A number of Hurricane Sandy victims have contacted our office in recent weeks with concerns that their flood claims are not being handled properly by the assigned adjusters. The issues raise the question whether those claims are being handled in bad faith or are the result of poor planning. Many may suggest poor planning is bad faith.
The majority of these flood handling complaints arise from slow claims processing. Poor communication from the adjuster is often cited as a frustration. Chip Merlin previously noted that claims under the National Flood Program are unfortunately immune from bad faith suits. Being immune from a bad faith claim does not mean bad faith claims handling does not occur. It helpful to look to the incentives of those involved to determine if bad faith exists.
As a former insurance defense attorney, I can tell you many private insurance companies are susceptible to bad faith claims due to their corporate structures. This is simply because they are, at their core, driven by profit. In fact, there is often a perverse incentive to lowball or deny claims as most bonus programs offered to employees by insurers are driven by company profit. When you align an employee’s pocketbook with the employer’s bottom line, it is amazing the “buy in” that you can get. The thought being, “the more money I save the company, the bigger the year end bonus.” The same is not necessarily true, however, for claims under the National Flood Insurance Program (NFIP).
Many in New Jersey are making claims under their flood insurance for the first time and are unfamiliar with the NFIP structure. While your flood policy is issued by a private company, it is generally underwritten by the federal government, which is responsible for any losses under the policy. Thus, the private insurance company acts as a servicing agent for the policy and any claims made against the policy.
For this service, the carrier is paid a fee based upon a schedule set by FEMA. This is where a flood policy and a homeowner’s policy part ways. While a private insurer retains more money by paying out less claim dollars, the flood servicer gets paid a percentage of the gross claim. Thus the larger the claim, the larger the fee to the servicing company. It is often argued that flood adjusters have some incentive to include every allowable loss on your claim.
With this incentive in mind, I believe some of the communication lapse coming from flood adjusters results from the carriers being completely unprepared for a northeast storm the size of Sandy. The carriers did not have enough boots on the ground quickly enough to handle their responsibilities. The flood carriers should have had more staff available and ready to process the claims that were bound to flow from a catastrophe of this magnitude. This lack of preparedness speaks to negligence which is, in some instances, compounded by bad faith.