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PIA Objects to Proposed Change in Flood Program

As Congress debated and finally approved a three-month reauthorization of the National Flood Insurance Program (NFIP), PIA filed formal comments objecting to a proposed rule...
December 1, 2003

Congress Votes Three-Month NFIP Extension

As Congress debated and finally approved a three-month reauthorization of the National Flood Insurance Program (NFIP), PIA filed formal comments objecting to a proposed rule change that would put PIA members at a disadvantage.

Many PIA members sell flood insurance to their clients and if this rule is adopted, it will make it far more difficult for them to meet their clients' needs.

PIA urged the Federal Emergency Management Agency (FEMA) to drop a proposed change to the NFIP that would convert all insurance producers, either contracted or employed by Write-Your-Own (WYO) insurers, into "agents acting for the insured."

"Far from being a minor change as FEMA contends, this is a sea change that completely recasts the entire program to the detriment of consumers and the agents they turn to for their flood insurance needs," said PIA Senior Vice President Patricia A. Borowski.

At the core of both WYO carriers' and PIA's concerns is the issue of indemnity. Over the last two years, a number of former WYOs have been terminated by FEMA or have left on their own accord, some after failing a FEMA audit. Fortunately, new WYOs have come on to take up that business.
When a book it is rolled, FEMA requires the new WYO to assure that each piece is re-underwritten to the current correct standards for the program. Often when this occurs, material errors or incorrect underwriting by the former WYO are found. So, the new WYO does not want to be responsible for any future losses, claims or litigations for what were the E&O exposures of the former WYO. (PIA has always and continues to agree with our WYO carriers on this).

PIA doesn't want the agent that relied upon the instructions and review of the former WYO to be at-fault for following the instructions of the former WYO that have since been found to be wrong! We also don't want this situation to relieve agents of their normal duty to "know and understand" the products that they sell.

FEMA would not be held responsible for any problems under the proposed rule change, even though one could argue the problem should have been noticed long ago.

So, the answer was for WYOs and FEMA to team up and propose to pass the buck exclusively to agents. While this may not be what many of our WYO carriers intend for this change, it is the negative scope possible under the proposed language. This is extraordinarily unfair to our members. PIA has and will continue to work with FEMA and the WYOs to correct this error.

On November 17, officials from FEMA, NFIP and the Flood Insurance Producers National Committee participated in a conference at PIA National headquarters. Rita Hollada, chair of the PIA National Flood Insurance Task Force, attended the meeting and reiterated PIA's position.

A Three Month Extension

The vote in Congress to reauthorize the NFIP for three months, until March 31, 2004, is to allow more time to consider comprehensive reform proposals. PIA conducted a nationwide grassroots lobbying effort to ensure that Congress give priority to a seamless reauthorization of the flood insurance program prior to adjournment.

By approving the three-month extension, lawmakers put resolution of the remaining differences on how to reform the program onto a very fast track. Previously, it was thought that a one-year extension would be approved.

In late 2002, Congress adjourned without passing NFIP reauthorization, leading to widespread concern about the status of properties insured from January 1, 2003 until Congress passed a one-year retroactive reauthorization on January 9, 2003.

Reforms Next

The main issue in reforming the NFIP is how to limit repetitive losses when property owners file repeat claims to rebuild. Rep. Doug Bereuter (R-Nebraska) sponsored H.R. 253, which provided for a five-year reauthorization of the program while making changes to guard against abuses.

In addition, the bill provided for a pilot program to allow owners of severe repetitive loss properties to be charged closer to actuarial rates when owners refuse assistance, such as a buyout.

H.R. 253 ran into opposition from House Energy and Commerce Committee Chairman W.J. "Billy" Tauzin (R-Louisiana). Rep. Richard Baker (R-Louisiana) and others tried to broker a compromise, but Tauzin was never fully satisfied, saying "it's still a bad bill."

About $200 million in claims are paid each year to owners of repetitive-loss property. Almost half goes toward 10,000 properties - a third of which are in Louisiana.

This article originally appeared in the November/December 2003 PIA Connection.

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