How do courts view acceptance of flood insurance payments?

From certain political figures representing Mississippi, there has been a great deal of talk about how insurance companies allegedly ducked their responsibilities to pay Katrina wind damage under  homeowners policies.  According to these people, the way insurers did this was by sneaking through flood insurance payments under the auspices of the National Flood Insurance Program.

True, insurers since 1983 have been involved in the Write Your Own program, where the insurance companies actually write the flood policies, and premiums go into the NFIP, where FEMA and the federal government disburse them to pay out claims.  In the minds of some, this presents a conflict of interest that insurers took advantage of by pushing through flood payments, counting on these payments to satisfy losses, thus reducing or eliminating their obligations to pay for covered wind damage.  To which I say: if paying out these claims was wrong, then accepting a claims check was wrong.  That is the logical trail of the argument — either there was flood damage that should have been paid under the flood policy, or not, and no insurance claim is paid unless the policyholder submits loss statements claiming a right to collect.  So as a starting point, let’s all acknowledge that policyholders who got flood insurance payments submitted applications for flood payments and asked for the money.  Mind, I am not accusing policyholders of wrongdoing.  I merely point out that the argument against insurers comes full circle in a conclusion that gob-smacks policyholders. 

Next, let’s turn to the contention that insurers plotted to reduce their wind payment obligations by use of the flood program.  Consider this excerpt from an April 1 story in the New Orleans Times-Picayune by Rebecca Mowbray

The Federal Emergency Management Agency, which houses the flood program, said in a Sept. 21 memo to the private insurance companies that administer the flood policies that it expedited its adjustment procedures after Katrina.

FEMA waived requirements for proof of loss, and by using water depth data, aerial imagery and basic underwriting data from files about the size of homes and their elevation, it cut checks if it was likely that the damage was significant. It sent an adjuster only where the flooding was minor; if the house was missing or inundated with water, instructions were to pay the policy limits.

"We had 240,000 losses, and we needed to go and get the money to the insureds as quickly as possible," said Tim Johnson, acting director of claims at FEMA. "You were looking for the total loss: that you could see that the water was up the second floor or the roof."

Butch Kinerney, a spokesman for FEMA, said the satellite photos were expensive and the agency ran into national security headaches trying to use images for adjusting claims, but it was worth it to get money into disaster victims’ hands quickly.

When FEMA went back and audited its claims handling, it found that 97 percent of its claims would have been resolved the same way under the old procedures, but the expedited claims handling sped up the process by six weeks to two months.

What does that sound like to you? Does it sound like insurer conspiracy, or does it sound like FEMA was the driving force behind an expedited claims process that paid flood money out to people who asked for it?

Now, many have treated the Katrina coverage cases as political theater — I certainly have to some extent — but beyond political psychology, public relations, mass showmanship and P.T. Barnumism are certain principles of insurance coverage law that eventually must be dealt with.  One of these is that you don’t collect indemnity twice for the same loss.  A second is that when you claim a loss and ask for indemnity, your words mean something and you can’t later demand a mulligan. 

So let’s look at some recent Katrina court rulings and see how courts have treated the issue of flood payments. 

In Esposito v. Allstate, Judge Jay Zainey of the U.S. District Court for the Eastern District of Louisiana granted summary judgment for Allstate in an April 13, 2007 opinion. The plaintiff had received $211,000 in flood policy proceeds for Katrina damage, then made a claim under his homeowners policy for wind damage to his home and the contents on the second floor of the two-story house. 

Here is what Judge Zainey said:

Esposito is entitled to recover in this lawsuit any previously uncompensated losses that are covered by his homeowner’s policy and which when combined with his flood proceeds do not exceed the value of his property. Esposito is not entitled to obtain a windfall double recovery by now recharacterizing as wind damage those losses for which he has already been compensated by previously attributing them to flood waters.  The NFIP program did not erroneously make payments to Plaintiff for flood losses to his home.  Plaintiff sought these payments and he obtained them by convincing FEMA that his losses were caused by flood and covered by his flood policy.  Plaintiff has now been compensated for those losses based on the statements and information that he provided to FEMA.  For purposes of the instant suit this Court will not allow Plaintiff to cavalierly repudiate those prior statements while nevertheless retaining the funds that he received based on those same statements.  (Italics were in original).   

Let’s also look at Judge Martin Feldman’s decision denying Allstate’s motion for summary judgment in Wellmeyer v. Allstate, also in the Eastern District of Louisiana. Judge Feldman adopted Judge Zainey’s reasoning, and failed to grant summary judgment because of factual issues, not because plaintiffs can collect on a flood policy and then a homeowners policy for the exact same damage, which they can’t.   The factual issues existed because the Wellmeyer home was valued at more than the amount of the flood insurance proceeds, theoretically allowing for the existence of uncompensated wind damage above the total of the flood payment, up to the total value of the home. (Judge Feldman pointed to evidence of a $4,352.35 difference between the flood payment and the home’s value).

If you check out a ruling last year by Judge L.T. Senter Jr.  in Mississippi federal court, in Glover v. Nationwide, you will see additional confirmation of this reasoning. 

So maybe some of the propaganda can be set aside when we realize that this is how federal judges are viewing the issue. Mind, I am not condemning policyholders, I am simply saying, as I have always said, that the argument that insurers conspired to rip off taxpayers through the flood insurance program makes no sense to me because, if true, it implicates policyholders as well.   

10 Comments

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10 Responses to How do courts view acceptance of flood insurance payments?

  1. Scott Jonsson

    Nice job. That sticks an arrow in the insurance mongerers arguments.

  2. Well, my purpose with the post isn’t necessarily to indict anyone or defend anyone, but merely to say we have to adhere to some standard of reason or we descend to the level of meaningless shouting, theatrics and talking points seen on CNN’s “Crossfire” (which, blessedly, was cancelled).

  3. JKB

    This reminds me of the old chestnut, “I don’t think my mom understood what she was saying when she called me a SOB.”
    This sort of thing seems to be common these days with quite a few homebuyers claiming they should never have gotten the loan they overstated their income to get. Sure the broker or lender should have questioned the “stated” income but the borrower should have some responsibility for signing off on that income statement.
    I guess all is fair and memory is selective when demonizing the evil corporation.

  4. Brian Martin

    FEMA did not come up with that policy. The insurers requested it and FEMA complied. FEMA is a big part of the problem. FEMA’s waiver of the proof of loss requirement does not relieve the insurers of their fiduciary responsiblity to the federal government or their contractual obligation to conduct a proper adjustment of combined wind and flood losses.
    You are cherry picking the cases again. In Allstate v. Weiss, Allstate added contents to the flood claim that the Weisses submitted for the wind claim. In Judge Senter’s rejection of the proposed State Farm settlement, he specifically rejected the settlement’s assumption that State Farm would not owe for some damages that it had assigned to NFIP.
    If a homeowner with wind and flood policies has a total loss, and Allstate paid the limits on the flood policy before determining how much damage was caused by wind and how much by flooding, that should be a bad faith action against the federal taxpayers. That is why the companies asked NFIP for the blank check waiver of their contractual requirements. It is not surprising that NFIP complied. Throughout the process, NFIP has represented the insurers rather than taxpayers. NFIP refuses to perform any responsible oversight because it is afraid that insurers will leave the Write Your Own program. As a taxpayer, you should be outraged that FEMA allowed Allstate, State Farm, et al to go around handing out checks up to $350,000 from the federal government with no one looking over their shoulders to verify the claims.

  5. Brian, I’m not cherry picking the cases, you are the one who keeps coming back to only the Weiss case. I just happened to look at three cases by different judges, and they all say the same thing, which is self-evident: policyholders asked for the payments to be made. Pick any case you want, that is the law and the reality.
    Let’s just have a hypothesis that insurers and FEMA were going to take some ultra-hard stand against flood claims and reject them by the passel. Let’s have another hypothesis that they are going to approve anything that is sent to them, claims on the back of bar napkins, requests made on post-it notes, someone’s brother-in-law dropping by with a picture cut out of the newspaper of some generic Katrina damage. What is the common element in these two hypotheses? Right. The policyholder first made the claim. So before, under your view, FEMA can screw up or the insurers can back up the dump trucks to the door of the Treasury and starting loading ’em up, they first have to be presented with claims of flood damage.
    Under your view, it sounds like policyholders are accomplices in bogus insurance claims. Maybe that is your view and you just don’t want to say it. We all know the NFIP is broke, with tremendous pressure to become even more of a welfare program rather than an insurance program. So maybe what you are saying is part of some meaningful reform of the criteria to get flood insurance, although I am skeptical this will result from the tone of the debate so far.
    But what you are saying seems to totally ignore that no one handed out these checks unless they were asked for checks. Let me see if I can get you to answer this. In instances where insurers and FEMA wrongly paid out flood insurance payments, was the request by the policyholder to be indemnified for flood damage also wrongful?
    Also, as for whether I should be outraged, I would say this: Congress provides the oversight for FEMA and the NFIP, and many, many hurricanes have occurred in which flood payments have been made. Human behavior tends to remain the same over time, so if there is a way to rip off the taxpayers, I’m sure it has been trotted out many times before to the applause and delight of the ripper-offers of the world. So my outrage would come back to Congress and I would say, shame on Congress for letting this go on and on and on. You would know this as policy director for Rep. Gene Taylor, how many times before Katrina did Rep. Taylor or any other U.S. Representative that you can name identify these problems you speak of and work to change them?

  6. Scott Jonsson

    Brian, you have been called out. What is your congressional reply ? Your position is unsupportable and is advanced only because there are obviously more policy holder voters than insurance carrier voters for your boss.

  7. Brian, I did have one more thought. If insurers had, instead of pushing FEMA to expedite flood claims as you say, pushed for a go-slow approach, wouldn’t we instead have heard complaints that they were interfering with the recovery of damaged areas and keeping badly needed money out of the hands of suffering hurricane victims?

  8. Brian Martin

    Stop misrepresenting our argument. We have never said that these homes did not suffer flooding. The homes were damaged or destroyed by both wind and flooding. The homeowners expected to be paid by both policies. They are not at fault for accepting the flood payment. The homeowners had hurricane damage, both wind and flood damage, and in many cases it is not possible to separate the two. The question is whether the flood policy paid more than it should have paid.
    State Farm’s claims handling protocol instructed its adjusters that where wind and flooding both caused damage, only the flood pays. That violates the contract with NFIP. The insurers do have a fiduciary reponsibility to federal taxpayers, and a responsibility to provide a proper adjustment of combined wind and flood claims. That is explicitly in the WYO regulations.
    No homeowner in Mississippi said his damage was 100% flooding. That came from the insurance companies. If you had a $400k loss and accepted a $250k flood payment, you are not at fault, but you still expect the insurer to pay the wind claim. NFIP, however, should have required the insurer to show that the $250k was attributable to flood and not wind. For homes with the Miss. windpool and flood policies, there were separate wind and flood adjusters because the windpool is not a WYO. The two adjusters got together, reconciled the claims, so that people were paid by both policies but did not get a windfall. The difference is that someone represented the flood claim who did not have an interest in denying or reducing the wind claim. The WYOs that used the single adjuster pushed everything onto the flood claim and NFIP did not represent the taxpayers.
    Most homeowners accepted the flood check for part of their loss and then sued for the wind policy to pay the rest or the loss. Nothing wrong with that. As the court cases have shown, they were right and the insurers acted in bad faith.
    As for our actions, Rep. Taylor tried to get the federal govenrment to provide oversight from the beginning and met with NFIP, FEMA, DHS, DOJ, and Republican House leaders who did nothing. None of them wanted to investigate insurance companies. That is why we had to pass language to require the DHS IG to investigate, and why we had to wait for a Democratic Congress to have hearings on the issue. Wait until the IG’s report before shedding any more tears for the poor insurance companies.

  9. Brian Martin

    To further explain the interest in this question:
    Obviously, the big problem in Mississippi is that the insurance companies refused to pay for wind damage if there also was flood damage. By law and precedent, the insurers should have the burden to prove damage was caused by flooding in order to exclude wind coverage. Instead, the insurers assumed flooding and made the homeowners prove wind and only wind to get any wind money. The state insurance commissioner directed insurers to pay unless they proved the exclusion, but did not of the power or the will or the courage to enforce his order. Because of McCarran Ferguson and the state action doctrine, we could get no federal agency to care whether consumers are cheated by insurance companies. Everything is referred to the states, and states like Mississippi and Louisiana have very weak enforcment records. Insurers regularly threaten to leave unless they get higher premiums, higher deductibles, and less risk, and the states usually cave in. The commissioners are afraid to make the pay while they are begging them to stay.
    By paying maximum flood payments while applying very different standards to their own claims, the WYO insurers violated their contractual obligations to NFIP and federal taxpayers. The question of overpayment of NFIP claims opened up federal jurisdiction to investigate the claims handling practices that otherwise had been brushed off as state regulatory matters.
    We pushed so hard for an investigation of flood claims because (1) we are sure that NFIP paid for some damages that should have been paid by wind coverage, and (2) it is the only aspect of insurance claims handling for which the federal government has indisputable interest, jurisdiction, and authority.

  10. Those are fine talking points that I will discuss in greater depth later, but for now, two things. Since neither Gene Taylor nor anyone else in Congress kept the NFIP from going broke and, as you say, being abused by insurers, that doesn’t give much confidence that Congress would do any better regulating specific insurance problems. Whenever I watch any of the Congressional hearings dealing with insurance, it reaffirms that Congress knows about as much about insurance as it does about fiscal responsibility. Second, I know you want to go back to your talking points, but was it wrongful for policyholders to apply for and accept flood insurance checks when, as you say, they did not actually suffer flood damage in that amount?