Eighty percent. Depending on what you are talking about 80% can be a very large number. When you are talking about the percentage of storm victims that were underpaid on their flood insurance claims, the number becomes unthinkable. Still, that’s the number cited by FEMA and quoted in a recent article published by NPR. In addition to that shocking number, the article cited another…. $400 million.

$400 million is the profits made by the Write Your Own insurance carriers in the wake of Superstorm Sandy. That is the amount that FEMA paid in fees to the private insurance carriers that help manage the program. Frequent readers of our blog know that the private insurance carriers who issue flood insurance policies under the National Flood Insurance Program do not underwrite those policies themselves. Rather they take a portion of the premium for an administration fee and pass the rest along to FEMA which retains the premiums and holds them to pay claims. If a flood occurs, the private carrier adjusts the loss (for another fee) and pays the claim out of the FEMA account. It is these two fees paid over thousands of policyholders that add up to the $400 million in profits discovered by NPR.

However, given that system, people find it hard to believe that the private insurance carriers would short-change their policyholders given that it’s not their money. Several theories exist as to why. First, the argument is that the insurance carriers are commercial enterprises driven by profit. They are set up to maximize revenue and minimize payments and underpayment is simply their nature. Still another thought is that the Write Your Own carriers know the debt the program is laden with, and fear that Congress could end it. This would end their ability to collect huge management and adjustment fees on policies for which they have zero risk.

A personal theory of mine focuses on FEMA’s crackdown on overpayments after Hurricane Katrina and the cottage industry of defense attorneys who represented the insurance carries. When FEMA said they would be strictly auditing flood payouts and would seek reimbursement from the carriers and adjusters who overpaid the claims, I believe certain defense attorneys, who stood to profit from the inevitable litigation (which again FEMA pays for), created a false fear of audits in the adjusters. I have heard stories of adjusters who believed that they could be held responsible for judgment calls with which FEMA later disagreed. This resulted in the adjusters writing low estimates for fear of to pay back overpayments themselves.

The theories why it happened abound, but it is clear based upon the admissions of FEMA that thousands of Sandy claims were underpaid. Regardless of which of the above theories is correct, the bottom line is that the motivation behind these underpayments is money in the pockets of the insurance carriers.

When reading the NPR article, I had one song lyric running through my head the whole time. See if you can guess which one it is. . . .

  • John

    And the federal flood program is $25 BILLION in the hole. Imagine how bad it would be if they had paid out the additional 20%. The flood program is broken and politicians can’t agree on how to fix it. Private flood is not the answer and will be a disaster when the next flood comes along. No guarantee, no federal back stop and even more profit for the carriers until the water rises.