1). Potential Coverage Gaps and Claims Uncertainties Can Arise When Homeowners Have Multiple Policies That Cover Different Perils

Insurance coverage for hurricane damages commonly requires the  purchase of multiple insurance policies—a general homeowners policy, an  NFIP policy, and in some areas, a special policy for wind damage. Insurance Coverage Gaps, Claims Adjustment Uncertainties, and Conflicts of Interest Can Materialize When Two or More Policies Cover One Event

Property owners do not know in advance whether their insurance policies  will cover all damages from a hurricane, because the payments ultimately  will depend on the extent to which each policy will cover the damages— that is, whether the damages are determined to be the result of hurricane  winds, flooding, or some combination of both. As part of the WYO arrangement, private property-casualty  insurers are responsible for selling and servicing NFIP policies, including  performing the claims adjustment activities to assess the cause and extent  of damages. Further, states may  temporarily relax these requirements after a catastrophe. Some of the coastal states had also  instituted some common licensing requirements for staff adjusters,  independent adjusters, and public adjusters, while others had varying  requirements for different types of adjusters. Lack of Relevant Claims Data Limits FEMA’s Ability to Oversee Hurricane Damage Assessments

Limited data are available for evaluating the damage assessments and  claims payments when properties are subjected to both high winds and  flooding and the extent of damage caused by each peril is difficult to  determine. Further, NFIP has not sought such  information even when the same insurance company serves as both the  NFIP WYO insurer and the insurer for wind-related risks. FEMA officials stated that they do not have access to wind damage claims  data from the WYO insurers. In the aftermath of the 2005 hurricane season, the NFIP reinspection  process was also challenged by the severity and scope of the damages. FEMA cannot be  certain of the quality of NFIP claims adjustments allocating damage to  flooding in cases where damages may have been caused by a combination  of wind and flooding because NFIP does not systematically collect and  analyze both types of damage claims data together on a property-level  basis. Matters for Congressional Consideration

To strengthen and clarify FEMA’s oversight of WYO insurers, particularly  those that service both wind and flood damage claims on the same  property, we recommend the Congress consider giving FEMA clear  statutory access to:    both wind and flood damage claims information available from NFIP’s  WYO insurers in cases in which it is likely that both wind and flooding  contributed to any damage or loss to covered properties, enabling NFIP to  match and analyze the wind and flood damage apportionments made on  hurricane-damaged properties in a systematic fashion, as appropriate; and the policies, procedures, and instructions used by WYO insurers and their  adjusters for both flood and wind claims to assess and validate insurers’  claims adjustment practices for identifying, apportioning, and quantifying  damages in cases where there are combined perils. When properties are subjected to both wind and flood perils,  particularly in cases where uncertainties exist due to limited or  compromised evidence at the damage scene, collecting enough  information to understand whether or not the WYO insurer is also the  wind insurer for the same property and, if so, the extent of damage it  determined to be caused by wind versus flooding, is key to maintaining  transparency over the adjustment process. Such information would strengthen FEMA’s  oversight and ability to identify abuses and better ensure the accuracy of  flood payments made. Appendix I: Objectives, Scope, and Methodology

To evaluate how key insurance coverage issues can arise when multiple  insurance plans are tied to a hurricane-damaged property, we contacted  and collected information from the Federal Emergency Management  Agency (FEMA), National Flood Insurance Program (NFIP) contractors,  state insurance regulators, the National Association of Insurance  Commissioners (NAIC), property-casualty insurers, state-sponsored wind  insurers, insurance agents, claims adjusters, industry associations, and  mediators. We  collected and compared licensing and training requirements for claims  adjusters provided by state insurance regulators in several coastal states,  incorporating information on requirements that existed prior to the 2005  hurricane season, as well as subsequent legislation enacted by some  coastal states to strengthen oversight requirements for adjusters. In  addition, we obtained information on FEMA’s reinspection program that is  used to reevaluate the quality of NFIP claims that have been processed.
Why GAO Did This Study

Disputes between policyholders and insurers after the 2005 hurricane season highlight the challenges in understanding the cause and extent of damages when properties are subjected to both high winds and flooding. Questions remain over the adequacy of steps taken by the Federal Emergency Management Agency (FEMA) to ensure that claims paid by the National Flood Insurance Program (NFIP) cover only those damages caused by flooding. GAO was asked to evaluate (1) issues that arise when multiple insurance policies provide coverage for losses from a single event, (2) state regulators' oversight of loss adjusters, and (3) information that NFIP collects to assess the accuracy of damage determinations and payments. GAO collected data from FEMA, reviewed reinspection reports and relevant policies and procedures, and interviewed state regulatory officials and others about adjuster oversight and NFIP.

What GAO Found

Insurance coverage gaps and claims uncertainties can arise when coverage for hurricane damage is divided among multiple insurance policies. Coverage for hurricanes generally requires more than one policy because private homeowners policies generally exclude flood damage. But the extent of coverage under each policy depends on the cause of the damages, as determined through the claims adjustment process and the policy terms that cover a particular type of damage. This process is further complicated when the damaged property is subjected to a combination of high winds and flooding and evidence at the damage scene is limited. Other claims concerns can arise on such properties when the same insurer serves as both NFIP's write-your-own (WYO) insurer and the property-casualty (wind) insurer. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating an inherent conflict of interest. Differences in licensing and training requirements for insurance claims adjusters among states also create uncertainties about adjusters' qualifications. Prior to the 2005 hurricane season, some coastal states had few or no requirements, while others had requirements for most types of adjusters. Further, states can waive their normal oversight requirements after a catastrophic event to help address demand, as they did after Hurricane Katrina. As a result, significant variations can exist in the qualifications of claims adjusters available after a catastrophic event. Strengthened and more uniform state requirements for adjusters could enhance the qualifications of the adjuster force in future catastrophes and improve the quality and consistency of claims adjustments. NFIP does not systematically collect and analyze both wind and flood damage claims data, limiting FEMA's ability to assess the accuracy of flood payments on hurricane-damaged properties. The claims data collected by NFIP through the WYO insurers--including those that sell and service both wind and flood policies on a property--do not include information on whether wind contributed to total damages or the extent of wind damage as determined by the WYO insurer. The lack of this data also limits the usefulness of FEMA's quality assurance reinspection program to reevaluate the accuracy of payments. In addition, the aggregate claims data that state insurance regulators collectively gathered after Hurricanes Katrina and Rita were not intended to be used to assess wind and flood damage claims together on a property- or community-level basis. Further, FEMA program contractors do not have access to WYO insurers' policies, procedures, and instructions that describe to adjusters how wind and flood damages are to be determined when properties are subjected to both perils. FEMA officials stated that they did not have the authority to collect wind damage claims data from insurers. But without the ability to examine claims adjustment information for both the wind and flood damages, NFIP cannot always determine the extent to which each peril contributed to total property damages and the accuracy of the claims paid for losses caused by flooding.