More than 140 claimants are suing federal flood insurance officials and the program’s insurance industry partners claiming they conspired to low-ball their claims payments after their properties were hit by Tropical Storm Isabel two years ago.
Homeland Security Undersecretary Michael Brown, David Maurstad, who runs the National Flood Insurance Program, and 17 insurance companies that are part of the Write Your Own program have been charged in the $2 billion damages suit.
The insureds’ lawsuit, which also cites Computer Sciences Corporation and several independent insurance adjusting firms, was filed June 8 in United States District Court in Greenbelt, Maryland, alleging that the group conspired to defraud thousands of catastrophe victims who had purchased flood insurance through the federal flood program.
The suit follows two years of only partially successful efforts by private citizens and public officials, including Maryland Insurance Commissioner Al Redmer and Congressional leaders, to change NFIP practices.
As a result of the alleged failure of those running the flood program to properly compensate victims, families have been strained, marriages have failed, and some residents have been left living in campers without indoor plumbing with temperatures below freezing, and no place for children to study or play, according to the suit.
The suit claims that many victims became “ill and debilitated from exposure to mold, sewage and fuel oil contamination stemming directly from the flooding of their properties” and it blames this situation on those in charge for failing to address the victims’ claims.
Adjusters’ training
The plaintiffs claim that CSC was training sales agents to tell policyholders they would be restored to their pre-flood condition, while simultaneously training adjusters to allow for only narrowly defined coverage in limited amounts.
“In fact, the CSC adjuster training teaches those persons authorized to adjust flood loss claims made under the SFIP (standard flood insurance policy), and persons authorized to train such adjusters, to employ and teach the employment of systematic ‘low-balling’ and high pressure tactics, as a result of which flood victim claimants, including plaintiffs herein, receive only a small fraction of the amount necessary to place their primary residences in their pre-flood conditions,” the complaint states.
The WYO insurer defendants in the suit are said to have participated in a conspiracy “which brought about and sustained the vast difference between the instruction of the marketers of the SFIP and the instruction of the insurance community segment dealing with claims adjustment.”
The insurance company defendants include Allstate, Harleysville Mutual, The Hartford, Liberty Mutual, Nationwide, State Farm, Travelers and USAA.
The complaint blasts Maurstad, acting NFIP director, for allowing the wrongful conduct to go on despite pleas from state officials and for also declaring at one point that the NFIP “is not insurance and never has been,” referring to it instead as a form of government aid.
The adjusters cited in the complaint-Allied American Adjusting Company, Bellmon Adjusters, CNC Resource, Insurance Claims Catastrophe Services, Jackson Adjustment Company, Pilot Catastrophe Services, Simsol Insurance Services, Valco-USA and Colonial Claims-are accused of employing “high-pressure, low-ball claims tactics.”
Among the adjusting practices questioned in the complaint are the use of new construction prices in lieu of costlier repair and renovations costs; the use of software that relied upon inadequate pricing; the recognition of damage only where water had physically contacted property, and the denial of payments for debris removal and elevation of structures.
Claims reevaluation
In March 2004, the Senate Banking Committee directed FEMA to reevaluate 24,000 victims’ claims. But rather than conduct an independent review, FEMA and CSC assembled a task force comprised of the identical management and many of the same adjusters that low-balled the victims in the first place, the suit continues.
According to the complaint, the questionable claims tactics were supported by the WYO insurers and leaders in the property casualty insurance industry because they were concerned that if they fairly paid the flood claims it would set a precedent for their non-flood claims.
Plaintiff attorney Martin Freeman of Rockville, Md., said that similar actions for victims from other states would likely be filed.
The suit seeks $1 million in compensatory damages plus punitive damages for each plaintiff in four out of the five claims. It also seeks $250,000 per plaintiff for breach of contract.
In April, NFIP’s Maurstad said that “there is a fundamental misunderstanding” of the flood program’s intent. Maurstad said the program was “never intended to restore policyholders to pre-flood condition; it was designed to help them recover.”
But critics maintain that agents selling flood policies tell homeowners that they will be fully restored, minus the deductible, to their “pre-flood conditions.” This language also is found in the Flood Insurance Reform Act of 2004.
Maryland Commissioner Redmer, who testified before the Congressional subcommittee in April, warned several months ago that a suit like this one was likely. His department’s own report highlighted many of the same problems brought forth in the lawsuit and led to reevaluations of many claims. But even that attempt failed to calm critics.
“While the reevaluations did assist some citizens, its implementation was problematic and some insureds still have not recovered what they believe they are entitled to under the policy. A number of Marylanders had no choice other than to seek legal recourse to attempt to obtain the coverage they believe they are entitled to under their flood policy,” Redmer told lawmakers in his Washington testimony.
As for the lawsuit being filed, Redmer is not surprised. “Quite frankly, we’re going to continue to have unhappy citizens, and we’re going to continue to have litigation until the flood program gets fixed,” he told the Associated Press.
According to FEMA, about 85 Maryland families are still living in trailers. Spokeswoman Niki Edwards said the agency recently sent eviction letters to about seven trailer families that were either not working to find permanent housing or violate provisions of their leases.
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