Study Accuses FEMA of Lax Implementation of Flood Program Changes Passed in 2004

October 19, 2005

A government report has found that the Federal Emergency Management Agency, which administers the national flood insurance program, has not fully implemented reforms mandated by Congress in 2004, including improved education for insurance agents and consumer education materials.

FEMA has disputed the findings of the report from the Government Accountability Office.

The 2004 act requires FEMA to provide policyholders a flood insurance claims handbook and other new materials for explaining their coverage when they purchase and renew policies and to establish a regulatory appeals process for claimants. The law also established minimum education and training requirements for insurance agents who sell NFIP policies.

Congress set a deadline of Dec. 30, 2004 for implementation of these changes.

FEMA reported that it finalized a revised handbook in September, 2005 and that it contains a description of an informal appeals process that is available to claimants. But the GAO said that FEMA was supposed to establish and describe a more formal appeals process.

“With respect to this appeals process, FEMA has not stated how long rulemaking might take to establish the process by regulation, or how the process might work, such as filing requirements, time frames for considering appeals, and the composition of an appeals board,” the GAO study says.

Regarding minimum training and education requirements for insurance agents, FEMA published a Federal Register notice on Sept. 1, 2005, which included an outline of training course materials. In the notice, FEMA stated that, rather than establish separate requirement, it had decided to work with the states to implement the NFIP requirements through already established state licensing schemes for insurance agents.

But the GAO criticized FEMA because its plans do not specify how or when states are to begin implementing the training and education requirements, making it unclear the extent to which insurance agents will meet FEMA’s minimum standards.

FEMA officials told GAO said that because changes to the program could have significant effects on policyholders and the private sector firms, the agency is taking a “measured approach” to addressing the changes.

But GAO was not satisfied with that explanation because it said that “without plans with milestones for completing its efforts. ” FEMA will not be able to hold officials accountable that statutorily required improvements are in place.

The report also addressed the issue of whether NFIP policies should restore claimants to their pre-flood condition. GAO said since NFIP coverage is limited by requirements set forth in statute and regulation, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood damaged property.

There is a $250,000 statutory ceiling on the amount of flood insurance homeowners may purchase so homes that might sustain more than $250,000 in damage cannot be insured to their full replacement cost. In addition, losses resulting primarily from a preexisting structural weakness defect in a home or prior water damage, and losses resulting from events other than flood, such as windstorms or earth movements, are not covered by the NFIP. Moreover, personal property is covered only if the homeowner has separately purchased NFIP personal property insurance.

The GAO also pointed out that the method of settling losses affects the amount recovered. For example, homes that qualify only for an actual cash value settlement—which represents the cost to replace damaged property, less the value of physical depreciation—would presumably receive payments that are less than homes that qualify for a replacement cost settlement, which does not deduct for depreciation.

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