The Mythical National Flood Claim Memo and Sandy Flood Claims

National Flood Insurance claims are different. The policies are unique, the law does not follow typical property insurance principals, and the adjustment practices vary greatly, depending on the catastrophe adjuster assigned. There are many misunderstandings and myths concerning flood insurance claims. I will tell you about one.

I gave a speech in New Jersey last week about Superstorm Sandy flood claims and discussed federal hearings regarding the National Flood Insurance Program claims handling issues which arose between 2004 and 2006. A public adjuster in the audience provided me a Proposed NFIP Claims Guidance Memorandum, which he told me was part of the record from those hearings. I could tell from just skimming the first page that it would be of interest to anybody adjusting a flood claim:

Direct Physical Loss

Flood victims report adjusters state: The SFIP only covers damaged caused by direct physical contact with flood waters. This is incorrect.

The SFIP pays for losses resulting from the unbroken chain of events flowing from the flood, provided the originating event which proximately caused the losses was in fact a flood and the damaged items are not expressly excluded from coverage in the SFIP.

Several examples of mis-communicated coverage regarding Direct Physical Loss are as follows:

The SFIP pays for the outside HVAC equipment if destroyed, but not the related indoor equipment if such equipment is not contacted by flood waters. This is incorrect.

When the outdoor HVAC equipment is torn from the building leaving refrigerant lines open to contaminates, the indoor unit, even if not contacted by flood waters, is a covered item.
Likewise, if the outdoor unit is inundated it is possible for electrical problems to arise as a result of improper signals on the wiring between the indoor and outdoor units. Such problems can destroy indoor equipment. In such a case the indoor equipment is covered.

The SFIP only pays for the portion of an electrical circuit that has been flooded. This is incorrect.

When electrical wiring becomes flooded at any point, in a crawl space junction box for example, the cost to remove and replace the circuit, from the point of water contact to the point inside the structure where it connects to another undamaged circuit is covered.

The SFIP does not pay for moisture damage. This is incorrect.

The public adjuster could not provide me the source of the document. Our law firm’s librarian, Ruck DeMinico, provided the answer:

This is not a FEMA or Congressional document. This document was submitted as part of a speaker's written testimony for an April 14, 2005, hearing before the Subcommittee on Housing and Community Opportunity. Steven J. Kanstoroom submitted the attached written testimony. He references the proposed claims memorandum in his testimony of April 14th.

In 2005, I met with Steven Kanstoroom. He is a concerned citizen with a website devoted to critical analysis of the National Flood Insurance Program. His testimony before Congress about flood insurance claims is interesting. Here is part of it:

In December 2003, I found that my elderly neighbors had received pennies on the dollar for their flood loss. They were living in my unheated, flood damaged home that I believed was unfit for my family to live in. It was 16 degrees outside. I felt something was dreadfully wrong and set out to find what it was.

Initially, I determined that FEMA had sanctioned the wrong use of a cost book for determining insurance losses. The publisher of the book, Mr. Gary Moselle of Craftsman Book Company, offered to fly from California to testify here today. His written testimony states “Such use of our data was never intended by the publisher and, if used as is, would result in pennies on the dollar for insurance claims”. In fact, this was the core issue in March 2004 that caused the Senate Banking Committee to direct the independent review of all Isabel claims.

The day after the hearing, the Federal Insurance Administrator made very positive statements to the press regarding my work and findings. I was then recognized as someone that perhaps could get the ear of people in a position to remedy the NFIP problems. Soon thereafter, industry insiders started calling, and in April 2004, people from inside the NFIP did as well – late at night. They explained wrongdoing and, fearful of reprisals, started leaving documents for me at various locations around the DC area.

* * * * *

I learned that, rather than conduct an independent review of Isabel claims as the Senate Banking Committee directed, leaked documents revealed that FEMA quietly assembled a Task Force comprised of the identical management and same adjusters or adjusting firms that originally low-balled the victims’ claims.

Video tape reveals that FEMA has taken the remarkable position that the program is intended to provide “some assistance.” FEMA’s insurance partners have gone as far as to say the NFIP doesn’t offer insurance at all, but merely a form of aid. Former Federal Insurance Administrator J. Robert Hunter wrote in the attached letter to the contrary. He describes the NFIP, during his tenure under Presidents Ford and Carter as an agency that “always restored victims to their pre-flood condition, less their deductible.”

Former Federal Insurance Administrator Jo Ann Howard also wrote a letter regarding her tenure from 1998 through 2001. Both former administrators describe the NFIP operating in sharp contrast to the NFIP’s current positions. Mr. Hunter made himself available to testify in this hearing.

Mr. Hunter’s letter and videotaped interview also describe the rationale for the low-balling of claims encountered by flood victims, the same rationale I learned from an insurance industry examiner.

Mr. Hunter said in his letter, and later in his linked video interview, “History seems to be repeating itself. Similar to [Kanstoroom’s] findings, in the early 1970s I found private insurance carriers refusing to pay legitimate claims out of concern for setting precedent related to similar language in their homeowners insurance policies. In fact, they told me so point blank. At the time the private carriers were members of the National Flood Insurers Association (“NFIA”). NFIA members were refusing to pay claims related to evacuations. I asked the General Counsel of HUD (the agency in which the FIA was located prior to being sent into FEMA) to review the matter to determine if our interpretation of coverage was correct. He agreed and issued orders for NFIA to pay the claims. NFIA refused and we began a process to have them kicked out of the program, which was accomplished in the late 1970s”.

Regardless of FEMA’s current interpretation of the congressional intent for the NFIP, I discovered a training disparity that an industry official, Mr. William Griffin, Jr., wished to testify to today. Mr. Griffin’s sworn statement attests to the fact FEMA’s private contractor, Computer Sciences Corporation (CSC) trains sales agents to tell policyholders they will be restored to their pre-flood condition while simultaneously training claims adjusters to allow only narrowly defined coverages in limited amounts. Mr. Griffin’s written testimony is attached. I too can attest to this fact. I too attended the training.

I learned that FEMA’s private contractor, CSC, is responsible for the day-to-day affairs of the NFIP, including training its sales agents and claims adjusters. Maryland State Senator Grosfeld wished to testify here today, that as early as July, 2004, CSC was aware of the training disparity as well as intentional training misrepresentations, such as instructing adjusters to suggest and allow for deodorizers as way of remediating toxic substances. I made CSC aware of these and other problems in a meeting held in the Senator’s office. CSC’s Vice President and Deputy General Counsel clearly stated that “FEMA has approved all of our actions.”

In the meeting, information was presented regarding CSC wrongly telling victims and adjusters they trained that fuel oil contamination could be remediated with what amounts to perfume. To date, CSC has failed to take any corrective action regarding the contaminated properties sited as examples.

Concerning this point, Senator Grosfeld wrote in part, “The information regarding the fuel oil contamination was also quite alarming, particularly given that weeks later Governor Ehrlich announced that the state had just completed cleaning up 600 tons of contaminated soil. To think the state hauled people’s front yards away due to the toxicity, yet victims have been left to live in houses knowingly contaminated with toxic and suspected substances is unconscionable.” (emphasis added)

I called and talked with Kanstoroom yesterday. He is concerned that Superstorm Sandy flood claimants may be receiving misinformation about the safety of living in homes which have been contaminated by toxic materials from the flood. He does not believe flood adjusters will calculate benefits that cover proper remediation of dangerous materials because they are ignorant of the problem or are directed to pay for less costly and improper methods of remediation.

Please note that on May 7, 2004, Jim Shortley, Director of Claims for National Flood, wrote an official memorandum regarding the adjustment of flood claims, which provides in part:

Over the last 6 months we have made the following flood insurance coverage determinations to the benefit of the policyholder:

1. Increased Cost of Compliance (ICC) Claims – We require only one contractor’s estimate.

2. Post-Claim Letters Of Map Amendment (LOMA) and Letters of Map Revision (LOMR) – A LOMA or LOMR for an elevated building, obtained after the loss, will be considered effective as of the date of the loss. The LOMA or LOMR removes the elevated building from the Special Flood Hazard Area, and the elevated building restrictions of the Standard Flood Insurance Policy then do not apply to the area beneath the lowest elevated floor.

3. Coverage of Connected Heating Machinery – Heating machinery, in a building, connected to and servicing the insured building, is covered. Reminder: air conditioning compressors in the open, connected to and servicing the building, are covered.

4. Replacement Cost Loss Settlement – When insured property is eligible for replacement cost loss settlement, there is no longer any requirement to hold back the recoverable depreciation.

Also, please pay particular attention to the following existing guidance:

1. Water, Moisture, Mildew, or Mold Damage – When this damage occurs in connection with a covered direct physical loss by or from flood, it will be covered unless there is clear evidence of the policyholder’s failure to inspect and maintain the insured property, where it was feasible to do so. If such damage is the result of wicking, it is covered.

2. Determination of the Lowest Elevated Floor – Full coverage for Post-FIRM elevated buildings begins at the lowest elevated floor. This is the lowest floor raised above ground, even if the pilings extend beyond it.

3. Repair Estimating and Pricing Guidelines – We expect that the repair estimate be based on current local prices and that the pricing guidelines be used with discretion and flexibility. Repair estimates and corresponding settlements are always to be adjusted in accordance with special conditions (like kind and quality), local pricing, and actual costs as provided by policyholders and their selected contractor.

4. Unit Cost and File DocumentationWe expect unit costs to include all materials, sales tax, disposable equipment, rented equipment, and any overhead of the contractor. Additionally, we expect estimated costs of personal property to include any delivery costs, setup fees, and sales tax. These are standard practices within the insurance industry. When actual documented costs such as repair invoices from service contractors, receipts, and replacement quotes differ from this standard practice, reasonable additional costs should be paid. (emphasis added)

And now you know the rest of the story. Have a great weekend.

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Comments (9) Read through and enter the discussion with the form at the end
SHIRLEY HEFLIN - December 7, 2012 11:03 AM

Chip: Isn't CSC linked to Allstate & Colossus?

Frankly, regarding this sentence in your first paragraph:

"The policies are unique, the law does not follow typical property insurance principals, and the adjustment practices vary greatly...."

I feel that the govt. and (most) privately based insurers have a lot in common and that their #1 goal is to save $ and to do that they have to deny and/or underpay claims...neither cares about the insured.

It's great that there are experts like you to catch them at it though. :)

Shirley Heflin
(Tampa, FL)

Gary Greenfield - December 7, 2012 12:55 PM

Chip: Hugely valuable post for the clarification of specific coverage issues and the history of behind-the-scenes maneuvering. Man, is the homeowner ever going to get an honest break?

Chip Merlin - December 7, 2012 3:38 PM

Shirley,

I will write more often with feedback like that.

Thank you.

Chip Merlin - December 7, 2012 3:40 PM

Gary,

With people like you and my other friends who pay attention to these details, they have a chance.

tom nemec - April 3, 2013 11:52 AM

PLEASE HELP. My insurance company Harlysville is not paying any ICC money until the job is completed.
I was told they dont have to and its ok with FEMA. I heard there was a decree that they have to pay 50% up front if your paper work is in order.

Chip Merlin - April 3, 2013 1:13 PM

Tom,

You are referring to WYO Bulletin W-13006 (February 11, 2013). Copy and paste the URL below into your web browser for a complete copy of the Bulletin:

http://www.propertyinsurancecoveragelaw.com/uploads/file/WYO Bulletin W-13006- Feb_ 11, 2013- partial payments for ICC (T0597805).PDF

The Bulletin covers two topics:
1. Conditional Waiver to Allow Partial Payments of Increased Cost of Compliance (ICC) Benefits Under Standard Flood Insurance Policy, Section III, Coverage D
2. Clarification of the Rule Regarding the Time Limit To Present an ICC Claim, and Amending Bulletins w-06019, w-09015, and w-12067

Deb C. - April 17, 2013 12:23 PM

I could use your help. I have a home built in the 1950's which is pre-firm and below the current elevation level. The flood waters approached 3 feet, entered full force into the crawl space (along with the first floor) and caused the foundation to shift. NFIP had an engineer review the damage which was identified as " flood induced differential settlement". The claim was denied since settlement is excluded from flood coverage. I would have assumed that settlement occurs over a period of time and that damage as a direct result of the flood should be covered. Any suggestions?

tom nemec - May 28, 2013 12:09 PM

Thanks Chip ..

ThrottleJoe - October 3, 2013 5:17 PM

Sandy Damage:

I live in Mystic Island, NJ. I am looking for documentation from FEMA/NFIP that I can use to fight my insurance adjuster with. Specific concerns mitigation and pre-existing condition replacement.

I had 33" inside and 55" outside sea and sewer water in my home. The town and NFIP recoganize my home as more than 50% damaged (substantial damage letter in hand) and have already been paid the first 50% of ICC funds. My house is raised but I need the FEMA/NFIP documentation that has the details that state:

Mitigate 24" above flood water level, if more tan 50% of water damage on walls or exterior siding then the entire wall or siding is covered and the things like that. Is there a FEMA mitigation guide with those type of details?

See they are only paying for 4' of water damage inside and outside. My question other question is...

If they're paying for 4' of water damage and the guideline is to mitigate 24" higher than that - that puts damage at 6'. Interior walls are 8' shouldn't the whole interior wall be covered? and the ceiling as well due to moisture? Also, if NFIP/FEMA already recognize my home as more then 50% damaged how can they pay less then that in a claim? Makes no sense.

Also, if they identified 55" outside how can they justify only 4' sheathing replacement? Wouldn't it be 6' at the least and again wouldn't they have to replace the whole 8' sheet of sheathing as that is more than 50%? and that is why I'm looking for FEMA/NFIP documentation with details about the mitigation guidelines/recommendations

Any help, guidance, direction would help as I'd hate to have to litigate but it might come to that.

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