Why Won’t Your Government-Mandated Flood Insurance Pay Your Claims?

CBS’ recent investigation found the federal National Flood Insurance Program (“NFIP”), intended to benefit homeowners caught in flood disasters, actually winds up paying most of its money to help insurers avoid paying claims.

The problem is NFIP doesn’t pay flood victims directly.  Instead, NFIP collects premiums and taxpayer dollars, then turns the money over to private insurers with minimal oversight.  Exacerbating the problem is most homeowners living in federally-designated “flood plains” are legally required to purchase flood coverage (sometimes by the government, sometimes by their mortgage lender).

A 2016 federal oversight report found NFIP often pays insurers more than it pays the homeowners it’s supposed to benefit.  The report called out one example in which NFIP paid an insurer over $87,000 to defend a claim worth a maximum of $25,000.  The report noted some insurance defense attorneys ran up the bill by, for instance, insisting on live, in-person testimony (typically including legal fees, court reporter fees, travel expenses and a conference room) just to verify receipts.  Another problem is NFIP will automatically pay, without scrutiny, any insurer defense “expert” expense as long as it falls below $2,500.

The report emphasized many of these problems plagued the victims of 2012 Superstorm Sandy, which caused extensive flooding in New Jersey and other Mid-Atlantic areas.  One estimate suggested Superstorm Sandy flood claims were underpaid by at least $189 million.

Part of the problem is the NFIP is essentially a risk-free investment for participating insurers, because any shortfalls are backed by taxpayer money.  But after huge losses following Hurricane Katrina, Congress started to investigate the NFIP’s losses and suggested shuttering the program.  That gives insurers in more recent disasters like Superstorm Sandy a huge incentive to lowball claims, keep NFIP’s losses low, and lower the risk Congress acts to reform or deactivate NFIP.