National Flood Insurance Program: Greater Transparency and Oversight of Wind and Flood Damage Determinations Are Needed
Published: 2007-12-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Disputes between policyholders and insurers after the 2005 hurricane season highlight the challenges in understanding the cause and extent of damages when properties are subjected to both high winds and flooding. Questions remain over the adequacy of steps taken by the Federal Emergency Management Agency (FEMA) to ensure that claims paid by the National Flood Insurance Program (NFIP) cover only those damages caused by flooding. GAO was asked to evaluate (1) issues that arise when multiple insurance policies provide coverage for losses from a single event, (2) state regulators' oversight of loss adjusters, and (3) information that NFIP collects to assess the accuracy of damage determinations and payments. GAO collected data from FEMA, reviewed reinspection reports and relevant policies and procedures, and interviewed state regulatory officials and others about adjuster oversight and NFIP.
section_title: What GAO Found
paragraphs: Insurance coverage gaps and claims uncertainties can arise when coverage for hurricane damage is divided among multiple insurance policies. Coverage for hurricanes generally requires more than one policy because private homeowners policies generally exclude flood damage. But the extent of coverage under each policy depends on the cause of the damages, as determined through the claims adjustment process and the policy terms that cover a particular type of damage. This process is further complicated when the damaged property is subjected to a combination of high winds and flooding and evidence at the damage scene is limited. Other claims concerns can arise on such properties when the same insurer serves as both NFIP's write-your-own (WYO) insurer and the property-casualty (wind) insurer. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating an inherent conflict of interest. Differences in licensing and training requirements for insurance claims adjusters among states also create uncertainties about adjusters' qualifications. Prior to the 2005 hurricane season, some coastal states had few or no requirements, while others had requirements for most types of adjusters. Further, states can waive their normal oversight requirements after a catastrophic event to help address demand, as they did after Hurricane Katrina. As a result, significant variations can exist in the qualifications of claims adjusters available after a catastrophic event. Strengthened and more uniform state requirements for adjusters could enhance the qualifications of the adjuster force in future catastrophes and improve the quality and consistency of claims adjustments. NFIP does not systematically collect and analyze both wind and flood damage claims data, limiting FEMA's ability to assess the accuracy of flood payments on hurricane-damaged properties. The claims data collected by NFIP through the WYO insurers--including those that sell and service both wind and flood policies on a property--do not include information on whether wind contributed to total damages or the extent of wind damage as determined by the WYO insurer. The lack of this data also limits the usefulness of FEMA's quality assurance reinspection program to reevaluate the accuracy of payments. In addition, the aggregate claims data that state insurance regulators collectively gathered after Hurricanes Katrina and Rita were not intended to be used to assess wind and flood damage claims together on a property- or community-level basis. Further, FEMA program contractors do not have access to WYO insurers' policies, procedures, and instructions that describe to adjusters how wind and flood damages are to be determined when properties are subjected to both perils. FEMA officials stated that they did not have the authority to collect wind damage claims data from insurers. But without the ability to examine claims adjustment information for both the wind and flood damages, NFIP cannot always determine the extent to which each peril contributed to total property damages and the accuracy of the claims paid for losses caused by flooding.

section_title: Letter
paragraphs: Hurricanes pose unique challenges for insurers and property owners  Hurricanes pose unique challenges for insurers and property owners  because damages caused by these storms can result from multiple perils.  because damages caused by these storms can result from multiple perils.  Among these are high winds and flooding, the combination of which  Among these are high winds and flooding, the combination of which  caused unprecedented damage during Hurricane Katrina. After such an  caused unprecedented damage during Hurricane Katrina. After such an  event, a necessary and challenging task is determining the extent of the  event, a necessary and challenging task is determining the extent of the  damage caused by each peril, as wind and flood damages are generally  damage caused by each peril, as wind and flood damages are generally  covered under different types of insurance policies. Private property- covered under different types of insurance policies. Private property- casualty insurance policies generally exclude flood damage, which is  casualty insurance policies generally exclude flood damage, which is  covered by federally backed flood insurance under the National Flood  covered by federally backed flood insurance under the National Flood  Insurance Program (NFIP). Since 1968, the federal government has offered  Insurance Program (NFIP). Since 1968, the federal government has offered  flood insurance policies through NFIP, a program now administered by the  flood insurance policies through NFIP, a program now administered by the  Federal Emergency Management Agency (FEMA), U.S. Department of  Federal Emergency Management Agency (FEMA), U.S. Department of  Homeland Security. However, private property-casualty insurers may sell  Homeland Security.
The NFIP was established under the authority of the National Flood Insurance Act of 1968,  42 U.S.C. §§ 4001 et seq., as a subsidized program sponsored by the federal government. compromised, making assessments and apportionments of damages more  difficult. These challenges further contributed to the concerns,  controversies, and disputes over the damage determinations made by  insurance adjusters.
In response to these issues and other concerns, you asked us to evaluate  (1) the issues that can arise for homeowners when multiple insurance  policies provide coverage for losses from a single event, (2) state  insurance regulators’ oversight of the licensing and performance of loss  adjusters, and (3) the information that NFIP collects and analyzes in order  to determine whether damage determinations and flood claims payments  accurately reflect the actual distribution of losses between wind and  flooding.
To accomplish our work, we discussed information and issues associated  with insurance coverage and claims processing activities with FEMA,  NFIP program contractors, state insurance regulators, the National  Association of Insurance Commissioners (NAIC), property-casualty  insurers, state-sponsored wind insurers, insurance agents, claims  adjusters, industry associations, and mediators. We also obtained licensing  and training requirements for claims adjusters from state insurance  regulators and industry representatives. Further, we identified and  reviewed the specific data elements and level of geographic detail  available to NFIP on hurricane claims payments. In addition, we reviewed  a statistically valid sample of files (740) of reinspections that NFIP  conducted for selected properties. Appendix I provides additional  information concerning the scope and methodology of our work. We  conducted our work between May 2006 and November 2007 in Florida,  Illinois, Louisiana, Mississippi, North Carolina, Pennsylvania, South  Carolina, and Texas in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: The federal government has long been a participant in addressing risks  that private property-casualty insurers have been unable or unwilling to  insure. One of these risks is damage due to flooding. While NFIP backs the  flood insurance policy, it generally contracts the sale and servicing of the  policies out to private property-casualty insurers, known as WYO  insurance companies. About 96 percent of NFIP’s policies are sold and  serviced by WYO insurers. For a given property, the WYO insurer writing  and administering the flood insurance policy on behalf of NFIP may also  provide coverage for wind-related risks on the same property.
Through its program contractor, FEMA operates a reinspection program  to monitor and oversee claims adjustments and address concerns about  flood payments. The reinspection program’s activities encompass  reevaluating the flood adjustments and claims payments made on  damaged property to determine whether NFIP paid the proper amount for  flood-related damages. The program conducts on-site reinspections and  reevaluations of a sample of flood claim adjustments.
Determining the cause and extent of damages is primarily the job of  insurance adjusters, who are either employed or contracted by insurance  companies and generally licensed by the states. Adjusters assess damage;  estimate losses; and submit required reports, work sheets, and  photographs to the insurance company, which reviews the claims and  approves them for payment. In general, insurance adjusters are paid on a  percentage basis or fee schedule tied to the amount of damages. These  adjusters can fall into several categories:    Staff (or company) adjusters are employees of insurance companies who  determine the amount of damages payable on claims under a contract of  insurance.
Independent adjusters and adjuster firms are contractors that insurance  companies hire to assess damages and determine claims losses.
Emergency adjusters are sometimes allowed by states to operate on a  temporary basis to further augment the force of adjusters following a  catastrophe.
Public adjusters are hired by and work on behalf of property owners to  assess damages and help prepare claims.
Insurance adjusters are regulated by the states, which have been granted  authority by Congress to oversee insurance activities. The federal  government retains the authority to regulate insurance, giving primary  responsibility for insurance regulation to the states in accordance with the  McCarran-Ferguson Act of 1945. State insurance regulators’ oversight  includes requirements pertaining to the licensing and training of insurance  adjusters. In addition, adjusters that have been licensed or allowed to  operate by a state can also be certified as flood adjusters by NFIP to  assess flood damages on properties.
A property owner who has experienced hurricane damages can initiate a  flood insurance claim by contacting the insurance agent of the WYO  insurer that sold the NFIP flood policy. The agent relays the claim  information to the WYO insurer, which assigns a flood claims adjuster to  the case. The adjuster will then inspect the property to determine the  damage caused by flooding and the extent to which that damage is  covered under the flood policy. To help carry out this work, insurance  adjusters commonly use software that organizes the damage information  and estimates the repair or replacement costs for such damages. Factors  utilized in determining loss estimates include the square footage of the  building; the type of building materials; and the cost of materials and  repairs at the market rate, which is subject to change. Once the  assessment of a damaged property is complete, the adjuster files a report  with the WYO insurance company, which reviews the claim and approves  or denies it for payment to the policyholder (see fig. 1).
Likewise, for wind-related damage claims on hurricane-damaged  properties, property owners can contact the insurance agent or company  that sold them their property-casualty policy to start the claims process.  For some property owners, their property-casualty insurer for wind- related risks is the same company that serves as NFIP’s WYO insurer. In  such cases, both the wind and flood insurance policies will be processed  by the same insurer. In other cases, where the property-casualty insurer is  a different company than the WYO insurer, claims for wind and flood  damages will be processed separately by different insurers.
Both the insurance industry and NFIP incurred unprecedented storm  losses from the 2005 hurricane season. State insurance regulators  estimated that property-casualty insurers had paid out approximately  $22.4 billion in claims tied to Hurricane Katrina (excluding flood) as of  December 31, 2006. However, industry observers estimate that insured  losses tied to Hurricane Katrina alone (other than flood) could total more  than $40 billion, depending on the outcome of outstanding claims and  ongoing litigation. FEMA estimated that NFIP had paid over $15.7 billion  in flood insurance claims from Hurricane Katrina as of August 31, 2007,  encompassing approximately 99 percent of all flood claims received.
As of September 2007, FEMA had about 68 employees, assisted by about  170 contractor employees, to manage and oversee the NFIP and the  National Flood Insurance Fund, into which premiums are deposited and  claims and expenses are paid. Their management responsibilities include  establishing and updating NFIP regulations, analyzing data to determine  flood insurance rates, and offering training to insurance agents and  adjusters. In addition, FEMA and its program contractor are responsible  for monitoring and overseeing the quality of the performance of the WYO  insurance companies to assure that NFIP is administered properly.
We have recently completed related work highlighting concerns with  payment formulas for services rendered by WYO insurers. We are also  engaged in other ongoing work focused on reviewing various aspects of  the oversight of WYO insurers.
section_title: Potential Coverage Gaps and Claims Uncertainties Can Arise When Homeowners Have Multiple Policies That Cover Different Perils
paragraphs: Insurance coverage for hurricane damages commonly requires the  purchase of multiple insurance policies—a general homeowners policy, an  NFIP policy, and in some areas, a special policy for wind damage. But  even with these policies, homeowners cannot be certain that all damage  resulting from a hurricane will be covered because the areas and limits of  coverage differ across policies. Further, because both homeowners and  NFIP policies can be serviced by a single WYO insurer, a conflict of  interest exists during the adjustment process. Since Hurricane Katrina,  legal disputes have been ongoing between property-casualty insurers and  policyholders over damage determinations and the interpretation of policy  language concerning coverage for damages that may have resulted from  both wind and flooding.
subsections: section_title: Covering Hurricane Damages Often Requires Two or More Policies with Different Limits and Coverage
paragraphs: Property owners cannot currently purchase a single insurance policy for  all hurricane-related damages because policies offered by property- casualty insurers generally exclude coverage for flood damage and  sometimes may exclude coverage for wind-related damage. Property  owners in flood-prone areas frequently have at least two insurance  policies—for example, a homeowners policy from a private insurer and a  flood insurance policy backed by NFIP. Additionally, on certain properties  in coastal areas, private insurers sometimes exclude from homeowners  policies coverage for wind-related damage, requiring policyholders to  either pay an additional premium for wind-related risks on their primary  policy or to purchase a separate supplemental policy for wind-related  damages. In such cases, this supplemental coverage is typically provided  by a state-sponsored wind insurance pool that has been created to address  shortages in the availability of insurance for wind-related risks. Moreover,  some property owners may also have excess flood insurance if the value of  their home exceeds the coverage limits offered by NFIP.
Private property-casualty insurance policies differ from the government- sponsored flood insurance policy in several ways. For example, key  differences exist between the level of coverage offered by NFIP and that  offered under common homeowners policies. Available coverage for  damages under an NFIP policy is limited by law to $250,000 for the  structure and $100,000 for contents, although the replacement cost value  of some homes exceeds such limits. Generally, private homeowners  policies can cover the replacement cost value of the house, and coverage  may be obtained to insure personal property, including outside property  and personal belongings (e.g., trees, plants, decks, and fences), in contrast  to an NFIP policy. Further, while homeowners policies often provide  coverage for additional living expenses if a house is rendered  uninhabitable, NFIP does not insure policyholders for such coverage,  although such expenses may be offset through other disaster assistance  provided by FEMA.
section_title: Insurance Coverage Gaps, Claims Adjustment Uncertainties, and Conflicts of Interest Can Materialize When Two or More Policies Cover One Event
paragraphs: Property owners do not know in advance whether their insurance policies  will cover all damages from a hurricane, because the payments ultimately  will depend on the extent to which each policy will cover the damages— that is, whether the damages are determined to be the result of hurricane  winds, flooding, or some combination of both. Even property owners that  purchase the maximum amount of flood insurance available through NFIP,  along with other private insurance for wind-related risks, do not know  whether they are completely covered until the insurers’ claims adjusters  determine what caused the damage. Given the differences between the  coverage offered under flood insurance and the coverage offered by  private property-casualty insurance, the damage determinations can be  crucial. For example, a homeowner whose house is worth $450,000 may  have both a flood insurance policy and wind coverage, but flood insurance  covers only up to $250,000 in damages. If damages to the policyholder’s  house are severe, and all of it is determined to be from flooding, the  property owner may not receive enough compensation to fully rebuild and  pay for temporary housing under the terms of the NFIP flood policy. But  if all of the damages are determined to have been caused by wind, the  homeowner may be able to fully recoup their losses and additional living  expenses. Hence, insurance coverage uncertainties can arise when  hurricane damages occur.
Claims adjustment uncertainties include challenges that can arise in  assessing and adjusting damages due to wind and flooding when the  evidence of damage at the damage scene is limited or compromised. As a  result of the magnitude and severity of damage from Hurricanes Katrina  and Rita, evidence of the damaged structures was often limited or  compromised. In some cases, buildings were completely destroyed,  leaving little except the foundations. Insurance claims adjusters and  industry participants we spoke with acknowledged that assessing the  cause and extent of damages was more problematic when little evidence  of the structure was left. Exacerbating such difficulties was the fact that  adjusters commonly arrived on the damage site several weeks after  Hurricane Katrina occurred, given the scope of damage. During the time  between Hurricane Katrina and the arrival of the adjusters, the remaining  evidence at damage scenes may have been further compromised by  subsequent natural and man-made events (such as the clearing of debris  from streets and roadways).
Finally, there is an inherent conflict of interest when the same insurer is  responsible for assessing damages for its own property-casualty policy, as  well as for the NFIP policy, each covering different perils on the same  property. As part of the WYO arrangement, private property-casualty  insurers are responsible for selling and servicing NFIP policies, including  performing the claims adjustment activities to assess the cause and extent  of damages. When the WYO insurer writes and services its own policy,  along with the NFIP policy for the same property, the insurer is  responsible for determining the cause of damages and, in turn, how much  of the damages it will pay for and how much NFIP will cover. In certain  damage scenarios, the WYO insurer that covers a policyholder for wind  losses can have a vested economic interest in the outcome of the damage  determination that it performs when the property is subjected to a  combination of high winds and flooding. In such cases, a conflict of  interest exists with the WYO insurer as it determines which damages were  caused by wind, to be paid by itself, and which damages were caused by  flooding, to be paid by NFIP. Moreover, the amount WYO insurers are  compensated for servicing a flood claim also increases as the amount of  flood damage on a claim increases—an allowance of 3.3 percent of each  claim settlement amount.
section_title: Legal Disputes Involving Policy Coverage Have Arisen Since the 2005 Hurricane Season
paragraphs: In the aftermath of the 2005 hurricane season, legal disputes emerged  between policyholders and insurers that centered largely on the extent to  which damages would be covered under a homeowners policy, as distinct  from an NFIP policy, when both high winds and flooding occurred. Such  disputes have been and continue to be argued and resolved though state  and federal courts, as well as through mediation programs.
Many of these cases have concerned the interpretation and/or  enforceability of certain property-casualty policy language in the context  of challenging the cause of the damages or losses. For example, some  disputes have raised the question of whether a policy’s flood exclusion  language clearly excluded the water-related event, such as storm surge,  that caused the damages at issue. Other cases have challenged the  enforceability of a property-casualty policy’s anti-concurrent causation  clause. Such a clause generally provides that coverage is precluded for  damage caused directly or indirectly by an excluded cause of loss (for  example, flood), regardless of any other cause (for example, wind) that  contributes concurrently to or in any sequence with the loss. Many of  these cases are still working their way through the judicial trial and  appeals processes and will eventually be resolved based on the particular  language of the policy, the evidence presented by both the policyholders  and the insurers, and the governing state law.
State mediation efforts have been initiated to help address the backlog of  unresolved claims between policyholders and insurance companies on  private homeowners policies. These programs, particularly in Louisiana  and Mississippi, have played a major role in facilitating many settlements  of residential property insurance claims arising out of Hurricanes Katrina  and Rita. Established after the 2005 hurricane season, these programs  offer policyholders and insurers a nonbinding, alternative dispute  resolution procedure to resolve claims and avoid the delays, expenses, and  uncertainties of resolving the disputes through the courts. On the whole,  state insurance regulators in Mississippi and Louisiana report that the  majority of cases brought to mediation have been resolved.
section_title: Lack of Uniformity in Licensing and Training Requirements among States Creates Uncertainties about Some Adjusters’ Qualifications
paragraphs: In spite of the importance of the insurance claims adjuster to  policyholders after a national catastrophe, licensing and training  requirements for adjusters vary considerably by state. Some states have no  requirements for insurance claims adjusters, others have them for most  types of adjusters, and many states have them for some types of adjusters  but not for others. This lack of uniformity results in uncertainties over the  qualifications and training of claims adjusters. Further, states may  temporarily relax these requirements after a catastrophe. Claims adjusters  who adjust flood insurance claims, however, must be trained and certified  by NFIP. Following Hurricane Katrina, some states that lacked licensing  requirements for adjusters passed laws to raise the level of oversight for  adjusters.
subsections: section_title: States’ Licensing and Training Requirements for Claims Adjusters Vary Widely
paragraphs: During our review, we found that adjuster licensing and training  requirements varied considerably among states, including those along the  Gulf Coast. Of the eight coastal states we contacted, most had varying  degrees of licensing and training requirements for different types of  adjusters during the 2005 hurricane season (Florida, Georgia, Mississippi,  North Carolina, South Carolina, and Texas), while two states (Louisiana  and Alabama) had no examination or continuing education requirements  for claims adjusters at that time. Some of the coastal states had also  instituted some common licensing requirements for staff adjusters,  independent adjusters, and public adjusters, while others had varying  requirements for different types of adjusters. Similarly, information  gathered from industry representatives showed that licensing and training  requirements varied substantially among the states nationwide. Figure 2  summarizes the varying level of requirements for claims adjusters among  several coastal states, as well as recent legislation enacted in some of the  coastal states impacted by Hurricane Katrina to strengthen their  requirements.
For coastal states with licensing and training requirements for claims  adjusters, a state licensing examination has been the principal oversight  tool used to regulate the entry of adjusters into the marketplace.
According to insurance regulators, the state licensing exam typically  includes questions on insurance regulation, adjusting practices, and  different kinds of insurance policies. Some states also require a certain  level of continuing education before a license can be renewed, while  others do not.
Continuing education requirements also vary among states for different  types of adjusters. For the states we contacted, continuing education  requirements were mixed, with some of the states requiring a certain level  of continuing education for some types of adjusters, while other states did  not have continuing education requirements. For example, during the 2005  hurricane season, staff and independent adjusters employed in Florida and  Texas were required to take at least 24 hours of continuing education  every 2 years, while other coastal states had no continuing education  requirements for some types of adjusters.
Motivated largely by concerns about the adjustment process, some states  that were impacted by the 2005 hurricanes enacted legislation to raise  their level of oversight for adjusters. When Hurricane Katrina hit,  Louisiana did not regulate any types of adjusters, and adjusters were able  to conduct business there without a license. In 2006, the Louisiana State  Legislature passed, and the governor signed, The Louisiana Claims  Adjuster Act, which required that staff and independent adjusters become  licensed beginning on June 30, 2007. Like other states, the Louisiana  Department of Insurance will issue nonresident adjusters a reciprocal  license as long as they are currently licensed in their home states.
In Mississippi, legislative proposals were also introduced for additional  oversight requirements for public adjusters. After Hurricane Katrina, the  state of Mississippi allowed public adjusters to work in the state under an  emergency provision approved by the Insurance Commissioner. In 2007,  the Mississippi State Legislature passed, and the governor signed, a bill to  allow public insurance adjusters to operate in the state permanently and  have their practices regulated, a change that requires these adjusters to get  certifications, licenses, and continuing education.
In addition to licensing and training requirements, some state regulators  we contacted also said they relied on insurance companies’ quality control  measures to help ensure the quality of adjusters. Insurance companies and  adjuster firms generally provide some degree of in-house or external  training for their adjusters, according to industry participants. However,  insurance companies and adjuster firms we contacted generally declined  to share company-specific instructions and manuals for their insurance  claims adjusters, citing proprietary concerns.
In contrast to the varying requirements for claims adjusters among the  states, NFIP conducts limited but uniform mandatory training to certify  individuals as flood adjusters. Flood adjusters must be trained and  certified annually. In addition, FEMA provides ongoing oversight of NFIP  claims adjustments through its claims reinspection program. However,  because independent claims adjusters must be licensed by a state to be  certified as a flood adjuster, the underlying qualifications and training for  adjusters that seek to become flood adjusters remain varied, as they  depend on the state. In the absence of uniform state standards for claims  adjusters, neither NFIP, state insurance regulators, nor policyholders can  be certain of the minimum qualifications held by a claims adjuster  assigned to a particular property, increasing the possibility of inconsistent  claims adjustments and payments for similarly damaged properties.
section_title: States May Waive Requirements for Adjusters During Emergencies, Potentially Magnifying the Impacts of Varied State Standards
paragraphs: Given the lack of uniformity for adjuster licensing and training  requirements among states, the qualifications and level of training of the  adjusters called upon in catastrophe situations can vary considerably. A  state’s normal oversight requirements for claims adjusters can be  weakened by nonresident licensed adjusters that are allowed to operate  from states with less stringent requirements. Further, while most states  have some adjuster licensing and training requirements that are applicable  to some types of adjusters, these oversight measures can be waived in  emergency situations, as they were in the aftermath of Hurricane Katrina.
The majority of states allow nonresident adjusters to operate within state  borders as long as the adjusters are licensed in other states. However,  differences in the qualifications and training of adjusters allowed to  operate in a state can materialize when this practice of reciprocity occurs  in the absence of uniform regulatory requirements. In most of the coastal  states we reviewed, nonresident adjusters were exempted from taking the  licensing exams if they were licensed in their home state. Although some  states have similar licensing examination requirements, oversight of  adjusters, nevertheless, lacks uniformity. Issues related to the quality and  consistency of regulatory requirements for insurance claims adjusters  across states also exist in other aspects of insurance regulation. For other  regulatory functions—such as the licensing of insurance agents—many  states accept licenses from other states as long as those states reciprocate.  As we have reported in other work, success with state reciprocity of  licensing functions depends on the adequacy and uniformity of  requirements among states. In the absence of adequate and consistent  licensing requirements, reciprocity can reduce one state’s level of  oversight to the more limited standards of another.
Additionally, all of the coastal states we contacted had provisions for  allowing “emergency adjusters” to augment the normal force of adjusters  by waiving the normal licensing and training requirements for adjusters, if  warranted by the scope of damage. Accordingly, coastal states most  impacted by Hurricane Katrina invoked emergency procedures to allow  additional adjusters to operate in their states without having to meet the  normal licensing and training requirements. However, a state’s oversight  requirements for claims adjusters may be weakened when nonresident  licensed adjusters from states with less stringent requirements are allowed  to operate in states with higher standards. During our review, insurance  regulatory officials and industry participants and observers acknowledged  possible inconsistencies and errors in adjustments that arose, given the  shortage of adjusters and the varying qualifications of those that worked in  the aftermath of Hurricane Katrina.
Some states have attempted to address concerns and uncertainties over  the qualifications of emergency adjusters with other varied approaches.  For example, Florida, Mississippi, North Carolina, and Texas require that  work performed by emergency adjusters be reviewed and certified by a  sponsoring licensed adjuster or insurance company. North Carolina has  set minimum guidelines for certifying adjusters on an emergency basis that  take into account, for instance, their level of experience. South Carolina  requires that emergency adjusters file an adjuster licensing application,  while Louisiana, which had no oversight requirements for emergency  adjusters during the 2005 hurricane season, now requires emergency  adjusters to register their name and employment contact information but  imposes no other requirements.
State insurance regulators can also use market conduct examinations to  further scrutinize a company’s claims adjustment processes. As we have  reported in previous work, state practices for market conduct exams vary  widely and are not always performed on a routine basis by most insurance  departments. However, most states can initiate targeted examinations to  assess certain company activities if they receive consumer complaints  suggesting a potential issue. The types of consumer complaints received  by state insurance regulators include those related to the denial of claims,  the untimely processing of claims, and the misrepresentation of coverage.  Some states had initiated market conduct examinations on selected  companies to assess their claims handling activities tied to the 2005  hurricane season and subsequent consumer complaints. For example,  state insurance regulators in Louisiana conducted several market conduct  examinations on various insurers. However, according to state regulators,  these examinations were focused on evaluating the timeliness of claims  payments in accordance with state statutes, rather than examinations on  the wind versus flood issue. In Mississippi, state regulators mentioned that  market conduct examinations pertaining to claims processing activities  following Hurricane Katrina were still ongoing.
section_title: Lack of Relevant Claims Data Limits FEMA’s Ability to Oversee Hurricane Damage Assessments
paragraphs: Limited data are available for evaluating the damage assessments and  claims payments when properties are subjected to both high winds and  flooding and the extent of damage caused by each peril is difficult to  determine. Data collected by NFIP from WYO insurers—including those  that serviced both NFIP flood policies along with their own policies for  wind-related risks on the same properties—include only information on  damage deemed by the WYO insurers to have been caused by flooding.  This limited information prevents NFIP from knowing how each peril  contributed to the total damages in order to verify that flood insurance  claims payments were accurate.  The lack of data also limits FEMA’s  reinspection program because the wind damage information is relevant to  understanding how all perils contributed to damages when certain  properties were subjected to both high winds and flooding. Further, the  lack of transparency over the extent of wind damage deemed to have  contributed to total damages limits FEMA’s ability to address conflicts of  interest that arise if the WYO insurer is also the wind insurer on the  property. FEMA and NFIP program officials have stated that they do not  have the authority to access data on wind claims for NFIP-insured  properties. NFIP program contractors also stated they cannot access WYO  insurers’ policies, procedures, or instructions describing to adjusters how  wind damage should be determined in conjunction with flood damage  when properties are subjected to both perils.
subsections: section_title: NFIP Generally Lacks Needed Data on Wind Damage Claims for Properties That It Insures
paragraphs: NFIP does not systematically collect and analyze data on wind-related  damage when collecting flood claims data on properties subjected to both  high winds and flooding, such as those damaged in the aftermath of  Hurricanes Katrina and Rita. Further, NFIP has not sought such  information even when the same insurance company serves as both the  NFIP WYO insurer and the insurer for wind-related risks. WYO insurers  are required to submit flood damage claims data in accordance with  NFIP’s Transaction Record Reporting and Processing (TRRP) Plan for  inclusion in the NFIP’s claims database. In our review of data elements in  NFIP’s claims database, we found that NFIP does not require WYO  insurers that are responsible for adjusting flood claims to report  information on property damages in a manner that could allow NFIP to  differentiate how these damages (to the building or its contents) were  divided between wind and flooding.
Specifically, the TRRP Plan for WYO insurers instructs them to include  only flood-related damage in the data fields on “Total Building Damages”  and “Total Damage to Contents.” Further, the “Cause of Loss” data field  does not incorporate an option to explicitly identify property damages  caused or partially caused by wind. As a result, WYO insurers do not  report total property damages in a manner that 1) identifies the existence  of wind damage or 2) discerns whether damages were divided between  wind and flooding for properties that were subjected to a combination of  both perils. Further, NFIP program contractors stated that they did not  systematically track whether the WYO insurer processing a flood claim on  a property was also the wind insurer for that property. This lack of  information limits FEMA’s ability to adequately oversee the WYO insurers  and verify that damage paid for under the flood policy was caused only by  the covered loss of flooding. In past years, the determination over the  cause of damages has been an issue. For example, as we reported in 2005,  following Hurricane Isabel, one of the reasons that claims for additional  losses were not paid was because damage was not due to flooding, but  wind-driven rain.
NFIP’s normal claims processing activities were stressed during the 2005  hurricane season. For both Hurricanes Katrina and Rita, FEMA estimates  that NFIP has paid approximately $16.2 billion in claims, with average  payments exceeding $95,000 and $47,000, respectively. As we reported in  December 2006, in an effort to assist policyholders, FEMA approved  expedited NFIP claims processing methods that were unique to  Hurricanes Katrina and Rita. Some expedited methods included the use  of aerial and satellite photography and flood depth data in place of a site  visit by a claims adjuster for properties that likely had covered damages  exceeding policy limits. Under other expedited methods, FEMA also  authorized claims adjustments without site visits if only foundations were  left and the square-foot measurements of the dwellings were known. Such  expedited procedures facilitated the prompt processing of flood claims  payments to policyholders, but once these flood claims—and others— were processed, NFIP did not systematically collect corresponding wind  damage claims data on an after-the-fact basis. Without information on both  wind and flood damages to certain properties subjected to both perils,  NFIP has reduced assurances that the amounts it paid for flood claims  were actually limited to flood damage.
FEMA officials stated that they do not have access to wind damage claims  data from the WYO insurers. Accordingly, NFIP does not systematically  collect data on wind damage for properties for which a flood claim has  been received. Rather, FEMA officials maintain that they review the  quality of claims adjustments through their reinspection program and  periodic operational reviews of companies. FEMA officials that we  contacted expressed different opinions concerning the need for the  authority to obtain wind-related data. While some FEMA and NFIP  contract officials stated that having the authority to obtain and analyze  wind-related claims information would be helpful in reviewing claims,  other senior FEMA officials questioned the usefulness of such information,  maintaining that existing oversight activities are generally sufficient  without an additional review of wind-related claims data.
Without analyzing wind-related claims information, however, FEMA’s  oversight process is limited for determining whether the inherent conflict  of interest that exists when a WYO insurer services its own policy and the  flood insurance policy on the same property is adversely affecting claims  determinations. This concern has also been noted in a Department of  Homeland Security’s Office of Inspector General’s interim report, which  stated, “NFIP oversight focused primarily on whether the flood claim was  correctly adjudicated with little or no consideration for wind damage as a  contributing factor.” The work being performed by the Office of  Inspector General also includes subpoenaing wind claims information  from WYO insurers to reevaluate wind versus flood determinations. This  work was ongoing as of the time this report was being completed.
section_title: FEMA’s Reinspection Program Has Limited Ability to Validate the Accuracy of Payments on Certain Hurricane- Damaged Properties Given the Lack of Information Available on Wind-Related Damage Claims
paragraphs: FEMA’s reinspection program, which reevaluates the adjustment process  and flood payments made, does not collect information that could help  enable FEMA to validate the claims payments on certain hurricane- damaged properties. The reinspection program does not systematically  evaluate the apportionment of damages between wind and flooding, even  when a conflict of interest exists with a WYO insurer. For example, the  program does not have a means of identifying whether wind-related  damage contributed to losses on the properties it evaluates or the extent  of such losses. Without the ability to examine damages caused by both  wind and flooding in some cases, the reinspection program is limited in its  ability to assess whether NFIP paid only the portion of damages it was  obligated to pay under the flood policy.
During our study, we reviewed 740 reinspection files for properties with  flood claims associated with Hurricanes Katrina and Rita. We found that  most of these files did not document a determination of whether or not  damages were caused by a combination of wind and flooding and did not  adequately document whether the claim paid actually reflected only the  damage covered by the flood insurance policy versus damage caused by  other uncovered damages, such as wind. Rather, the files contained  limited and inconsistent documentation concerning the presence or extent  of wind-related damage on properties and lacked the documentation that  would have enabled NFIP to verify that damages paid for under the flood  policy were caused only by the covered loss of flooding.
Specifically, the reinspection activities focused on reevaluating the extent  to which building and content damages were caused by flooding in the  absence of information concerning wind-related damage. While some of  the files documented damages that had been caused by a combination of  wind and flooding, most did not. Around two-thirds of the 740 reinspection  files did not indicate whether the damages had been caused only by  flooding or by a combination of wind and flooding and did not include  enough documentation for a reviewer to make such a determination.  Approximately 26 percent of the files indicated that the damages were  caused only by flooding, and 8 percent indicated that the damages were  caused by a combination of wind and flooding. When NFIP program  contractors conducting the reinspections did indicate that damages were  caused by a combination of wind and flooding, insufficient documentation  existed to determine the extent to which the wind damage contributed to  total property damages and, hence, the accuracy of the flood damage  claim.
Concerning the lack of wind damage claims data available to NFIP, we  found that hurricane claims data gathered separately by state insurance  regulators were of limited value for understanding how wind and flooding  contributed to property damages. In the aftermath of Hurricanes Katrina  and Rita, state insurance regulators in Alabama, Florida, Louisiana,  Mississippi, and Texas jointly established a data call mechanism to collect  aggregate claims data associated with the storms reported by property- casualty insurers. But such data were of limited value for assessing how  wind and flooding contributed to damages because this information lacked  sufficient geographic detail to be matched with corresponding flood  claims data on a community-level (e.g., zip-code) or property-level basis.  Rather, claims data reported by property-casualty insurers were reported  on a statewide and county- or parish-level basis for different elements. As  a result, the hurricane claims data collectively gathered by state insurance  regulators would have been of limited benefit to NFIP to understand how  both wind and flooding contributed to property damages. State insurance  regulators, through NAIC, are currently developing specifications and  exploring the feasibility of collecting more geographically detailed  information for an updated disaster reporting system based on lessons  learned from recent hurricanes and comments from interested parties  about monitoring insurance claims following a natural disaster.
In the aftermath of the 2005 hurricane season, the NFIP reinspection  process was also challenged by the severity and scope of the damages.  Many properties were completely destroyed, making damage  determinations and reevaluations of such determinations difficult. The on- site reinspections of properties with flood claims associated with  Hurricanes Katrina and Rita were generally conducted several months  after the event—delays that were to some extent understandable,  considering the magnitude of the devastation. But the delays further  limited FEMA’s ability to reevaluate the quality and accuracy of the initial  damage determinations, given the ongoing natural and man-made events  that continued to alter the damage scenes.
Additionally, we have previously reported that FEMA did not choose  statistically valid random samples of the universe of all closed claims for  its reinspection process. Therefore, the results of the reinspections could  not be projected to the universe of properties for which flood claims were  made. Accordingly, we have previously recommended that FEMA select a  statistically valid sample of reinspections for its reinspection program.  FEMA has agreed to implement this recommendation.
Finally, NFIP program contractors responsible for administering the  reinspection program also mentioned that they do not have access to WYO  companies’ adjusting policies, procedures, and instructions to assess the  guidance provided to their adjusters (company staff or contracted) for  discerning and quantifying the damages caused by wind versus flooding.  The lack of information on the specific methodologies and instructions  conveyed by WYO insurers to their force of adjusters diminishes the  transparency over how damages were discerned between wind and  flooding on hurricane-damaged properties and the extent to which these  instructions are consistent with or at odds with FEMA’s instructions to  adjusters. Absent such information along with the wind-related claims  data, FEMA’s oversight of the NFIP WYO insurers to assess the accuracy  of flood claims payments is limited, particularly in cases where the WYO  insurer is also the wind insurer on the same property.
section_title: Conclusions
paragraphs: Resolving the unique insurance issues posed by hurricanes requires  actions to address numerous uncertainties. The NFIP must balance  pressures to quickly pay claims to policyholders with ensuring that it is  enforcing the terms of the flood policy. Uncertainties involved in this  process begin with the extent of covered damages from multiple policies,  contingent on the damage scenario, and continue with the claims  adjustment and regulatory oversight activities that follow. As we have  seen, policyholders do not know in advance of a hurricane the extent to  which damages will be covered because the amount of insured losses  depends on whether it is a multiperil event, how much of the damages are  caused by wind and how much by flooding, and how policy language will  be interpreted in accordance with relevant state laws. Other concerns can  also materialize when the WYO insurer determines not only the damage  caused by flooding that is covered by the flood policy, but also the damage  caused by wind that is covered under its own property-casualty policy,  creating an inherent conflict of interest that must be managed or  mitigated. In the aftermath of Katrina, policyholders and insurance  companies were and continue to be uncertain as to how current language  on property-casualty insurance policies will be interpreted, and numerous  lawsuits continue to make their way through federal and state courts.
Once an event has occurred, other uncertainties arise concerning the  qualifications and training of claims adjusters. State licensing and training  requirements vary considerably, and standards that do exist may be  relaxed or eliminated after a major catastrophe, depending on the scope of  damage. Additionally, uncertainties remain over the probability of  accurately discerning the extent to which damages were caused by wind  versus flooding on certain hurricane-damaged properties. The difficulty in  performing this task can increase when evidence remaining at the damage  scene is limited or compromised. Not surprisingly, the variations in  adjusters’ qualifications, coupled with limited or compromised evidence at  damage scenes, foster debate and uncertainty over the way damage  determinations are made, the consistency of adjustments for similarly  damaged properties, and how losses are apportioned between flood and  wind insurers. In the absence of uniform state standards for claims  adjusters, state insurance regulators, as well as policyholders, cannot be  certain of the minimum qualifications or level of professional training of a  claims adjuster assigned to a particular property, increasing the possibility  of inconsistent claims adjustments and payments for similarly damaged  properties.
Uncertainties are also present in the oversight of claims adjustment  processes, given the lack of information concerning both wind and flood  damage claims for certain hurricane-damaged properties. FEMA cannot be  certain of the quality of NFIP claims adjustments allocating damage to  flooding in cases where damages may have been caused by a combination  of wind and flooding because NFIP does not systematically collect and  analyze both types of damage claims data together on a property-level  basis. Although FEMA officials believe they can verify the accuracy of  flood claim payments without the wind data, there are situations where  additional information is warranted. Without information on the wind  damage claims adjustments prepared by WYO insurers at the time they  submit flood claims on hurricane-damaged properties, FEMA lacks  controls to independently assess whether or not the apportionments  between flood and wind damage appear reasonable. FEMA officials have  determined that they currently lack the authority to access the WYO  insurers’ claims data and guidance to adjusters for wind-related claims to  evaluate the reasonableness of the flood claims for properties that were  also subject to damage from high winds. Hence, for a given property, NFIP  does not know how each peril contributed to the total property damages  or how adjusters working for the WYO insurers made such determinations.
As a result, FEMA cannot be certain whether NFIP has paid only for  damage caused by flooding when insurers with a financial interest in  apportioning damages between wind and flooding are responsible for  making such apportionments.
section_title: Matters for Congressional Consideration
paragraphs: To strengthen and clarify FEMA’s oversight of WYO insurers, particularly  those that service both wind and flood damage claims on the same  property, we recommend the Congress consider giving FEMA clear  statutory access to:    both wind and flood damage claims information available from NFIP’s  WYO insurers in cases in which it is likely that both wind and flooding  contributed to any damage or loss to covered properties, enabling NFIP to  match and analyze the wind and flood damage apportionments made on  hurricane-damaged properties in a systematic fashion, as appropriate; and the policies, procedures, and instructions used by WYO insurers and their  adjusters for both flood and wind claims to assess and validate insurers’  claims adjustment practices for identifying, apportioning, and quantifying  damages in cases where there are combined perils.
section_title: Recommendation for Action
paragraphs: We recommend that state insurance commissioners, acting through NAIC,  enhance the quality and consistency of standards and oversight for all  types of claims adjusters among states through more stringent and  consistent licensing and training requirements for adjusters, including, in  those states where appropriate, training to assess and apportion damages  due to wind, flooding, or both.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from FEMA and NAIC.  The Department of Homeland Security provided written comments on a  draft of this report, which have been reprinted in appendix II. FEMA  concurred with our recommendation to strengthen licensing requirements  for adjusters but disagreed with the matters for congressional  consideration to give FEMA clear statutory authority to obtain 1) wind  damage claims information available from WYO insurers and 2) the  policies, procedures, and instructions used for determining wind damage  versus flood damage when properties are subjected to both perils. In oral  comments, NAIC expressed general agreement with the draft’s findings  and recommendations. In addition, both FEMA and NAIC provided  technical comments, which we have incorporated as appropriate.
FEMA stated that it believed existing oversight measures for NFIP and  WYO insurers were sufficient and that statutory access to wind and flood  damage claims information from NFIP WYO insurers would place an  unneeded burden and cost on NFIP. FEMA also stated that it did not  believe NFIP needs the wind estimate or data to determine the amount of  flood damage that occurred. It also noted that additional unnecessary  costs would be incurred to access and analyze wind damage claims  information from WYO insurers. We disagree. Because of the inherent  conflict of interest that exists when WYO insurers are the property- casualty insurers for wind claims and are also responsible for servicing the  flood claims on the same properties, FEMA must ensure that its internal  controls are sufficient to minimize the potential adverse impacts of this  conflict on the accuracy of damage determinations and flood claims  payments. Accurately determining claims payments is particularly  important, given the likely eventuality that FEMA would need to draw on  the U.S. Treasury to pay flood losses that exceed the funds available from  premiums.
We do not suggest that FEMA collect and analyze wind claims data for  each claim or even each flood event. Rather, we recommend that FEMA  have the ability to access wind damage claims information when it is  available from the WYO insurer—that is, in circumstances when the WYO  insurer is responsible for servicing both the wind and flood policies on the  same property and when uncertainties exist, such as when the physical  evidence has been compromised or limited physical evidence remains.  Obtaining wind damage claims information that is already available from  WYO insurers establishes proper transparency over the adjustment  process when both wind and flooding contribute to damages without an  unreasonable or costly burden. As long as a conflict of interest exists with  a WYO insurer that services its own policy for wind-related risks along  with the NFIP flood policy on the same property, additional controls are  warranted. When properties are subjected to both wind and flood perils,  particularly in cases where uncertainties exist due to limited or  compromised evidence at the damage scene, collecting enough  information to understand whether or not the WYO insurer is also the  wind insurer for the same property and, if so, the extent of damage it  determined to be caused by wind versus flooding, is key to maintaining  transparency over the adjustment process. Furthermore, when the same  insurance company has already determined the amount of damage caused  by wind and flooding for a given property, obtaining and assessing this  available information should not be cost prohibitive for FEMA or WYO  insurers. The authority to access policies, procedures, and guidance used  for determining wind versus flood damage would enable FEMA to have a  more complete understanding about how concurrent damages are handled  by the WYO insurers. Such information would strengthen FEMA’s  oversight and ability to identify abuses and better ensure the accuracy of  flood payments made.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Administrator of  FEMA; the Chief Executive Officer of NAIC; the Chairman of the House  Committee on Financial Services; the Chairman and Ranking Member of  the Senate Committee on Banking, Housing, and Urban Affairs; the  Chairman and Ranking Member of the House Committee on Homeland  Security; the Chairman and Ranking Member of the Senate Committee on  Homeland Security and Governmental Affairs; and other interested  committees and parties. We will also make copies available to others on  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-8678 or williamso@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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To evaluate how key insurance coverage issues can arise when multiple  insurance plans are tied to a hurricane-damaged property, we contacted  and collected information from the Federal Emergency Management  Agency (FEMA), National Flood Insurance Program (NFIP) contractors,  state insurance regulators, the National Association of Insurance  Commissioners (NAIC), property-casualty insurers, state-sponsored wind  insurers, insurance agents, claims adjusters, industry associations, and  mediators. This work encompassed reviewing key areas and limits of  coverage from insurance policies offered through NFIP and property- casualty insurers to identify potential gaps in coverage that can arise  based on the terms of such policies and the nature of the damage.  Additionally, we reviewed the roles and responsibilities of write-your-own  (WYO) insurers that service NFIP policies to identify whether a conflict of  interest exists with a WYO insurer in certain circumstances.
To evaluate state insurance regulators’ oversight of the licensing and  performance of loss adjusters, we contacted and collected information  from state insurance regulators, NAIC, property-casualty insurers, state- sponsored wind insurers, claims adjusters, and industry associations. We  collected and compared licensing and training requirements for claims  adjusters provided by state insurance regulators in several coastal states,  incorporating information on requirements that existed prior to the 2005  hurricane season, as well as subsequent legislation enacted by some  coastal states to strengthen oversight requirements for adjusters. We also  discussed the activities, challenges, and damage scenarios encountered by  claims adjusters in the aftermath of recent hurricanes with state  regulators, FEMA and NFIP program officials, and industry participants.  We also requested information from some property-casualty insurers and  claims adjustment firms on their guidance (policies, procedures, manuals,  and instructions) to claims adjusters on how to discern and quantify wind  versus flood damages when properties are subjected to both perils.  Industry participants declined to provide such information, citing  proprietary concerns and ongoing litigation. This work included on-site  fieldwork in Florida, Illinois, Louisiana, Mississippi, North Carolina,  Pennsylvania, South Carolina, and Texas.
To evaluate the completeness of the information that NFIP collects and  analyzes in order to determine whether damage determinations and flood  payments made accurately reflect the actual distribution of losses between  wind and flooding, we reviewed claims information collected by NFIP  from WYO insurers serving the flood claims. This work included reviewing  the type of information routinely collected from WYO insurers through  NFIP’s Transaction Record Reporting and Processing (TRRP) Plan. In  addition, we obtained information on FEMA’s reinspection program that is  used to reevaluate the quality of NFIP claims that have been processed. We  assessed the type of information used by NFIP to validate the damage  determinations made by WYO insurers, reviewing a statistically valid  sample of files (740) of reinspections that NFIP conducted on selected  properties from Hurricanes Katrina and Rita. We also reviewed hurricane  claims data collectively gathered by several state insurance regulators to  ascertain the extent to which such information would be useful for  assessing wind versus flood damage determinations made on properties.  We conducted our review between May 2006 and November 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Department of Homeland Security
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Lawrence D. Cluff, Assistant  Director; Tania Calhoun; Emily Chalmers; Rudy Chatlos; Chir-Jen Huang;  Barry Kirby; Kristopher Natoli (intern); and Melvin Thomas made key  contributions to this report.