How Flood Insurance Failed Superstorm Sandy Victims When Their Homes Actually Flooded

Image courtesy of Scott Lynch

It’s difficult to think of natural disasters as a business, but ultimately they are. More than three years ago, Superstorm/Hurricane Sandy hit heavily populated parts of the East Coast. We’re a wealthy country, though, with a robust national flood insurance program, plenty of disaster aid, and a can-do spirit. All of the people driven out of their homes have rebuilt or received settlements and moved on, right? No.

In the days and weeks after the storm, you might have seen politicians promising to cut red tape, and President Obama giving hugs and assurances to victims. People whose homes were destroyed or severely damaged still don’t have their homes back, and PBS’s Frontline and NPR reporter Laura Sullivan
investigated why this is, and who made money from it.

You’ll be able to hear stories based on their reporting on NPR’s All Things Considered starting this afternoon, and the hour-long Frontline documentary will air on local PBS stations tonight. You should check their stories out to meet some interesting people and shake your head at some terrible incompetence, but here’s some of what we learned about what went wrong

There was a reason why they called it a “Superstorm.” You may remember that the governors of affected states insist that the tropical storm never reached land as a hurricane, which means that higher insurance deductibles for hurricanes shouldn’t apply. Unfortunately, much of the damage to homes was caused by flooding, which means it would have been covered by government-underwritten flood insurance.

Yes, the government underwrites flood insurance policies. People who live in flood-prone areas have additional flood insurance from a program backed by the federal government, the logically-named National Flood Insurance Program. When losses from any one flood are too great and the total goes over the amount paid in premiums, taxpayer money kicks in to cover the rest.

“Insurance companies don’t have any risk in the program,” explained J. Robert Hunter, head of the program in the ’70s. “The risk is all the taxpayers’.”

Under Hunter, the flood insurance program found that insurance companies were collecting government money but not paying valid claims, and the government ended its relationship with more than 100 insurance companies that handled flood policies. Instead, a single company administered the program.

The government partnered up again with insurance companies in 1984, and that’s when the program of private insurance policies underwritten by the federal government that we still have began. More than 80 insurance companies are part of the program.

The National Flood Insurance Program’s deep debt affected how claims from Sandy were processed. Serious storms in the mid-aughts, particularly Hurricane Katrina, sent the program almost $18 billion in debt.

One homeowner went over the numbers with NPR’s Sullivan. He explained that he has to still pay the mortgage and insurance (yes, even the flood insurance) on his house that was destroyed in the flood. He received an insurance settlement of $90,000, but it would cost over $250,000 to actually rebuild his house. He appealed the decision to FEMA, which agreed with the insurance company’s assessment.

The real problems became evident when lawyers got involved. Engineering firms that took part in evaluations of flood-damaged properties have been accused of fraud, with employees claiming that managers who never visited the properties altered their reports to minimize storm damage. The state attorneys general in New York and New Jersey are still investigating those engineering reports. Insurance adjusters also spoke out about the pressures on them after Sandy to low-ball homeowners’ claims to save money.

No one knows how much of a profit insurance companies make from the program. They take about 1/3 of the premiums collected as fees, but how much of that is actual “profit” isn’t something that FEMA actually tracks. However, Frontline and NPR were able to obtain information about the insurance companies’ expenses from state regulators, and compare that with how much the program paid insurance companies in fees.

Their calculations showed that from 2011 to 2014, the around 80 insurance companies in the program collectively earned about $325 million in profit each year from administering flood policies.

Business of Disaster [Frontline]

FURTHER READING:
Red Cross Raised More Than $300 Million After Hurricane Sandy: How Did They Spend It?