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Reforms Urged for NFIP following Sandy Issues

Pertaining to the July 30th hearing on post-Sandy flood insurance claims, U.S. Senator Robert Menendez (D-N.J.) issued a letter on 9/10/2014 to FEMA’s Administrator, Craig Fugate, asking for urgent reforms to the NFIP claim process.

The following is the entire text of the letter to FEMA:

September 10, 2014

The Honorable Craig Fugate
Federal Emergency Management Agency
500 C Street SW
Washington, D.C. 20410

Dear Administrator Fugate:

I am writing to urge you to immediately undertake reforms to the National Flood Insurance Program’s (NFIP) claim process in order to address the serious shortcomings revealed at the July 30, 2014, Banking Subcommittee on Housing, Transportation, and Community Development hearing that I chaired and you testified before. I appreciated the opportunity to discuss ways to make the claims process fairer and simpler for policyholders, and I was encouraged by your willingness to address the issues facing thousands of New Jersey families.

One of the most common complaints New Jerseyans have had about the flood insurance claims process after Superstorm Sandy is that insurance payouts are far below the cost to rebuild damaged homes. The incentive and penalty structure for Write Your Own (WYO) insurance companies that service policies and process claims is at the root of these complaints. As I noted at the hearing, if FEMA determines in one of its audits that a WYO has made an overpayment, the WYO is financially responsible for every dollar they overpaid. In contrast, if a FEMA audit uncovers a WYO underpaying a claimant, the WYO is not financially penalized and only faces increased scrutiny if it exhibits a consistent pattern of improper payments. While in theory a WYO could be expelled from the program for repeated failures, in reality such a step has never been taken in the history of the NFIP and therefore lacks the teeth necessary to properly deter underpayments.

This unbalanced treatment of over and underpayments directly leads to WYOs “…err[ing] on the side of conservativism (sic)” when questions arise in the claims process, according to WYO Representative Don Griffin’s testimony. This violates both the spirit and letter of the Improper Payments Elimination and Recovery Act [P.L. 111-204], which requires government agencies to treat both over and underpayments equally. In order to correct this imbalance, I am asking that you increase WYO penalties for underpayments so they are commensurate with penalties for overpayments. This will level the playing field and ensure that WYOs will have the incentive to take strong steps to avoid lowballing policyholders.

This current imbalanced penalty structure has led to a large number of underpayments, which in turn caused a high volume of appeals filed to FEMA. This high volume prevented FEMA from complying with the 2004 Flood Insurance Reform Act, which required the agency to adjudicate appeals within 90 days. With an 88-day median response time, FEMA barely responded to half of the appeals within the deadline. While this fact alone is unacceptable, even more egregious is the fact that FEMA has summarily dismissed 270 claims because the policyholder missed one of FEMA’s imposed deadlines. This seems to be a double standard and must be addressed. I urge you to reopen these 270 cases and give the policyholders fair consideration of their claim. If FEMA cannot comply with its own deadlines, it should not disenfranchise policyholders for failing to meet FEMA-imposed deadlines.

The common thread that ties together most NFIP complaints involves policyholders feeling overwhelmed during the claims process and having no place to seek independent advice and assistance. As you know, the Homeowner Flood Insurance Affordability Act (HFIAA) [P.L. 113-89] establishes a “flood insurance advocate,” which would be responsible with educating and assisting policyholders in all aspects. I was very encouraged by your testimony at the July 30th hearing, specifically when you stated that you wanted the “office to be the voice of the consumers and be the focal point for consumers for all flood insurance issues and not limited to just maps.” I share your belief that the flood advocate must act independently and be a true advocate for the consumer. That was my intent when I drafted HFIAA and I look forward to working with you to ensure this intent is fully carried out.

Taken together, these three reforms will go a long way towards making the claims process and the NFIP in general stronger, fairer, and more effective. I was encouraged by your commitment to address these issues administratively and stand ready to introduce legislation if you determine these actions are beyond your administrative capacity. I look forward to hearing from you.


United States Senator