Following up on issues that were raised at the July 30 hearing on post-Sandy flood insurance claims, U.S. Sen. Robert Menendez (D-N.J.) sent a letter on Wednesday, Sept. 10, to Federal Emergency Management Agency’s (FEMA) Administrator Craig Fugate, urging him to implement reforms to the National Flood Insurance Program’s (NFIP) claims process.
“We have, in my view, a process and a standard that is stacked against policyholders,” Menendez told Fugate at the July 30 hearing before the U.S. Senate Banking Subcommittee on Housing, Transportation and Community Development.
“I don’t want anybody getting a dime they shouldn’t get; at the same token, I don’t want a policyholder who’s done the right thing for 10, 20, 30 years, in some cases, getting low-balled because the process is stacked against them,” Menendez said at the July hearing.
In his follow-up letter Wednesday, Menendez urged Fugate to implement reforms to address what the senator described as “serious shortcomings” in the NFIP claims process revealed during the July hearing.
Menendez laid out three specific reforms in the letter that he said FEMA should implement immediately:
• Raise penalties for insurance companies that lowball homeowners to level the playing field and bring fairness to the system;
• Reopen the 270 Sandy claims that FEMA dismissed solely because the policyholder missed an arbitrary FEMA deadline; and
• Create an independent and robust flood insurance advocate to help homeowners navigate the claims and appeals process.
“Taken together, these three reforms will go a long way towards making the claims process and the NFIP in general stronger, fairer and more effective,” Menendez wrote to Fugate. “I was encouraged by your commitment to address these issues administratively and stand ready to introduce legislation if you determine these actions are beyond your administrative capacity.”
Menendez said the July hearing exposed several “glaring problems,” which tilt the federal flood insurance claims process against the homeowner. According to Menendez:
• The system does not create meaningful penalties for insurance servicing companies that lowball homeowners, while imposing strong, tangible penalties for overpayments
• A double-standard exists in the appeals process in which homeowners are forced to adhere to strict arbitrary deadlines imposed by FEMA while FEMA admittedly failed to follow their own guidelines
• The failure to establish a homeowner flood insurance advocate that was authorized in the Menendez “Homeowner Flood Insurance Affordability Act” has left homeowners in the dark, with no entity to help them through the claim or appeal process at a time when they are under extreme personal distress
• FEMA lacks the capabilities to provide proper oversight and performance checks on the system in order to identify and address potential problems.
“We have the ultimate hypocrisy and double-standard here,” the senator told Fugate at the hearing. “You don’t have to live under the deadline and there’s no consequence to the agency for not meeting the deadline, but there is a consequence for the policyholder for not meeting the deadline. That’s when people think poorly of their government.”
In response, Fugate announced at the July hearing that he had asked the Department of Homeland Security Office of Inspector General to investigate issues with the claims process and said he would explore administrative remedies.
The following is the full text of the letter to FEMA Administrator Fugate:
September 10, 2014
The Honorable Craig Fugate
Federal Emergency Management Agency
500 C Street SW
Washington, D.C. 20410
Dear Administrator Fugate:
I am writing to urge you to immediately undertake reforms to the National Flood Insurance Program’s (NFIP) claim process in order to address the serious shortcomings revealed at the July 30, 2014, Banking Subcommittee on Housing, Transportation, and Community Development hearing that I chaired and you testified before. I appreciated the opportunity to discuss ways to make the claims process fairer and simpler for policyholders, and I was encouraged by your willingness to address the issues facing thousands of New Jersey families.
One of the most common complaints New Jerseyans have had about the flood insurance claims process after Superstorm Sandy is that insurance payouts are far below the cost to rebuild damaged homes. The incentive and penalty structure for Write Your Own (WYO) insurance companies that service policies and process claims is at the root of these complaints. As I noted at the hearing, if FEMA determines in one of its audits that a WYO has made an overpayment, the WYO is financially responsible for every dollar they overpaid. In contrast, if a FEMA audit uncovers a WYO underpaying a claimant, the WYO is not financially penalized and only faces increased scrutiny if it exhibits a consistent pattern of improper payments. While in theory a WYO could be expelled from the program for repeated failures, in reality such a step has never been taken in the history of the NFIP and therefore lacks the teeth necessary to properly deter underpayments.
This unbalanced treatment of over and underpayments directly leads to WYOs “…err[ing] on the side of conservativism (sic)” when questions arise in the claims process, according to WYO Representative Don Griffin’s testimony. This violates both the spirit and letter of the Improper Payments Elimination and Recovery Act [P.L. 111-204], which requires government agencies to treat both over and underpayments equally. In order to correct this imbalance, I am asking that you increase WYO penalties for underpayments so they are commensurate with penalties for overpayments. This will level the playing field and ensure that WYOs will have the incentive to take strong steps to avoid lowballing policyholders.
This current imbalanced penalty structure has led to a large number of underpayments, which in turn caused a high volume of appeals filed to FEMA. This high volume prevented FEMA from complying with the 2004 Flood Insurance Reform Act, which required the agency to adjudicate appeals within 90 days. With an 88-day median response time, FEMA barely responded to half of the appeals within the deadline. While this fact alone is unacceptable, even more egregious is the fact that FEMA has summarily dismissed 270 claims because the policyholder missed one of FEMA’s imposed deadlines. This seems to be a double standard and must be addressed. I urge you to reopen these 270 cases and give the policyholders fair consideration of their claim. If FEMA cannot comply with its own deadlines, it should not disenfranchise policyholders for failing to meet FEMA-imposed deadlines.
The common thread that ties together most NFIP complaints involves policyholders feeling overwhelmed during the claims process and having no place to seek independent advice and assistance. As you know, the Homeowner Flood Insurance Affordability Act (HFIAA) [P.L. 113-89] establishes a “flood insurance advocate,” which would be responsible with educating and assisting policyholders in all aspects. I was very encouraged by your testimony at the July 30th hearing, specifically when you stated that you wanted the “office to be the voice of the consumers and be the focal point for consumers for all flood insurance issues and not limited to just maps.” I share your belief that the flood advocate must act independently and be a true advocate for the consumer. That was my intent when I drafted HFIAA and I look forward to working with you to ensure this intent is fully carried out.
Taken together, these three reforms will go a long way towards making the claims process and the NFIP in general stronger, fairer and more effective. I was encouraged by your commitment to address these issues administratively and stand ready to introduce legislation if you determine these actions are beyond your administrative capacity. I look forward to hearing from you.
United States Senator
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