Hurricane Katrina exposed the severe conflict questions that arise when a private insurer settles both wind and flood claims. The conflict is obvious–each dollar the adjuster finds to be caused by wind comes out of the insurer's pocket, while each dollar found to be flood comes out of the taxpayer's pocket.

Worse, the insurer gets fees for settling the flood insurance claim that go up as the size of the payout goes up. The temptation for insurers to determine greater flood damage than is justified–and less wind damage–is great.

Lawsuits abound. In one, a WYO insurer allegedly paid flood insurance dollars even though no floodwaters entered the building. Other suits allege hundreds of claims were mishandled to the insurer's benefit.

The best proof that WYO insurers are more worried about their own interests than that of the taxpayers is many WYO carriers adopted the anti-concurrent-causation clause in homeowners policies.

The blatantly anti-consumer clause works like this: If an insured wind claim happens, and at about the same time a flood claim occurs, the wind coverage is voided and the insurer pays nothing for wind (but will pay the flood claim). Insurers claim the legal right to revoke wind coverage because flood damage occurs, even for distinguishable flood damage occurring hours after the wind damage happened.

The use of the ACC clause by WYO insurers exposes taxpayers to huge potential liabilities not anticipated under flood rates, by making it more likely the NFIP will end up paying for at least some wind damage.

Other conflict questions have arisen after Hurricane Katrina.

WYO insurers get paid fees for handling flood insurance policies and claims–fees that appear to be excessive.

NFIP pays insurers an expense load based on the average costs for underwriting, policy writing and advertising, as well as taxes and general expenses in five property lines. Right now, that average is about 16 percent. To this is added a 15 percent commission allowance, paid to insurers regardless of whether an agent or broker receives a commission. A 1 percent “addition” is also paid (2 percent if the WYO insurer meets production goals).

On top of that, the insurer is reimbursed for allocated claims adjustment expenses (such as attorney and adjuster fees) and receives 3.3 percent of the amount of claims for unallocated claims adjustment expenses.

Overall, the overhead for the WYO companies approaches 40 percent, which is outlandishly high for insurers merely adding flood coverage to a homeowners policy.

There are several actions Congress can take to improve this situation, such as:

o Study whether going back to a direct program administered by a competitively bid contractor would save money.

o Eliminate conflict-of-interest questions, in part, perhaps, by bifurcating claims from policy service–using a contractor to do the claims and WYO insurers to service and sell flood insurance policies.

o Bring competition to bear in setting fees–perhaps by having competitive bids for regions of the country, or allowing insurers to discount the expense portion of the premium. This would allow insurers to compete for flood insurance market share by cutting fees.

o Require FEMA to advertise which insurers offer the lowest costs to help consumers shop and encourage other WYO companies to cut flood fees and premiums.

o Consider removing Computer Sciences Corp. as the contractor, data collector and auditor of the WYO Program. CSC is a major supplier of services to insurance companies, and this appears to be another conflict of interest that needs to be rectified.

o Set a standard for participation as a WYO company that forbids an insurer from using a policy clause like ACC that has the effect of shifting privately insured claims into the NFIP.

o Require a WYO company to use the best deal it has for its own costs when paying flood insurance–for example, no more charging the NFIP more for materials than the insurer is paying for wind damage.