Congress created the National Flood Insurance Program (the “NFIP”) to help make flood insurance more affordable in areas prone to flood damage.
FEMA oversees the program and writes the terms of the Standard Flood Insurance Policy (the “Policy”), and the Federal government pays claims. While designed to help those suffering from flood damage, the NFIP claims process is unfortunately not worry-free. Rather than giving a break to disaster victims, the NFIP and applicable Federal regulations allow insurance companies to deny coverage for even small missteps in the claims process, which is riddled with deadlines, technicalities, and formalities that must be satisfied.
If you need to make a claim under an NFIP Policy, or if your claim has been denied, advice and guidance from someone experienced in dealing with NFIP claims is critical. Below are just a few facts that are important for NFIP policyholders to know about NFIP Policies and the claims process.
NFIP Policies are Administered by Private Insurance Companies, not FEMA
Almost all NFIP policies are sold by private insurance companies, such as Allstate or Nationwide, to name a few. Accordingly, the NFIP claims process and the decisions about whether to pay or deny claims are handled by an insurance company, not by FEMA.
The Federal government allows private insurance companies to sell flood policies using the Policy that FEMA has drafted through what is called the “Write Your Own” or “WYO” program. The Federal government pays these private insurance companies certain fees for administering these claims. Although the money to pay for covered NFIP claims comes from the Federal government, a private insurance company will make all decisions in the claims process.
Federal Law Protects These Private Insurers From “Bad Faith” Claims, Taking Away Rights that You May Have Under North Carolina Law
North Carolina law contains important protections that keep insurance companies from taking advantage of their insureds. Under North Carolina law, insurance companies are prohibited from acting in “bad faith” by engaging in conduct such as unreasonably delaying claims or refusing to pay without good reason. If an insurance company acts in “bad faith,” the insured may be able to recover punitive damages. The prospect of “bad faith” claims and other remedies under North Carolina law help keep insurance companies accountable for their actions and deter unfair practices.
Unfortunately, these protections are not available when dealing with NFIP claims, as Federal law provides that the same insurance companies cannot be held liable under North Carolina law for “bad faith,” punitive damages, or attorneys’ fees when they are administering NFIP flood claims. For example, in a 2016 Court decision arising out of a North Carolina homeowners’ NFIP claim, an Appellate Court ruled that Allstate was protected from liability for punitive damages that would otherwise be available under North Carolina law, even where the Trial Court found:
Allstate has endeavored at every step of the process to deny coverage to plaintiffs’ worthy claim…This is an example of the worst kind of misconduct on the part of an insurance carrier with one of its insureds: plaintiffs did everything they knew to do, including providing strong and uncontroverted proof that the damage to the house was from the flood waters, and, yet, Allstate engaged in a long pattern of denial and cover-up.
Editor’s note: The author and Ward and Smith, P.A., represented the homeowner in this case.
This should serve as a warning to flood victims for two reasons. First, there is the potential for private insurance companies to engage in unfair conduct relating to NFIP claims, as the Trial Court found above. Second, flood victims have little legal recourse to hold private insurers accountable for unfair conduct, such as unreasonably delaying in paying a claim or flatly refusing to pay a claim for no good reason. These facts make it all the more important for NFIP claimants to involve legal counsel early in the claims process.
Exclusions Result in Some Flood Damage Not Being Covered
The Policy covers “loss or damage to insured property, directly caused by flood.” This seems obvious: if a flood causes damage, the Policy provides coverage. Not so fast! The Policy also contains a number of exclusions. One of the exclusions, called the “earth movement exclusion,” actually excludes coverage for damage caused by flood! That exclusion states:
We do not insure for loss to property caused directly by earth movement even if the earth movement is caused by flood. Some examples of earth movement that we do not cover are…land subsidence…sinkholes…de-stabilization or movement of land that result from accumulation of water…or gradual erosion.
This exclusion does not become an issue in the most common NFIP claim – where floodwaters enter a home and damage floors, walls, or other interior finishes. However, this exclusion is a very big issue for any NFIP claim that relates to a home or building’s foundation. If, for example, floodwaters wash away or undermine the soil supporting a home’s foundation, resulting in shifting, sinking, tilting, or destabilization of the structure and/or cracking or separation of supporting walls, the “earth movement exclusion” could mean a denial of the claim. Likewise, if, during or after the flood event, a portion of the foundation settles, causing cracking or separation of walls and/or uneven surfaces, the “earth movement exclusion” may mean a denial of the claim. Court decisions interpreting this exclusion depend on the detailed facts of each case and can be unpredictable.
The “earth movement exclusion” is particularly surprising because it excludes coverage for damage that unquestionably was caused by flood. As a result, understanding the precise nature of the damage to your home or building and presenting it to your insurance company with precision is critical to having your claim paid. If the foundation of your home or building was impacted by a hurricane or storm event, you are in particular need of experienced assistance in navigating the NFIP claim process.
Proof of Loss Warning No. 1 – The Insurance Company Doesn’t Have to Help You
A “Proof of Loss” is the document that informs the insurance company what was damaged, how it was damaged, and how much you expect the repairs to cost. The Proof of Loss must be submitted to the insurance company within 60 days from the date of loss unless FEMA has published an extended deadline, as it did in 2018 for Hurricane Florence claims (see below). FEMA has published an official Proof of Loss form on its website.
The insurance company has no obligation to provide the Proof of Loss form to you, to tell you the deadline for submitting it, to help you complete it, or even to let you know that it is required in the first place. Do not wait to receive a Proof of Loss form from your insurance agent or from the adjuster. Much like the old adage that “ignorance of the law is no excuse,” the fact that a homeowner was unaware of the need to submit the Proof of Loss is no excuse.
In the case of Hurricane Florence, FEMA issued a bulletin that seemed to relax this requirement. The bulletin, dated September 18, 2018, directed WYO insurance companies to pay flood claims from Hurricane Florence based on signed reports from their adjusters without requiring Proof of Loss forms from the insured. While this sounds helpful to flood victims, keep in mind that this only applies to amounts that the insurance company and its adjuster have initially decided to pay. Often, owners are not satisfied with these initial offers. A Proof of Loss would likely still be required if the homeowner did not agree with the amount in the insurance company adjuster’s report.
Proof of Loss Warning No. 2 – Do Not Miss the Deadline
As noted, the Proof of Loss must be submitted to the insurance company within 60 days from the date of loss unless FEMA has published an extended deadline. Date of loss in this context means the 60 days runs from the first date that floodwaters could possibly have caused damage to your home or building.
In the example where FEMA’s September 18, 2018, bulletin formally extended the deadline to submit the Proof of Loss forms for Hurricane Florence flood claims until 365 days from the date of loss, the 365-day deadline likewise began running from the first date that floodwaters could possibly have caused damage to the insured home or building, not 365 days from the date that FEMA’s September 18, 2018, bulletin was issued.
Under Federal law, the deadline for submission of the Proof of Loss is strictly enforced. A submission even one day after the deadline is a valid basis for an insurance company to deny a flood claim. In fact, Federal regulations, Court decisions, and Policy language suggest that an insurance company is required to deny a claim if the Proof of Loss is not submitted by the applicable deadline.
This is another instance where the NFIP is much harsher than North Carolina law. Under North Carolina law, an insurance company generally cannot base a denial on late submission of information unless the insurance company could show that the delay actually harmed its ability to investigate the claim (such as by preventing an assessment of the damage before a building was torn down).
Proof of Loss Warning No. 3 – Submit As Much Detail As Possible For Repair Costs
It is not sufficient to send in any Proof of Loss. Federal regulations require a “complete” and “adequate” Proof of Loss. To be complete and adequate, the Proof of Loss must include, among other things “detailed repair estimates.”
There are several difficulties with the requirement that a flood victim provide “detailed repair estimates.” First, there is no definition of what this means. In other words, how detailed is detailed enough? Clearly, just providing a single number representing the total cost to repair is not sufficient. Breaking down the needed repair work into all required categories, such as “drywall,” “flooring,” or “equipment rental,” and providing a cost estimate for each category is likely sufficient. However, some WYO insurance companies have claimed that specificity, such as the number of feet of drywall and the price per foot of drywall, must be included.
Second, the flood victim likely will need help from a contractor, engineer, or other professional to prepare a sufficient repair estimate, and FEMA imposes strict deadlines for the submission of this information. This may be less of a concern in instances where the deadline has been extended, but it can still be a concern in those cases as the number of impacted property owners vying to find professionals to look at and assess their property taxes limited market resources.
Third, FEMA’s form Proof of Loss does not provide space for a homeowner to list a detailed repair estimate, nor does the form provide any type of formatting or guidance on how to do it. Instead, the form Proof of Loss is one page. This may lead a homeowner to assume that brevity is expected when the opposite is true.
More Confusing Deadlines – A FEMA Appeal Does Not Stop the One-Year Deadline to File a Lawsuit
If an NFIP flood claim is denied, either in whole or in part, by a WYO carrier, an owner has two options: (a) appeal to FEMA and ask FEMA to review the insurance company’s decision to deny the claim, or (b) file a lawsuit against the insurance company. Not surprisingly, both of these options come with deadlines.
If the owner elects to appeal the denial to FEMA, written notice must be submitted to FEMA within 60 days of the insurer’s denial of the claim. FEMA will then confirm receipt of the appeal and request any additional information that it may require. FEMA states that it will make a decision on the appeal within 90 days of its receipt of all requested information.
If the owner is unsatisfied with FEMA’s decision on appeal, the next step is to file a lawsuit. Note that an appeal to FEMA is not necessary and that a lawsuit can be filed upon receipt of the denial from the insurance company.
Whether or not an appeal with FEMA is filed, the owner has a firm deadline to file a lawsuit. A suit must be filed against the insurance company within 1 year from the date of the insurance company’s denial of the claim. Further, any lawsuit against a WYO insurance company must be filed in the Federal District Court for the district where the property is located. Flood victims may not file a lawsuit in their local state courts.
This 1-year deadline to file a lawsuit may be confusing in several ways. For example, an owner might logically think that the deadline is 1 year from receipt of FEMA’s decision on appeal. That is incorrect. Or, it is possible that FEMA would not issue a decision on an owner’s appeal within 1 year from the date of the flood. If that happened, the owner would need to file the lawsuit by the 1-year deadline even though FEMA had not yet made a decision on the appeal.
Flood claims can involve significant amounts of money and almost always come at times when homeowners are stressed, and time is of the essence to get repairs made. On top of all that, as shown above, NFIP flood policies are confusing at best and provide plenty of opportunities for insurance companies to deny claims based on technicalities.
This is a part of our September series: “The Power of Preparedness.” For more insights, click here.
Clinton Mora is a reporter for Trending Insurance News. He has previously worked for the Forbes. As a contributor to Trending Insurance News, Clinton covers emerging a wide range of property and casualty insurance related stories.