Federal Flood Coverage, A Love Story

*Bam Bam readers, astute observers they are, will readily detect that certain events in the “Story” are dramatized for effect, including the anonymous dialogues below.

state_farm HQ
State Farm Corporate Headquarters

In August 2005, the month of Katrina, headquarters in Bloomington was bedlam. For all its awesome power, State Farm could do nothing but watch the leviathan hurricane augur the Gulf, trying to decide which sovereignty it would smash to smithereens. Didn’t really matter, State Farm was sure to hemorrhage its record profits, and the thought of it was killing everyone. No one . . . no select senator, congressman, lobbyist, corrupt federal judge or ex-FBI man could do anything this time.

Katrina was aiming for Louisiana-Mississippi. Hourly alerts spewed out to department heads, permeating every building on the so-called Bloomington “campus.” In the days ahead, scores of corn fed, flat-butted minions – “Stepfords” – the townspeople called them, would be summoned from various corporate divisions: legal, claims, Cat services, underwriting, media relations, data management, etc. Even the draconian “Claims Counsel” would be called into session.

Katrina threatened to burn a hole in the company’s record profits. With 800 in-house lawyers, State Farm had nearly perfected the art of defeating claim payments, but given the scale of Katrina, this simply wouldn’t do here. The situation demanded that the smartest guys in the room come up with a solid mitigation strategy.

Legal had already delivered its briefing. “Yea, it’s confirmed, the ACC is in every HO policy we issued down there and if this storm surge thing they’re talking about happens . . . we can probably deny coverage if water touches the property at all. The Jackson lawyers tell us the commissioner’s our guy, he’s in office 30 years. Renfroe in Birmingham says it can put up to 300 boots on the ground tomorrow.” Somebody cracked an ill-timed joke: “one booted people . . . or divide that by 2?” Not a soul laughed. Legal went on to explain that a global ACC denial would produce a boatload of lawsuits, but everybody agreed, lawsuits are a cost of doing business, it’s just another cost-benefit thing for somebody in claims to price out: per litigation dollar spent, what’s the “beat down” ratio, the dollar reduction on the claims side? As a back-up strategy, ACC denials could certainly bring some relief, but everyone knew the ACC alone was not gonna stem the coming red sea of claims.

The scene in the main conference room must have looked like the Bush White House bunker on September 11th. Elbow to elbow, senior badge wearers circled the huge conference table, desperate to voice something, anything, that could stanch the profit drain about to occur. Finally, a hand went up, asking to speak.

In less than 5 minutes, a strategy was announced that would rock the room: “We need a global coverage map, something that will show us every property we’ve insured in the counties and parishes fronting the Gulf. It’s gotta highlight each property that has dual coverage – our HO policy, and the fed flood policy. Somebody needs to take that map and crank out a number . . . give me the total dollar of all that flood coverage. Listen now . . . I need the total flood dollar. When I get that number, I’ll be able to tell you exactly how much claim loss we’re gonna avoid when this thing hits.” Somebody blurted: “whatever you’re thinking, I’ll tell you one darned thing, it better be quick cause NOAA says this thing makes landfall Monday AM.”

Across the table, a voice called out, “excuse me for asking, now I’m definitely on board, but how’s this thing supposed to work . . . like, what happens if wind slams in first, and turns out water was just secondary, just a partial cause? How do you deal with that? We can’t max-out flood just cause some water came in. And besides, fed flood’s gotta be adjusted, and those God awful proof of loss forms gotta be done . . . all this crap takes time. Hell, there’s a 60, or depending, 90 day waiting period before any flood payment can even be made. We gotta adjust HO too, and if we pay on HO first, we’ve already bought that pro rata of the loss.”

A work in progress at this point, the concept was to use fed flood coverage to offset claim losses due under State Farm’s own policies. Like any genius strategy, careful planning and execution were the keys to its success. A host of problems threatened, including thorny legal ones, but the plus side was sweeter than Baptist sex.

Even before the storm hit, State Farm’s media wonks had purchased “field whores,” junk science “experts” who’d worked past hurricane, tornado and earthquake venues. Their job was to write phony reports blaming the mind blowing devastation on excluded causes. For tornados and earthquakes, the exclusion handle was “faulty and defective construction.” For Katrina, the key exclusion was “water damage.” State Farm knew, if you can teach people a 56 billion dollar monopoly is a “good neighbor,” surely you can slap in the head ’til they swallow your scripted definition of Katrina: wind vs. water, water came first, water caused the damage.

So how was this gonna work? For years State Farm had been a write-your-own (“WYO”) carrier under the flood program, but that didn’t mean it could go out and instantly disburse billions of US treasury dollars, maxing-out flood policies. The flood program was stricter than private coverage when it came to claims handling, and besides, WYO’s were under a fiduciary standard of care when adjusting fed flood. If that weren’t enough, the proof of loss guidelines under flood were a 60 day nightmare, and like anything “government” . . . nothing could happen fast.

However genius the plan sounded, the smart guys knew . . . none of this could happen unless the flood money could be expedited, and to do that, somebody had to get to FEMA. The key to the entire strategy could be summed up in single idea: the 60 day waiting period and NFIP proof of loss requirements had to be waived. If this could be done, State Farm could spread flood money all over creation before the HO policies were even adjusted. And for every flood dollar paid, a credit dollar was racked up under State Farm’s HO coverage. But how to get to FEMA? Go through CSC? Call on industry shills? Hartwig? Eric Goldberg at the foremost lobbying group “American Insurance Association?” Something needed to happen fast.

State Farm was in luck here. The flood program had its own “Brownie,” as in “Brownie, you’re doing a heck of a job.” David Maurstad, a former mayor and insurance company owner from Beatrice, Nebraska (pop. 12,890), had been appointed by Bush as administrator of the National Flood Insurance Program. His lieutenant and director of claims was a man named James Shortly. You or I might laugh at the suggestion we could mobilize a federal agency by a simple phone call or email, but not State Farm. Its connections to the Bush white house in 2005 were legendary. Rust the lesser had attended SMU law school in Dallas, the heart of Bush’s hallowed stomping grounds. State Farm had lined the pockets of republican politicians for years, now it was time to call in some favors.

Was a time in history when US corporations dare not “game” the feds, you just didn’t screw with federal agencies. Private was private, guv’ment was guv’ment. First off, low paid worker bees would simply hang up on corporate types trying to bully them around. And, clutzy as they were, there was still some authenticity left in government agencies – they weren’t yet “owned,” or third world hijacked by corporate profiteers. Republican dynasties changed all that.

The first to fall was the granddaddy SEC. It had been hijacked by Wall Streeters, people rotating from private to public sector, in and out of Goldman Sachs, Bear Stearns, Lehman Bros., et al. Hell, under Bush/Rove government agencies weren’t even “government” anymore. FEMA was outright run by a private for profit corporation, Computer Sciences Corporation (“CSC”). With board members like David Barram, former head of the US General Services Administration, CSC had direct phone lines to everyone in FEMA. CSC handled all WYO affairs for FEMA. In other words, Maurstad and Shortly were at all times just a phone call away from Bloomington.

In the wee hours of Monday morning August 29, 2005, Katrina hit Mississippi like a measured dose nuclear bomb. When it had passed, the Coast looked like post war Dresden absent the embers.


Two days later, on August 31, 2005, Maurstad unlocked the fed flood vault and gave State Farm “ATM access” to US treasury funds in the flood program. I’m not sure the real facts will ever get out, but somehow it took only two days for State Farm to get to Maurstad and obtain the waiver. According to Mississippi’s Department of Insurance, by August 31, 2007, State Farm and other WYO carriers had sucked 2.4 billion dollars from the US treasury. It seemed inconceivable that a federal agency’s entire statutory mandate – that is was unlawful to expend US treasury funds unless flood claims were first proved payable under fiduciary agency guidelines – could be dropped like an unwanted spouse, but that’s exactly what happened. In one sense State Farm was way ahead of the vampire pack – they were tapping treasury dollars before the bankers, brokers and automakers caught on.

The integrated parts of State Farm’s strategy were genius. Policyholders would praise State Farm for getting money in their hands fast. Utterly destitute, many didn’t care where the funds came from, and were all too eager to comply. Mr pimp commissioner got a great big PR boost cause “claims” were getting paid. Adjusters needed no prompting at all, their sweetheart commissions vested the minute they hit flood limits. Most would make more in 6 months of storm duty than in a whole year at their day jobs. A chatty gregarious bunch, they quickly spread the word to everybody working the storm – “hit your limits, get your commission.” State Farm and Renfroe billed the adjusters’ commissions and per diems to the flood program. Renfroe’s owners would make more profit off the homeless shell-shocked victims of Katrina than they’d made in company history. They’d later build an Alabama mansion off storm profits. And best of all, State Farm got a dollar-for-dollar credit under its HO policy, for every flood policy paid.

Stories emerged of adjusters meeting homeowners on the interstate, forking over $350,000 in flood checks, damage site unseen. Phony contents schedules were written up to hit limits. Allstate was caught phonying-up contents lists. At a Texas flood claims center, call sheets noted “19 feet of water per insured,” as justification for maxing flood payment. Turns out there was no waterline, the property was a slab, and the insured had evacuated before the storm.

To make sure State Farm was adequately protected, Maurstad issued a second memo declaring “FEMA will not seek reimbursement . . . when a subsequent review identifies overpayments . . . .”

Like the white washed market conduct exam of State Farm, the flood program would ultimately release an audit saying it found no improper WYO conduct during Katrina.

Finally, when State Farm just couldn’t think of a thing else to ask for, an early Christmas gift came: dateline November 28, 2007, fall of the house of Scruggs.

Gimme sum Junior Walker y’all, Federal Flood Coverage, how sweet it is.

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6 thoughts on “Federal Flood Coverage, A Love Story”

  1. Bam Bam, I suppose you could call that “looking for love in all the wrong places”! Based on the original complaint in Rigsby, I’d say things got really kinky when Allstate, Nationwide, and others joined in and had their way with the taxpayer-funded NFIP – perhaps a m

  2. I had to watch Chocolate on DVD the other week: it was her turn to pick. I am tired of love stories and chick flicks.

    And a love story with mostly guys in it I is somewhat avant guard, but none the less a love story. So what do you call the movie “The Cowboy – Farmers Romance”?

  3. Does State Farm have a Board of Directors. Have they ordered an internal investigation of the matter? It would seem if they waited for the trial to be over it could be too late. Better to do an internal investigation before not after the trial. It has happened to other companies that the thing happens so fast the BOD has been left with personal liability?

  4. The eastern portions of North Carolina have a humongous amount of political clout. That foolish policies send money from other portions of the state to these areas has been going on a long time.

    North Carolina has tended to vote conservative (by national standards) to the general assembly. And the Eastern portion of the state is the most solidly democratic area. So the kingpins are often from the east.

    Marc Basnight, the leader of the State Senate, is from Dare County, right on the coast.

  5. I wish every homeowner in the US would read this Bam Bam post so they could best understand TX, LA & MS’s victims of the insurance giants could be them next time. They need to know their faithfully paid premiums don’t correlate well with fair payoffs in the event of mass casualty.

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