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Flood insurance doesn't have you covered

By now, thanks to the horror of last year's hurricane season, most people know that standard homeowner's insurance doesn't cover flood damage.  And so, as this year's storm season approaches, it makes sense for you to consider purchasing flood insurance for your home.

But before you buy, you would do well to read up on a wide-ranging lawsuit that's being heard in a Maryland federal court. Plaintiffs in that case – hurricane victims who paid for flood insurance -- would warn you that contrary to what many believe, even those who have flood insurance are often unable to rebuild flood-damaged homes.

"When they buy flood insurance, here's what they buy. They're buying the right to sue," said Steve Kanstoroom, a self-appointed Hurricane victims’ advocate and vocal critic of the National Flood Insurance Program (NFIP) and the Federal Emerency Management Agency, which administers the program. Kanstoroom runs Web site, which chronicles the bureaucratic troubles facing hurricane victims. “They are not buying peace of mind. They are buying a false sense of security.”

Kanstoroom’s advocacy work forms the backbone of a lawsuit filed last year against FEMA officials and others involved in administering the flood insurance program. The case hits its first big milestone this week, as a federal judge in Greenbelt, Md., entertains a defense motion to dismiss the lawsuit.

The lawsuit doesn't stem from last year's Katrina nightmare. Instead, it was filed by Maryland-based victims of the 2004 Hurricane Isabel, but its claims could have far-reaching implications for all hurricane victims.

Victims of Isabel have sued FEMA officials, including former director Michael Brown, government contractor Computer Sciences Corp., and others, claiming flood insurance marketing was misleading. 

How covered is covered?

The issue is simple: Is flood insurance intended to restore victims to "pre-flood" condition, to pay for complete restoration of damaged homes, or simply to serve as a form of financial assistance?

Kanstoroom, himself a victim of Hurricane Isabel, and the plaintiffs in the Maryland case argue the former.  According to attorney Marty Freeman, when the plaintiffs purchased flood insurance, they were led to believe that they would be "made whole" in the event of a flood disaster.

“To induce (homeowners) to purchase (flood insurance), they were told by each of the defendants … that, in the event of a flood loss to their primary residence, benefits would be paid to them which would make them whole (after satisfaction of the deductible), and which would be in an amount sufficient to return their property to its pre-flood condition, up to the policy limits,” Freeman writes in his complaint.

The defendants say that Congress – when it created flood insurance in 1968 -- never expected it would pay for every eventuality and was simply intended to supplement victims' rebuilding efforts.   

"It is irrefutable that CONGRESS KNOWS THAT NOT EVERY FLOOD LOSS WILL BE COMPENSATED BY JUST THIS ONE PROGRAM," the defense motion to dismiss says, making its point in all capital letters. Congress has made changes to the flood program through the years which "undercut any reasonable contention that the Congress actually intended back in 1968 that all (flood insurance) participants be completely restored to their ‘pre-flood condition’ after every flood loss," it says.

'Will make you whole'

But victims allege that flood insurance sellers said otherwise. Flood insurance can be bought directly from the federal government, or through insurance firms like State Farm and Allstate. Kanstoroom says consumers were regularly told flood insurance would pay the full costs of damage repair.

“Their marketing materials say that,” says Kanstoroom, a retired fraud detection expert. 

In fact, FEMA seemed to say so on at least one occasion, Kanstoroom claims. A FEMA press release that Kanstoroom says he copied from FEMA's Web site, dated Oct. 16, 2003, describes flood insurance this way: "Flood insurance can make you whole again." Kanstoroom says public statements by FEMA officials and other marketing materials make similar claims.

The distinction is hardly trivial to any who's just lost their home in a flood. Plaintiffs in the Maryland case think claims in the wake of Hurricane Isabel were underpaid by about $2 billion because of this distinction. 

Why the steep difference?  It in part depends on the price scales adjusters use when settling a victim's claim.

Prices for basic building materials skyrocket after a hurricane hits as materials quickly become scarce. Often, fixing a damaged home after a storm can be more expensive than constructing a new home before a storm. Those who pay extra for flood insurance -- as they are advised and sometimes required by the federal government -- expect to get a check to cover the cost of rebuilding their homes, just as those who file a car insurance claim expect their car to look like it did before the accident.

Claims of conspiracy, fraud

While the “restored to pre-flood conditions” premise is simple, the Isabel victims’ lawsuit is quite complex, and its assertions go much farther than misunderstanding. Plaintiffs claim rampant fraud; the lawsuit claims the misunderstanding was intentional.

"The defendants conspired to tell the prospective (insurance) purchasers they would be paid (for full restoration) when the defendants knew otherwise, having already (put) in place the machinery to pay pennies on the dollar of what would be due," it says. 

In fact, the lawsuit claims government contractor Computer Sciences Corp., which helps administer the flood program, simultaneously trained its adjusters and its sales force to deliver opposite messages. 

"While CSC instructors are instructing the (flood program) marketers to inform prospective insureds that their primary residences damaged by flood will be restored to their pre-flood condition, other CSC employees are simultaneously training and instructing claims adjusters and those responsible for training claims adjusters to allow only narrowly defined coverage in limited amounts – contrary to the sales agent training,” it says. “In fact, the CSC adjuster training teaches those persons authorized to adjust flood loss claims … to employ and teach the employment of systematic ‘low-balling’ and high pressure tactics, as a result of which flood victim claimants, including plaintiffs herein, receive only a small fraction of the amount necessary to place their primary residences in their pre-flood condition."

The defense

A call to CSC's public relations office was not returned, and a FEMA public relations official said the agency could not comment on the lawsuit. The motion to dismiss says the fraud accusations are baseless, and claims years of settled cases make clear that victims can only sue to challenge the amount of their settlement.

“Every other aspect of the complaint is nothing beyond an effort to wage politics in a judicial forum,” the defendants say in their motion.

The motion also argues that victims have already received payouts for their flood claims, and should not be demanding additional payments as well as premium refunds.

“This is no different than asking for your money back after buying a car, and also asking to keep the car,” it says.

Finally, the motion also asserts that national flood insurance is a special kind of insurance – purchasing it forms a direct relationship between the federal government and a private citizens, rather than between a consumer and a company. As a result, citizens are required to understand the law that governs flood insurance, which is published as part of the Federal Register. Similar to the well-worn line, “ignorance of the law is no excuse,” the burden is on consumers to know and understand the terms of flood insurance. Even misrepresentations by flood insurance resellers give hurricane victims no right to sue because buyers have a responsibility to look up provisions of the federal program for themselves, the defense argues.

It is hard to sue Uncle Sam, making the case incredibly complex for any who attempt to brave the documents. The most immediate issue before the judge is whether or not the plaintiffs can in fact sue FEMA and its agents, or if the agency has immunity that insulates it from certain kinds of lawsuits. 

Freeman, the attorney for the plaintiffs, counters that federal immunity does not apply to federal employees who are acting outside of their duties – and conspiracy would constitute such outside activity. That’s one reason the lawsuit targets individuals within FEMA, and not he agency as a whole.

Success in the lawsuit would open a Pandora’s box for FEMA, and open a window of opportunity for all hurricane victims.

“This will have a definite impact on hundreds of thousands of claims sitting around waiting to be determined,” Freeman said.  “But it not only will impact thousands of claims, it may have impact on how the insurance industry works.”

The progress of the fraud claims will be watched closely by FEMA and by journalists, but consumers considering flood insurance also should take heed. For now, the message is clear: Even if you buy flood insurance, you should not expect full compensation for the cost of rebuilding your flood-damaged home. After the storm, you might get some help, but you might be on your own.