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The Federal Emergency Management Agency (FEMA) is preparing mass mailings to homeowners who filed flood insurance claims following 2012's Hurricane Sandy, offering to reconsider the claims. The policy comes on the heels of revelations that some of the insurance carriers hired by FEMA to administer flood insurance policies (the so-called "Write Your Own" carriers) engaged in a widespread practice of altering field reports by claims investigators — without notifying homeowners of the alterations, and, in some cases, without even informing the field investigators themselves of the changes.

New Jersey Congressman Chris Smith issued a statement May 6 after a Congressional meeting with FEMA officials, saying: "FEMA plans to begin sending letters on May 18th to NFIP policyholders who filed Sandy-related claims. Letters will be sent in batches by ZIP code over several weeks, and policyholders will be given 90 days from the date of the notice to contact FEMA by phone or online to begin the review process."

"Each policyholder who wishes to have their claim reviewed will be assigned a caseworker—a certified NFIP flood adjuster—who will walk them through the process," Smith said. "FEMA has assured us that these caseworkers have been handpicked based on experience and have undergone thorough training to ensure that policyholders get every dime they deserve. In addition, if policyholders choose to have the final determination reviewed by the neutral third party, FEMA says it will give great deference to that review."

Earlier this spring, FEMA had already pledged to review flood cases, and had moved to take over management of the claims process from the "Write Your Own" firms whose policies had come under fire in federal courts. In a blog post about FEMA's  Plaintiffs' attorney Chip Merlin released portions of a letter from newly appointed FEMA official Brad Kieserman, who is now in charge of damage control for the agency in the controversy (see "FEMA takes over Sandy flood claims from WYO carriers," by William F. "Chip" Merlin. In the letter, Kieserman detailed how FEMA was moving to eliminate an apparent conflict of interest between the agency's goals and the hired carriers' motivations.

Wrote Kieserman: "Under the Arrangement, FEMA will reimburse the WYO Companies for all Loss Payments, which include 'payments as a result of litigation that arises under the scope of this Arrangement.' This means FEMA will reimburse WYO Companies for any litigation costs, including attorney fees, and civil judgments and awards, arising from this settlement process. Given that FEMA will be making all decisions regarding settlement in this process, FEMA accepts full responsibility for the scope and amount of such payments made to policyholders for purposes of any subsequent audit. Accordingly, FEMA will not seek to recoup from WYO companies funds paid to policyholders through this settlement process as a result of any subsequent audit finding because the decision to make the payment rests solely with FEMA, not with the respective WYO company."

Keiserman's move goes to a question that has puzzled observers: If flood insurance awards are paid by FEMA, and not by the carriers, why have the carriers apparently gone to such lengths to reduce the clai awards? NJSpotlight took a look at that question in a report this week (see: "The List: 10 Reasons Why Insurance Companies May Have Underpaid Sandy Victims," by Scott Gurian). The leading possibility: an unbalanced penalty structure, where insurance carriers are nicked for cash if they overpay claims, but not if they underpay.

Given the incentive structure in the flood insurance program, underpayments on claims may not hurt insurance companies — but they increase the burden on other relief agencies in the community, reports Newsworks (see: 'Congress to review FEMA's handling of Superstorm Sandy victims," by Scott Gurian). "While many people in New Jersey have long since moved on from Sandy, case managers at the Ocean County Long Term Recovery Group still have full caseloads, and they've had to turn away some homeowners in recent months due to the ongoing demand for help," Newsworks reports. "Sue Marticek, the group's executive director, said the flood-insurance denials are a big reason for that backlog."

Said Marticek: "Many people have said that if they would have received the money they deserved from their insurance company, they never would have never applied for RREM [New Jersey's Rehabilitation, Reconstruction, Elevation and Mitigation Program]. They would have never come to us for charity dollars. They feel that they have been shortchanged from the get-go. So now they're behind the eight ball."