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The National Flood Insurance Program - It's Not Just About Reauthorization

Reauthorization of the National Flood Insurance Program (NFIP) into 2004 is designed by Congress as a short-term breathing space for "the troops" to get...
November 24, 2003

By Patricia A. Borowski, CPIW, CAE
Senior Vice President
PIA National

Reauthorization of the National Flood Insurance Program (NFIP) into 2004 is designed by Congress as a short-term breathing space for "the troops" to get their act together and support a broader reform package to the program that turns on "wet-state" vs. "dry-state" perceptions.

As important as it is, the Congressional drama has overshadowed the real emerging challenge for all insurance people in NFIP: liability exposure, and who will be the one held liable by the courts. Pressure has been building on this issue for some time, reaching the point where it cannot be overlooked.

The decisive trigger-point has been the recent and growing rolling-over of books of Write-Your-Own (WYO) business from failed, ejected or voluntarily terminated former WYOs. NFIP requires that when a book is rolled, it be thoroughly re-underwritten to assure that all aspects of the account are being written correctly to the current requirements and particulars of the NFIP. Sounds quite reasonable, so, you might ask, what's the problem?

Well, it seems some of this business has been written incorrectly, and we're all finding that some former WYOs' files are not as complete as they should be.  The question has now come up - if "claims" of any nature arise that turn on the errors or omissions that were made while the business was under the stewardship of the previous WYO, who takes the liability hit for mistakes that are identified and corrected as the business is rolled - and that later turn up to create "a claim"?

The former WYO is gone.  The federal government will never admit they caused, compounded or contributed to an error or omission. The new WYO doesn't want to and should not be left holding the bag for past mistakes that they corrected when they rolled the book. So that leaves only the independent insurance producer - PIA members.

That is exactly who FEMA is attempting to target in the latest round of rule changes that PIA has been vigorously fighting.  Despite the outcome of these proposed rule changes (we will not know until the end of this year), the issue of producer liability exposure in this program is critical - and something about which we must continue to take action now.

The reality is that insurance producers wrote NFIP business with these former WYOs legally depending upon and contractually obligated to follow their instructions, directions and rely upon their explanation and education of the NFIP program. WYOs were to be the experts. Given the nature of NFIP business, WYO producers correctly understood that if something they were writing was inaccurate in this extraordinarily complicated flood insurance program, it was the legal responsibility of the WYO to identify that, bring it to their attention and together correct the error. 

Never was the WYO program designed for passive - "We only process what we are given" - insurers.  PIA members had their fill of that routine under the direct program. In frustration of being left holding the liability bag in those days for the mistakes of others, we created the Write-Your-Own program in 1983.  Put simply, the WYO program was to sign up insurers to have the direct legal relationship with FEMA for NFIP.  WYO insurers would then execute in the marketplace through their existing producer configurations governed under their existing legal understandings.  

Well, somewhere along the way, everyone "forgot" (except of course PIA) and too many are taking dead aim on independent insurance producers.  It is now the independent insurance producer that too many in NFIP (attorneys for WYOs and FEMA) are arguing is the E&O tag for it all - despite any of their or other parties' culpability.
 
In looking at the recent spade of issues that are arising in this area, PIA has found from our preliminary review that:

  • Too many former WYOs did not know the program, and thus misguided their producers in how to write, rate, and process NFIP business. (This raises questions as to how well do current WYOs know the program).
  • Former WYOs instructed producers to turn over original "forms" to them for retention. Thus, we're finding that elevation certificates and other original documentation are no longer in these WYOs' files.  Further, we can't be sure that all the missing paperwork was solely the errors of the former WYO since some of these books were rolled to FEMA and their vendor, CSC, then rolled to other WYOs through vendors, and the only party we know wasn't touching any of those files was the producers.  This underscores the decades-long arguments that PIA has had with members' carriers about the agency retaining original documentation - NOT the carrier.
  • We also see evidence that while what the WYO instructed about NFIP at first was either what FEMA was saying, or was attempting their best in the absence of required FEMA clarification, that when FEMA finally clarified the matter later (sometimes years later), the former WYO failed to inform their producers to/of or internally make the necessary corrections.
  • Last, PIA at this point is having absolute difficulty knowing what are acceptable differences among WYOs vis a vis per se carrier practices, what differences among WYOs are due to their different servicing vendors and usual procedural differences, when those differences mean some WYOs are right while others are wrong about NFIP matters - and when WYOs are doing their best because FEMA hasn't decided as yet or changed their mind in mid-stream, usually in the midst of a claim.

All this being the case, if PIA can't readily discern any of this, how on earth do FEMA, WYOs or their service vendors expect any independent insurance producers to know who and what is right or wrong and operate accordingly?  Further, how can PIA provide any guidance to members, or how can members understand directly what their legal exposure and obligations are to any party, if WYOs change contracting provisions and producer status on a regular basis that the WYO does not bring to the producers' attention?  Last, how can a representative of the WYO interests publicly state that producers can always affect their own individual indemnity deals with WYOs - when the WYO attorney is attempting to affect all WYO carriers' legal interests collectively?

The idea that the independent insurance producer is the sole person responsible to the insured for the correctness of the WYO-NFIP insurance process is nuts!

PIA National has shared further instructions with PIA affiliates as to how together, affected PIA members, PIA affiliates and PIA National will need to work to affect the broad range of reforms needed programmatically, politically and legally to keep this vital program running for the benefit of all and without undue legal exposure to only some.  We intend as well to take our case directly to each of the WYOs for which PIA are writing, and to FEMA for the WYOs that you have written for that are no longer here.

In the meantime, please be sure that whether currently contracted, or considering a new WYO arrangement in the future, please read the agreement and ask in writing, requesting answers in writing:

  1. What specifically does your WYO believe your status is with them?  Is it as appointed agent or contracted broker or "enrollee'?
  2. What legal obligation does the WYO have to assure that their contracted processing vendor that they are directing to use will respond to their E&O - and assist you in writing NFIP business correctly?
  3. If the WYO requires original documents to go to them (or their service vendor), have they provided a liability exemption for the producer?
  4. What is the scope of the agreement's usual and customary indemnification provision, and if you represent the WYO in other lines of business, how does the WYO differ your relationship and legal aspects between WYO and regular insurance processing?
  5. Does the WYO archive all educational and instructional materials they provide to producers for NFIP business, as well as for their carrier processes?

Be sure that you understand your current program and do not operate upon assumption.  Writing flood insurance is an accommodation to their clients and executing your professional expertise for clients and properties that have an exposure (at any level).  PIA members want to be sure that they writing with the right WYO, not just any WYO.  The right WYO knows the program, provides the education, stands by its instructions and does not leave its producer flapping in the liability wind!

Patricia A. Borowski patbo@pianet.org is Senior Vice President of PIA National.

November 2004

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