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.