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entitled 'Federal Emergency Management Agency: Improvements Needed to 
Enhance Oversight and Management of the National Flood Insurance 
Program' which was released on October 18, 2005. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

October 2005: 

Federal Emergency Management Agency: 

Improvements Needed to Enhance Oversight and Management of the National 
Flood Insurance Program: 

GAO-06-119: 

GAO Highlights: 

Highlights of GAO-06-119, a report to Congressional Committees: 

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. 

What GAO Recommends: 

GAO is recommending that FEMA use a statistically valid method to 
select claims for review and establish milestones for meeting 
provisions of the Flood Insurance Reform Act. FEMA reviewed a draft of 
this report and expressed concerns about our findings related to NFIP 
program management. 

www.gao.gov/cgi-bin/getrpt?GAO-06-119. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William O. Jenkins, Jr. 
at (202) 512-8777 or jenkinswo@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Due to Statutory and Regulatory Limitations, NFIP Payments May Not 
Cover All Costs to Repair or Replace Flood-Damaged Property: 

Monitoring and Oversight of NFIP Identifies Specific Problems, but Does 
Not Provide Comprehensive Information on Overall Program Performance: 

FEMA Task Force Closed about Half of Hurricane Isabel Claims Reviewed 
with Additional Payments: 

FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the 
Flood Insurance Reform Act of 2004: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Federal Emergency Management Agency: 

Appendix III: GAO Contact and Staff Acknowledgements: 

Tables: 

Table 1: NFIP Claims Payments on Flood Events in 2003: 

Table 2: NFIP Claims Payments on Flood Events in 2004: 

Table 3: Total Number of Operational Reviews of Write-Your-Own 
Companies Conducted by FEMA (January 2000 to August 2005): 

Figures: 

Figure 1: NFIP Policies in Force, 1978-2005: 

Figure 2: Total NFIP Payments to Claimants, 1972-2004: 

Figure 3: Key Participants in the NFIP: 

Figure 4: Disposition of Hurricane Isabel Claims Reviewed by the FEMA 
Task Force: 

Figure 5: Comparison of Claims Settlement Amounts for Hurricane Isabel 
Claims Reviewed by the Task Force and All Claims Closed with Payment 
(2002-2004): 

Abbreviations: 

FEMA: Federal Emergency Management Agency: 

NFIP: National Flood Insurance Program: 

OMB: Office of Management and Budget: 

SFIP: Standard Flood Insurance Policy: 

United States Government Accountability Office: 

Washington, DC 20548: 

October 18, 2005: 

The Honorable Richard Shelby: 
Chairman: 
The Honorable Paul Sarbanes: 
Ranking Minority Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Michael Oxley: 
Chairman: 
The Honorable Barney Frank: 
Ranking Minority Member: 
Committee on Financial Services: 
House of Representatives: 

Ninety percent of all natural disasters in the United States involve 
flooding. Although homeowner insurance policies typically cover damage 
and losses from fire or theft and often from wind-driven rain, they do 
not cover flood damage because private insurance companies are largely 
unwilling to bear the economic risks associated with the potentially 
catastrophic impact of flooding. To provide some insurance protection 
for flood victims, as well as incentives for communities to adopt and 
enforce floodplain management regulations to reduce future flood 
damage, Congress established the National Flood Insurance Program 
(NFIP) in 1968. NFIP coverage is available to owners and occupants of 
insurable property in flood-prone areas.[Footnote 1] The Federal 
Emergency Management Agency (FEMA) within the Department of Homeland 
Security is responsible for, among other things, oversight and 
management of the NFIP.[Footnote 2] 

To implement the NFIP, FEMA principally relies on private insurance 
companies that sell flood insurance policies and adjust claims from 
policyholders after floods occur. FEMA is assisted in its management 
and oversight functions by a program contractor. As of August 2005, the 
NFIP had about 4.6 million policyholders in about 20,000 communities. 
As of August 2005, the program had paid a total of about $14.6 billion 
in insurance claims financed primarily by policyholder premiums. 
Without the NFIP, the costs to repair damage covered by these claims 
would otherwise have been paid through taxpayer-funded disaster relief 
or by the flood victims themselves. 

Policyholders' concerns regarding the processing and payments of NFIP 
claims after Hurricane Isabel in 2003 focused congressional attention 
on the program. Specifically, some policyholders cited inadequate 
payments for flood damages they incurred and a lack of clarity 
regarding their insurance policies and the procedures for filing and 
adjusting claims for flood damage. 

The Flood Insurance Reform Act of 2004,[Footnote 3] which mandated that 
FEMA implement new processes and requirements for selling NFIP policies 
and adjusting flood insurance claims, also mandated that we study and 
report on issues related to the processing of flood insurance claims 
and FEMA's oversight and management of the program. To address this 
mandate, this report assesses (1) the statutory and regulatory 
limitations on homeowners' coverage under the NFIP; (2) FEMA's role in 
monitoring and overseeing the NFIP; (3) FEMA's response to concerns 
regarding NFIP payments for claims related to Hurricane Isabel; and (4) 
the status of FEMA's implementation of provisions of the Flood 
Insurance Reform Act of 2004. 

As we finalized this report, the extent of the devastation from 
Hurricanes Katrina and Rita in August 2005 and September 2005 was not 
yet fully determined, as the nation struggled to respond to the 
immediate needs of populations of entire cities and towns for food, 
water, shelter, and basic health care. Although impacts from Hurricane 
Katrina and Rita were not part of our mandate for this report, clearly 
this disaster will challenge the NFIP with demands the program has 
never before faced in its more than 30-year history. Already, a record 
number of flood insurance claims have been filed in 2005, and Congress 
has increased the program's authority to borrow from the United States 
Treasury from $1.5 billion to $3.5 billion. 

To determine the statutory and regulatory limitations on homeowners' 
coverage under the NFIP, we researched The National Flood Insurance Act 
of 1968, as amended,[Footnote 4] its legislative history, and FEMA's 
implementing regulations, which include FEMA's "Standard Flood 
Insurance Policy" (SFIP). We also discussed the results of our analysis 
with officials of the DHS Office of General Counsel. To assess FEMA's 
NFIP monitoring and oversight role, we examined program requirements 
and reports and observed NFIP training programs for insurance agents 
and adjusters. We also observed a FEMA review of an insurance company's 
operations, and we analyzed reports of the results of all reviews of 
insurance operations and follow-up visits at insurance companies where 
FEMA identified critical errors over a 10-year period, from 1996 to 
April 2005--a total sample of 15 reports. We interviewed officials of 
FEMA and its program contractor about their oversight activities and 
discussed aspects of the process with private-sector insurance 
officials from four of the five largest insurance companies 
participating in the NFIP based on the number of claims filed in 2004. 
We also obtained documentation on how reviews of a sample of claims 
adjustments are done after flood events and talked with staff employed 
by FEMA's contractor about how they reinspect the work of private- 
sector adjusters who prepare flood damage estimates and how they select 
properties to visit for these reviews. We interviewed them because they 
had performed quality reinspections of claims adjustments for damage 
from Hurricane Isabel, as well as from hurricanes in Florida in 2004. 

To determine FEMA's response to concerns about Hurricane Isabel claims 
payments, we discussed the actions FEMA took to address concerns of 
Hurricane Isabel claimants with FEMA officials, and we reviewed a 
statistically valid sample of 100 files from claimants in Maryland, 
Virginia, and North Carolina who were dissatisfied with their initial 
claims settlements resulting from Hurricane Isabel and who had their 
claims reviewed by a special FEMA task force. We based our analysis of 
these claims on the information in the files we reviewed; we did not 
independently verify the accuracy of the information in the claims 
files. To test the overall reliability of the NFIP database, we 
reviewed a statistically valid sample of 250 claims for all flood 
events that occurred in 2003 and 2004. We conducted this reliability 
testing to assure ourselves that information from the NFIP database was 
sufficiently accurate for our reporting purposes. To determine the 
extent to which FEMA implemented provisions of the Flood Insurance 
Reform Act of 2004, we examined documentation of the agency's efforts 
and interviewed officials. We conducted our work from December 2004 
through August 2005 in accordance with generally accepted government 
auditing standards. Our scope and methodology are discussed in greater 
detail in appendix I. 

Results in Brief: 

The amount of insurance coverage available to homeowners under the NFIP 
is limited by requirements set forth in statute and regulation. 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, there is a $250,000 statutory ceiling on 
the amount of flood insurance homeowners may purchase; thus, homes that 
might sustain more than $250,000 in damage cannot be insured to their 
full replacement cost. In addition, NFIP policies cover only direct 
physical loss by or from flood. Therefore, 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, a 
homeowner's personal property is covered, with certain limitations, 
only if the homeowner has separately purchased NFIP personal property 
insurance in addition to coverage for the building. Finally, 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. 

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. In addition, 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. For operational reviews, FEMA examiners are to do a 
thorough review of the companies' NFIP underwriting and claims 
settlement processes and internal controls, including checking a sample 
of claims and underwriting files to determine, for example, whether a 
violation of policy has occurred, an incorrect payment has been made, 
and if files contain all required documentation. Separately, FEMA's 
program contractor is responsible for conducting quality assurance 
reinspections of a sample of claims adjustments for specific flood 
events in order to identify, for example, whether an insurer allowed an 
uncovered expense or missed a covered expense in the original 
adjustment. The operational reviews and follow-up visits to insurance 
companies that we analyzed followed FEMA's internal control procedures 
for identifying and resolving specific problems that may occur in 
individual insurance companies' processes for selling and renewing NFIP 
policies and adjusting claims. According to information provided by 
FEMA, the number of operational reviews completed between 2000 and 
August 2005 were done at a pace that allows for a review of each 
participating insurance company at least once every 3 years, as FEMA 
procedures require. In addition, the processes FEMA had in place for 
operational reviews and quality assurance reinspections of claims 
adjustments met our internal control standard for monitoring federal 
programs. However, the process FEMA used to select a sample of claims 
files for operational reviews and the process its program contractor 
used to select a sample of adjustments for reinspections were not 
randomly chosen or statistically representative of all claims. We found 
that the selection processes used were, instead, based upon judgmental 
criteria including, among other items, the size and location of loss 
and complexity of claims. As a result of limitations in the sampling 
processes, FEMA 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--actions necessary for FEMA meet our 
internal control standard that it have reasonable assurance that 
program objectives are being achieved and that its operations are 
effective and efficient. 

In the months after Hurricane Isabel, FEMA took steps intended to 
uniquely address concerns that arose from that flood event. In April 
2004, FEMA established a task force to review claims settlements from 
Hurricane Isabel claimants. This was the first time in the history of 
the NFIP that a formal claims review process was established. As a 
result of task force reviews, almost half of the 2,294 policyholders 
who sought a claims 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 
personal property not included in the initial adjuster's loss 
determination; or to cover additional material or labor costs. For 
example, in one instance the original adjuster had not included 
coverage for a kitchen countertop and a cable television outlet that 
the task force added to the claims settlement. In other claims, 
reviewers allowed higher prices for paint, dry wall, insulation, and 
other building materials than had been allowed in the initial loss 
report. An NFIP manager said that the original pricing was not an error 
in many cases, but that the costs of the materials had increased 
between the time of the initial loss and the final settlement offer. 
Among reasons that claims reviewed by the task force were closed with 
no additional payment were that the reviewer agreed with the original 
determination that (1) flood damage to parts of a basement were not 
covered and that (2) damage was not due to flood but to wind-driven 
rain. 

As of September 2005, FEMA had not yet fully implemented provisions of 
the Flood Insurance Reform Act of 2004. The 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; to establish a regulatory appeals process for claimants; and 
to establish minimum education and training requirements for insurance 
agents who sell NFIP policies. The 6-month statutory deadline for 
implementing these changes was December 30, 2004. While FEMA advised us 
that it finalized statutorily required informational materials in 
September 2005, its flood insurance claims handbook does not yet fully 
comply with statutory requirements. The handbook contains information 
on anticipating, filing and appealing a claim, but does not include 
information regarding the appeals process that FEMA is statutorily 
required to establish through regulation. In its comments on our draft 
report, FEMA stated that it was offering claimants an informal appeals 
process pending the establishment of a regulatory process, and that the 
handbook describes this informal appeals process. However, by statute, 
the claims handbook must describe the regulatory process, which FEMA 
has yet to establish. 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. With respect to minimum training and education requirements for 
insurance agents who sell NFIP policies, FEMA published a Federal 
Register notice on September 1, 2005, which included an outline of 
training course materials. In the notice, FEMA stated that, rather than 
establish separate and perhaps duplicative requirements from those that 
may already be in place in the states, it had chosen to work with the 
states to implement the NFIP requirements through already established 
state licensing schemes for insurance agents. The notice did not 
specify how or when states were to begin implementing the NFIP training 
and education requirements. Thus, it is too early to tell the extent to 
which insurance agents will meet FEMA's minimum standards. FEMA 
officials said that, because changes to the program could have broad 
reaching and significant effects on policyholders and private-sector 
stakeholders upon whom FEMA relies to implement the program, the agency 
is taking a measured approach to addressing the changes mandated by 
Congress. Nonetheless, without plans with milestones for completing its 
efforts to address the provisions of the act, FEMA cannot hold 
responsible officials accountable or ensure that statutorily required 
improvements are in place to assist victims of future flood events. 

To strengthen and improve FEMA's monitoring and oversight of the NFIP, 
we are recommending that FEMA use a methodologically valid approach for 
sampling files selected for operational reviews and quality assurance 
claims reinspections. To help ensure that actions are taken in a timely 
manner to address legislative requirements established in the Flood 
Insurance Reform Act of 2004, we are recommending that FEMA establish 
documented plans with milestones for completing its efforts and hold 
NFIP officials accountable for implementing these plans. 

In commenting on a draft of this report, FEMA expressed concerns about 
our findings related to NFIP program management and oversight. 
Specifically, FEMA was concerned that we did not directly address the 
issue of whether Congress intended the NFIP to restore flood-damaged 
properties to their pre-flood conditions. We believe we have addressed 
the issue consistent with our statutory mandate by explaining the 
statutory and regulatory provisions that affect both dollar ceilings 
and other coverage limitations. In other words, flood insurance 
policies can only restore victims to pre-flood conditions within, but 
not beyond, the dollar ceilings and other coverage limitations 
established by law and regulation. FEMA also questioned our 
characterization of its operational reviews and claims reinspection 
processes in the context of FEMA's overall financial and management 
control efforts. However, our focus was on overall NFIP program 
management and oversight, not on FEMA's fiduciary responsibilities or 
additional internal control measures. During our review, FEMA managers 
described the operational reviews and claims inspections as the primary 
methods FEMA used for monitoring and overseeing the NFIP. 

FEMA also noted that its method of selecting its sample for operational 
reviews was more appropriate than the statisticall y random probability 
sample we recommended. We believe that, although FEMA's current 
sampling strategy may provide an opportunity to focus on particular 
areas of risk, it does not provide management with the information 
needed to assess the overall performance of private insurance companies 
and adjusters participating in the program--information that FEMA needs 
to have reasonable assurance that program objectives are being 
achieved: 

In addition, FEMA disagreed with our characterization of the extent to 
which FEMA has met provisions of the Flood Insurance Reform Act of 
2004. We believe that our description of those efforts and our 
recommendations with regard to implementing the Act's provisions remain 
valid. FEMA's comments are contained in appendix II. In addition, FEMA 
provided technical comments, which we incorporated into the report as 
appropriate. 

Background: 

Nearly 20,000 communities across the United States and its territories 
participate in the NFIP by adopting and agreeing to enforce state and 
community floodplain management regulations to reduce future flood 
damage. In exchange, the NFIP makes federally backed flood insurance 
available to homeowners and other property owners in these communities. 
Homeowners with mortgages from federally regulated lenders on property 
in communities identified to be in special high-risk flood hazard areas 
are required to purchase flood insurance on their dwellings. Optional, 
lower-cost coverage is also available under the NFIP to protect homes 
in areas of low to moderate risk. To insure furniture and other 
personal property items against flood damage, homeowners must purchase 
separate NFIP personal property coverage. Although premium amounts vary 
according to the amount of coverage purchased and the location and 
characteristics of the property to be insured, the average yearly 
premium for a 1-year policy was $446, as of June 2005. 

The National Flood Insurance Act of 1968[Footnote 5] established the 
NFIP. Congress mandated that the NFIP was to be implemented "based on 
workable methods of pooling risks, minimizing costs, and distributing 
burdens equitably among those who will be protected by flood insurance 
and the general public."[Footnote 6] To make "flood insurance coverage 
available on reasonable terms and conditions to persons who have need 
for such protection,"[Footnote 7] the NFIP strikes a balance between 
the scope of the coverage provided and the premium amounts required to 
provide that coverage. Coverage limitations arise from statute and 
regulation, including FEMA's standard flood insurance policy (SFIP), 
which is incorporated in regulation and issued to policyholders when 
they purchase flood insurance. 

To the extent possible, the program is designed to pay operating 
expenses and flood insurance claims with premiums collected on flood 
insurance policies rather than by tax dollars. However, as we have 
reported, the program, by design, is not actuarially sound because 
Congress authorized subsidized insurance rates to be made available for 
policies covering certain structures to encourage communities to join 
the program. As a result, the program does not collect sufficient 
premium income to build reserves to meet the long-term future expected 
flood losses.[Footnote 8] FEMA has statutory authority to borrow funds 
from the Treasury to keep the NFIP solvent.[Footnote 9] Following 
Hurricane Katrina in August 2005, legislation was enacted that 
increased FEMA's borrowing authority from a total of $1.5 billion to 
$3.5 billion through fiscal year 2008.[Footnote 10] FEMA has exercised 
its borrowing authority four times in the last decade when losses 
exceeded available fund balances. For example, as of August 2005, FEMA 
had borrowed $300 million in 2005 to pay an estimated $1.8 billion on 
flood insurance claims resulting from the 2004 hurricane season. As it 
has done when it has borrowed in the past, FEMA intends to repay these 
funds with interest, according to agency officials, however, the 
officials had not yet estimated NFIP claims amounts anticipated for 
flood damage from Hurricane Katrina in August 2005. 

Participation in the NFIP and Claims Payments Have Grown: 

As shown in figure 1, the number of NFIP policies in force has grown 
steadily over the past 27 years to a total of about 4.6 million 
policies in force as of May 31, 2005. 

Figure 1: NFIP Policies in Force, 1978-2005: 

[See PDF for image] 

[End of figure] 

As shown in figure 2, NFIP claims payments have varied widely by year 
over the life of the program depending on the number and severity of 
flood events; however, as the number of policies in force increased 
(see fig. 1), the claims payments have trended upward. Claims paid in 
2004 were the highest amount in the history of the NFIP--more than $1.9 
billion for all flood events. 

Figure 2: Total NFIP Payments to Claimants, 1972-2004: 

[See PDF for image] 

[End of figure] 

Tables 1 and 2 provide information on payments by flood event in 2003 
and 2004. In 2003, the NFIP paid about $478 million on more than 21,000 
claims from 5 named flood events and an additional $287 million on 
15,232 claims filed for damage from unnamed floods. Of those claims, 
more than half resulted from damage from Hurricane Isabel in six states 
and Washington, D.C. Hurricane Isabel was a category 5 hurricane at its 
peak with sustained winds in excess of 165 miles per hour. It made 
landfall on September 18, 2003, near Drum Inlet, North Carolina, as a 
category 2 storm. As it traveled across Virginia, Maryland, and 
Pennsylvania, Isabel weakened to a tropical storm, but its heavy rains 
caused storm surge flooding. 

Table 1: NFIP Claims Payments on Flood Events in 2003: 

Dollars in thousands: 

Flood event/state(s): Hurricane Isabel (Delaware, Maryland, North 
Carolina, Pennsylvania, South Carolina, Virginia, and Washington, 
D.C.); 
Number of paid losses: 19,523; 
Amount paid: $455,869. 

Flood event/state(s): Delaware flooding (Delaware); 
Number of paid losses: 10; 
Amount paid: $64. 

Flood event/state(s): Torrential rain (Puerto Rico); 
Number of paid losses: 261; 
Amount paid: $1,366. 

Flood event/state(s): Hurricane Claudette (Texas); 
Number of paid losses: 1,035; 
Amount paid: $10,884. 

Flood event/state(s): Tennessee flood (Tennessee); 
Number of paid losses: 309; 
Amount paid: $9,759. 

Flood event/state(s): Named flood event total; 
Number of paid losses: 21,138; 
Amount paid: $477,942. 

Flood event/state(s): Unnamed flood total; 
Number of paid losses: 15,232; 
Amount paid: $287,317. 

Total; 
Number of paid losses: 36,370; 
Amount paid: $765,259. 

Source: GAO analysis of FEMA data. 

[End of table] 

For 2004 flood events, as of April 30, 2005, the NFIP paid more than 
$1.9 billion on more than 52,785 NFIP claims from storms including 
Hurricanes Charley, Frances, Ivan, and Jeanne that caused major damage 
in Florida and other East Coast and Gulf Coast states. 

Table 2: NFIP Claims Payments on Flood Events in 2004: 

Flood event/state(s): Kentucky Flood (Kentucky); 
Number of paid losses: 279; 
Amount paid: $5,717. 

Flood event/state(s): Hurricane Alex (North Carolina); 
Number of paid losses: 249; 
Amount paid: $2,436. 

Flood event/state(s): Hurricane Charley (Florida and North Carolina); 
Number of paid losses: 2,434; 
Amount paid: $46,369. 

Flood event/state(s): Hurricane Frances (Florida); 
Number of paid losses: 4,737; 
Amount paid: $139,866. 

Flood event/state(s): Hurricane Ivan (Alabama, Florida, Georgia, 
Louisiana, Mississippi, Ohio, Pennsylvania, Virginia, and West 
Virginia); 
Number of paid losses: 25,558; 
Amount paid: $1,233,964. 

Flood event/state(s): Hurricane Jeanne (Florida and Puerto Rico); 
Number of paid losses: 3,994; 
Amount paid: $78,355. 

Flood event/state(s): Named flood event total; 
Number of paid losses: 37,251; 
Amount paid: $1,506,707. 

Flood event/state(s): Unnamed flood total; 
Number of paid losses: 15,534; 
Amount paid: $442,678. 

Flood event/state(s): Total; 
Number of paid losses: 52,785; 
Amount paid: $1,949,385. 

Source: GAO analysis of FEMA data. 

[End of table] 

Private Insurers Sell Policies and Adjust NFIP Claims under FEMA 
Oversight and Management: 

The work of selling, servicing, and adjusting claims on NFIP policies 
is carried out by thousands of private-sector insurance agents and 
adjusters who work independently or are employed by insurance companies 
or their designated subcontractors. 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.[Footnote 11] The companies, called 
write-your-own companies, receive an expense allowance from FEMA of 
about one-third of the premium amounts for their services and are 
required to remit premium income in excess of this allowance to the 
National Flood Insurance Fund.[Footnote 12] The write-your-own 
companies also receive a percentage fee--about 3.3 percent of the 
incurred loss--for adjusting and settling claims. The insurance 
companies share the FEMA expense allowance and fee for claims 
settlements with insurance agents who sell and service the policies, a 
vendor, or subcontractor, if the company has subcontracted with one to 
handle all or part of its flood insurance business, and flood claims 
adjusters.[Footnote 13] 

Figure 3 shows the key participants in the process: a homeowner; an 
insurance agent, an insurance company, and, in many cases, a flood 
insurance vendor, or subcontractor, to assist with aspects of the NFIP 
business; and a flood adjuster. FEMA and its program contractor manage 
and oversee the NFIP and the National Flood Insurance Fund accounts 
into which premiums are deposited and claims and expenses paid. 

Figure 3: Key Participants in the NFIP: 

[See PDF for image] 

[End of figure] 

Insurance agents under contract to one or more write-your-own insurance 
company are the main point of contact for most policyholders to 
purchase an NFIP policy, seek information on coverage, or file a claim. 
In order to sell flood insurance, agents must meet basic state 
insurance licensing requirements. Based on information the insurance 
agents submit, the insurance companies issue policies, collect premiums 
from policyholders, deduct an allowance for expenses from the premium, 
and remit the balance to the National Flood Insurance Fund. In some 
cases, insurance companies hire subcontractors--flood insurance 
vendors--to conduct some or all of the day-to-day processing and 
management of flood insurance policies. 

Insurance companies work with certified flood adjusters to settle NFIP 
claims. When flood losses occur, policyholders contact their insurance 
agents to report the loss. The agent then contacts the write-your-own 
company to report the loss and it assigns a flood adjuster to assess 
damages. Flood adjusters may be independentor employed by an insurance 
or adjusting company. These adjusters are responsible for assessing 
damage, estimating losses, and submitting required reports, work 
sheets, and photographs to the insurance company, where the claim is 
reviewed and, if approved, processed for payment. Adjusters determine 
prices for repairs by reviewing estimates of costs prepared by 
policyholders and their contractors, consulting pricing software and 
checking local prices for materials. Claims amounts may be adjusted 
after the initial settlement is paid if claimants submit documentation 
that some costs were higher than estimated. An adjuster must have a 
least 4 consecutive years of full-time property loss adjusting 
experience and have attended an adjuster workshop, among other 
requirements, to be certified by FEMA to work on NFIP claims,. To keep 
their certifications current, adjusters are required to take a 1-day 
refresher workshop each year and pass a written examination testing 
their knowledge each year. 

Flood claims adjusters employed by write-your-own companies are paid 
salaries and sometimes bonuses for working long hours after major flood 
events from a percentage fee--about 3.3 percent of the incurred loss, 
which the NFIP pays write-your-own companies for settling claims, 
according to an NFIP official. Independent adjusters who work for 
multiple insurance companies are also paid based on a standard NFIP fee 
schedule that varies adjuster compensation according to the size of the 
claim. For example, the fee schedule pays $1,000 for a claim settlement 
of between $25,000 and $35,000. If the independent adjuster is 
registered with an independent adjusting firm, a portion of the fee 
goes to the adjusting firm. 

About 40 FEMA employees, assisted by about 170 contractor employees, 
are responsible for managing the NFIP. Management responsibilities 
include establishing and updating NFIP regulations, administering the 
National Flood Insurance Fund, analyzing data to actuarially determine 
flood insurance rates and premiums, and offering training to insurance 
agents and adjusters. In addition, FEMA and its program contractor are 
responsible for monitoring and overseeing the quality of the 
performance of the write-your-own companies to assure that the NFIP is 
administered properly. 

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.[Footnote 14] First, by statute, there are limitations on 
the amount of insurance coverage homeowners may purchase for their 
dwellings and personal property. In addition, FEMA has further defined 
the general terms and conditions of flood insurance coverage pursuant 
to a broad grant of congressionally delegated authority, issuing 
regulations that include a SFIP. 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. 

In terms of statutory limitations, there is a ceiling on the amount of 
insurance coverage available for single-family homes, which is 
$250,000.[Footnote 15] Because of this statutory ceiling, homes that 
could sustain more than $250,000 in damage cannot be insured to reflect 
full replacement costs. Furthermore, while homes whose full replacement 
cost is less than $250,000 may be fully insured, this is not 
statutorily required. There is a "mandatory purchase" requirement for 
homeowners in special high-risk flood hazard areas who hold mortgages 
from federally regulated lenders, but they are only required to insure 
their homes for the amount of their mortgages, which may be less than 
their homes' full replacement cost.[Footnote 16] For homeowners in 
areas of low-to moderate-flood risk, the purchase and amount of 
insurance is optional, up to the $250,000 statutory maximum.[Footnote 
17] As a result of the $250,000 ceiling and the "mandatory purchase" 
floor, insurance on a given home may be less than its full replacement 
cost. Homeowners may also separately elect to insure the contents of 
their homes under the NFIP, although they are not required to do so. As 
with the $250,000 cap on building coverage, there is also a statutory 
limit on the amount of personal property coverage homeowners can buy. 
By statute, homeowners can purchase no more than $100,000 in personal 
property coverage, even if the value of their personal property exceeds 
this amount.[Footnote 18] 

In addition to the statutory limitations on coverage amounts, Congress 
also gave FEMA broad authority to issue regulations establishing "the 
general terms and conditions of insurability," including the classes, 
types, and locations of properties that are eligible for flood 
insurance; the nature and limits of loss that may be covered; the 
classification, limitation, and rejection of any risks that FEMA 
considers advisable; and the amount of appropriate loss 
deductibles.[Footnote 19] Pursuant to this delegation of authority, 
FEMA has issued regulations, including a "Standard Flood Insurance 
Policy," that further delineate the scope of coverage.[Footnote 20] All 
flood insurance made available under the NFIP is subject to the express 
terms and conditions of the statute and regulations, including the 
SFIP.[Footnote 21] 

The SFIP is a contractual document that contains the terms of coverage 
and is issued to homeowners when they purchase flood insurance. Some of 
the principal SFIP limitations concern whether particular events, 
losses, building property and personal property are covered, and what 
deductible amounts and loss settlement methods apply when an insured 
files a claim. While either FEMA or private write-your-own insurance 
companies may issue flood insurance policies, FEMA's regulations 
prohibit any change to the SFIP provisions without the express written 
consent of the Federal Insurance Administrator, the FEMA official 
responsible for administering the NFIP.[Footnote 22] The Administrator 
is also charged with interpreting the scope of coverage under the 
SFIP.[Footnote 23] 

The SFIP covers only "direct physical loss by or from flood."[Footnote 
24] It does not cover losses resulting from events other than flood, 
such as windstorms or earth movements. Additionally, if the losses 
primarily result from conditions inherent to the dwelling or within the 
control of the insured, they are not covered by the SFIP.[Footnote 25] 
Nor does the SFIP provide coverage if the flood is already in progress 
when the policy begins or when the insured adds coverage. Finally, the 
SFIP only covers direct, physical flood losses, not indirect losses 
such as loss of revenue or profits, interruption of business, access to 
and use of the insured property, or living expenses incurred while 
property is uninhabitable.[Footnote 26] 

The SFIP limits what type of building property is covered, considering 
such things as the property's use, permanence, and degree of enclosure. 
For coverage purposes, the SFIP defines a "building" as a manufactured 
home; a travel trailer affixed to a permanent foundation; or a 
"structure with two or more outside rigid walls and a fully secured 
roof, that is affixed to a permanent site."[Footnote 27] A building 
under construction may be covered even if not yet walled or roofed if 
the construction is underway at the time the losses are 
incurred.[Footnote 28] Detached garages may be covered, but not if the 
garage is used for residential, business, or farming purposes,[Footnote 
29] in which case it must be separately insured. Certain items of 
property are considered part of the building. In general, these are 
items built in or affixed to the building, for example, stoves, ovens, 
refrigerators, central air conditioners, and permanently installed 
cabinets and carpets. At the basement level, building coverage is more 
limited and does not extend to finishing materials. For example, 
whereas the SFIP covers permanently installed paneling and wallpaper 
above the basement level, coverage in the basement is limited to 
unfinished drywall.[Footnote 30] 

The SFIP only insures for personal property if the homeowner purchases 
personal property coverage and the personal property is inside a 
building.[Footnote 31] Personal property includes movable items such as 
portable microwaves, window-type air conditioning units, and carpets 
that are not permanently installed. In a basement, coverage is limited 
to certain items installed in their functioning location and, if 
necessary for operation, connected to a power source, for example, 
portable air conditioning units and clothes washers and dryers. Certain 
types of personal property are specially limited to payment of no more 
that $2,500, regardless of the magnitude of the loss. These objects 
include artwork, collectibles, jewelry, furs, and property used in any 
business.[Footnote 32] Personal property coverage does not extend to 
such things as currency, postage, deeds, and other valuable 
papers.[Footnote 33] 

Certain types of property are wholly excluded from both building 
property and personal property coverage. The first type of excluded 
properties are those that are generally separate from the main 
dwelling, such as recreational vehicles; self-propelled vehicles and 
machines; land, plants, and animals; walkways, driveways, patios; and 
hot tubs and swimming pools. The second type of excluded properties are 
those with a close relationship with water or that are located below 
ground, including buildings and personal property located entirely, in, 
on, or over water; boathouses, wharves, piers, and docks; underground 
structures or equipment; and buildings and contents where more than 49 
percent of the actual cash value of the building is below 
ground.[Footnote 34] 

The amount recoverable under the SFIP is limited to the amount that 
exceeds the applicable deductible.[Footnote 35] Applicable deductible 
amounts are not listed in the SFIP itself, but are shown on the 
Declarations Page, a computer-generated summary of the information 
provided by the insured in the insured's application. The Declarations 
Page is part of each insured's flood insurance policy. [Footnote 36] 

The final type of limitation found in the SFIP derives from the methods 
of settling losses. There are three loss settlement methods under the 
SFIP: (1) "replacement cost," which homeowners may only purchase for 
single-family dwellings in which they principally reside; (2) "special 
loss settlement," which only applies to large manufactured 
homes;[Footnote 37] and (3) "actual cash value," which applies to any 
property that does not qualify for replacement cost or special loss 
settlement. 

The only difference between replacement cost and actual cash value is 
the significance attached to the property's physical depreciation. An 
actual cash value loss settlement represents what it would cost to 
replace damaged property, less the value of its physical 
depreciation.[Footnote 38] Because of depreciation, actual cash value 
will presumably be less than the full cost to repair or replace the 
damage.[Footnote 39] A replacement cost loss settlement, on the other 
hand, does not deduct for physical depreciation. If replacement cost 
coverage applies, the policy will pay the actual amount spent to repair 
or replace the damage with materials of like kind and quality, subject 
to the applicable deductible and the building's limit of 
liability.[Footnote 40] 

Homeowners can only obtain replacement cost coverage for their single- 
family dwellings, not for multi-family dwellings or items of personal 
property, which are subject to actual cash value coverage. In addition, 
not all single-family dwellings are eligible for replacement cost 
coverage. To qualify for such coverage, a home must be insured for 80 
percent or more of its full replacement cost or the maximum coverage 
amount of $250,000, and it must a principal residence. If a home does 
not meet both criteria, the policy will pay the actual cash value for 
the covered damage. 

An additional limitation in replacement cost coverage applies when the 
full cost of repair or replacement is greater than $1,000 or 5 percent 
of the entire amount of insurance on the dwelling. In that case, the 
SFIP provides that it "will not be liable for any loss unless and until 
the actual repair or replacement is completed," unless the insured 
foregoes a replacement cost settlement and makes a claim for actual 
cash instead.[Footnote 41] If the insured eventually spends more on the 
repair or replacement than the actual cash settlement, the individual 
may file a claim for additional replacement cost liability, provided he 
or she provides a notice of intent to do so within 180 days after the 
date of loss. [Footnote 42] 

We developed the following hypothetical property adjustment example 
with the assistance of FEMA's director of NFIP claims to illustrate how 
applicable limitations could reduce coverage for claimants whose 
property is damaged by flood: 

Hypothetical: A poorly maintained 30-year-old home located in a 
designated flood zone was damaged when a nearby river overflowed. The 
home's full replacement cost was $60,000. The homeowner purchased an 
NFIP policy for $30,000 in coverage. Although a contractor estimated it 
would cost $40,000 to repair damages to the structure and personal 
property losses totaled another $10,000, a NFIP adjuster determined 
that payment on the claim was $8,000 because: 

* The homeowner had chosen not to insure his personal property. 

* The adjuster determined that some problems that needed to be 
addressed had not been caused by the flood (e.g., leaking pipes in the 
bathroom and preexisting mold in the basement). 

* The basement of the home, where the largest amount of damage 
occurred, was finished, and coverage was limited to drywall damage. 

* Actual cash value will be paid for repairs or replacement of damage 
to the dwelling because the homeowner did not insure the structure for 
at least 80 percent of its full replacement cost. Because the condition 
of the home before the flood was poor, the actual cash value was low. 
In this hypothetical case, the adjuster determined that the actual cash 
value of damaged property covered by the policy was $9,000. 

* A $1,000 deductible applied, reducing the $9,000 actual cash value 
payment to $8,000. 

Monitoring and Oversight of NFIP Identifies Specific Problems, but Does 
Not Provide Comprehensive Information on Overall Program Performance: 

FEMA's primary method to monitor and oversee the NFIP is to conduct 
operational reviews of the 95 write-your-own insurance companies 
participating in the NFIP. In addition, FEMA's program contractor is to 
reinspect a sample of claims adjustments for every flood event to 
identify errors, among other things. The operational reviews and follow-
up visits we analyzed followed FEMA's internal control procedures on 
the processes for examiners to follow in conducting the reviews and for 
doing the reviews at a pace that allows for a review of each write-your-
own company on at least a triennial basis. The processes FEMA followed 
also met our internal control monitoring standard that requires federal 
agencies to ensure that the findings of audits and other reviews are 
promptly resolved. However, in doing these monitoring and oversight 
activities, neither FEMA nor its program contractor used a 
statistically valid method for sampling files selected for operational 
reviews or claims reinspections. 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. 

FEMA's Operational Reviews of Insurers We Analyzed Identified and 
Followed Up on Problems: 

Operational reviews of flood insurance companies participating in NFIP 
that are conducted by FEMA staff are FEMA's primary internal control 
mechanism for monitoring, identifying, and resolving problems related 
to how insurers sell and renew NFIP policies and adjust claims. Our 
analysis of reports of all 15 operational reviews and follow up visits 
at companies that were identified as having critical errors (e.g., 
incorrect payments) found that FEMA checked information and conducted 
file reviews in accordance with the requirements and procedures 
outlined in its Write Your Own Financial Control Plan.[Footnote 43] In 
addition, our analysis found that FEMA followed up at all of the 
companies where operational reviews had identified critical errors to 
monitor the progress these companies made over time in addressing and 
resolving critical errors. Monitoring the quality of performance over 
time and ensuring that the findings of audits and other reviews are 
promptly resolved is an internal control standard that we have 
identified for the federal government.[Footnote 44] 

According to the FEMA director of NFIP claims, one or two examiners 
from FEMA's NFIP Claims and Underwriting sections go on-site to review 
the operations of the 95 write-your-own companies. If vendors handle 
all or part of a company's NFIP business, operational reviews are 
conducted at the vendor locations and reviews of all of the companies 
doing business with the vendor can be completed during one visit. Seven 
FEMA staff in the Mitigation Division underwriting section and two 
staff in the claims section have primary responsibility for conducting 
operational reviews in addition to other responsibilities including 
writing insurance manuals and regulations, providing technical 
assistance, and responding to inquiries from policyholders, Members of 
Congress and others. As discussed below, FEMA directs examiners to 
conduct three steps for each operational review--a general underwriting 
review, a specific underwriting review, and a claims operation review 
of each insurance company's NFIP business. Requirements and procedures 
for the operational review are outlined in FEMA's Write Your Own 
Financial Control Plan. 

In the general underwriting review, examiners are to review how the 
company has handled applications for NFIP policies and how policies are 
issued and cancelled among other items. The examiners are to check a 
sample of files to determine, for example, whether NFIP policies were 
renewed using correct payment rates and whether appropriate 
documentation was included in the file. In the specific underwriting 
review and the claims operation review, examiners are to conduct 
detailed examinations of files to check for completeness and accuracy. 
For example, they must make sure that elevations are calculated 
correctly on new policies and that photographs document damage on flood 
claims. 

For all aspects of the operational reviews, the examiners are to 
determine whether files are maintained in good order, whether current 
forms are used and whether staff has a proficient knowledge of 
requirements and procedures to properly underwrite and process flood 
claims. Examiners are also to look at internal controls in place at 
each company. When problems are identified, examiners are to classify 
the severity of the errors. Each file reviewed is to be classified as 
satisfactory or unsatisfactory. Unsatisfactory files contain either a 
critical error (e.g., a violation of policy or an incorrect payment) or 
three non-critical errors (e.g., violations of procedures that did not 
delay actions on claims). 

Write-your-own companies with error rates of 20 percent or higher of 
the total number of files reviewed for the specific underwriting or 
claims operation review would always receive an unsatisfactory 
designation. If a company receives an unsatisfactory designation, FEMA 
requires that it develop an action plan to correct the problems 
identified and is to schedule a follow-up review in 6 months to 
determine whether progress has been made. The action plans developed by 
the companies generally must contain a timetable for addressing 
deficiencies, including a plan for making progress reports to FEMA and 
developing more stringent internal quality control procedures. If a 
company continues to have problems and fails to implement an action 
plan, it can ultimately be withdrawn from the NFIP. According to FEMA 
officials, a company has been required to withdraw from the NFIP once 
in the program's history in part because of issues raised in 
operational reviews and in part due to other financial problems. 

In our analysis of reports of all 15 operational reviews and follow-up 
visits done at insurance companies that were identified as having 
critical errors, we found that examiners checked information and did 
file reviews in accordance with the requirements and procedures 
outlined in the Write Your Own Financial Control Plan. We also 
determined that FEMA followed up to monitor the progress the companies 
made in addressing and resolving critical errors. For example, in one 
instance after a write-your-own company received two unsatisfactory 
designations, it was directed by FEMA to rewrite all of its policies to 
be sure that the correct premiums were being charged to policyholders. 
In another instance, FEMA required a write-your-own company to take 
more extensive action than was proposed in its plan to address 
deficiencies. 

In addition, according to information provided by FEMA, operational 
reviews completed since 2000 were on pace to meet FEMA's policy that 
each of the 95 write-your-own companies be operationally reviewed at 
least once every 3 years. Table 3 shows the number of operational 
reviews reported by FEMA from January 2000 through August 2005. FEMA 
has scheduled a review of 31 write-your-own companies at a large vendor 
location for later in 2005. 

Table 3: Total Number of Operational Reviews of Write-Your-Own 
Companies Conducted by FEMA (January 2000 to August 2005): 

Year: 2000; 
Number of companies reviewed: 43. 

Year: 2001; 
Number of companies reviewed: 10. 

Year: 2002; 
Number of companies reviewed: 33. 

Year: 2003; 
Number of companies reviewed: 9. 

Year: 2004; 
Number of companies reviewed: 42. 

Year: January to August 2005; 
Number of companies reviewed: 11. 

Total; 
Number of companies reviewed: 148. 

Source: FEMA. 

[End of table] 

Reinspections of NFIP Claims Conducted by Program Contractor: 

In addition to operational reviews done by FEMA staff, FEMA's program 
contractor conducts quality assurance reinspections of claims for 
specific flood events. The program contractor employs nine general 
adjusters who conduct quality assurance reinspections of a sample of 
open claims for each flood event.[Footnote 45] Procedures for the 
general adjusters to follow in conducting these reinspections are 
outlined in FEMA's Write Your Own Financial Control Plan. According to 
the general adjusters we interviewed, in addition to preparing written 
reports of each reinspection, general adjusters discuss the results of 
the reinspections they perform with officials of the write-your-own 
companies that process the claims. If a general adjuster determines 
that the insurance company allowed an expense that should not have been 
covered, the company is to reimburse the NFIP. If a general adjuster 
finds that the private-sector adjuster missed a covered expense in the 
original adjustment, the general adjuster will take steps to provide 
additional payment to the policyholder. An instructor at an adjuster 
refresher training session, while observing that adjusters had 
performed very well over all during the 2004 hurricane season, cited 
several errors that he had identified in reinspections of claims, 
including improper measurement of room dimensions and improper 
allocation of costs caused by wind damage (covered by homeowners' 
policies) versus costs caused by flood damage. In addition, the 
instructor identified a problem that arose, namely, poor communication 
with homeowners on the process followed to inspect the homeowner's 
property and settle the claim. Overall error rates for write-your-own 
companies are monitored. Procedures require additional monitoring, 
training, or other action if error rates exceed 3 percent. According to 
the general adjusters we interviewed and FEMA's program contractor, 
quality assurance reinspections are forwarded from general adjusters to 
the program contractor where results of reinspections are to be 
aggregated in a reinspection database as a method of providing for 
broad-based oversight of the NFIP as its services are delivered by the 
write-your-own companies, adjusting firms and independent flood 
adjusters. 

Sampling Methods Used to Conduct Operational Reviews and Quality 
Assurance Reinspections Do Not Provide Management Information on 
Overall Performance: 

FEMA used nonprobability sampling processes rather than random sampling 
to select files for operational reviews and claims for quality 
assurance reinspections. In nonprobability sampling, staff select a 
sample based on their knowledge of the population's characteristics. 
The major limitation of this type of sampling is that the results 
cannot be generalized to a larger population, because there is no way 
to establish, by defensible evidence, how representative the sample is. 
A nonprobability sample is therefore not appropriate to use if the 
objective is to generalize about the population from which the sample 
is taken.[Footnote 46] 

For the operational reviews, specific guidance on how to select files 
for review is not documented, although guidance is provided on the 
number of files to review based on the size of the write-your-own 
companies' volume of NFIP business. The process used to select claims 
for review, as it is described by FEMA managers who oversee operational 
reviews, identifies problems at the write-your-own companies, but it is 
not designed to assess overall performance. For the specific 
underwriting portion of the review, examiners use a process described 
by a FEMA official as adverse selection, or selection of files for 
review that include the most difficult new policies that the company 
underwrote in the period since the last operational review under the 
assumption that if the company addresses difficult underwriting issues 
correctly, it will also be able to do routine underwriting issues 
correctly. According to this official, some examples of the most 
difficult underwriting issues are policies covering properties in the 
flood hazard areas closest to bodies of water and elevated buildings 
that have enclosures underneath them. For the claims operation portion 
of the operational review, like the underwriting portion, an examiner 
said that FEMA attempts to select the more difficult or potentially 
troublesome claims files to review. In addition, files that are closed 
without payment and those with particularly large settlements are to be 
included in the sample of files reviewed. Thus, the operational reviews 
provide FEMA with management information on specific problems that 
occur at write-your-own companies but, by design, do not assess the 
overall performance of the companies. 

For quality assurance reinspections, procedures are included in the 
written FEMA guidance on the number of claims to sample, but not on the 
sample selection process. General adjusters employed by FEMA's 
contractor are to reinspect a sample of properties based on the total 
number of claims the write-your-own company is processing for the flood 
event. A FEMA official said that this number is up to about 4 percent 
of claims for each flood event based on the total number of claims 
filed for the flood event. Although the two general adjusters we 
interviewed said their inspection sample selection process was random, 
the selection process they described involved choosing properties to 
reinspect based upon criteria they considered to be important. The 
general adjusters said that they generally reinspected the adjustments 
done on properties from a variety of neighborhoods that represented 
different types (i.e., single family and condominium) and values of 
houses, and varying flood loss claims amounts. A FEMA manager said that 
this process was comparable to the approach used by all nine of the 
general adjustors. While these criteria, if properly applied, would 
lead to some variety in the selection of claims to review, the 
selection process is not random or statistically valid for purposes of 
projecting results to overall performance. By exercising a more 
rigorous sample selection process, without incurring additional costs 
or selecting larger sample sizes, FEMA would improve its internal 
control processes. 

Because FEMA's primary means of providing oversight are its operational 
reviews and quality assurance reinspections, statistically-valid 
information from these oversight activities is essential. However, 
FEMA's use of an approach that lacks statistical validity for selecting 
files for operational reviews and claims for reinspections does not 
provide management with the information needed to assess the overall 
performance of the write-your-own companies, including the overall 
accuracy of the underwriting of NFIP policies and the adjustment of 
claims--information that FEMA needs to have reasonable assurance that 
program objectives are being achieved. Without a statistically valid 
sampling methodology, FEMA did not meet our internal control standard 
that federal agencies provide reasonable assurance that program 
objectives are being achieved and that program operations are effective 
and efficient.[Footnote 47] 

FEMA Task Force Closed about Half of Hurricane Isabel Claims Reviewed 
with Additional Payments: 

FEMA took unique actions to respond to concerns regarding NFIP payments 
for Hurricane Isabel flood claims. 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.[Footnote 
48] It was the first time in the history of the NFIP that a formal 
review process was established for NFIP claimants who were not 
satisfied with actions taken on their claims. According to an NFIP 
official, the task force was comprised of about 50 current and former 
certified flood adjusters from various private sector flood insurance 
adjusting firms, the nine general adjusters employed by FEMA's program 
contractor, and three FEMA staff. Adjusters were assigned to review 
claims outside of states where they had previously adjusted claims for 
Hurricane Isabel damage, according to the official. 

As shown in figure 4, FEMA officials said they sent notifications to 
23,770 Isabel claimants in six states[Footnote 49] and Washington, 
D.C., to advise claimants that they could have their claims reviewed by 
a special FEMA task force if they were unhappy with actions taken to 
settle them. Claimants could request a review by the FEMA task force in 
person at a community meeting, by telephone, mail, or fax. About 10 
percent of the claimants who were notified (2,294)--all with property 
in Maryland, Virginia, and North Carolina--responded. In reviewing 
those claims, the task force determined that 1,229 of the claims should 
be closed with no additional payment and that 1,065 claims should be 
closed with additional payments. 

Figure 4: Disposition of Hurricane Isabel Claims Reviewed by the FEMA 
Task Force: 

[See PDF for image] 

[End of figure] 

Based on our review of a statistically representative sample of claims 
files selected from the 2,294 claimants that responded to FEMA that 
they wanted a task force review of their claims, the task force closed 
claims with no additional payment for a variety of reasons. For 
example: 

* Task force agreed with the original determination that flood damage 
to parts of a basement were not covered. 

* Task force agreed with the original determination that damage was not 
due to flood but to wind-driven rain. 

* Task force agreed with the original determination that a claimant did 
not have coverage for personal property. 

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. 

* Pay a higher amount for materials, labor, or personal property items 
than the original adjuster had allowed. 

In more than 90 percent of claims closed by the task force with 
additional payment, the reviewer determined that additional payments 
were due for one of these two reasons.[Footnote 50] In 48 percent of 
the claims, additional payments were allowed for items that the initial 
adjuster did not include in the loss report, and in 43 percent of 
claims, additional payments were allowed to pay a higher amount for 
costs than the original adjuster had allowed. For example, in one claim 
we reviewed, the original estimate did not include coverage for a 
kitchen countertop and a cable television outlet that the reviewer 
included in the final claim settlement. In other claims, reviewers 
allowed higher prices for paint, dry wall, insulation, base molding, 
ceramic floor tile, and window trim, among other items, than had been 
allowed in the initial loss report. One general adjuster for FEMA's 
program contractor said that the original pricing was not an error in 
many cases, but that the costs of the materials had increased between 
the time of the initial loss and the final settlement offer. 

Based on our analysis of the statistically representative sample of 100 
claims files reviewed by the FEMA task force, the average amount paid 
on claims closed with payments and for which claimants requested a 
review by the task force was $32,438.[Footnote 51] The average 
additional payment amount determined by the task force for claims that 
were closed with an additional payment was $3,340. In comparison, as 
illustrated in figure 5, the average closed payments for 2002, 2003, 
and 2004 for claims closed with payment were $16,878, $19,980, and 
$30,668, respectively[Footnote 52].: 

Figure 5: Comparison of Claims Settlement Amounts for Hurricane Isabel 
Claims Reviewed by the Task Force and All Claims Closed with Payment 
(2002-2004): 

[See PDF for image] 

[End of figure] 

FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the 
Flood Insurance Reform Act of 2004: 

As of September 2005, FEMA had not fully implemented NFIP program 
changes mandated by the Flood Insurance Reform Act of 2004 to (1) 
develop supplemental materials for explaining coverage and the claims 
process to policyholders when they purchase and renew policies and (2) 
establish, by regulation, an appeals process for claimants. The 6-month 
statutory deadline for implementing these changes was December 30, 
2004. The act also required FEMA to establish minimum training and 
education requirements for flood insurance agents and to publish the 
requirements in the Federal Register by December 30, 2004. Although 
FEMA published a Federal Register notice of its requirements on 
September 1, 2005, the notice explained that FEMA intended to work with 
the states to implement the minimum NFIP standards through existing 
state licensing schemes for insurance agents. Thus, it is too early to 
tell the extent to which insurance agents will meet FEMA's minimum 
requirements. 

For purposes of explaining coverage and the claims process to 
policyholders, the Flood Insurance Reform Act of 2004 required FEMA to 
develop three types of informational materials. The required materials 
are: (1) supplemental forms explaining in simple terms the exact 
coverage being purchased; (2) an acknowledgement form that the 
policyholder received the SFIP and any supplemental explanatory forms, 
as well as an opportunity to purchase coverage for personal property; 
and (3) a flood insurance claims handbook describing the process for 
filing and appealing claims.[Footnote 53] FEMA officials said they had 
drafted an acknowledgement form and new insurance program forms to 
explain coverage to policyholders when they purchase and renew their 
insurance. FEMA officials said that these forms were final as of 
September 2005, and that they expected distribution to policyholders to 
begin in October 2005. While FEMA appears to have completed its 
implementation efforts with respect to the supplemental and 
acknowledgement forms, its flood insurance claims handbook does not yet 
fully comply with statutory requirements. FEMA posted a flood insurance 
claims handbook, dated July 2005, on its website in September 2005. The 
handbook contains information on anticipating, filing and appealing a 
claim, but does not include information regarding the appeals process 
that FEMA is statutorily required to establish through regulation. In 
its comments on our draft report, FEMA stated that it was offering 
claimants an informal appeals process pending the establishment of a 
regulatory process, and that the handbook describes this informal 
appeals process. However, by statute, the claims handbook must describe 
the regulatory process, which FEMA has yet to establish. 

The establishment of a regulatory appeals process is required by 
section 205 of the Flood Insurance Reform Act of 2004. To address this 
requirement, FEMA officials said they had discussed the feasibility of 
maintaining a permanent task force to consider appeals--like the one 
created to review Hurricane Isabel claims. In commenting on a draft of 
this report, the acting director of FEMA's Emergency Preparedness and 
Response Directorate said that FEMA had rejected this plan, but he did 
not disclose any alternative plan detailing key elements of an appeals 
process such as how to initiate an appeal, time frames for considering 
appeals, the size of an appeals board, and the qualifications for 
membership, or how long the rulemaking process to provide for appeals 
by regulation might take. Therefore, it remains unclear how or when 
FEMA will establish the regulatory appeals process, as directed by the 
Flood Insurance Reform Act of 2004. 

Finally, section 207 of the Flood Insurance Reform Act of 2004 required 
FEMA, in cooperation with the insurance industry, state insurance 
regulators, and other interested parties, to establish minimum training 
and education requirements for all insurance agents who sell flood 
insurance policies and to publish the requirements in the Federal 
Register. On September 1, 2005, FEMA published a Federal Register 
notice in response to this requirement.[Footnote 54] In the notice, 
FEMA provided a course outline for flood insurance agents, which 
consisted of eight sections: an NFIP Overview; Flood Maps and Zone 
Determinations; Policies and Products Available; General Coverage 
Rules; Building Ratings; Claims Handling Process; Requirements of the 
Flood Insurance Reform Act of 2004; and Agent Resources. FEMA further 
stated that, rather than establish separate and perhaps duplicative 
requirements from those that may already be in place in the states, it 
had chosen to work with the states to implement NFIP requirements 
through already established state licensing schemes for insurance 
agents. However, the notice did not specify how or when states were to 
begin implementing the NFIP training and education requirements. Given 
the recent publication of the Federal Register notice, and the states' 
eventual role in implementing FEMA's training and education 
requirements, it is too early to tell the extent to which insurance 
agents will meet FEMA's minimum standards. 

FEMA officials said that developing and implementing changes to the 
NFIP can have broad reaching and significant impacts for the millions 
of NFIP policyholders, as well as the private sector stakeholders upon 
whom FEMA relies to implement the program. As a result, the agency is 
taking a measured approach to making the mandated changes to ensure 
that it achieves results and minimizes any negative effects on 
policyholders and NFIP stakeholders. Nonetheless, without plans with 
milestones for completing its efforts 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, FEMA 
cannot hold responsible officials accountable and track progress to 
ensure that these management improvements are in place to assist 
victims of future flood events. 

Conclusions: 

A key challenge that FEMA faces in its role as coordinator of the 
federal disaster response efforts, including the NFIP, is to ensure 
through its monitoring and oversight efforts that programs are 
implemented in accordance with statutory and regulatory requirements 
across the nation. It is a difficult challenge to meet, as services are 
delivered primarily through a decentralized system of private-sector 
contractors, their employees, and their subcontractors. However, it is 
increasingly important that FEMA have assurances that program 
requirements are followed in light of the growing participation and 
increasing costs of its programs. 

While FEMA's NFIP monitoring and oversight processes have identified 
specific problems with the delivery of services, the lack of 
statistically representative samples for processes to assess the 
accuracy of claims and adjustments limits FEMA's ability to project the 
results of its analyses in order to provide management information on 
the private sector's overall implementation of the program. Without 
such information, the value of FEMA's monitoring processes--operational 
reviews and quality assurance reinspections--as critical internal 
control activities is limited. Such information could also help the 
agency better identify potential needs for such things as additional 
training requirements or clarification of NFIP coverage and claims 
guidance, as identified in the Flood Insurance Reform Act of 2004. 

FEMA officials have been working to address the consequences of the 
most devastating hurricane season on record, and these efforts have 
understandably put pressure on FEMA's resources, particularly since 
claims began to be filed for the damage from Hurricane Katrina. 
Nonetheless, the agency may continue to face challenges like those 
posed by Hurricane Isabel in implementing the NFIP until plans for 
addressing some of the key legislative requirements of the Flood 
Insurance Reform Act of 2004 are developed and implemented. 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. 

Agency Comments and Our Evaluation: 

On October 12, 2005, the Acting Director of FEMA's Mitigation Division 
provided written comments on a draft of this report. FEMA offered 
substantive comments on three issues (App. II). FEMA offered comments 
principally in three areas: (1) its disappointment that we had not 
directly addressed the issue of whether Congress intended the flood 
insurance program to restore damaged property to its pre-flood 
condition; (2) its view that the method of choosing its sample for 
operational reviews was appropriate and that its financial and internal 
controls are wide-ranging and include processes that we did not 
address; and (3) its view that contrary to the impression given in our 
draft report, FEMA has worked diligently to implement the requirements 
of the Flood Insurance Reform Act of 2004. 

* FEMA expressed disappointment that our report made no explicit, 
unambiguous statement regarding whether Congress intended flood 
insurance to restore damaged property to its pre-flood condition. We 
believe we have addressed the issue consistent with our statutory 
mandate by explaining the statutory and regulatory provisions that 
affect both dollar ceilings and other coverage limitations. Section 208 
of the Flood Insurance Reform Act of 2004 mandated GAO to conduct a 
study of aspects of the National Flood Insurance Program (NFIP), 
including "the adequacy of the scope of coverage provided under flood 
insurance policies in meeting the intended goal of Congress that flood 
victims be restored to their pre-flood conditions, and any 
recommendations to ensure that goal is being met." To address this 
mandate, it was necessary to consider the legal framework of flood 
insurance coverage established by the National Flood Insurance Act of 
1968, as amended, and FEMA's implementing regulations. The amounts and 
limitations of flood insurance policy coverage are affected by both the 
statute and the regulations. In other words, flood insurance policies 
can only restore victims to pre-flood conditions within, but not 
beyond, the limits established by law and regulation. To address our 
mandate, we therefore explained the statutory and regulatory provisions 
that placed limitations on the amount claimants could recover under 
their flood insurance policies. Our April 2005 testimony[Footnote 55] 
and this report make clear that the statutory ceilings on the maximum 
amount of coverage that can be purchased and the policy limitations 
that result from FEMA regulations may result in a policyholder's 
insured structure not being restored to its pre-flood condition. 

* FEMA highlights a number of oversight and management procedures for 
the program, including those for financial management. It also noted 
that its method of selecting its sample for operational reviews was 
more appropriate than the statistically random probability sample we 
recommended. Most of the additional oversight and management processes 
and controls FEMA noted in its comments are for financial management-- 
an area not included in the scope of our work. Our work focused on 
program implementation and oversight. During our review, FEMA managers 
described the operational reviews and claims inspections as the primary 
methods FEMA used for monitoring and overseeing the NFIP. 

* In support of its current sampling strategy for its operational 
reviews, FEMA cites a report it had commissioned in 1999---a report 
FEMA had not previously mentioned or provided to us. Thus, we cannot 
comment on that report or its recommendations. Nevertheless, although 
FEMA's current sampling strategy may provide an opportunity to focus on 
particular areas of risk, it does not provide management with the 
information needed to assess the overall performance of the write-your- 
own companies, including the overall accuracy of the underwriting of 
NFIP policies and the adjustment of claims--information that FEMA needs 
to have reasonable assurance that program objectives are being 
achieved: 

* With respect to FEMA's implementation of program changes mandated by 
the Flood Insurance Reform Act of 2004, we described several actions 
FEMA had taken in its efforts to comply with the Act, while noting that 
it had not fully implemented the Act's requirements. In its comments on 
our draft report, FEMA said that it had been working diligently to meet 
the Act's requirements and had made further progress on certain 
initiatives, for example, by finalizing "Summary of Coverage" forms 
required by section 202 of the act and distributing them to 
policyholders purchasing or renewing their coverage after September 21, 
2005. We have updated our draft report to reflect the new status 
information, but work remains to be done before FEMA fully implements 
other requirements of the Flood Insurance Reform Act of 2004. As we 
noted in our report, section 205 of the Act requires FEMA to establish 
a claim appeals process by regulation, and section 204 of the Act 
requires FEMA to describe this regulatory appeals process in its flood 
insurance claims handbook. Although FEMA commented that it was offering 
claimants an informal appeals process pending the establishment of a 
regulatory process, it must establish the regulatory process to be in 
compliance with the informational requirements of section 204 and the 
procedural requirements of section 205 of the act. Finally, although 
FEMA published minimum education and training requirements for flood 
insurance agents in the Federal Register in September 2005, FEMA has 
not established how or when states are to begin imposing these 
requirements on flood insurance agents. Thus, we believe our 
recommendation that FEMA develop documented plans with milestones for 
implementing the requirements of the Flood Insurance Reform Act of 2004 
remains appropriate. 

FEMA also offered a number of technical comments that we incorporated 
as appropriate. 

We are sending copies of this report to the Secretary of the Department 
of Homeland Security. We will also make copies available to others upon 
request. In addition, the report will be available at no charge on 
GAO's Web site at http://www.gao.gov. 

If you have any questions, please contact me at (202) 512-8777 or 
jenkinswo@gao.gov or Christoper Keisling, assistant director at (404) 
679-1917 or keislingc@gao.gov. Contact points for our offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in appendix III. 

Signed by: 

William O. Jenkins, Jr.: 
Director, Homeland Security and Justice Issues: 

[End of section] 

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. 

To determine the statutory and regulatory limitations on homeowners' 
coverage under the NFIP, we reviewed the National Flood Insurance Act 
of 1968, as amended, its legislative history, and FEMA's implementing 
regulations, including its "Standard Flood Insurance Policy." We also 
discussed our review with officials of DHS Office of General Counsel. 

To assess FEMA's role in monitoring and overseeing the NFIP, we 
examined program requirements and reports. We analyzed the results of 
15 operational reviews and follow-up visits FEMA completed from 2001 
through February 2005 to determine whether they were done in accordance 
with requirements and procedures outlined in FEMA's Write Your Own 
Financial Control Plan and GAO's Standards for Internal Control in the 
Federal Government. To determine whether FEMA met the standard for 
assessing the quality of performance over time and ensuring that 
findings of its operational reviews were addressed, we analyzed reports 
of the results of all reviews of insurance operations and follow-up 
visits at insurance companies where FEMA identified critical errors 
over a 10-year period, from 1996 to April 2005--a total of 15 reports. 
All of the reviews and visits for this 10-year period occurred from 
2001 to April 2005 because for several years prior to 1999, FEMA did 
not conduct operational reviews. The reviews were restarted on a 
"practice" basis in 1999 and a regular basis in 2000. We also observed 
FEMA examiners as they conducted a portion of an operational review at 
a flood insurance vendor location and obtained information on the 
schedule of operational reviews from 2000 to June 2005. We obtained 
documentation on how quality assurance reinspections of claims 
adjustments are done after flood events and reviewed copies of several 
reinspection reports and examples of data maintained in the NFIP 
reinspection database, as well as aggregate information on the number 
of quality assurance reinspections done from 2000 to June 2005. We 
interviewed officials of FEMA and its program contractor about their 
oversight activities, and we discussed aspects of the process with 
private-sector insurance officials from four of the five largest write- 
your-own companies in terms of the number of claims filed in 2004. For 
example, we talked with FEMA officials about how claims files were 
selected for each operational review to examine write your own 
companies' claims underwriting and adjustment activities and talked 
with two of the nine general adjusters employed by FEMA's program 
contractor about how they reinspect the work of adjusters who prepare 
flood damage estimates and how they select properties to visit. We 
interviewed these two general adjusters because they had performed 
reinspections of claims adjustments for damage from Hurricane Isabel 
and from hurricanes in Florida in 2004. We did not evaluate FEMA's 
methodology for selecting sample sizes for its monitoring and oversight 
activities. 

To determine FEMA's response to concerns about Hurricane Isabel claims 
payments, we reviewed a statistically valid sample of 100 claims files 
of claimants in Maryland, Virginia, and North Carolina who were not 
satisfied with their initial claims settlements and had their claims 
reviewed by a special FEMA task force. The claims files included 
documentation of actions taken on the claims by the write-your-own 
companies and the FEMA task force, as well as correspondence and 
documentation provided by the claimants. For this representative sample 
of claims, we determined the average additional amount paid on claims 
that were closed with an additional payment; the average amount of 
claims reviewed by the task force; and reasons claims were closed by 
the task force with and without additional payments. We based our 
analysis on the information in the files we reviewed; we did not verify 
the accuracy of the information in the claims files. We tested the 
reliability of claims payments amounts for the NFIP database on a 
statistically valid sample of 250 claims for all flood events in 2003 
and 2004. We determined that the NFIP database was sufficiently 
reliable for our reporting purposes. We discussed the actions FEMA took 
to address concerns of Hurricane Isabel claimants with FEMA officials, 
as well as the two general adjusters we interviewed, other officials of 
FEMA's program contractor, and private-sector insurance officials. We 
did not interview NFIP policyholders who filed claims for flood damage 
after Hurricane Isabel because (1) such interviews would have provided 
anecdotal information that could not be used to make judgments about 
Hurricane Isabel claimants as a group or any subset of the group; and 
(2) we started our review more than a year after Hurricane Isabel 
occurred; thus, testimonial information would have been dated. 

To determine the extent to which FEMA had implemented provisions of the 
Flood Insurance Reform Act of 2004, we examined documentation of the 
agency's efforts, including draft materials FEMA had prepared for 
distribution to policyholders. We also interviewed officials to 
determine what progress had been made and what milestones, if any, had 
been established to meet the legislative mandates. 

We conducted our work in accordance with generally accepted government 
auditing standards between December 2004 and August 2005. 

[End of section] 

Appendix II: Comments from the Federal Emergency Management Agency: 

U.S. Department of Homeland Security: 
500 C Street, SW: 
Washington, DC 20472: 

FEMA: 

October 12, 2005: 

William O. Jenkins, Jr.: 
Director: 
Homeland Security and Justice: 
441 G St., NW: 
Washington, DC 20548: 

Dear Mr. Jenkins: 

Thank you for providing the draft GAO report entitled, "Improvements 
Needed to Enhance Oversight and Management of the National Flood 
Insurance Program" for FEMA's review and comment. Based on FEMA's 
review, I am providing general and specific comments on this report. 
FEMA's primary comments fall in three areas, as follows: 

As I indicated to the GAO in my letter of September 23, 2005, to Norman 
J. Rabkin, I am disappointed that the issue regarding restoration of 
policyholders to their "pre-flood" condition and Congressional intent 
has not been directly addressed as FEMA would have expected based on 
the language in the Reform Act of 2004 and the GAO letter dated October 
1, 2004 that DHS received prior to the initiation of this study. The 
GAO was instructed to investigate and report with regard to this issue 
and should provide an unambiguous statement as to its findings. Since 
in the subject report it is stated that the legislative history of the 
National Flood Insurance Program (NFIP) as well as the authorizing 
statute were examined, it would seem that the GAO found no expression 
of intent to restore properties completely to pre-flood condition. 

A relevant, similar issue was addressed by the GAO for Congress in 1986 
when FEMA implemented certain limitations to basement coverage under 
the Standard Flood Insurance Policy. In that report, the GAO stated 
that: 

"Under Section 1306, FEMA's Director is authorized to provide, by 
regulation, the general terms and conditions of insurability. This 
Section includes authority to specify the nature and limits of loss or 
damage in any areas covered by flood insurance; the classification, 
limitation, and rejection of risks; and any other terms and conditions 
relating to insurance coverage or exclusion which may be needed to 
carry out the program. 

FIA said its decision to limit flood insurance coverage of basement 
contents is authorized under several provisions of the act, including 
those cited above. We concur with this position." (Appendix I, page 8, 
"Flood Insurance - Federal Emergency Management Agency's Basement 
Coverage Limitations," GAO/RCED-86-10FS, January 1986). 

The basement coverage changes went through a public comment process as 
well as Congressional scrutiny and were sustained. 

* The GAO has given prominence to a concern that is not the main issue 
and is based on only partial review of Program controls. With its 
report title and "highlights" section GAO has chosen to emphasize a 
rather arcane recommendation with regard to statistical sampling 
without noting, as the report itself states on Page 5 that "..the 
processes that FEMA had in place for operational reviews and quality 
assurance reinspections of claims adjustments met our internal control 
standard for monitoring federal programs" and later on page 21 that 
"The processes FEMA followed also met our internal control monitoring 
standard that requires federal agencies ensure that the findings of 
audits and other reviews are promptly resolved." Further, the report 
does not put operational reviews and claims reinspections in the 
appropriate context within the entirety of what FEMA does to provide 
oversight of the NFIP and the Write Your Own (WYO) Companies. It is 
misleading to characterize the operational reviews as "FEMA's primary 
method to monitor and oversee the NFIP." (Page 27) While very 
important, these operational reviews, as well as the claims 
reinspections, are only parts of a comprehensive Financial Control Plan 
that has effectively provided oversight and control of the WYO 
insurance operations of the NFIP as discussed below. Biennial audits by 
CPA firms, annual Inspector General financial audits, monthly editing 
of policy and claims transactions along with the statistical and 
financial reconciliations provide an abundant amount of random sampling 
and thorough review of WYO transactions. This information does not 
appear to have been considered by the GAO in its study. However, these 
monitoring and control mechanisms do have a bearing on the design and 
use of operational reviews and claims reinspections. It is difficult to 
understand how the GAO can reach a conclusion that FEMA is not meeting 
an internal control standard without a thorough consideration of all 
the controls and processes that FEMA has in place to provide oversight 
of the Program. 

* FEMA is pleased to find that in one of its primary areas of inquiry, 
the GAO does not criticize FEMA's handling of the extensive review 
process of the loss settlements resulting from the devastating impact 
of Hurricane Isabel. 

FEMA's Oversight and Management of the NFIP: 

The WYO Financial Control Plan was developed as part of the original 
implementation of the WYO Program in 1983. All WYO companies must 
adhere to it. The Plan consists of the following elements including the 
operation reviews and the claims reinspection program: 

* Part 1 requires companies to have a CPA firm, on a biennial basis, 
conduct independent financial, underwriting and claims audits following 
GAO "yellow book" requirements. As part of these audits, random 
sampling of claims and underwriting files is required. The audit 
results are provided to FEMA. 

* Part 2 provides the procedures for the monthly reconciliation and 
review of financial statement and detailed policy and claim 
transactions submitted by the WYO companies. 

* Part 3 is the claims reinspection program reviewed by the GAO. 

* Part 4 requires monthly company certifications of the reconciled 
financial and statistical data submitted by the WYO companies. 

* Part 5 incorporates the Transaction Record Reporting and Processing 
Plan (TRRP Plan) that requires the companies' monthly submissions of 
detailed policy and claims transactions. As already mentioned, these 
statistical records are reconciled each month with company financial 
statements. Routine system editing of the statistical transactions 
allows for reviews of such things as the proper rating of policies and 
whether claims have been submitted for valid policies in force and 
claim settlements being within policy limits. This requirement is for 
all records, not for only a sample. 

* Part 6 incorporates the WYO Accounting Procedures Manual. 

* Part 7 lays out the procedures for the Underwriting and Claims 
Operational Reviews that the GAO focused on in the report. 

* A Standards Committee comprised of both insurance industry and 
Federal executives assists in providing oversight of WYO companies in 
meeting the requirements of the Financial Control Plan and provides 
recommendations to the FEMA Mitigation Division Director on actions 
that should be taken when a WYO company is failing to meet its 
responsibilities. 

It is important to note that FEMA also continues to fund and 
participate with the Office of the Inspector General's annual financial 
statement and operations audit. Each year six WYO companies and the 
NFIP Direct business contractor are audited. This audit includes random 
sampling of policy and claims files as well as auditing of system 
transactions and financial statements. 

As a result of the WYO Financial Control Plan activities, and 
conscientious follow up by FEMA with regard to various audit findings, 
the NFIP portion of the Inspector General's financial audit has always 
received a clean, unqualified audit opinion. 

In 1999, prior to FEMA's reinstituting the underwriting and claims 
operational reviews, Deloitte and Touche, in a report commissioned by 
FEMA, recommended that the operational reviews should be largely based 
on the findings of their study to target certain areas. They further 
recommended that a broad based general operational review would not be 
effective to improve file handling weaknesses, but that there should 
instead be a focused approach. Additionally, they recommended that the 
intent of the operational reviews should not be assessment oriented. 
These recommendations, along with FEMA's risk assessment and 
determination of resource availability for this aspect of management 
and program control led to the current design of the operational 
reviews. This design is oriented to keying on certain higher risk and 
higher consequence aspects of underwriting and claims that might not be 
ferreted out through the variety of other Financial Control Plan 
mechanisms. Thus, there is a bias in the sampling of files. However, 
this affords the best opportunities to provide immediate feedback to 
companies on proper procedures and to rapidly effect changes. 

In summary, regarding FEMA's operations review and claims reinspection 
process, the draft report does state that FEMA follows the requirements 
of the Financial Control Plan (Page 21). The report also states that 
FEMA's process meets the GAO's internal control standard in that "the 
findings of audits and other reviews are promptly resolved" (p. 21). 
However, it also states that the GAO's standards are not met because 
FEMA does not use a statistically valid sampling technique to select 
files for the operations reviews or for the claims reinspections 
(introduction and Pages. 5, 21, 25, 26, 27, 34). In response, FEMA 
comments that the operations reviews do include a random sampling 
technique but were never intended to be based on statistically valid 
samples. Instead, they are used to select the more difficult cases 
based upon the judgment of FEMA's professional staff for the purposes 
of correcting improper handling by the WYO Companies and for training 
purposes. The claims reinspections and financial reviews are components 
of a more comprehensive financial control plan. 

FEMA's Actions in Carrying Out the Mandates of FIRA 2004: 

Contrary to the impression conveyed by the draft report's other primary 
criticism, FEMA has worked diligently to meet the requirements of FIRA 
2004. The materials required by Sections 202 (Supplemental form), 203 
(Acknowledgement form), and 204 (Flood Insurance Claims Handbook) have 
been developed and distribution began September 21. The WYO Companies 
are now sending out the Supplemental (Summary of Coverage) form and at 
claim time the Claims Handbook. In connection with policy issuance the 
Bureau and Statistical Agent will begin sending out the Claims 
Handbook, the prior loss history required by Section 202 and the 
Acknowledgement form in December based on the NFIP statistical system 
reports for the month of October. The appeals process required by 
Section 205 to be established by regulation will be placed in the 
FEMA/DHS concurrence process this month, after which it will go to OMB 
for concurrence. The report to Congress on the use of Increased Cost of 
Compliance (ICC) coverage required by Section 206 is being prepared and 
will be placed in the FEMA/DHS concurrence process by the end of 
November 2005. The minimum training and education requirements for 
flood insurance agents in Section 207 have been established and 
published as a notice in the Federal Register on September 1, 2005, as 
required. A bulletin providing for the charging of additional premium 
only prospectively was been issued on May 23, 2005 in accordance with 
Section 209. In the next revision to the Standard Flood Insurance 
Policy, which requires regulatory action, these changes will be made in 
the policy. 

Thank you for giving FEMA the opportunity to provide input on the draft 
report. 

Sincerely, 

Signed by: 

David I. Maurstad, 
Acting Director/Federal Insurance Administrator: 
Mitigation Division: 
Emergency Preparedness and Response Directorate: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgements: 

GAO Contact: 

William O. Jenkins, Jr. (202) 512-8777: 

Acknowledgments: 

Amy Bernstein, Christine Davis, Pawnee Davis, Wilfred Holloway, Deborah 
Knorr, and Raul Quintero made significant contributions to this report. 

FOOTNOTES 

[1] Our report focuses on homeowners' NFIP coverage; NFIP coverage is 
also available for other structures such as apartment buildings, 
schools, churches, businesses, cooperative associations, and 
condominium associations. 

[2] In March 2003, FEMA and its approximately 2,500 staff became part 
of the Department of Homeland Security (DHS). Most of FEMA--including 
its Mitigation Division, which is responsible for administering the 
NFIP--is now part of the department's Emergency Preparedness and 
Response Directorate. However, FEMA has retained its name and 
individual identity within the department. The Secretary of DHS has 
proposed a reorganization of DHS in which FEMA would report directly to 
the Secretary and Undersecretary of DHS. 

[3] Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, 
Pub. L. No. 108-264, 118 Stat. 712 (2004). 

[4] The National Flood Insurance Act of 1968, as amended, is codified 
at 42 U.S.C. 4001 to 4129. 

[5] The National Flood Insurance Act of 1968, as amended, is codified 
at 42 U.S.C. 4001 to 4129. 

[6] 42 U.S.C. 4001(d). 

[7] Id. 4001(a)(4). 

[8] GAO, Flood Insurance: Information on the Financial Condition of the 
National Flood Insurance Program, GAO-01-992T (Washington, D.C.: July 
2001). 

[9] See 42 U.S.C. 4016. 

[10] The National Flood Insurance Program Enhanced Borrowing Authority 
Act of 2005, Pub. L. No. 109-65 (Sept. 20, 2005). 

[11] The other 5 percent of policies are sold and serviced by state- 
licensed insurance agents and brokers who deal directly with FEMA. 

[12] The fund, which was established in the Treasury by the 1968 
legislation authorizing the NFIP, is the account into which premiums 
are deposited and from which losses and operating and administrative 
costs are paid. See 42 U.S.C. 4017. 

[13] For example, the flood program manager from one insurance company 
said that agents receive a commission of 15 percent of the policy 
amount as an incentive to write flood insurance and may receive other 
incentives during special flood marketing campaigns. 

[14] As with homeowners' coverage, statutory and regulatory limitations 
apply to NFIP coverage for other types of property. See 44 C.F.R. Part 
61, appendix A(1), "Standard Flood Insurance Policy Dwelling Form," 
appendix A(2), "Standard Flood Insurance Policy General Property Form," 
and appendix A(3), "Standard Flood Insurance Policy Residential 
Condominium Building Association Form." 

[15] 42 U.S.C. 4013(b)(2). 

[16] Id. 4012a(a), (b)(1). 

[17] See id. 4012. 

[18] Id. 4013(b)(3). 

[19] Id. 4013(a). 

[20] The insurance coverage regulations appear at 44 C.F.R. Part 61, 
and the SFIP is an appendix to these regulations, set forth at 44 
C.F.R. Part 61, appendix A(1), "Standard Flood Insurance Policy 
Dwelling Form." 

[21] 44 C.F.R. 61.4. 

[22] Id. 61.13(d), (f). 

[23] Id. 61.4(b), 61.14. 

[24] The SFIP defines a flood as "[a] general and temporary condition 
of partial or complete inundation of two or more acres of normally dry 
land area or of two or more properties" caused by specified events such 
as the overflow of inland or tidal waters. SFIP section II, Definitions 
("Flood"). 

[25] SFIP section V, Exclusions. For example, the SFIP would not cover 
water damage that primarily resulted from a structural defect in the 
insured's dwelling. 

[26] SFIP section V, Exclusions. 

[27] SFIP section II, Definitions ("Building"). 

[28] SFIP section III, Property Covered (Coverage A - Building 
Property). However, if the building under construction does not have at 
least two walls and a roof, the deductible amount is twice that which 
would otherwise apply. SFIP section VI, Deductibles. 

[29] SFIP section III, Property Covered (Coverage A - Building 
Property). Coverage for a detached garage is limited to no more than 10 
percent of the building's limit of liability. Use of this insurance is 
optional but reduces the building's limit of liability. 

[30] SFIP section III, Property Covered (Coverage A - Building 
Property). 

[31] SFIP section III, Property Covered (Coverage B - Personal 
Property). 

[32] SFIP section III, Property Covered (Coverage B - Personal 
Property). 

[33] SFIP section IV, Property Not Covered. 

[34] SFIP, section IV, Property Not Covered. 

[35] SFIP section VI, Deductibles. 

[36] SFIP section II, Definitions ("Declarations Page"). 

[37] "Special Loss Settlement" combines elements of replacement cost 
and actual cash value settlements. Under the "Special Loss" rules, 
totally destroyed dwellings receive either replacement cost coverage or 
1.5 times the actual cash value, whichever is less, up to the 
dwelling's limit of liability. Partially damaged dwellings are entitled 
to replacement cost coverage. 

[38] SFIP section II, Definitions ("Actual Cash Value"). 

[39] An actual cash settlement may be increased to reflect a greater 
proportion of the costs of repairing or replacing damaged property, 
without deduction for depreciation. The SFIP provides a formula for 
calculating the proportion of the repair or replacement costs an 
insured with actual cash coverage is eligible to receive. The SFIP will 
pay this proportional amount if it is greater than the actual cash 
settlement. 

[40] SFIP section VII, General Conditions, subsection V, Loss 
Settlement. 

[41] SFIP section VII, General Conditions, subsection V, Loss 
Settlement. 

[42] FEMA officials told us that the agency did not require Hurricane 
Isabel claimants to wait until after making repairs to obtain the full 
replacement cost. They also said that FEMA plans to amend its 
regulations to delete the requirement from the SFIP. 

[43] National Flood Insurance Program, The Write Your Own Program 
Financial Control, Plan Requirements and Procedures, revised December 
1, 1999. 

[44] See GAO, Standards for Internal Control in the Federal Government 
(Washington, D.C.: Nov. 1999) 

[45] In addition to doing reinspections, these general adjustors are 
responsible for estimating damage from flood events, coordinating 
claims adjustment activities at disaster locations, and conducting 
adjuster training. 

[46] GAO, Policy Manual (Washington, D.C.: Jan.1, 2004). 

[47] In addition, the Improper Payments Information Act of 2002, Pub. 
L. No. 107-300, 116 Stat. 2350, (2002), requires each executive agency 
to review all of its programs and activities annually and identify 
those that may be susceptible to significant improper payments. If DHS 
determines during the annual review that the NFIP is susceptible to 
significant improper payments, it will be required, in accordance with 
Office of Management and Budget (OMB) guidance, to report statistically 
valid estimates of improper NFIP payments to Congress before March 31 
of the following applicable year. 

[48] After the task force was created, the Senate Committee on Banking, 
Housing, and Urban Affairs affirmed the need for an independent review 
of Hurricane Isabel claims. See S. Rep. No. 108-262, at 5 (2004). 

[49] Maryland, North Carolina, Virginia, Delaware, Pennsylvania, and 
South Carolina. 

[50] In 9 percent of the cases, the task force allowed recoverable 
depreciation not allowed in the original settlement or determined that 
the claim should be paid for a primary residence at replacement cost 
value rather than for a seasonal residence at actual cash value. Some 
claimants received additional payments for more than one reason. 

[51] This information was current at the time of the review of the 
claim by the task force and does not reflect any subsequent actions 
taken on the claim by the write-your-own companies. FEMA's program 
contractor reported that about 3,866 Hurricane Isabel claims were 
closed without any payment. Most frequently Hurricane Isabel claims 
were closed without payment because the adjuster report determined that 
the damages did not exceed the amount of the deductible on the NFIP 
policy. In other instances, policyholders filed a claim but failed to 
follow up by providing appropriate documentation of loss. In several 
instances, claims were filed for damage to seawalls, which are 
specifically excluded from coverage under the NFIP. 

[52] For claims in our file review, the median settlement amount--the 
point at which half of the cases were settled at higher amount and half 
were settled at a lower amount--was $15,583 before the task force 
review and $19,826 after the task force review. Data on median 
settlement amounts for 2002, 2003, and 2004 was not available. 

[53] Sections 202, 203 and 204 of the Flood Insurance Reform Act of 
2004 contain these requirements. 

[54] See Flood Insurance Training and Education Requirements for 
Insurance Agents, 70 Fed. Reg. 52,117 (2005). 

[55] See GAO, National Flood Insurance Program: Oversight of Policy 
Issuance and Claims, GAO-05-523T (Washington, D.C.: April 14, 2005). 

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