In
August, when Hurricane Harvey was bearing down on Texas, David Clutter
was in court, trying one more time to make his insurer pay his flood
claim — from Hurricane Sandy, five years before.
Mr.
Clutter’s insurer is the federal government. As it resists his claims,
he has been forced to take out a third mortgage on his house in Long
Beach, N.Y., to pay for repairs to make it habitable for his wife and
three children. He owes more than the house is worth, and his
flood-insurance premiums just went up.
The
government-run National Flood Insurance Program is, for now, virtually
the only source of flood insurance for more than five million households
in the United States. This hurricane season, as tens of thousands of
Americans seek compensation for storm-inflicted water damage, they face a
problem: The flood insurance program is broke and broken.
The
program, administered by the Federal Emergency Management Agency, has
been in the red since Hurricane Katrina flooded New Orleans in 2005. It
still has more than a thousand disputed claims left over from Sandy. And
in October, it exhausted its $30 billion borrowing capacity and had to
get a bailout just to keep paying current claims.
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Congress
must decide by Dec. 8 whether to keep the program going. An unusual
coalition of insurers, environmentalists and fiscal conservatives has
joined the Trump administration in calling for fundamental changes in
the program, including direct competition from private insurers. The
fiscal conservatives note that the program was supposed to take the
burden off taxpayers but has not, and environmentalists argue that it
has become an enabler of construction on flood-prone coastlines, by
charging premiums too low to reflect the true cost of building there.
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The
program has other troubles as well. It cannot force vulnerable
households to buy insurance, even though they are required by law to
have it. Its flood maps can’t keep up with new construction that can
change an area’s flood risk. It has spent billions of dollars repairing
houses that just flood again. Its records, for instance, show that a
house in Spring, Tex., has been repaired 19 times, for a total of
$912,732 — even though it is worth only $42,024.
And
after really big floods, the program must rely on armies of
subcontractors to determine payments, baffling and infuriating
policyholders, like Mr. Clutter, who cannot figure out who is opposing
their claims, or why.
Roy
E. Wright, who has directed the flood insurance program for FEMA since
June 2015, acknowledged in an interview on Friday that major changes
were called for and said some were already in the works. The program’s
rate-setting methods, for example, are 30 years old, he said, and new
ones will be phased in over the next two years. But other changes — like
cutting off coverage to homes that are repeatedly flooded — would
require an act of Congress.
“The
administration feels very strongly that there needs to be reform this
year,” he said. “I believe strongly that we need to expand flood
coverage in the United States, and the private insurers are part of
that.”
The
federal program was created to fill a void left after the Great
Mississippi Flood of 1927, when multiple levees failed, swamping an area
bigger than West Virginia and leaving hundreds of thousands homeless.
Insurers, terrified of the never-ending claims they might have to pay,
started to exclude flooding from homeowners’ insurance policies. For
decades, your only hope if your home was damaged in a flood was disaster
relief from the government.
Policymakers
thought an insurance program would be better than ad hoc bailouts. If
crafted properly, it would make developers and homeowners pay for the
risks they took.
When
Congress established the National Flood Insurance Program in 1968, it
hoped to revive the private flood-insurance market. Initially about 130
insurers gave it a shot, pooling their capital with the government. But
there were clashes, and eventually the government drove out the insurers
and took over most operations.
Since
1983, Washington has set the insurance rates, mapped the floodplains,
written the rules and borne all of the risk. The role of private
insurers has been confined to marketing policies and processing claims,
as government contractors.
That
worked for a few decades. But now, relentless coastal development and
the increasing frequency of megastorms and billion-dollar floods have
changed the calculus.
Unable to Keep Up With the Floods
The National Flood Insurance Program has been in the red
since 2005, when Hurricane Katrina flooded New Orleans and it suddenly
had to pay out $16.3 billion in claims.
billion
$16
National Flood
Insurance Program:
Insurance Program:
14
Hurricanes Harvey,
Irma and Maria
Total premiums collected
12
Hurricane
Katrina
Flood loss claims paid
10
8
Hurricane
Sandy
6
4
2
0
’78
’80
’85
’90
’95
’00
’05
’12
’17
“Put
plainly, the N.F.I.P. is not designed to handle catastrophic losses
like those caused by Harvey, Irma and Maria,” Mick Mulvaney, the
director of the White House Office of Management and Budget, said in a
letter to members of Congress after the three huge hurricanes barreled
into the United States this season.
Mr. Mulvaney called on Congress to forgive $16 billion of the program’s debt, which both houses agreed to do.
The
program, however, needs more than a financial lifeline: Without major,
long-term changes, it will just burn through the $16 billion in savings
and be back for more.
The
White House is hoping to lure companies back into the market, letting
them try to turn a profit on underwriting flood policies instead of
simply processing claims for the government.
One
measure proposed by the Trump administration is for the government to
stop writing coverage on newly built houses on floodplains, starting in
2021. New construction there is supposed to be flood-resistant, and if
the government retreats, private insurers may step in. Or so the theory
goes.
“The
private market is anxious, willing and completely able to take
everything except the severe repetitive-loss properties,” said Craig
Poulton, chief executive of Poulton Associates, which underwrites
American risks for Lloyd’s of London, the big international insurance
marketplace.
“Severe
repetitive-loss properties” is FEMA’s term for houses that are flooded
again and again. There are tens of thousands of them. While they account
for fewer than 1 percent of the government’s policies, they make up
more than 10 percent of the insurance claims, according to the Natural
Resources Defense Council, which sued FEMA to get the data.
The
Trump administration has also proposed creating a new category of
properties that are at extreme risk of repeat flooding and that could
have their insurance cut off the next time they flooded.
That
might sound harsh. Environmental groups, though, argue it’s worse to
repeatedly repair doomed houses on flood-prone sites as oceans warm and sea levels rise. The Natural Resources Defense Council argues that the flood-insurance program should buy such properties so the owners can move somewhere safer.
The
program, however, has only limited authority to make such purchases;
homeowners need to line up funding through other government agencies. As
a result, such buyouts are rare.
“I
have mounds and mounds of paper, and I’m still waiting,” said Olga
McKissic of Louisville, Ky., who applied for a buyout in 2015 after her
house flooded for the fifth time. “I want them to tear it down.”
Ms.
McKissic even had her house classified as a severe repetitive-loss
property, thinking FEMA would give it higher priority. But FEMA has not
responded to her application. Instead, it doubled her premiums.
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That’s what happens when there’s a monopoly, said Mr. Poulton, the Lloyd’s underwriter.
Over
the years, he said, he has noticed that his customers are buying
Lloyd’s earthquake insurance because it includes flood coverage. They do
not like the government’s flood insurance because payouts are capped at
$250,000 and have other limits.
Such as basements.
Matt
Herr of Superior Flood in Brighton, Colo., another underwriter for
Lloyd’s, recalled a client whose handicapped son lived in a “sunken
living room,” eight inches lower than the rest of the house. When the
neighborhood flooded, $22,000 of medical equipment was ruined. The
government refused to pay, calling the living room a basement. Its
policies exclude basements.
While
the government program insures more than five million homeowners, that
is just a small fraction of the number of people who live on
floodplains.
Mr. Poulton researched the flood insurance program and eventually found a public report
that explained how its pricing worked. The program, he learned, was not
using the detailed, house-by-house information on flood risk that is
available through satellite imagery and other sources.
That’s
because Congress gave the program a legal mandate to work with
communities, not individual households. So the program was surveying
floodplains, then calculating an “average annual loss” for all the
houses there. Its insurance rates were based on those averages.
“It undercharges 50 percent of its risks, and it overcharges 50 percent of its risks, on an equal weighting,” Mr. Poulton said.
Offer
a better deal to the households with a below-average risk of flooding —
a policy whose price reflects their lower risk — and they will jump at
the opportunity to save money on premiums, he said.
But
the government does not readily divulge all of its historical claims
data, so insurers cannot comb through them and analyze the risks.
“What
we know is snippets,” said Martin Hartley, chief operating officer of
Pure Insurance in White Plains, which offers supplementary flood
insurance to homeowners who want more than the government’s $250,000
coverage.
Also,
the government relies on mortgage lenders to enforce the rule requiring
at-risk homeowners to buy flood insurance. Mr. Poulton said he found
that FEMA officials had told lenders that, in effect, they shouldn’t
trust private insurance.
He went to Washington to complain to program officials.
“We
told them their guidelines were bad, bad for consumers,” he said. “We
said: ‘They’re only good for you. You’ve got to change them.’ They said:
‘We don’t answer to you. We answer to Congress.’ We’ve been lobbying
ever since.”
No
one paid much attention until after Sandy, when the program fell deeper
into debt with the Treasury. To help fill that hole, Congress in 2012
approved big increases in its premiums. But that caused an uproar when
people got their bills. Two years later, Congress rescinded much of the
increase.
Then came this season’s hurricanes and the $16 billion bailout.
The
Office of Management and Budget sent Congress an updated list of
proposals in October, including measures that would remove certain
obstacles to private-sector competition. Its plan would open up the data
trove to potential competitors and direct mortgage lenders to accept
private flood-insurance policies. It would also revoke an agreement that
the program’s contractors — including about 70 insurance companies —
must currently sign, promising not to compete against the government
program.
Some
members of Congress — including Democrats like Senators Chuck Schumer
of New York and Robert Menendez of New Jersey, whose states have
significant flood exposure and bad memories of Hurricane Sandy — are
resisting. They say bringing in private insurers would make the
program’s troubles worse, because the insurers would cherry-pick the
most profitable customers and leave the government with all the “severe
repetitive-loss properties.”
Mr. Poulton did not dispute that. In fact, he said that was exactly what should happen.
“We
need the N.F.I.P. to be a full participant in this as the insurer of
last resort,” he said. That means it would take the high-risk properties
that the private insurers did not want, acting like the state-run
insurance pools for especially risky drivers.
Some lawyers for aggrieved policyholders think a shake-up might improve things, if it brought accountability.
August
J. Matteis, who is representing Mr. Clutter in his lawsuit, said the
insurance program had been so criticized by Congress for its borrowing
that by the time Sandy blew in, it had instructed contractors to hold
the line on claims. They did so with a vengeance. Thousands of people
with flood damage from Sandy ended up disputing the government’s
handling of their claims.
Long
Beach, Mr. Clutter’s town, is on a barrier island off the southern
shore of Long Island. When Sandy sent several feet of floodwater washing
over it, the piers supporting the Clutter family’s foundation
collapsed. Upstairs, floors buckled. Walls cracked.
Mr.
Clutter called Wright National Flood Insurance, the Florida company
that administers his policy. Wright sent an independent adjuster, who
took photos with captions like “structural foundation wall has been
washed in” and “piers have collapsed — no longer supporting risk.”
But then, Wright sent a structural engineer from U.S. Forensic of Louisiana who declared that Sandy had not caused the damage.
In
2015, Mr. Clutter happened to catch a “60 Minutes” report on the
aftermath of Sandy. It included accusations that U.S. Forensic had
falsified engineering reports on other people’s houses.
There
were so many disputed claims and questionable inspections, in fact,
that the government opened an unusual review process for Sandy victims.
Mr. Clutter went through it, but said the government’s offer fell far
short of his repair costs. He sued FEMA and Wright Flood Insurance in
August.
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Michael
Sloane, Wright Flood’s executive vice president, said in an email that
while the company could not comment on Mr. Clutter’s case, “we are
always committed to working with our customers to keep the lines of
communication open as we continue working toward resolution.”
U.S. Forensic did not respond to messages.
Mr.
Wright, the program director, acknowledged the problems after Sandy but
said corrective measures had been taken “so that it doesn’t happen
again.”
Much
of Long Beach has been rebuilt since Sandy. Small houses like Mr.
Clutter’s are being torn down and replaced with bigger ones that sprawl
across two lots. Mr. Clutter worries that if insurers, not the
government, set the prices, premiums will soar.
“Then, what happens to me?” he asked. “I’m essentially being driven out of my home that I have three mortgages on.”
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