EDISON - New Jersey Sens. Cory Booker and Robert Menendez have joined with New York’s Senate delegation to call for hearings into the National Flood Insurance Program, amid a growing number of lawsuits by Sandy victims. Meantime, Kane In Your Corner finds FEMA rules in place during and after Sandy gave insurance carriers an incentive to limit flood insurance payouts, contrary to the insurance industry’s contention that it had nothing to gain by underpaying homeowners since all claims are paid directly by FEMA.

Joan Tunbridge, of Point Pleasant, was part of a Kane In Your Corner investigation last October, when she was unable to move back into her home on the second anniversary of Superstorm Sandy. Five months later, nothing has changed. Tunbridge is still without a home, and the issue is still her flood insurance payout. Her first claims adjuster told her she had $210,000 in flood damage, but her insurance company then sent a second adjuster, who lowered the amount to $147,000. That left Tunbridge unable to complete repairs.

Tunbridge is not accusing anyone of conspiring to lowball her. But across the tri-state area, a growing number of Sandy victims are. More than 1,500 homeowners have now filed lawsuits over what they call unfairly low flood insurance payouts. Many contend engineering firms hired to assess the damage doctored reports, sometimes without the customers’ knowledge, to ensure they would get less money.  

The insurance industry has long contended insurers have no financial incentive to underpay flood claims since the money comes from FEMA.   “The insurer does not earn any money by reducing the value of the claim to the policyholder”, says Robert Hartwig, president of the Insurance Information Institute, an industry group.

That is technically true, but Kane In Your Corner finds that FEMA rules in place during and after Sandy certainly provided insurers with a strong incentive not to overpay, and to err on the side of paying too little. 

In testimony before the Senate Banking Subcommittee last summer, FEMA Administrator Craig Fugate admitted that insurance companies found to have overpaid on flood insurance claims were required to reimburse FEMA for the full amount of each overpayment.  By contrast, insurers faced essentially no consequences for underpaying.  Under FEMA rules, insurers could not be penalized for individual cases of underpayment. And the penalty for consistently underpaying – expulsion from the flood insurance program – had never been imposed on any insurance company in the more than 40 years that the NFIP had been in existence.

In December 2014, as the outcry from Sandy homeowners grew, FEMA announced that it would be reforming its flood insurance rules, including making the financial penalties for underpayment and overpayment equal. But that change will come too late to make a difference for victims of Sandy.