BY J. ROBERT HUNTER
In the 1970s, when I administered the National Flood Insurance Program, we had serious problems with the National Flood Insurers Association, which at the time ran the NFIP.
One of the key problems was that private insurers that made up the NFIA refused to pay some claims we determined were covered under flood policy language.
A specific case I recall involved a community ordered to evacuate by the Army Corps of Engineers, who believed an upstream dam was about to fail. Later, the evacuation was cancelled as the dam held and the rains unexpectedly stopped.
However, some people with NFIP policies evacuated and rented trucks and did other things to remove their belongings from the path of the predicted flood. They filed claims for these costs.
When NFIA refused to pay the claims, these people appealed to the government. The General Counsel of the Department of Housing and Urban Development (where the NFIP was then housed; it is now in the Federal Emergency Management Agency, part of the Department of Homeland Security) found that the claims were legitimate and ordered them paid.
NFIA refused, arguing not that the counsel was wrong, but that they did not want a precedent to apply to their homeowners’ insurance policies, which had similar language.
In the NFIA case, the insurers demanded to not pay claims. Today the WYO companies are alleged to have overpaid claims. While the impact of these actions appear to be in conflict (underpaying versus overpaying), in both cases the effect is to lower the insurer’s overall claims’ costs.
HUD also determined the cost of servicing flood policies was excessive, and asked NFIA to consider competitively bidding the servicing contracts.
NFIA had run the program by contracting with insurers to service flood insurance in specific areas—usually an entire state. NFIA used sole-source contracting with large insurers. No competitive bidding was involved. The members of the NFIA Governing Committee received the lion’s share of the contractual dollars, effectively contracting with themselves and producing sweetheart deals.
Because of these and other problems between HUD and NFIA, we ended the arrangement and sought competitive bids to run the program. The winning contractor charged fees about one-half of what NFIA had been charging the government.
I won a rare “Golden Taxpayer Savings” award from Senate Banking Committee Chairman William Proxmire—the Wisconsin Democrat famous for his “Golden Fleece” awards pointing out taxpayer waste.