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Hurricanes blow holes into flood and wind insurance policies

When a river or lake rises and floods your neighborhood, a flood insurance claim is clear cut, assuming you carry flood insurance. Flood insurance is available from many private home insurers, called Write-Your-Own (WYO) insurers, and administered by the National Flood Insurance Program (NFIP), which is also in charge of mapping the nation's flood plains and setting rates for flood policies.

Home insurance does not cover flooding, which is why you need to buy a separate flood insurance policy. And flood insurance does not cover damage from anything else, like high winds. What happens when a storm brings a combination of winds and floods? What happens when multiple insurance policies cover different damages from the same event?

What happens when multiple insurance policies cover different damages from the same event?

A December 2007 report from the U.S. Government Accountability Office (GAO) shows that there are significant claims problems when properties are subject to both high winds and water. This came to vivid light after the 2005 hurricance season and Hurricane Katrina. The Federal Emergency Management Agency (FEMA), which oversees the NFIP, still faces questions over whether all the claims paid by the NFIP covered only damages from flooding.

In addition, conflicts of interest can arise when an insurer provides a home insurance policy and also writes the flood policy for the same property. That means the same insurer is responsible for determining the damages it must pay and the damages that will be paid by the NFIP. Are the bills sent to the NFIP really including only flood damage, and how can losses even be assigned properly when an insurance adjuster arrives at a house destroyed through a combination of wind and flood?

Complicating the endeavor is that fact the the NFIP does not collect or analyze both wind and flood claims data, which limits FEMA's ability to assess the accuracy of claims paid for hurricane-damaged property, according to the GAO. FEMA officials do not even have access to WYO insurers' guidelines on how to determine wind vs. flood damages for properties subjected to both.

Also thrown into this muddy mix is the problem of differences in licensing and training for insurance adjusters. Because each state controls adjuster licensing requirements, in states with few or no regulations there are uncertainties about adjusters' qualifications. In addition, notes the GAO, after a disaster, states can waive normal oversight of adjusters so that they can meet demand — but that means every Tom, Dick and Harry and can be out there putting dollar values on losses and determining whether damage came from wind or flood. It can mean that giant insurance bills are being directed to the wrong entities.

If you're a homeowner standing next to an uninhabitable hurricane-damaged house, the competency of your insurance adjuster is vital. Your flood and wind policies likely have different coverage limits, and flood policies don't offer coverage for additional living expenses when you can't occupy your house. If your insurance adjuster determines your losses come from flood, you may not receive enough money to rebuild (the maximum flood coverage for a residential structure is $250,000) and you'll have to foot your own hotel and food bills. It's possible that your neighbor next door could have a different determination from his adjuster and be able to make a windstorm claim that gives him more coverage.

There's no easy solution to the claims problems that arise after hurricanes, but the GAO recommended that FEMA get the authority to obtain wind-damage claims data from private insurers for properties that take hits from both wind and flood. The GAO also recommended that states improve the quality and consistency of adjuster oversight, to avoid a repeat of adjuster failures after Hurricane Katrina.

What did FEMA think? It agreed about adjuster oversight but did not agree that Congress should give it authority to look at wind-claims data.

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