A common theme during conversations with other advocates for policyholders as of late has been the stagnation of the flood insurance lawsuits arising from Superstorm Sandy. The question is why are these claims delayed for so long and what are the barriers to settlement? Chip Merlin offered a partial answer to this question in his July 31, 2014 blog post, National Flood Claims Do Not Get Paid Properly Because the Only Incentive is to Underpay.

In his post, Chip wrote:

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.

I can say that I wholeheartedly agree with Chip on this point. What’s more important is that our experience here in New Jersey is proving this statement correct. We are handling hundreds of flood insurance claims as a result of Superstorm Sandy, most were written by Write Your Own carriers and the lawsuits are being handled by a small group of defense attorneys. However, a small portion of the claims are FEMA direct write flood policies and are being handled by the local offices of the United States Attorney.

On most all of these direct write cases, we are actively involved in settlement discussions and have been successful in narrowing the issues over which the parties disagree. The same cannot be said for the Write Your Own claims. Why? The answer, I believe, is found in Chip’s post quoted above. The United States Attorneys handling the direct write claims have no financial interest in dragging out claims unnecessarily. Rather, they appear to be taking only the discovery necessary to move quickly towards resolution. Our experience is that the Write Your Own cases are dragging on far longer because of unnecessary discovery under the dubious guise of protecting the federal treasury, all in the name of protecting the carrier from a FEMA audit. Ironically, the threat of a FEMA audit causes the Write Your Own carrier to waste countless dollars on defense fees that are ultimately paid for by…..FEMA!

Seems logical. . . .