The Disaster Insurance Disaster

October 6th, 2017 by CHHS RAs

By CHHS Extern Charles Richardson

As new stories push the public’s attention away from the disasters of a hurricane, the people who still live in the impacted areas are left to pick up the pieces. Superstorm Sandy hit in the late fall of 2012 and has left a lasting impact on New Yorkers and on the shore communities of New Jersey. Although most of the areas impacted have recovered, some still face the storm after the storm: insurance claims.

For the lucky few who had flood insurance after Superstorm Sandy, many are unlucky enough to still be dealing with long-term litigation from their claims. Families who paid their premiums for years were forced to pay out of pocket to reestablish their homes to pre-hurricane standards. The Stapleton’s from Long Beach, New York is one of these unlucky families. After superstorm Sandy, the Stapleton’s filed for their claim and were offered only $98,000. The insurance company claimed pre-hurricane foundation damage when it had cost the Stapleton’s $220,000 to rebuild their home. The Stapleton’s suit has gone on for years and has been met with high resistance over petty issues such as insurance lawyers questioning electronic signatures, demanding on-site inspections, and subpoenaing numerous government employees. A portion of the suit, which took two years to resolve, was about obtaining contractor information regarding $55,000 worth of damage. As the Stapleton’s lawyer puts it, “Are we going to have more than $55,000 worth of legal fees here to address a $55,000 claim?” The Federal Emergency Management Agency (FEMA) at the time had called for more mediation and less litigation from flood insurance groups but more mediation just continued to surge legal costs as suits were not settled and moved into the courts. The problems of Sandy still linger on to this day as the underlying cause of the Stapleton’s problem has yet to be reformed. Overzealous litigation and poor insurance strategy planning is an insidious problem derived out of one entity which needs to be reevaluated by policymakers: The National Flood Insurance Program (NFIP).

The NFIP is a program administered by the federal government housed in the Federal Emergency Management Agency. According to FEMA the NFIP “aims to reduce the impact on private and public structures [after floods].” Although most forms of insurance are provided by private firms, flood insurance is different. NFIP was created to help counteract the cost of expensive relief legislation that was typically used after large flooding disasters, such as Hurricane Betsy in 1968. The need for a federal insurance program came from the lack of private companies in the disaster insurance business. Most saw disaster insurance, particularly flooding, as a bad bet. Floods are localized, so there are fewer customers to buy the insurance, which means premiums to reflect this risk would be too costly to sell. The government stepped in to fill this gap and subsidize premiums to make a realistic flood insurance program work; it didn’t. Unfortunately, those who do live in flood zones have not purchased NFIP coverage. Without customers, already expensive premiums had to be even further subsidized by the federal government. Since claims covered home rebuilding, rather than relocation, the insurance has the adverse effect of keeping more people in flood zones. Further, even with subsidies people still do not buy policies out of a false sense that their property is not flood prone and that the government will always take care of disaster victims. In high-risk flooding areas such as Louisiana and South Florida, flooding insurance coverage only peaks around 50%. Low participation rates mean the risk pool remains too small to absorb losses from major flood events. Besides the failing business end of the program, all suits filed against the NFIP are paid for by the taxpayers. The NFIP claims it has a fiduciary responsibility to the taxpayers to thoroughly litigate claims. After Sandy, according to court documents, lawyers for insurance companies estimate that legal fees could top $100 million, which could be more money than the disputed amount. Don Griffin, the chairman of a coalition of flood insurance companies contracted by the NFIP, made statements to Congress after Sandy that suits sometimes need to cost more than the claims in order to establish a friendlier precedent for the insurance companies, which would save taxpayers money in the long run.

Clearly, there is a poor use of taxpayers’ dollars and a government-created conflict of interest, so why hasn’t congress fixed it? They did! But then they undid it. After Sandy the Biggert-Waters Act reformed NFIP to act more like an actual insurance company, removing subsidies, encouraging movement away from flood zones and creating more realistic standards for calculating flood risk. But this had the effect of making flood insurance more expensive, so Congress undid the reforms in the 2014 Homeowner Flood Insurance Affordability Act. Unfortunately, this means the systematic problems of NFIP have not been solved and the issues will reappear in Texas and Florida.

As people start to file claims under the NFIP after Harvey and Irma there will be a continued overuse of litigation and a return of redeveloping in flood zones. The issues will continue to perpetuate themselves unless Congress steps in, and until it does, the taxpayer will have to pay for it. So now what? Perhaps the NFIP should be used to encourage relocation, prevent development in flood zones and cover those who still do live in flood zones. Another concept, that current Republicans are encouraging, would be to subsidies private insurance company’s premiums so that the private companies can replace NFIP. Replacing NFIP with privately subsidized insurance would have the added benefit of also removing the fiduciary obligation to taxpayers which would cut down on lawsuits post disasters. For now, the only bipartisan plan for the NFIP has been to continue its existence as is until 2023.

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