With so much rain and flooding sustained recently in Florida related to some of the early season Tropical Storms, I thought it may be beneficial to give a brief overview of the National Flood Insurance Program and how it operates. The National Flood Insurance Program (“NFIP”), was designed by the federal government to reduce future flood damage through community floodplain management ordinances, and to make riskbased flood insurance generally available for property owners. The NFIP is a complex statutory system that is federally subsidized and administered by the Federal Emergency Management Agency (“FEMA”).
Policies can be obtained in two ways under the NFIP. Either directly from FEMA or from FEMA authorized private insurers, known as Write–Your–Own (“WYO”) insurance companies. The WYO companies serve as intermediaries in providing flood insurance. The flood-insurance policies issued under the NFIP are called Standard Flood Insurance Policies (“SFIP”). FEMA regulations establish terms, rate structures, and premium costs of SFIPs, but WYO companies issue SFIPs in their own name and handle claims adjustments.
Because of their role in this system, WYO companies are fiscal agents of the federal government. WYO companies deposit premiums in separate bank accounts from which they disburse claims and make refunds. After a deduction for a WYO company’s operating costs, SFIP premiums are deposited in the National Flood Insurance Fund in the U .S. Treasury. If a WYO company lacks sufficient funds to pay a claim or make a refund, it can draw on FEMA’s letters of credit from the U.S. Treasury.
FEMA provides financial protection for WYO companies involved in SFIP litigation. Federal regulations mandate that loss payments under policies of flood insurance shall be made by the Company from federal funds retained in the separate bank accounts. Loss payments encompass related expenses such as litigation costs. While its default rule provides for federal reimbursement of litigation expenses, FEMA may deny reimbursement if the litigation is grounded in actions by the Company that are significantly outside the scope of the statutory arrangement, and/or involves issues of agent negligence. FEMA must give notice to the WYO insurance company if it intends to deny reimbursement.
Flood insurance is a niche within the niche of first-party property insurance. There are requirements, deadlines and important conditions to be aware of that may differ slightly from general first-party claims. Always refer to the policy terms and statutory provisions for guidance in this area. If any questions arise, do not hesitate to contact competent counsel/representatives with experience in this field.