Speaking of lobbying – NFIP pays insurance company legal fees in flood claims disputes!

We are pleased to transmit to you the Federal Insurance Administration’s (“FIA”) new Guide for Write Your Own Counsel. This Guide provides important information on the policies and procedures to be followed by Write Your Own Companies (“WYO Companies”) and their counsel in litigation involving the National Flood Insurance Program (“NFIP”)…

Since the inception of the WYO Program in October 1983, defense of lawsuits based on the SFIP has generally been handled smoothly and effectively. We stand ready to continue to offer support to WYO Companies in all litigation matters concerning the NFIP in our ongoing spirit of partnership.

Can you believe it? I can not – but google search results for “NFIP litigation” offered a copy.

This Guide for Write Your Own Counsel (“Guide”) has been developed by the Federal Insurance Administration (“FIA”) and the Federal Emergency Management Agency (“FEMA”) Office of General Counsel (“OGC”) to assist Write Your Own (“WYO”) Companies and their counsel defending National Flood Insurance Program (“NFIP”) litigation.

So much for thinking it is the deep pockets of the insurance industry that put most NFIP policyholder-plaintiffs at a financial disadvantage in litigation – those deep pockets are in Uncle Sam’s pants!

The FIA and WYO Company share a unique and common interest in the defense of cases related to the NFIP. Among other factors that give rise to this shared interest are the fiduciary responsibilities of the Company, the statutory and regulatory basis for the NFIP, the Federal government’s administrative and oversight responsibilities for the program, the need to share privileged information, and the fact that Federal funds are at risk. Accordingly, through the Arrangement, the FIA and the WYO Company have entered into a joint defense agreement to implement FEMA’s oversight responsibilities for the purpose of any litigation related to or arising under the NFIP to enable the free flow of information between the FIA, FEMA OGC, the WYO Company, and its legal counsel.

“Unique” is not exactly what I’d call the the government’s “common interest” with the insurer defendants in Katrina litigation.  I wonder if Judge Senter had a better word in mind in the “opinion” he would not “venture” in his December 12, 2008 Order in Gagne v State Farm.

The Court will not venture an opinion as to why this cause of action, which for all practical purposes is the only remaining insurance dispute between a homeowner and his insurance carrier filed in this Court in 2006 and which appears to be no different from any other typical Hurricane Katrina lawsuit, has more than 450 numerical entries on the docket sheet and is not set for trial until April 2009.

However, according to the Guide, any of the “more than 450 numberical entries on the docket sheet” filed by State Farm would have been in an approved Case Plan and Budget for NFIP Litigation required for reimbursement from NFIP/FEMA.

Within forty-five (45) days of service of process of any lawsuit involving the NFIP, a WYO Company must provide the FIA Legal Liaison: 1) three copies of all initial court documents, and 2) a Case Plan and Budget for the case (See Appendix 2 for a sample Case Plan and Budget). Supplying these documents to other than the FIA Legal Liaison may result in a failure to achieve sufficient notice within the required time period.

The Case Plan should summarize the WYO Company’s defense strategy and projected schedule for preparing and trying the case. Complex or time-consuming activities should be divided into subparts. FIA must be provided with sufficient information to determine the basis of a claim. The Budget should translate the case plan into financial expectations. At a minimum, the budget should reveal major assumptions, conform to the case plan, identify specific phases of the case, and estimate the cost of each phase…

Federal funds to pay a settlement or judgment under the Arrangement will be determined by the FIA in consultation with the FEMA OGC the initial case management plan and budget must be supplemented in a timely manner as the lawsuit proceeds. The WYO Company counsel should also submit to the FEMA OGC attorney assigned to the case significant pleadings or other documents, such as dispositive motions, which might reflect significant changes in the legal nature of the case…(emphasis added).

Gange v State Farm grew to 533 docket items by the time it settled – a number that pales in comparison to the 1316 item, 135 page docket of McIntosh v State Farm at settlement.

By regulation (44 C.F.R. § 62.23(d)) and the terms of the Arrangement, the WYO Company is obligated to arrange for the defense of claims arising under the NFIP, including settlement when appropriate…Accordingly… The settlement strategy should be noted in the Case Plan and Budget submitted to the FIA Legal Liaison.

When considering settlement options, the WYO Company should act in a manner consistent with its fiduciary obligations as a “fiscal agent” of the Federal government, and the propriety of a settlement will be considered on that basis.

Surely, Congress did not intend to place taxpaying policyholders at a legal disadvantage when filing suits that protect both their property and the government’s interest or consider the possibility of a WYO handing claims in a way that would be subject to litigation under RICO or the FCA.  Nonetheless, that is unarguably the case.

Counsel should be aware that legal defenses that otherwise may not be available to a private sector insurer may be asserted due to the Federal nature of the NFIP. Various defenses are discussed in the Digest and Guide on Litigation Concerning the National Flood Insurance Program .

Like the referenced legal defenses, this Digest and Guide also appears to be unavailable to the private sector – that sucks – so did Katrina’s power sucking wind – and, in some cases, the water then poured in; but, according to the 5th Circuit, that’s not a flood!

17 thoughts on “Speaking of lobbying – NFIP pays insurance company legal fees in flood claims disputes!”

  1. For a blog that seems to do an enormous amount of research, I believe you dropped the football way back down the field if your are just now figuring out the gummint pays for everything under the NFIP. In the 1980s, the gummint realized it was doing a poor job of marketing flood policies (it had taken the role back from private insurers) and it went back to those same companies on bended knee and offered to allow them to become WYO (write your own) carriers.

    The policy is standardized (approved by Congress) so even though it may have a carrier name attached to it, you get the same policy language no matter where you buy. The Underwriting rules are standardized as are the adjustment practices- all administered and policed by a gummint agency.

    The insurance agent selling the policy receives a commission (again established by the gummint) and when claims are made, the writing company adjusts them and is paid for that function (again based upon a fee schedule established by the gummint). The loss payments are also reimbursed by the gummint but the NFIP has a reinspection program which evaluates a sampling of the claims paid for accuracy. If a company pays all or part of a claim in error, they do not receive reimbursement for their mistake (and that triggers a more extensive reinspection/ review process). Claims that go to suit are handled by the companies but again the gummint is involved and as you point out, they are the “deep pocket”.

    The policy has traditionally contained language which required any suit brought under the policy to be filed in US District Court. Basically, way back when all the changes took place (re-entry of private companies into WYO business) I think the gummint realized there were far too many people who did not have flood insurance and they really did not have a good network to sell it. Obviously, the private companies with their various agency structures did. Sorry to drag this out so long but hope it helps.

  2. Thank you for the information! Frankly, I’m also surprised that anyone could do the research I’ve done and never see a mention of the government picking up the tab for legal fees until it popped up in a list of search results.

    It’s not unusual for the government to pay any of the NFIP expenses
    other than the legal – and that is a significant departure from the rules found in the various OMB circulars.

    Think about all the times it should have been mentioned – none more than in the reports of government investigations of allegations the WYOs were allocating wind damage to NFIP claims – and in no report was the omission more glaring than in that issued by the Office of the Inspector General of HHS.

    None of the reports indicate the examination of files on disputes that were resolved with legal action – mediation or a court decision. Yet, those files where were an investigator would have seen the allocation of damage to both NFIP and private wind coverage – and to what if any extent the allocation changed after the claim was resolved by legal action.

    It’s unthinkable that the Inspector General of OIG would not or that FEMA would not have offered the information. Instead, the OIG’s findings and FEMA’s response all but deny the existence of such files. For example:

    OIG Recommendation based on findings:
    Expand the re-inspection process to include a review of and determination that flood and wind damage on the same structure was settled in a fair and equitable manner to ensure that wind damage was not paid under the flood

    FEMA Response:
    The NFlP has no jurisdiction over the WYO Companies’ other lines of business and has no authority to demand copies of their wind claim files. As
    previously stated, the NFIP does not need a wind file in order to determine a flood claim was paid properly.

    “No jurisdiction” when FEMA via NFIP was approving case plans for the various legal actions and paying the bill!

    In fact, the OIG appears to be totally unaware the NFIP “arrangement” with the WYOs includes a legal component.

    Appendix C of the report:
    NFIP uses federal employees, contractors, and private sector organizations to process flood claims. Contractors and private sector organizations consist of insurance carriers, flood claims processing companies, catastrophe adjusting firms (CAT), and information technology management companies that support core NFIP databases and systems.

    This paragraph is followed by a diagram or the “standard process” that ends with “payment” – and in “slab cases” some form of legal action is pretty “standard” (sadly).

    All of this leaves me wondering just how many people do know about the legal component of the NFIP-WYO contractual relationship.

    It certainly would be interesting to see a case by case report of expenditures legal fees associated with Katrina.

    For example, when Judge Senter (or any other) issues an order of settlement, most say that each party will assume the cost of legal fees. The insurer can turn to the government for reimbursement; however, the insured simply adds those fees to the uncompensated loss.

    Again, thank you for taking the time to respond – it did help!

  3. Just another reason not to expand any government involvement into private enterprise. The feds are incompetent and all they have to cover their incompetence in any endeavor is OUR money.

  4. Sup, we need to get you back to Georgia for a little attitude adjusting fraternity party!

    NFIP’s WYO program is touted as a public-private partnership – and that makes it a public-private failure.

    I wish there were more in the industry today with your loyalty and commitment but it just doesn’t seem to be the case – and I know that has to be an even bigger disappointment to you than it is to me.

    None of us can do more than try to make a difference – and that makes me think more of us need to sing and dance! You pick the song and I’ll post it! : )

  5. For us old Geezers this issue will give a new meaning to the term “follow the money”. The benefactors of the NFIP are not the flood victims.
    A GAO report at: http://www.gao.gov/htext/d071078.html
    alleges that as much as 66% of premiums collected may be diverted to the WYO companies. That leaves little fo flood victims. It would appear that someone at FEMA needs to retake a grade school math class.

    Last March 2008, in Congressional testimony, FEMA stated that it is their goal to collect “twice the amount of average annual losses in premiums”. Apparently they were unaware of the fact that at the time of their testimony the premiums paid to average annual losses was already OVER their goal. By Sep 30 2008 premiums were 280% of losses.

    If only 1/3 of premiums go to cover losses than their goal should have been “triple the amount of average annual losses”. A goal which I suspect they will exceed by Sep 30 of this year.

    This program should be renamed WYO-CC. AKA as the WYO Cash Cow.

    There are currently over 5 million policy holders, over 4 million have never had a claim or received a single dollar from this program. The current director at the NFIP is on a mission to get even more people into this program. The easiest way to do that is to raise the Base Flood Elevations on new flood maps. Accuracy of those maps and their supporting documentation is irelevant. ( Check “Mapping the Zone: Improving Flood Map Accuracy, 2009” by the National Research Service)

    This program is a testimony to public bureaucracy incompetence and also a failure of public-private partnership. It is just a matter of time before this program becomes a political trainwreck. At which point something MIGHT be done by our politicians.

    I’m sorry, occasionally I suffer bouts of Rectal-Cranium Inversion.

    Slabbed is a great antidote, LOL

  6. Gange was not suing State Farm for not paying his flood claim. He was suing State Farm for not paying his wind claim.
    In the former case, State Farm would be acting as fiduciary of NFIP. In the lattter case, State Farm is on its own and NFIP doesn’t pay any legal expenses.
    sampson above is generally correct except that NFIP’s reinspection and oversight of WYOs is worse than weak. They don’t even require the WYOs to submit to independent audits of their flood business, and much of the oversight is performed by contractors who also have conflicts of interest.
    The companies received Katrina windfalls first by billing NFIP for 100% of any loss whose cause was uncertain, and then by collecting administrative subsidies based on a percentage of those total flood payments. The formula for estimating loss adjustment expenses greatly overstated their Katrina adjustment costs. There really was not much work or expense involved in driving around handing out checks for policy limits with no effort to prove how much of the loss was caused by flooding, but NFIP paid the companies as if they had substantial administrative costs from performing itemized adjustments.

  7. WYO-CC is great idea – maybe then “Wyoming” won’t come up first when I’m searching for information!

    By the way, I just stopped by your place and plan to come back and really read. Sop has been saying for weeks we need to update our blogroll and we definitely need to link up from our end.

    You don’t have any data on the amount spent on legal fees by chance, do you?

    Changing direction slightly here – IMO the easiest way to get more people into the program is to stop screwing around with the ones you have.

    Surely the new administration can figure out that picking up the tab for legal counsel to defeat its own citizen policyholders in court is not a marketing strategy!

    Thanks for stopping by – come often but don’t be surprised when you find the slabbed all living in bird houses because of the new elevation requirements.

  8. Don’t forget, Brian, that windfall grew when the NFIP picked up the cost of the legal fees for cases that were really about private coverage.

    It took me a minute to figure out your comment on Gagne, Brian, but then I re-read what I’d written and realized my “train of thought” had jumped the track and taken readers with me.

    At least we were all in the good company of most judges here and Louisiana! They are issuing rulings based on NFIP rules in cases that aren’t about NFIP at all.

    Gagne had a motion left on the table at settlement that could have ended most or all of that – which likely accounts for what reportedly was a more than satisfactory settlement..

    Of course, it would have been thoughtful of me to explain that. I’ll try and get back on track as I finish the posts I have holding in the “draft file”..

  9. I just did a quick check on the report I posted earlier, it does not provide any detail on the totals spent on legal fees.

    If I do find it I’ll post asap.

  10. Brian, my file copy of the Rules change published in the Federal Register: October 14, 2003 (Volume 68, Number 198) isn’t “postable”; but, I believe the changes below opened the door to reimbursement wide enough for Katrina’s wind claims to blow through, washed by flood water.

    The proposed amendment also provides that the Federal Government is not a proper party defendant in any lawsuit arising out of a WYO policy.

    FEMA proposes to expressly recognize that a part of litigation could be “significantly outside the scope” of the Arrangement while part is within the scope. In such a case, reimbursement would be based on the appropriate division of responsibility, if possible.

  11. Great discussion. I totally agree with Brian Martin above regarding the oversight part. As I reflected on that, I remembered the all around failure of gummint…think the Superdome and school buses. Think of the “who’s in charge” firedrill that went on for a couple of weeks after the storm.

    Somewhere in past reading here, I recall seeing an order by Judge Senter (I think it was the latest one in the Rigsby Qui Tam) where he affirmed knowledge that the gummint through NFIP and FEMA had “relaxed” their standards on the adjustment of flood claims. It would be interesting to know how standards were “relaxed”. Seems as though the motive of the gummint may have been to get as much money in the hands of the folks as quickly as possible.

    What would really be interesting to know is what was said (not written) to the WYOs about the process. We may find out is some of the litigation still pending on the coast. I guess my point is, if standards were “relaxed”, did the gummint really want the WYOs to go through a lengthy battle of what is wind and what is flood?

    In my feeble mind, when I read that statement, it changed my whole opinion of the cases. My bet is Brian is talking about some of the “relaxed” standards in his remarks about oversight. Who knows? We should also remember this was an event unlike any other previously experienced on the coast. I believe everyone who was supposed to help was unprepared for such a storm and its aftermath (including insurers, gummint, help agencies, etc.)

  12. Sampson, I need a few more minutes to respond.

    Meanwhile, my favorite wallflower on the blog selected a great Saturday song to get us all relaxed and thinking about those standards.

  13. The FEMA/NFIP memo that “realxed” the requirements (I think it was 9-21-05) is where all of this abuse of the NFIP started. David Murstad, after conferring with “industry experts,” decided that all slab claims were attributable to the homes being washed off their foundations.

    If Nowdy and Sop don’t have the memo, I’m positive Brian Martin does. If not, I’ll send it for posting on Monday.

  14. I’ve got it – it’s pdf so I had to link in a post.

    At some point in the last couple of days/weeks, I’ve read an article with a comment from the head of one of the insurance trade groups taking credit for bringing the concept to FEMA/NFIP.

    In other words, based on this article, the “industry representatives” do not appear to have been from individual companies.

    However, in this interview, the spokesperson for the trade group made it clear the concept discussed and “approved” did not include maxing out the money on a claim.

    Anyone remember this article?

  15. Here is my understanding of facts and reasonable inferences:
    NFIP came down right after the storm to hold adjuster orientation or some such. Juan Guevara of State Farm asked for a private meeting with Maurstad and Shortley of NFIP to discuss an expedited procedure. Guevara and others from SF met with Maurstad in Mobile. Maurstad asked State Farm to draft something and send it to NFIP. NFIP sent the draft to AIA and others in the industry. The resulting memo from Maurstad said that WYOs could pay on flood policies without proof or detailed adjustments on any property within areas that had any flooding according to FEMA’s data.

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