GAO report on insurance adjusting of Katrina claims: an inherent conflict of interest?

This GAO report on insurers’ adjusting of Katrina claims, which Congress ordered way back when in response to allegations insurers committed massive fraud, is one of the things I wanted to get to in my post from last Friday but didn’t have time to. 

Here’s one of the penultimate conclusions of the study: 

Other claims concerns can arise on such properties [those where wind and water are both claimed to have acted as causal agents of loss] when the same insurer serves as both NFIP’s write-your-own (WYO) insurer and the property-casualty (wind) insurer.  In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating an inherent conflict of interest.

A couple things:

One, this "inherent conflict of interest" certainly exists, just as it exists whenever you file a first-party property claim.  This is not very startling, because it has been said — wait while my computer comes up with the final tally — 3,456 kajillion times before in insurance literature.  For many of you the following explanation will be something you know already, but many don’t know it, so I am going to set it down in writing here.  As you may or may not know, when someone makes a liability claim against you, say you ran into them with your car, your insurer owes you a fiduciary duty, assuming a duty to defend arises out of the allegations and the language of the insurance policy. A fiduciary duty is the highest duty imposed by law, and requires one to treat another’s interests like one’s own, resolving all conflicts of interest in favor or the insured.  These type of liability claims are called third-party claims.  In contrast, claims you file with your own insurer for damage to your house or other property are called first-party claims. An adversary relationship is assumed to exist between the insurer and insured from the time the claim is filed, and generally speaking, no fiduciary duty arises on the part of the insurer.  This doesn’t mean it’s OK for insurers to cheat you, merely that it is understood that an inherent conflict exists to an even greater degree than in third-party claims, where it could also be said that a conflict exists, because paying for the legal defense of an insured is expensive.  All this is inherent in the nature of insurance, and is why we have various rules ranging from bad faith laws to  interpreting ambiguities against the insurer in insurance law.

Two, there are inherent conflicts of interest in many things in life, and especially in the law, and some of these are viewed as unacceptable conflicts and others as necessary evils that will exist as long as human beings are the way the are.  An unacceptable conflict is where I want to represent both you and the person who is suing you — "Hey, don’t worry, have you ever seen a one-man show where the actor plays all the parts? Some of those shows are pretty good!  Just remember, when I’m wearing the blue jacket I’m on your side, when I wear the gray, I’m for the other guy, so don’t tell me anything secret while I’m wearing the gray." Other conflicts we can’t do anything about except to impose legal duties on those with the conflict.  An example of such an inherent conflict of interest could be, say, the U.S. Attorney in southern Mississippi looking into alleged insurer claims mishandling — after two years of grand jury investigations, is there an inherent bias toward justifying the massive expenditure of taxpayer resources by finding wrongdoing?

Third, do you notice that this GAO report, like the prior reports in June and September 2007, buries the real news? Although the wind data FEMA needs to do a real study of this issue is available from state regulators, FEMA doesn’t have it, and FEMA and the GAO lack the ability to actually review whether wind payments were improperly paid out under federally backed flood insurance.  One does not have to believe that insurers engaged in massive intentional fraud to believe this would be a productive study — undoubtedly, in an endeavor as large as adjusting 1.2 million Katrina claims, some mistakes were made.  What kind and how many? We don’t know. Any study by FEMA of Katrina payments under the flood insurance program is compromised by the fact FEMA is not looking at all the needed data. This latest report gives some indication FEMA is continuing its review, but it hardly seems worth the bother under the current circumstances.  

Fourth, I saw this editorial in the Times-Picayune on the GAO report.  That lawsuit they mention in the editorial? It was dismissed.  Not on the merits, true.  It was dismissed because the Ex rel. Rigsby "whistleblower" lawsuit was filed first by Dickie Scruggs and the Rigsby sisters and covers more or less the same general theory, although the specific allegations differ. But let’s just remember, the allegations of the lawsuit have not been proven or even looked at by the public in any detail.  Still, the editorial makes some good points, as does the GAO report.  I doubt any of them will ever be implemented — the National Flood Insurance Program is a national disgrace rife with folly and unsound practices, and every "overhaul" of the program amounts only to taking aspirin after falling four stories to the sidewalk. But good points nonetheless.



Filed under First Party Insurance

3 Responses to GAO report on insurance adjusting of Katrina claims: an inherent conflict of interest?

  1. observer

    I doubt they will ever be implemented either. Still, time for the lobbyists to start writing those checks to make sure, (investing in good government, you know).

  2. Doug Richmond

    Perhaps it is a minor point given the subject of your post, but, as a rule, liability insurers do not owe a fiduciary duty to their insureds. The notion that the relationship between a liability insurer and its insured is fiduciary is a distinctly minority position, as it should be (because it is flat wrong).

  3. floodman

    On your points about conflicts of interest, this is one conflict that FEMA has deemed necessary for the good of consumers and the NFIP, so much so that FEMA actually REQUIRES Write-Your-Own insurers to use a single adjuster when they write both the flood policy and the homeowners policy on a given property. See 44 CFR 62, Appendix A, Article II.C. To eliminate the conflict would require the engagement of two separate adjusters for every location, leading to higher costs for the program, and greater delays and inconvenience for the policyholder. (Incidentally, these were the kinds of considerations that led to the creation of the WYO program in the first place, before which the NFIP had failed to attract enough policyholders to be able to achieve its purposes in any meaningful way.)
    Even the GAO is not offering any recommendation that would eliminate this ‘inherent conflict of interest.’ Instead, it suggests that FEMA be given access to wind claim files. While it might be interesting to compare wind claim files with the corresponding flood claim files, the GAO never really asks or answers the question why the flood claim files alone are insufficient. It merely states as a conclusory matter that understanding the apportionment between flood and other perils is a necessary prerequisite to verifying that flood payments were appropriate. FEMA’s response to the report rightly takes issue with this. See Appendix II of the report.
    When FEMA reinspects a flood claim payment, it requires documentation of the damage paid for and that flood was the cause. If support for the payment is lacking, FEMA can and does require the WYO company to refund the payment. So if insurers had really defrauded the government, FEMA and/or the GAO should have been able to find evidence in the flood claim files themselves that payments were systematically made under flood policies on homes that in fact sustained no flood damage or less flood damage than payments issued. And of course, GAO did not cite any such evidence. As FEMA points out, the marginal value of reviewing wind claim data isn’t worth what it would cost.