The Federal Emergency Management Agency is making sweeping reforms to the nation's flood insurance program in the wake of a series of critical reports on NPR and the PBS series Frontline. But lawmakers say this isn't enough when private insurance companies are profiting millions of dollars from a program that is already $23 billion in debt.
"This is a federal program at the end of the day," says Sen. Bob Menendez, D-N.J., whose constituents were heavily affected by Superstorm Sandy. "It needs to fundamentally transform. And if it cannot do so on its own, then we have to consider legislatively whether we scrap the entire model."
Menendez and other lawmakers say they are considering ending the National Flood Insurance Program. The program is an unusual hybrid model: private companies are paid a fee to process policies and claims, but taxpayers bear the risk and largely pay the claims. Records show that nearly 80 firms participate in the government's flood program, including some of the nation's largest insurance companies.
In a joint investigation, called Business of Disaster, NPR and Frontline found that the government allowed private insurance companies to make more than $400 million in profit at a time when tens of thousands of homeowners affected by Superstorm Sandy came forward alleging that the companies were underpaying them. Our investigation also found that when homeowners appealed to FEMA about the problems in their claims, FEMA would send the appeals to the insurance companies to review and to write a response.
FEMA officials say they will be rewriting the contracts with the program's private insurance carriers and adding oversight.
The changes are the first major reforms to the program in 17 years.
"These are the right steps to turn this program around and we have a lot more work to go," says Roy Wright, who runs the National Flood Insurance Program. "This sets the groundwork by which I can have a true standards-based approach to manage the companies and ensure that policyholders get everything they are entitled to."
In addition to the contract changes, the reforms will overhaul two of the most controversial areas of the program — its appeals process and its arrangement to pay the legal bills of the insurance firms. FEMA pays all the companies' legal fees, but not those of homeowners. In one instance, according to a government audit, FEMA paid legal fees estimated at $87,000 just for pretrial motions in a case where the homeowner was seeking no more than $25,000.
Wright says the new appeals process will be independent and fair to homeowners, and all legal bill payments will now be overseen by an in-house FEMA monitor.
"As we go forward, there will be FEMA lawyers, rather than outside counsel, that are making the final decisions about our litigation strategies," Wright says.
Wright says FEMA is now carefully analyzing the profit structure of the insurance companies, as the Government Accountability Office told the agency to do more than seven years ago, and says he expects to make more changes in coming months.
Robert Hartwig, president of the Insurance Information Institute, which is paid for by the insurance companies, says in a statement that the firms support "sound improvements to the program."
"Those insurers will continue to provide high quality service to impacted policyholders consistent with the new administrative changes recently announced by the NFIP," he says.
Lawmakers, however, were still not appeased.
"It is too little, too late," says Menendez. "FEMA has basically turned over this program to the private insurance companies."
Menendez says FEMA could run the program, along the lines of a small, direct flood business it already operates. Or, he says, Congress can make flood insurance private, much like other homeowners insurance.
Sen. Cory Booker, also from New Jersey, says he agrees.
"The private insurance companies had a serious lack of oversight," he says. "Folks after the storm suffered enough. For folks to have suffered in the way they have since is unconscionable."
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Insurance companies have been making millions of dollars through the nation's flood insurance program, all this while thousands of homeowners have suffered. That finding by NPR and the PBS series "Frontline" has now led the Federal Emergency Management Agency to make big changes to the program. Several senators say it's not enough. NPR's Laura Sullivan reports.
LAURA SULLIVAN, BYLINE: The changes are the first major revisions to the flood insurance program in 17 years. The program itself is an unusual hybrid model. Private companies get paid to manage flood policies, but taxpayers bear the risk and, for the most part, pay all the claims. That's worked out well for insurance companies. NPR and "Frontline" found that companies make hundreds of millions of dollars every year from the program, which is now $23 billion in debt.
And after Sandy, at a time when tens of thousands of homeowners alleged the insurance companies were underpaying them, the companies together brought in more than $400 million dollars in profit before taxes. FEMA says it's making significant changes to its contracts and oversight of the flood insurance program. Roy Wright runs the program.
ROY WRIGHT: These are the right steps to build out this foundation and turn this program around. And we have a lot more work to go.
SULLIVAN: Wright says FEMA is now carefully analyzing the profit structure of the companies and will be making more changes in the months to come.
WRIGHT: This sets the groundwork by which I can have a true, standards-based approach to manage the companies and ensure that policyholders get everything that they're entitled to.
SULLIVAN: But Senator Bob Menendez, a Democrat whose New Jersey constituents were badly affected by the storm, is not impressed.
BOB MENENDEZ: It is too little, too late. FEMA has basically turned over this program to the private insurance companies.
SULLIVAN: Menendez and other lawmakers say they are now considering ending the flood insurance program. They say flood insurance could go private, like auto insurance, or the program could come entirely in-house to FEMA, like it once was in the 1970s. FEMA still runs a small direct flood insurance business. Menendez says even with the new changes, the program is unlikely to be in the best interest of taxpayers or homeowners.
MENENDEZ: It needs to fundamentally transform. And if it cannot do so, then we have to consider whether legislatively we scrap the entire private insurance company model.
SULLIVAN: Senator Cory Booker, also from New Jersey, says he agrees.
CORY BOOKER: The private insurance companies had a serious lack of oversight, perverse incentives, and I think we have a long way to go to really fix this program for the long-term.
SULLIVAN: Booker says at the end of the day, it may not be worth salvaging.
BOOKER: Folks after the storm had suffered enough. For folks to have to suffer in the way they have since is just unconscionable.
SULLIVAN: Among the reforms, Wright says there will be an immediate change to FEMA's appeals process. NPR and "Frontline" found the agency was sending homeowner appeals to the insurance companies and having the insurance companies review them and write a response. Wright says he is also altering one of the agency's controversial practices - FEMA pays all the legal fees of the insurance companies. It does not pay the legal bills of homeowners.
Homeowners say that can lead to some cases dragging out. In one instance, FEMA paid $87,000 just for pretrial motions in a case that involved a homeowner who was asking for $25,000. Wright says he is putting someone in charge of overseeing how FEMA handles the insurance company's legal bills.
WRIGHT: As we go forward, there will be FEMA lawyers rather than outside counsel that are making the final decisions about our litigation strategies.
SULLIVAN: The insurance companies' advocacy group, the Insurance Information Institute, says the companies are supportive of any reforms that are deemed improvements to the program. In a statement, the Institute's president, Robert Hartwig, said the companies will, quote, "continue to provide high-quality service to homeowners." Senators Booker and Menendez said they, too, hope that will be the case. Laura Sullivan, NPR News. Transcript provided by NPR, Copyright NPR.