The processes FEMA followed also 

met our internal control monitoring standard that requires federal 

agencies to ensure that the findings of audits and other reviews are 

promptly resolved. However, in doing these monitoring and oversight 

activities, neither FEMA nor its program contractor used a statistically 

valid method for sampling files selected for operational reviews or claims 

reinspections. As a result, FEMA did not meet our internal control 

standard that federal agencies have internal controls in place to provide 

reasonable assurance that program objectives are being achieved and that 

program operations are effective and efficient. Without a statistically valid 

sampling methodology, the agency cannot project the results of these 

monitoring and oversight activities to determine the overall accuracy of 

claims settled for specific flood events or assess the overall performance 

of insurance companies and their adjusters in fulfilling their 

responsibilities for the NFIP. 

Monitoring and 

Oversight of NFIP 

Identifies Specific 

Problems, but Does 

Not Provide 

Comprehensive 

Information on 

Overall Program 

Performance 
Page 23 GAO-06-119 Federal Emergency Management Agency 

Operational reviews of flood insurance companies participating in NFIP 

that are conducted by FEMA staff are FEMA’s primary internal control 

mechanism for monitoring, identifying, and resolving problems related to 

how insurers sell and renew NFIP policies and adjust claims. Our analysis 

of reports of all 15 operational reviews and follow up visits at companies 

that were identified as having critical errors (e.g., incorrect payments) 

found that FEMA checked information and conducted file reviews in 

accordance with the requirements and procedures outlined in its Write 

Your Own Financial Control Plan.

43 In addition, our analysis found that 

FEMA followed up at all of the companies where operational reviews had 

identified critical errors to monitor the progress these companies made 

over time in addressing and resolving critical errors. Monitoring the quality 

of performance over time and ensuring that the findings of audits and 

other reviews are promptly resolved is an internal control standard that 

we have identified for the federal government.44

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

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

the operations of the 95 write-your-own companies. If vendors handle all 

or part of a company’s NFIP business, operational reviews are conducted 

at the vendor locations and reviews of all of the companies doing business 

with the vendor can be completed during one visit. Seven FEMA staff in 

the Mitigation Division underwriting section and two staff in the claims 

section have primary responsibility for conducting operational reviews in 

addition to other responsibilities including writing insurance manuals and 

regulations, providing technical assistance, and responding to inquiries 

from policyholders, Members of Congress and others. As discussed below, 

FEMA directs examiners to conduct three steps for each operational 

review—a general underwriting review, a specific underwriting review, 

and a claims operation review of each insurance company’s NFIP 

business. Requirements and procedures for the operational review are 

outlined in FEMA’s Write Your Own Financial Control Plan. 

In the general underwriting review, examiners are to review how the 

company has handled applications for NFIP policies and how policies are 

issued and cancelled among other items. The examiners are to check a 

 43 National Flood Insurance Program, The Write Your Own Program Financial Control, 

Plan Requirements and Procedures, revised December 1, 1999. 

44 See GAO, Standards for Internal Control in the Federal Government (Washington, D.C.: 

Nov. 1999). 

FEMA’s Operational 

Reviews of Insurers We 

Analyzed Identified and 

Followed Up on Problems 
Page 24 GAO-06-119 Federal Emergency Management Agency 

sample of files to determine, for example, whether NFIP policies were 

renewed using correct payment rates and whether appropriate 

documentation was included in the file. In the specific underwriting 

review and the claims operation review, examiners are to conduct detailed 

examinations of files to check for completeness and accuracy. For 

example, they must make sure that elevations are calculated correctly on 

new policies and that photographs document damage on flood claims. 

For all aspects of the operational reviews, the examiners are to determine 

whether files are maintained in good order, whether current forms are 

used and whether staff has a proficient knowledge of requirements and 

procedures to properly underwrite and process flood claims. Examiners 

are also to look at internal controls in place at each company. When 

problems are identified, examiners are to classify the severity of the 

errors. Each file reviewed is to be classified as satisfactory or 

unsatisfactory. Unsatisfactory files contain either a critical error (e.g., a 

violation of policy or an incorrect payment) or three non-critical errors 

(e.g., violations of procedures that did not delay actions on claims). 

Write-your-own companies with error rates of 20 percent or higher of the 

total number of files reviewed for the specific underwriting or claims 

operation review would always receive an unsatisfactory designation. If a 

company receives an unsatisfactory designation, FEMA requires that it 

develop an action plan to correct the problems identified and is to 

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

has been made. The action plans developed by the companies generally 

must contain a timetable for addressing deficiencies, including a plan for 

making progress reports to FEMA and developing more stringent internal 

quality control procedures. If a company continues to have problems and 

fails to implement an action plan, it can ultimately be withdrawn from the 

NFIP. According to FEMA officials, a company has been required to 

withdraw from the NFIP once in the program’s history in part because of 

issues raised in operational reviews and in part due to other financial 

problems. 

In our analysis of reports of all 15 operational reviews and follow-up visits 

done at insurance companies that were identified as having critical errors, 

we found that examiners checked information and did file reviews in 

accordance with the requirements and procedures outlined in the Write 

Your Own Financial Control Plan. We also determined that FEMA 

followed up to monitor the progress the companies made in addressing 

and resolving critical errors. For example, in one instance after a writeyour-own company received two unsatisfactory designations, it was 
Page 25 GAO-06-119 Federal Emergency Management Agency 

directed by FEMA to rewrite all of its policies to be sure that the correct 

premiums were being charged to policyholders. In another instance, 

FEMA required a write-your-own company to take more extensive action 

than was proposed in its plan to address deficiencies. 

In addition, according to information provided by FEMA, operational 

reviews completed since 2000 were on pace to meet FEMA’s policy that 

each of the 95 write-your-own companies be operationally reviewed at 

least once every 3 years. Table 3 shows the number of operational reviews 

reported by FEMA from January 2000 through August 2005. FEMA has 

scheduled a review of 31 write-your-own companies at a large vendor 

location for later in 2005. 

Table 3: Total Number of Operational Reviews of Write-Your-Own Companies 

Conducted by FEMA (January 2000 to August 2005) 

Year 

Number of

 companies reviewed

2000 43

2001 10

2002 33

2003 9

2004 42

January to August 2005 11

Total 148

Source: FEMA. 

In addition to operational reviews done by FEMA staff, FEMA’s program 

contractor conducts quality assurance reinspections of claims for specific 

flood events. The program contractor employs nine general adjusters who 

conduct quality assurance reinspections of a sample of open claims for 

each flood event.45 Procedures for the general adjusters to follow in 

conducting these reinspections are outlined in FEMA’s Write Your Own 

Financial Control Plan. According to the general adjusters we 

interviewed, in addition to preparing written reports of each reinspection, 

general adjusters discuss the results of the reinspections they perform 

 45 In addition to doing reinspections, these general adjustors are responsible for estimating 

damage from flood events, coordinating claims adjustment activities at disaster locations, 

and conducting adjuster training. 

Reinspections of NFIP 

Claims Conducted by 

Program Contractor 
Page 26 GAO-06-119 Federal Emergency Management Agency 

with officials of the write-your-own companies that process the claims. If a 

general adjuster determines that the insurance company allowed an 

expense that should not have been covered, the company is to reimburse 

the NFIP. If a general adjuster finds that the private-sector adjuster missed 

a covered expense in the original adjustment, the general adjuster will 

take steps to provide additional payment to the policyholder. An instructor 

at an adjuster refresher training session, while observing that adjusters 

had performed very well over all during the 2004 hurricane season, cited 

several errors that he had identified in reinspections of claims, including 

improper measurement of room dimensions and improper allocation of 

costs caused by wind damage (covered by homeowners’ policies) versus 

costs caused by flood damage. In addition, the instructor identified a 

problem that arose, namely, poor communication with homeowners on the 

process followed to inspect the homeowner’s property and settle the 

claim. Overall error rates for write-your-own companies are monitored. 

Procedures require additional monitoring, training, or other action if error 

rates exceed 3 percent. According to the general adjusters we interviewed 

and FEMA’s program contractor, quality assurance reinspections are 

forwarded from general adjusters to the program contractor where results 

of reinspections are to be aggregated in a reinspection database as a 

method of providing for broad-based oversight of the NFIP as its services 

are delivered by the write-your-own companies, adjusting firms and 

independent flood adjusters. 

FEMA used nonprobability sampling processes rather than random 

sampling to select files for operational reviews and claims for quality 

assurance reinspections. In nonprobability sampling, staff select a sample 

based on their knowledge of the population’s characteristics. The major 

limitation of this type of sampling is that the results cannot be generalized 

to a larger population, because there is no way to establish, by defensible 

evidence, how representative the sample is. A nonprobability sample is 

therefore not appropriate to use if the objective is to generalize about the 

population from which the sample is taken.46

For the operational reviews, specific guidance on how to select files for 

review is not documented, although guidance is provided on the number 

of files to review based on the size of the write-your-own companies’ 

volume of NFIP business. The process used to select claims for review, as 

 46 GAO, Policy Manual (Washington, D.C.: Jan.1, 2004). 

Sampling Methods Used to 

Conduct Operational 

Reviews and Quality 

Assurance Reinspections 

Do Not Provide 

Management Information 

on Overall Performance 
Page 27 GAO-06-119 Federal Emergency Management Agency 

it is described by FEMA managers who oversee operational reviews, 

identifies problems at the write-your-own companies, but it is not designed 

to assess overall performance. For the specific underwriting portion of the 

review, examiners use a process described by a FEMA official as adverse 

selection, or selection of files for review that include the most difficult 

new policies that the company underwrote in the period since the last 

operational review under the assumption that if the company addresses 

difficult underwriting issues correctly, it will also be able to do routine 

underwriting issues correctly. According to this official, some examples of 

the most difficult underwriting issues are policies covering properties in 

the flood hazard areas closest to bodies of water and elevated buildings 

that have enclosures underneath them. For the claims operation portion of 

the operational review, like the underwriting portion, an examiner said 

that FEMA attempts to select the more difficult or potentially troublesome 

claims files to review. In addition, files that are closed without payment 

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

sample of files reviewed. Thus, the operational reviews provide FEMA 

with management information on specific problems that occur at writeyour-own companies but, by design, do not assess the overall performance 

of the companies. 

For quality assurance reinspections, procedures are included in the 

written FEMA guidance on the number of claims to sample, but not on the 

sample selection process. General adjusters employed by FEMA’s 

contractor are to reinspect a sample of properties based on the total 

number of claims the write-your-own company is processing for the flood 

event. A FEMA official said that this number is up to about 4 percent of 

claims for each flood event based on the total number of claims filed for 

the flood event. Although the two general adjusters we interviewed said 

their inspection sample selection process was random, the selection 

process they described involved choosing properties to reinspect based 

upon criteria they considered to be important. The general adjusters said 

that they generally reinspected the adjustments done on properties from a 

variety of neighborhoods that represented different types (i.e., single 

family and condominium) and values of houses, and varying flood loss 

claims amounts. A FEMA manager said that this process was comparable 

to the approach used by all nine of the general adjustors. While these 

criteria, if properly applied, would lead to some variety in the selection of 

claims to review, the selection process is not random or statistically valid 

for purposes of projecting results to overall performance. By exercising a 

more rigorous sample selection process, without incurring additional costs 

or selecting larger sample sizes, FEMA would improve its internal control 

processes. 
Page 28 GAO-06-119 Federal Emergency Management Agency 

Because FEMA’s primary means of providing oversight are its operational 

reviews and quality assurance reinspections, statistically-valid information 

from these oversight activities is essential. However, FEMA’s use of an 

approach that lacks statistical validity for selecting files for operational 

reviews and claims for reinspections does not provide management with 

the information needed to assess the overall performance of the writeyour-own companies, including the overall accuracy of the underwriting of 

NFIP policies and the adjustment of claims—information that FEMA 

needs to have reasonable assurance that program objectives are being 

achieved. Without a statistically valid sampling methodology, FEMA did 

not meet our internal control standard that federal agencies provide 

reasonable assurance that program objectives are being achieved and that 

program operations are effective and efficient.47

FEMA took unique actions to respond to concerns regarding NFIP 

payments for Hurricane Isabel flood claims. In April 2004, about 7 months 

after Hurricane Isabel, FEMA established a task force to review claims 

settlements based on requests by Hurricane Isabel claimants.48 It was the 

first time in the history of the NFIP that a formal review process was 

established for NFIP claimants who were not satisfied with actions taken 

on their claims. According to an NFIP official, the task force was 

comprised of about 50 current and former certified flood adjusters from 

various private sector flood insurance adjusting firms, the nine general 

adjusters employed by FEMA’s program contractor, and three FEMA staff. 

Adjusters were assigned to review claims outside of states where they had 

previously adjusted claims for Hurricane Isabel damage, according to the 

official. 

As shown in figure 4, FEMA officials said they sent notifications to 23,770 

Isabel claimants in six states49 and Washington, D.C., to advise claimants 

 47 In addition, the Improper Payments Information Act of 2002, Pub. L. No. 107-300, 116 

Stat. 2350, (2002), requires each executive agency to review all of its programs and 

activities annually and identify those that may be susceptible to significant improper 

payments. If DHS determines during the annual review that the NFIP is susceptible to 

significant improper payments, it will be required, in accordance with Office of 

Management and Budget (OMB) guidance, to report statistically valid estimates of 

improper NFIP payments to Congress before March 31 of the following applicable year. 

48 After the task force was created, the Senate Committee on Banking, Housing, and Urban 

Affairs affirmed the need for an independent review of Hurricane Isabel claims. See S. Rep. 

No. 108-262, at 5 (2004). 

49 Maryland, North Carolina, Virginia, Delaware, Pennsylvania, and South Carolina. 

FEMA Task Force 

Closed about Half of 

Hurricane Isabel 

Claims Reviewed with 

Additional Payments 
Page 29 GAO-06-119 Federal Emergency Management Agency 

that they could have their claims reviewed by a special FEMA task force if 

they were unhappy with actions taken to settle them. Claimants could 

request a review by the FEMA task force in person at a community 

meeting, by telephone, mail, or fax. About 10 percent of the claimants who 

were notified (2,294)—all with property in Maryland, Virginia, and North 

Carolina—responded. In reviewing those claims, the task force 

determined that 1,229 of the claims should be closed with no additional 

payment and that 1,065 claims should be closed with additional payments. 

Figure 4: Disposition of Hurricane Isabel Claims Reviewed by the FEMA Task Force 

Based on our review of a statistically representative sample of claims files 

selected from the 2,294 claimants that responded to FEMA that they 

wanted a task force review of their claims, the task force closed claims 

with no additional payment for a variety of reasons. For example: 

• Task force agreed with the original determination that flood damage to 

parts of a basement were not covered. 

• Task force agreed with the original determination that damage was not 

due to flood but to wind-driven rain. 

• Task force agreed with the original determination that a claimant did 

not have coverage for personal property. 

Total Isabel claimants: 23,770

21,476

2,294

Source: GAO analysis of FEMA data.

1,229 1,065

54% 46%

Claims closed 

with no 

additional 

payment

Claims closed 

with 

additional 

payment

Responded

No response
Page 30 GAO-06-119 Federal Emergency Management Agency 

Based on our analysis, reviewers allowed additional payments most 

frequently to: 

• Repair or replace building or personal property items that the initial 

adjuster did not include in the loss report. 

• Pay a higher amount for materials, labor, or personal property items 

than the original adjuster had allowed. 

In more than 90 percent of claims closed by the task force with additional 

payment, the reviewer determined that additional payments were due for 

one of these two reasons.50 In 48 percent of the claims, additional 

payments were allowed for items that the initial adjuster did not include in 

the loss report, and in 43 percent of claims, additional payments were 

allowed to pay a higher amount for costs than the original adjuster had 

allowed. For example, in one claim we reviewed, the original estimate did 

not include coverage for a kitchen countertop and a cable television outlet 

that the reviewer included in the final claim settlement. In other claims, 

reviewers allowed higher prices for paint, dry wall, insulation, base 

molding, ceramic floor tile, and window trim, among other items, than had 

been allowed in the initial loss report. One general adjuster for FEMA’s 

program contractor said that the original pricing was not an error in many 

cases, but that the costs of the materials had increased between the time 

of the initial loss and the final settlement offer. 

Based on our analysis of the statistically representative sample of 100 

claims files reviewed by the FEMA task force, the average amount paid on 

claims closed with payments and for which claimants requested a review 

by the task force was $32,438.51 The average additional payment amount 

 50 In 9 percent of the cases, the task force allowed recoverable depreciation not allowed in 

the original settlement or determined that the claim should be paid for a primary residence 

at replacement cost value rather than for a seasonal residence at actual cash value. Some 

claimants received additional payments for more than one reason. 

51 This information was current at the time of the review of the claim by the task force and 

does not reflect any subsequent actions taken on the claim by the write-your-own 

companies. FEMA’s program contractor reported that about 3,866 Hurricane Isabel claims 

were closed without any payment. Most frequently Hurricane Isabel claims were closed 

without payment because the adjuster report determined that the damages did not exceed 

the amount of the deductible on the NFIP policy. In other instances, policyholders filed a 

claim but failed to follow up by providing appropriate documentation of loss. In several 

instances, claims were filed for damage to seawalls, which are specifically excluded from 

coverage under the NFIP. 
Page 31 GAO-06-119 Federal Emergency Management Agency 

determined by the task force for claims that were closed with an 

additional payment was $3,340. In comparison, as illustrated in figure 5, 

the average closed payments for 2002, 2003, and 2004 for claims closed 

with payment were $16,878, $19,980, and $30,668, respectively.52

Figure 5: Comparison of Claims Settlement Amounts for Hurricane Isabel Claims 

Reviewed by the Task Force and All Claims Closed with Payment (2002-2004) 

 52 For claims in our file review, the median settlement amount—the point at which half of 

the cases were settled at higher amount and half were settled at a lower amount—was 

$15,583 before the task force review and $19,826 after the task force review. Data on 

median settlement amounts for 2002, 2003, and 2004 was not available. 

0

5000

10000

15000

20000

25000

30000

35000

40000

2004

xxxx

xxxx

xxxx

Hurricane Isabel

2002

2003

Claims (in dollars)

Source: GAO analysis of NFIP data.

16,878

19,980

32,438

30,688
Page 32 GAO-06-119 Federal Emergency Management Agency 

As of September 2005, FEMA had not fully implemented NFIP program 

changes mandated by the Flood Insurance Reform Act of 2004 to (1) 

develop supplemental materials for explaining coverage and the claims 

process to policyholders when they purchase and renew policies and (2) 

establish, by regulation, an appeals process for claimants. The 6-month 

statutory deadline for implementing these changes was December 30, 

2004. The act also required FEMA to establish minimum training and 

education requirements for flood insurance agents and to publish the 

requirements in the Federal Register by December 30, 2004. Although 

FEMA published a Federal Register notice of its requirements on 

September 1, 2005, the notice explained that FEMA intended to work with 

the states to implement the minimum NFIP standards through existing 

state licensing schemes for insurance agents. Thus, it is too early to tell the 

extent to which insurance agents will meet FEMA’s minimum 

requirements. 

For purposes of explaining coverage and the claims process to 

policyholders, the Flood Insurance Reform Act of 2004 required FEMA to 

develop three types of informational materials. The required materials are: 

(1) supplemental forms explaining in simple terms the exact coverage 

being purchased; (2) an acknowledgement form that the policyholder 

received the SFIP and any supplemental explanatory forms, as well as an 

opportunity to purchase coverage for personal property; and (3) a flood 

insurance claims handbook describing the process for filing and appealing 

claims.53 FEMA officials said they had drafted an acknowledgement form 

and new insurance program forms to explain coverage to policyholders 

when they purchase and renew their insurance. FEMA officials said that 

these forms were final as of September 2005, and that they expected 

distribution to policyholders to begin in October 2005. While FEMA 

appears to have completed its implementation efforts with respect to the 

supplemental and acknowledgement forms, its flood insurance claims 

handbook does not yet fully comply with statutory requirements. FEMA 

posted a flood insurance claims handbook, dated July 2005, on its website 

in September 2005. The handbook contains information on anticipating, 

filing and appealing a claim, but does not include information regarding 

the appeals process that FEMA is statutorily required to establish through 

regulation. In its comments on our draft report, FEMA stated that it was 

offering claimants an informal appeals process pending the establishment 

 53 Sections 202, 203 and 204 of the Flood Insurance Reform Act of 2004 contain these 

requirements. 

FEMA Has Not Fully 

Implemented NFIP 

Program Changes 

Mandated by the 

Flood Insurance 

Reform Act of 2004 
Page 33 GAO-06-119 Federal Emergency Management Agency 

of a regulatory process, and that the handbook describes this informal 

appeals process. However, by statute, the claims handbook must describe 

the regulatory process, which FEMA has yet to establish. 

The establishment of a regulatory appeals process is required by section 

205 of the Flood Insurance Reform Act of 2004. To address this 

requirement, FEMA officials said they had discussed the feasibility of 

maintaining a permanent task force to consider appeals—like the one 

created to review Hurricane Isabel claims. In commenting on a draft of 

this report, the acting director of FEMA’s Emergency Preparedness and 

Response Directorate said that FEMA had rejected this plan, but he did 

not disclose any alternative plan detailing key elements of an appeals 

process such as how to initiate an appeal, time frames for considering 

appeals, the size of an appeals board, and the qualifications for 

membership, or how long the rulemaking process to provide for appeals 

by regulation might take. Therefore, it remains unclear how or when 

FEMA will establish the regulatory appeals process, as directed by the 

Flood Insurance Reform Act of 2004.

Finally, section 207 of the Flood Insurance Reform Act of 2004 required 

FEMA, in cooperation with the insurance industry, state insurance 

regulators, and other interested parties, to establish minimum training and 

education requirements for all insurance agents who sell flood insurance 

policies and to publish the requirements in the Federal Register. On 

September 1, 2005, FEMA published a Federal Register notice in response 

to this requirement.54 In the notice, FEMA provided a course outline for 

flood insurance agents, which consisted of eight sections: an NFIP 

Overview; Flood Maps and Zone Determinations; Policies and Products 

Available; General Coverage Rules; Building Ratings; Claims Handling 

Process; Requirements of the Flood Insurance Reform Act of 2004; and 

Agent Resources. FEMA further stated that, rather than establish separate 

and perhaps duplicative requirements from those that may already be in 

place in the states, it had chosen to work with the states to implement 

NFIP requirements through already established state licensing schemes for 

insurance agents. However, the notice did not specify how or when states 

were to begin implementing the NFIP training and education 

requirements. Given the recent publication of the Federal Register notice, 

and the states’ eventual role in implementing FEMA’s training and 

 54 See Flood Insurance Training and Education Requirements for Insurance Agents, 70 Fed. 

Reg. 52,117 (2005). 
Page 34 GAO-06-119 Federal Emergency Management Agency 

education requirements, it is too early to tell the extent to which insurance 

agents will meet FEMA’s minimum standards. 

FEMA officials said that developing and implementing changes to the 

NFIP can have broad reaching and significant impacts for the millions of 

NFIP policyholders, as well as the private sector stakeholders upon whom 

FEMA relies to implement the program. As a result, the agency is taking a 

measured approach to making the mandated changes to ensure that it 

achieves results and minimizes any negative effects on policyholders and 

NFIP stakeholders. Nonetheless, without plans with milestones for 

completing its efforts to provide policyholders with a flood insurance 

claims handbook that meets statutory requirements, to establish a 

regulatory appeals process, and to ensure that insurance agents meet 

minimum NFIP education and training requirements, FEMA cannot hold 

responsible officials accountable and track progress to ensure that these 

management improvements are in place to assist victims of future flood 

events. 

A key challenge that FEMA faces in its role as coordinator of the federal 

disaster response efforts, including the NFIP, is to ensure through its 

monitoring and oversight efforts that programs are implemented in 

accordance with statutory and regulatory requirements across the nation. 

It is a difficult challenge to meet, as services are delivered primarily 

through a decentralized system of private-sector contractors, their 

employees, and their subcontractors. However, it is increasingly important 

that FEMA have assurances that program requirements are followed in 

light of the growing participation and increasing costs of its programs. 

While FEMA’s NFIP monitoring and oversight processes have identified 

specific problems with the delivery of services, the lack of statistically 

representative samples for processes to assess the accuracy of claims and 

adjustments limits FEMA’s ability to project the results of its analyses in 

order to provide management information on the private sector’s overall 

implementation of the program. Without such information, the value of 

FEMA’s monitoring processes—operational reviews and quality assurance 

reinspections—as critical internal control activities is limited. Such 

information could also help the agency better identify potential needs for 

such things as additional training requirements or clarification of NFIP 

coverage and claims guidance, as identified in the Flood Insurance Reform 

Act of 2004. 

Conclusions 
Page 35 GAO-06-119 Federal Emergency Management Agency 

FEMA officials have been working to address the consequences of the 

most devastating hurricane season on record, and these efforts have 

understandably put pressure on FEMA’s resources, particularly since 

claims began to be filed for the damage from Hurricane Katrina. 

Nonetheless, the agency may continue to face challenges like those posed 

by Hurricane Isabel in implementing the NFIP until plans for addressing 

some of the key legislative requirements of the Flood Insurance Reform 

Act of 2004 are developed and implemented. Without establishing a 

roadmap and a schedule for meeting mandated time frames that have 

already elapsed, FEMA is limited in its ability to project when program 

improvements will be made. 

To improve FEMA’s oversight and management of the NFIP, we 

recommend that the Secretary of the Department of Homeland Security 

direct the Under Secretary of Homeland Security for Emergency 

Preparedness and Response to take the following two actions: 

• use a methodologically valid approach to draw statistically 

representative samples of claims for underwriting and claims portions 

of operational reviews and for quality assurance reinspections of 

claims by general adjusters; and 

• develop documented plans with milestones for implementing 

requirements of the Flood Insurance Reform Act of 2004 to provide 

policyholders with a flood insurance claims handbook that meets 

statutory requirements, to establish a regulatory appeals process, and 

to ensure that insurance agents meet minimum NFIP education and 

training requirements. 

On October 12, 2005, the Acting Director of FEMA’s Mitigation Division 

provided written comments on a draft of this report. FEMA offered 

substantive comments on three issues (App. II). FEMA offered comments 

principally in three areas: (1) its disappointment that we had not directly 

addressed the issue of whether Congress intended the flood insurance 

program to restore damaged property to its pre-flood condition; (2) its 

view that the method of choosing its sample for operational reviews was 

appropriate and that its financial and internal controls are wide-ranging 

and include processes that we did not address; and (3) its view that 

contrary to the impression given in our draft report, FEMA has worked 

diligently to implement the requirements of the Flood Insurance Reform 

Act of 2004. 

Recommendations for 

Executive Action 

Agency Comments 

and Our Evaluation 
Page 36 GAO-06-119 Federal Emergency Management Agency 

• FEMA expressed disappointment that our report made no explicit, 

unambiguous statement regarding whether Congress intended flood 

insurance to restore damaged property to its pre-flood condition. We 

believe we have addressed the issue consistent with our statutory 

mandate by explaining the statutory and regulatory provisions that 

affect both dollar ceilings and other coverage limitations. Section 208 

of the Flood Insurance Reform Act of 2004 mandated GAO to conduct a 

study of aspects of the National Flood Insurance Program (NFIP), 

including “the adequacy of the scope of coverage provided under flood 

insurance policies in meeting the intended goal of Congress that flood 

victims be restored to their pre-flood conditions, and any 

recommendations to ensure that goal is being met.” To address this 

mandate, it was necessary to consider the legal framework of flood 

insurance coverage established by the National Flood Insurance Act of 

1968, as amended, and FEMA’s implementing regulations. The 

amounts and limitations of flood insurance policy coverage are 

affected by both the statute and the regulations. In other words, flood 

insurance policies can only restore victims to pre-flood conditions 

within, but not beyond, the limits established by law and regulation. To 

address our mandate, we therefore explained the statutory and 

regulatory provisions that placed limitations on the amount claimants 

could recover under their flood insurance policies. Our April 2005 

testimony55 and this report make clear that the statutory ceilings on the 

maximum amount of coverage that can be purchased and the policy 

limitations that result from FEMA regulations may result in a 

policyholder’s insured structure not being restored to its pre-flood 

condition. 

• FEMA highlights a number of oversight and management procedures 

for the program, including those for financial management. It also 

noted that its method of selecting its sample for operational reviews 

was more appropriate than the statistically random probability sample 

we recommended. Most of the additional oversight and management 

processes and controls FEMA noted in its comments are for financial 

management—an area not included in the scope of our work. Our 

work focused on program implementation and oversight. During our 

review, FEMA managers described the operational reviews and claims 

inspections as the primary methods FEMA used for monitoring and 

overseeing the NFIP. 

 55 See GAO, National Flood Insurance Program: Oversight of Policy Issuance and 

Claims, GAO-05-523T (Washington, D.C.: April 14, 2005). 
Page 37 GAO-06-119 Federal Emergency Management Agency 

• In support of its current sampling strategy for its operational reviews, 

FEMA cites a report it had commissioned in 1999---a report FEMA had 

not previously mentioned or provided to us. Thus, we cannot comment 

on that report or its recommendations. Nevertheless, although FEMA’s 

current sampling strategy may provide an opportunity to focus on 

particular areas of risk, it does not provide management with the 

information needed to assess the overall performance of the writeyour-own companies, including the overall accuracy of the 

underwriting of NFIP policies and the adjustment of claims—

information that FEMA needs to have reasonable assurance that 

program objectives are being achieved 

• With respect to FEMA’s implementation of program changes mandated 

by the Flood Insurance Reform Act of 2004, we described several 

actions FEMA had taken in its efforts to comply with the Act, while 

noting that it had not fully implemented the Act’s requirements. In its 

comments on our draft report, FEMA said that it had been working 

diligently to meet the Act’s requirements and had made further 

progress on certain initiatives, for example, by finalizing “Summary of 

Coverage” forms required by section 202 of the act and distributing 

them to policyholders purchasing or renewing their coverage after 

September 21, 2005. We have updated our draft report to reflect the 

new status information, but work remains to be done before FEMA 

fully implements other requirements of the Flood Insurance Reform 

Act of 2004. As we noted in our report, section 205 of the Act requires 

FEMA to establish a claim appeals process by regulation, and section 

204 of the Act requires FEMA to describe this regulatory appeals 

process in its flood insurance claims handbook. Although FEMA 

commented that it was offering claimants an informal appeals process 

pending the establishment of a regulatory process, it must establish the 

regulatory process to be in compliance with the informational 

requirements of section 204 and the procedural requirements of section 

205 of the act. Finally, although FEMA published minimum education 

and training requirements for flood insurance agents in the Federal 

Register in September 2005, FEMA has not established how or when 

states are to begin imposing these requirements on flood insurance 

agents. Thus, we believe our recommendation that FEMA develop 

documented plans with milestones for implementing the requirements 

of the Flood Insurance Reform Act of 2004 remains appropriate. 

FEMA also offered a number of technical comments that we incorporated 

as appropriate. 
Page 38 GAO-06-119 Federal Emergency Management Agency 

We are sending copies of this report to the Secretary of the Department of 

Homeland Security. We will also make copies available to others upon 

request. In addition, the report will be available at no charge on GAO’s 

Web site at http://www.gao.gov. 

If you have any questions, please contact me at (202) 512-8777 or 

jenkinswo@gao.gov or Christoper Keisling, assistant director at (404) 679-

1917 or keislingc@gao.gov. Contact points for our offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made major contributions to this report are listed in 

appendix III. 

William O. Jenkins, Jr. 

Director, Homeland Security and Justice Issues 
Appendix I: Scope and Methodology 

Page 39 GAO-06-119 Federal Emergency Management Agency 

To address provisions in the Flood Insurance Reform Act of 2004 for a 

GAO study and report on issues related to the processing of flood 

insurance claims and the Federal Emergency Management Agency’s 

(FEMA) oversight and management of the program, we assessed (1) the 

statutory and regulatory limitations on homeowners’ coverage under the 

National Flood Insurance Program (NFIP); (2) FEMA’s role in monitoring 

and overseeing the NFIP; (3) FEMA’s response to concerns regarding 

NFIP payments for Hurricane Isabel claims; and (4) the status of FEMA’s 

implementation of requirements of the Flood Insurance Reform Act of 

2004. 

To determine the statutory and regulatory limitations on homeowners’ 

coverage under the NFIP, we reviewed the National Flood Insurance Act 

of 1968, as amended, its legislative history, and FEMA’s implementing 

regulations, including its “Standard Flood Insurance Policy.” We also 

discussed our review with officials of DHS Office of General Counsel. 

To assess FEMA’s role in monitoring and overseeing the NFIP, we 

examined program requirements and reports. We analyzed the results of 

15 operational reviews and follow-up visits FEMA completed from 2001 

through February 2005 to determine whether they were done in 

accordance with requirements and procedures outlined in FEMA’s Write 

Your Own Financial Control Plan and GAO’s Standards for Internal 

Control in the Federal Government. To determine whether FEMA met the 

standard for assessing the quality of performance over time and ensuring 

that findings of its operational reviews were addressed, we analyzed 

reports of the results of all reviews of insurance operations and follow-up 

visits at insurance companies where FEMA identified critical errors over a 

10-year period, from 1996 to April 2005—a total of 15 reports. All of the 

reviews and visits for this 10-year period occurred from 2001 to April 2005 

because for several years prior to 1999, FEMA did not conduct operational 

reviews. The reviews were restarted on a “practice” basis in 1999 and a 

regular basis in 2000. We also observed FEMA examiners as they 

conducted a portion of an operational review at a flood insurance vendor 

location and obtained information on the schedule of operational reviews 

from 2000 to June 2005. We obtained documentation on how quality 

assurance reinspections of claims adjustments are done after flood events 

and reviewed copies of several reinspection reports and examples of data 

maintained in the NFIP reinspection database, as well as aggregate 

information on the number of quality assurance reinspections done from 

2000 to June 2005. We interviewed officials of FEMA and its program 

contractor about their oversight activities, and we discussed aspects of the 

process with private-sector insurance officials from four of the five largest 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 40 GAO-06-119 Federal Emergency Management Agency 

write-your-own companies in terms of the number of claims filed in 2004. 

For example, we talked with FEMA officials about how claims files were 

selected for each operational review to examine write your own 

companies’ claims underwriting and adjustment activities and talked with 

two of the nine general adjusters employed by FEMA’s program contractor 

about how they reinspect the work of adjusters who prepare flood damage 

estimates and how they select properties to visit. We interviewed these 

two general adjusters because they had performed reinspections of claims 

adjustments for damage from Hurricane Isabel and from hurricanes in 

Florida in 2004. We did not evaluate FEMA’s methodology for selecting 

sample sizes for its monitoring and oversight activities. 

To determine FEMA’s response to concerns about Hurricane Isabel claims 

payments, we reviewed a statistically valid sample of 100 claims files of 

claimants in Maryland, Virginia, and North Carolina who were not satisfied 

with their initial claims settlements and had their claims reviewed by a 

special FEMA task force. The claims files included documentation of 

actions taken on the claims by the write-your-own companies and the 

FEMA task force, as well as correspondence and documentation provided 

by the claimants. For this representative sample of claims, we determined 

the average additional amount paid on claims that were closed with an 

additional payment; the average amount of claims reviewed by the task 

force; and reasons claims were closed by the task force with and without 

additional payments. We based our analysis on the information in the files 

we reviewed; we did not verify the accuracy of the information in the 

claims files. We tested the reliability of claims payments amounts for the 

NFIP database on a statistically valid sample of 250 claims for all flood 

events in 2003 and 2004. We determined that the NFIP database was 

sufficiently reliable for our reporting purposes. We discussed the actions 

FEMA took to address concerns of Hurricane Isabel claimants with FEMA 

officials, as well as the two general adjusters we interviewed, other 

officials of FEMA’s program contractor, and private-sector insurance 

officials. We did not interview NFIP policyholders who filed claims for 

flood damage after Hurricane Isabel because (1) such interviews would 

have provided anecdotal information that could not be used to make 

judgments about Hurricane Isabel claimants as a group or any subset of 

the group; and (2) we started our review more than a year after Hurricane 

Isabel occurred; thus, testimonial information would have been dated. 

To determine the extent to which FEMA had implemented provisions of 

the Flood Insurance Reform Act of 2004, we examined documentation of 

the agency’s efforts, including draft materials FEMA had prepared for 

distribution to policyholders. We also interviewed officials to determine 
Appendix I: Scope and Methodology 

Page 41 GAO-06-119 Federal Emergency Management Agency 

what progress had been made and what milestones, if any, had been 

established to meet the legislative mandates. 

We conducted our work in accordance with generally accepted 

government auditing standards between December 2004 and August 2005. 
Appendix II: Comments from the Federal 

Emergency Management Agency 

Page 42 GAO-06-119 Federal Emergency Management Agency 

Appendix II: Comments from the Federal 

Emergency Management Agency 
Appendix II: Comments from the Federal 

Emergency Management Agency 

Page 43 GAO-06-119 Federal Emergency Management Agency 
Appendix II: Comments from the Federal 

Emergency Management Agency 

Page 44 GAO-06-119 Federal Emergency Management Agency 
Appendix II: Comments from the Federal 

Emergency Management Agency 

Page 45 GAO-06-119 Federal Emergency Management Agency 
Appendix II: Comments from the Federal 

Emergency Management Agency 

Page 46 GAO-06-119 Federal Emergency Management Agency 
Appendix III: GAO Contact and Staff 

Acknowledgements 

Page 47 GAO-06-119 Federal Emergency Management Agency 

William O. Jenkins, Jr. (202) 512-8777 

Amy Bernstein, Christine Davis, Pawnee Davis, Wilfred Holloway, 

Deborah Knorr, and Raul Quintero made significant contributions to this 

report. 

Appendix III: GAO Contact and Staff 

Acknowledgements 

GAO Contact 

Acknowledgments 

(440358) 
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Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 

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

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

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