National flood claims are having all kinds of problems in New Jersey and New York at an unprecedented level. What is causing this? The answer is obvious – the Write Your Own Carriers (WYO) and especially their attorneys have no penalties so long as they underpay claims. The only penalty, as repeated often by the WYO attorneys, is if a FEMA audit finds amounts paid were “too much.” Then, FEMA can ask for money back from the WYO carrier.

Who pays the WYO attorneys fee? FEMA does. As a result of this, the very small cottage of WYO attorneys publicly warn, scare, scream and raise fear to their WYO clients that they better not pay a penny more than what may be owed or face the possibility of a FEMA audit and back payment. Who wins in this situation? The WYO defense attorney firms.

FEMA pays the WYO carriers a small percentage to oversee flood claims—less than two percent of the gross amount paid. The WYO carriers usually contract with independent catastrophe loss adjustment firms that hire field adjusters. These field adjusters are compensated by FEMA on a percentage of the amount paid as well. Some WYO attorneys wrongfully suggest there is an incentive for the WYO carriers to pay as much as possible because the field adjusters and WYO carriers get paid on a percentage of the total amount paid. This is a fabrication.

In reality, the field adjuster has an incentive to adjust as many individual claims as possible but not overpay any individual claim for fear of having to pay any overpayment out of his own pocket. Catastrophe claims adjuster David Charles calls this practice “running and gunning.” For example, rather than accurately estimating one or two losses in a day which may total $200,000, a FEMA percentage paid field adjuster will estimate 8 claims a day for a total of $1,000,000. So long as none of the individual estimates are overestimated, which results in a back payment to FEMA, the field adjuster has the financial incentive to estimate as much possible in total rather than as accurately as possible. If any of the estimates are found later by FEMA to result in an overpayment, the field adjuster may contractually pay out a lot more money from his own pocket than what he may have made in an entire catastrophe. So, “running and gunning” results in massive amounts of underpaid claims because the field adjuster is financially rewarded for that and has a penalty only if he overestimates a loss. WYO insurance attorneys intentionally fail to mention this reality in their speeches about the flood insurance claims process.

The WYO carrier gets paid its small administrative percentage based upon the gross amount paid. It does not have to pay for the WYO attorney’s fees and costs if litigation results from a denial or underpayment. There is no financial penalty to the WYO carrier for underpaying a claim. There is no penalty for providing bad service to the policyholder. The only penalty is the one that the WYO attorneys warn the WYO carrier about—overpayment.

So, when there is a call for the WYO carrier to re-adjust a claim or spend any additional time on a wrongfully adjusted claim, there is no economic incentive for it to do so. There is no penalty for poor adjustment.

When there is no economic incentive to “get it right,” and disincentives if overpayment occurs, you do not have to be a rocket scientist to figure out which way claims payments go on a flood claim.

If you ask me, FEMA should demand that the WYO carriers pay back attorney’s fees caused by poor adjustment and administration. The WYO carriers would not be so quick to deny and underpay claims. Their attorneys would stop taking numerous depositions and dragging out litigation.

Congress should re-write the requirements of a proof of loss and prevent the WYO carriers from winning lawsuits based on technical post loss conditions primarily centered around proofs of loss. WYO lawyers are damning policyholders and feasting on technical requirements rather than advising their clients to pay what is otherwise properly owed. The WYO lawyers are making a fortune based upon a system they promote which advances technical reasons for non-payment and then obsessively warns about overpayment. Congress and the GAO should study the costs associated with underpayment. Much of it results in attorney’s fees paid from the US Treasury to the same WYO insurance attorneys claiming to be safeguarding the interests of taxpayers.

On the other hand, those very clever and tough WYO attorneys are merely responding to the economic incentives and disincentives of the National Flood Program. Until Congress brings these problems to light and requires change, we can expect WYO attorneys to respond as they have been doing. It is in their and their client’s interest to do so. Paying too little and fighting off the valid claims through technical defenses is the status quo in the flood claims game.

  • James Purcell

    Chip,

    This post could not be more accurate and should be on the front page of every newspaper. Without any possibly of financial penalties, incentives to pay the claim correctly disappear.

    Add to that the burden of the policyholder to fully prove their claim, including line-by-line estimates, photos of every disputed item and the policyholder’s lack of knowledge regarding estimating programs and you have the perfect recipe for the problems happening on flood claims. Having been involved with over 200 Sandy flood claims, I have yet to see an insurance company send an adjuster back out to re-inspect the property, which would solve 90% of the disputes. Remember, in addition to trying to rush through as many claims as possible, the independent adjuster is often scoping in the dark, with 6 inches of mud and water on the floor, furniture floating around, etc. A common issue we discover when re-estimating these claims is multiple layers of subflooring, which is impossible to see when covered in 6 inches of mud. By the time a supplemental claim has been filed, the carrier’s independent adjuster is back in his home state and busy with his usual load of cases or in another flood zone buried in new files. The client’s $15,000 underpayment rarely gets the priority it deserves.

    Another issue I see is WYO companies automatically issuing denial letters as soon as they receive the supplemental claim without even reviewing the evidence provided. I suspect this is to get the statute of limitations clock ticking but as you said, what’s the downside for them?

    Last issue I’d bring up is the WYO companies not understanding, or applying, FEMA’s guidelines correctly. I constantly see letters stating they can ‘only accept paid receipts’ or ‘water has to touch the item to be covered’ and other inaccurate information they tell the insureds. Whether done intentionally or as a failure to keep up with NFIP Bulletins and updates, it all contributes to hurting the people who have already lost so much.

  • James Purcell

    One last point-I’d love to see data on how many claims are audited and what percentage are found to be overpaid. My experience has shown that even when the IA pays for an item that should not have been covered, the entire claim was paid so low that the insured is still shorted even with the incorrect payment.

  • Very helpful in further understanding the problems associated with the NFIP program.

    One control factor we notice in our day to day, put in place to insure lower payouts by field inspectors(NFIP Certified adjusters) by WYO carriers, is the fee schedule for writing the scope of damage. When calculating the fee an adjuster will receive, 3.4% of the total claim value between 50k and 100k which is the loss value we find in most of our client base, there is no real financial incentive for the adjuster to spend the time to accurately estimate the reconstruction cost. It is just more cost effective for the adjuster to cap the damage at 55k(3.4%=$1,870.00), and move on than to spend the time to properly estimating the damage on the claim at 65k(3.4%=$2,210.00). The difference in the fee for the adjuster will only be $340.00. From my personal experience, a day’s expenses working as an NFIP adjuster in a CAT zone. The adjuster will have to spend his own money for the additional travel expenses for the increase in time it would take to finely detail the loss as it should be done. It is simply less expensive to undervalue and close out claims as an adjuster than to properly estimate the loss. Another point that needs to be acknowledged, is the lack of true construction experience these field adjusters have. No amount of class room training can prepare people to become reconstruction estimators- Software application training will never replace the hands on experience the contractors have learned from decades of actually building the property’s that are covered in the program- And as we all understand, average market values can change monthly, quarterly and annually or daily after a major catastrophic loss event has taken place.

    Thank you for the insight, we learn a great deal of information by following your firm’s blog.

  • Chip-

    Spot on- You hit it 100% on the head, There has to be some type of help from Senate & Congress on this.

    If you read in this latest article, Craig Fugate, the director of FEMA
    (http://www.app.com/story/news/local/ocean-county/sandy-recovery/2014/07/30/sandy-fema-jersey-shore/13375333/)States “it determines claims based on actual cash value — not replacement value —at the time of flooding”

    This is coming from the director of FEMA. HE DOESN’T EVEN KNOW THAT HIS NFIP PAYS REPLACEMENT COST IF IT’S A PRIMARY RESIDENCE!

    The system is beyond broken, and is in need of complete & total overhaul.

  • Chip-

    Spot on- You hit it 100% on the head, There has to be some type of help from Senate & Congress on this.

    If you read in this latest article, Craig Fugate, the director of FEMA
    (http://www.app.com/story/news/local/ocean-county/sandy-recovery/2014/07/30/sandy-fema-jersey-shore/13375333/)States “it determines claims based on actual cash value — not replacement value —at the time of flooding”

    This is coming from the director of FEMA. HE DOESN’T EVEN KNOW THAT HIS NFIP PAYS REPLACEMENT COST IF ITS A PRIMARY RESIDENCE!

    The system is beyond broken, and is in need of complete & total overhaul.