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 the costs of repairing or replacing flood- damaged property. For example, there is a $250,000 statutory ceiling on the amount of flood insurance homeowners can purchase for the building structure and a $100,000 ceiling on the amount they can purchase for certain personal property. Thus, homes that might sustain more than $250,000 in damage cannot be insured to their full replacement cost. 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. Pursuant to this delegation of authority, FEMA has issued regulations, including a “Standard Flood Insurance Policy,” that further delineate the scope of coverage. All flood insurance made available under the NFIP is subject to the express terms and conditions of the statute and regulations, including the standard policy. The Federal Insurance Administrator within FEMA is charged with interpreting the scope of coverage under the standard policy. 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 prior water damage, and losses resulting from events other than flood, such as windstorms or or earth movements, are not covered by the NFIP. Personal property is covered, with certain limitations, only if the homeowner has purchased separate 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 damages 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. Finally, the amount recoverable under the SFIP is limited to the amount that exceeds the applicable deductible. Our report discusses the limitations on coverage and recoverable losses in greater detail. 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 of the write-your-own companies to assure that the NFIP is administered properly. 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 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. Operational reviews of flood insurance companies participating in the 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 review NFIP policies and adjust claims. For all aspects of 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 or 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. In such cases, FEMA requires that the company 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 operational reviews and follow-up visits to insurance companies that we analyzed during 2005 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. 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. Procedures for the general adjusters to follow 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 with officials of 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. Conversely, if a general adjuster finds that the private-sector adjuster missed a covered expenses in the original adjustment, the general adjuster is to 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 overall during the 2004 hurricane season, cited several errors that he had identified in reinspections of claims, including improper room dimension measurements and improper allocation of costs caused by wind damage (covered by homeowners’ policies) versus costs caused by flood damage. In addition, the instructor identified as a problem poor communication with homeowners on the processes 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, qualify 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. 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 to meet our internal control standard that it have reasonable assurance that program objectives are being achieved and that its operations are effective and efficient. To strengthen and improve FEMA’s monitoring and oversight of the NFIP, we are recommending in today’s report that FEMA use a methodologically valid approach for sampling files selected for operational reviews and quality assurance claims reinspections. As of September 2005, FEMA had not yet fully implemented provisions of the Flood Insurance Reform Act of 2004. Among other things, the act requires FEMA to provide policyholders a flood insurance claims handbook; 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. In September 2005, FEMA posted a flood insurance claims handbook on its Web site. The handbook contains information on anticipating, filing and appealing a claim through an informal appeals process, which FEMA intends to use pending the establishment of a regulatory appeals process. However, because the handbook does not contain information regarding the appeals process that FEMA is statutorily required to establish through regulation, it does not yet meet statutory requirements. 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. Therefore, it remains unclear how or when FEMA will establish the statutorily required appeals process.