According to FEMA, about 95 percent of the  NFIP policies in force are written by insurance agents who represent 95  private insurance companies that issue policies and adjust flood claims in  their own names. Due to Statutory and Regulatory Limitations, NFIP Payments May Not Cover All Costs to Repair or Replace Flood-Damaged Property

The amount of insurance coverage available to homeowners under the  NFIP is limited, based on requirements set forth in statute and regulation. Because of  these statutory and regulatory limitations, insurance payments to  claimants for flood damage may not cover all of the costs of repairing or  replacing damaged property. Because of this statutory ceiling, homes that could sustain more than  $250,000 in damage cannot be insured to reflect full replacement costs. The SFIP covers only “direct physical loss by or from flood.” It does not  cover losses resulting from events other than flood, such as windstorms or  earth movements. In addition, FEMA’s program contractor is to  reinspect a sample of claims adjustments for every flood event to identify  errors, among other things. As a result, FEMA did not meet our internal control  standard that federal agencies have internal controls in place to provide  reasonable assurance that program objectives are being achieved and that  program operations are effective and efficient. Without a statistically valid  sampling methodology, the agency cannot project the results of these  monitoring and oversight activities to determine the overall accuracy of  claims settled for specific flood events or assess the overall performance  of insurance companies and their adjusters in fulfilling their  responsibilities for the NFIP. In April 2004, about 7 months  after Hurricane Isabel, FEMA established a task force to review claims  settlements based on requests by Hurricane Isabel claimants. For example:    Task force agreed with the original determination that flood damage to  parts of a basement were not covered. Based on our analysis, reviewers allowed additional payments most  frequently to:    Repair or replace building or personal property items that the initial  adjuster did not include in the loss report. The 6-month  statutory deadline for implementing these changes was December 30,  2004. Without establishing a  roadmap and a schedule for meeting mandated time frames that have  already elapsed, FEMA is limited in its ability to project when program  improvements will be made. Recommendations for Executive Action

To improve FEMA’s oversight and management of the NFIP, we  recommend that the Secretary of the Department of Homeland Security  direct the Under Secretary of Homeland Security for Emergency  Preparedness and Response to take the following two actions:    use a methodologically valid approach to draw statistically  representative samples of claims for underwriting and claims portions  of operational reviews and for quality assurance reinspections of  claims by general adjusters; and    develop documented plans with milestones for implementing  requirements of the Flood Insurance Reform Act of 2004 to provide  policyholders with a flood insurance claims handbook that meets  statutory requirements, to establish a regulatory appeals process, and  to ensure that insurance agents meet minimum NFIP education and  training requirements. Appendix I: Scope and Methodology

To address provisions in the Flood Insurance Reform Act of 2004 for a  GAO study and report on issues related to the processing of flood  insurance claims and the Federal Emergency Management Agency’s  (FEMA) oversight and management of the program, we assessed (1) the  statutory and regulatory limitations on homeowners’ coverage under the  National Flood Insurance Program (NFIP); (2) FEMA’s role in monitoring  and overseeing the NFIP; (3) FEMA’s response to concerns regarding  NFIP payments for Hurricane Isabel claims; and (4) the status of FEMA’s  implementation of requirements of the Flood Insurance Reform Act of  2004.
Why GAO Did This Study

In the wake of Hurricane Isabel in 2003, GAO was mandated by the Flood Insurance Reform Act of 2004 to report on issues related to the National Flood Insurance Program (NFIP) and its oversight and management by the Federal Emergency Management Agency (FEMA). Private insurance companies sell NFIP policies and adjust claims, while a private program contractor helps FEMA administer the NFIP. To address this mandate, this report assesses (1) the statutory and regulatory limitations on coverage for homeowners under the NFIP; (2) FEMA's role in monitoring and overseeing the NFIP; (3) FEMA's response to concerns regarding NFIP payments for Hurricane Isabel claims; and (4) the status of FEMA's implementation of provisions of the Flood Insurance Reform Act of 2004. Although impacts from Hurricane Katrina were not part of the report's scope, GAO recognizes that this disaster presents the NFIP with unprecedented challenges.

What GAO Found

The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and FEMA's regulations, which include FEMA's standard flood insurance policy. As a result of these limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood-damaged property. For example, homes that could sustain more than $250,000 in damage cannot be insured to their full replacement cost, thus limiting claims to this statutory ceiling. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home or losses resulting from events other than flood, such as windstorms, are not covered by NFIP policies. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP, and FEMA's program contractor is to check the accuracy of claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. FEMA did not use a statistically valid method for sampling files to be reviewed in these monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP--actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. In the months after Hurricane Isabel, FEMA took steps intended to address concerns that arose from that flood event. In April 2004, FEMA established a task force to review claims settlements from Hurricane Isabel claimants. As a result of task force reviews, almost half of the 2,294 policyholders who sought a review received additional payments. The additional payment amount averaged $3,300 more than the original settlement--for a total average settlement of about $32,400 per claimant. In most cases, the additional funds were for repairing or replacing buildings or property not included in the initial adjuster's loss determination, or to cover additional material or labor costs. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum NFIP education and training requirements. The statutory deadline for implementing these changes was December 30, 2004. Efforts to implement the provisions are under way, but have not yet been completed. FEMA has not developed plans with milestones for assigning accountability and projecting when program improvements will be made, so that improvements are in place to assist victims of future flood events.