As a result of the devastation from the severe storms affecting Louisiana, Mississippi, Arkansas and Texas, FEMA is making an effort to ensure accurate and prompt settlement of NFIP policyholders’ claims.
On August 17, 2016, David I. Maurstad, Assistant Administrator for Federal Insurance, issued Bulletin W-16053 titled “Advance Payments Under Standard Flood Insurance Policies” authorizing two advance payment opportunities for use by WYO carriers or the NFIP Direct Servicing Agent:
When the insurer who issues the policy (a WYO Company or the NFIP Direct Servicing Agent for FEMA) receives a notice of loss, it will confirm coverage and validate that the insured building and/or personal property has flooded. After the insurer determines that a general and temporary condition of flooding as defined in the SFIP existed and damaged the insured property, the insurer should offer an advance payment to the policyholder for building and/or personal property damages up to a total of $5,000. However, if the policyholder provides photographs depicting flood damage and documentation validating their out of pocket expenses, such as receipts or a contractor’s itemized estimate for covered flood damage, the insurer may make advance payment up to a total of $10,000.
2. Preliminary Payment for Significant Damage
The preliminary payment for significant damage advance payment process is applicable where prompt action is necessary to provide immediate loss assistance to a policyholder having a claim with significant damage. To provide adequate assistance to the policyholder, the insurer should offer an advance payment as a percentage of the general contractor’s estimate. The insurer must have a copy of the contractor’s estimate and an inspection by the flood insurance adjuster prior to offering advances on this size of loss. As a general business practice, a general contractor usually requires a 20 percent advance payment from the policyholder as a commitment for losses exceeding $150,000. Contractors may require 25 percent of the estimated loss ranging from $75,000 to $150,000, and 33 percent for moderate losses ranging $25,000 to $75,000. The flood insurance adjuster should be able to conclude losses less than $25,000 after the initial inspection.
Paying up to 50% of the estimated covered loss allows the policyholder the ability to proceed with recovery efforts while negotiating the proof of loss with the adjuster.
Based on #1 above, there is a possible difference of $5,000 for an advance payment when a policyholder submits photographs and documentation validating out of pocket expenses. For #2, obtaining a general contractor’s estimate is critical for a claim with significant damage.
There are several conditions that the insurer must notify the policyholder about in writing for both advance payment scenarios:
- The advance payment is not a payment for Additional Living Expenses (ALE). ALE is specifically excluded in the SFIP.
- The advance payment is conditioned upon the insured signing an Advance Payment Request which contains a Non-Waiver Agreement (which means that no claims by the insured or insurer, or available defenses to the insured or insurer, are prejudiced or waived by the issuance and acceptance of the advance payment, and coverage under the policy is not admitted).
- Acceptance of an advance payment will not affect the insured’s right to seek additional payments under the terms and conditions of their SFIP.
- After the claim is settled, the final payment will be reduced by the amount of any advance(s) made to the policyholder.
- Any mortgagee shown on the declarations sheet of the policy or any known mortgagee at the time of payment must be named on the building property check.
- The insured will eventually have to sign a proof of loss meeting the requirements of the Standard Flood Insurance Policy for all amounts received, including the amount of the advanced Payment.
You can read the full bulletin here.