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.

How Do I Make An Insurance Claim After Wildfires, Floods, Hurricanes or Other Natural Disasters?

Disasters have been in the news a lot in the last 12 months, between west coast wildfires, Texas floods and Florida hurricanes.  Disasters raise a number of insurance issues for policyholders, especially when they’re busy digging out of the wreck already.  Disasters also strain overworked insurance company personnel, who might make hasty guesses about your loss that wind up being inaccurate. Here are some steps you might consider taking if that happens (after making sure everyone is safe of course):

  • Promptly Notify Your Insurer – Your first step if you think you might have a claim is to tell your insurer. Delayed claim notice is a basis to deny an otherwise valid claim.  It’s also wise to make sure the insurer has your updated contact information.
  • Read Your Policy – Your insurance policy is an important starting point. It spells out your rights and the company’s obligations.  It contains important time limits and similar rules you need to follow in order to make a valid insurance claim.  It also specifies your coverage in detail; don’t assume the overworked adjuster processing thousands of similar claims will identify all coverage that might benefit you. It may require you consult with the company before undertaking any repairs, or have similar rules you need to follow.
  • Protect Yourself From Further Loss – Protecting yourself and your property from further damage is common sense. It’s also explicitly required by many insurance policies.  If you sustain further loss because you failed to take reasonable preventative measures, your insurer may have a valid basis to refuse to cover the additional loss you could have avoided.  But keep in mind that your policy may provide that non-emergency repairs require you to consult with the company before undertaking the work.
  • Make a Paper Trail – Take notes when you speak to the adjuster or contractors, and save your receipts for all disaster-related expenses such as repairs or hotel bills. Make sure you get important statements from the insurer, like requests for information or coverage statements, in writing. Keep an inventory detailing the full scope of the loss.
  • Get Repair Quotes – Get an estimate from the contractor or another appropriate person of the cost to repair the damage. This will give you a reasonable basis to double-check your insurer’s estimate.
  • Be Present During the Inspection – Your adjuster will likely inspect your property to ascertain the scope of the damage. It’s often wise to attend the inspection in person.  That way, you can point out the full extent of the damage and make sure the adjuster doesn’t miss anything.
Light snow in the Olympics.