Scrap national flood insurance system, Schumer says

Sen. Charles Schumer Thursday called for the National Flood Insurance Program to abandon a complex system of using private companies to manage policies and process claims, saying it led to homeowners being cheated after superstorm Sandy.

The push by New York's senior senator comes amid widespread allegations that companies hired by the government-run insurance program exploited loopholes and used other means to fraudulently deny claims after the 2012 storm. It marks the first time a high-ranking lawmaker has called for an end to the system, which outsources to more than 80 companies.

"These independent companies simply do not have homeowners' interests at heart," said Schumer, a Democrat.

The move would require a sweeping overhaul of the flood insurance program, which covers 90,000 homes and businesses on Long Island and 5.2 million nationwide. In place of hiring multiple insurers to oversee policies, Schumer is proposing that Washington work directly with a single company.

A spokesman for the Federal Emergency Management Agency, which runs the program, said officials share Schumer's concerns and are considering an overhaul. "Everything is on the table," Rafael Lemaitre said.

While the government underwrites flood insurance, it has long hired private companies to sell and manage policies.

The program, however, has been accused by lawmakers and in government reports of overpaying the companies while exercising little oversight.

In a letter Thursday to FEMA administrator W. Craig Fugate, Schumer said the companies' "profit-driven motivations" are out of step with a government program intended to help storm victims rebuild their homes.

Insurance industry professionals, however, warn that terminating the program's partnerships with private companies would lead to poorer service and more bureaucracy. "The immediate loser in this equation would be the policyholders," said Robert Hartwig, president of the Insurance Information Institute, a trade group.

The debate comes as FEMA is in talks to settle some 1,800 lawsuits filed by homeowners claiming they were underpaid on claims after Sandy. On Monday, the agency launched a process to reopen claims for any of the other 142,000 policyholders who suspect they were underpaid.

Program began in 1968

SEE PHOTOSSandy's destruction

The National Flood Insurance Program began in 1968 after private companies stopped writing policies at prices most homeowners could afford, saying the business was too risky.

So Washington began offering coverage at subsidized rates. But it farms out much of the work of selling and managing policies to the private sector through an initiative called the Write Your Own Program, so named because companies write the policies themselves.

Today, FEMA contracts with 83 companies. Yet many of those insurers don't handle the policies themselves. Rather, they subcontract the work to a handful of vendors that specialize in flood insurance.

So despite the outsourcing, many of the policies are ultimately managed by a small circle of vendors. One company, National Flood Services of Kalispell, Montana, services 58 percent of policies nationwide.

Critics say the layers of outsourcing and subcontracting create a bewildering system, where oversight is challenging and storm victims are ill-treated.

SEE PHOTOSAerial views of Sandy damage

While the government pays for settlements, the private companies are regularly accused of lowballing damage estimates. That is primarily, critics say, because Washington penalizes companies caught inflating claims. Plus, critics say, the private insurance companies want to avoid setting a precedent for larger payouts for their own wind and fire claims.

Insurers deny those accusations, saying mistreating policyholders would only drive away customers.

After Sandy, more than 2,000 homeowners in New York and New Jersey sued the private insurers who managed their flood insurance policies, saying they were underpaid on claims. Those lawsuits led to allegations that companies forged documents to avoid paying settlements, prompting a criminal investigation by the New York State attorney general.

FEMA sought suggestions

FEMA, meanwhile, asked Schumer and fellow Democrats Sen. Kirsten Gillibrand of New York and Sen. Robert Menendez of New Jersey for suggestions on how to overhaul the program.

SEE PHOTOSLI's Sandy deaths: A look at the victims

"The lack of oversight and accountability from FEMA in the current model remains shocking and it needs to change," Gillibrand said Thursday, echoing Schumer's call to terminate partnerships with private insurers.

FEMA, which does not need congressional approval to overhaul the program, would not necessarily have to start from scratch without the private insurers. The agency already manages nearly 1 million policies, which it subcontracts directly to National Flood Services.

Schumer said expanding that model to cover the remaining 4.2 million policies would give FEMA tighter oversight. It would also allow the agency to better track data, coordinate inspectors and adjusters after storms and ultimately serve policyholders better, he said.

"We know the current model is terribly flawed," Schumer wrote in his letter to FEMA. "A new model will allow the . . . program to function more effectively and efficiently."