[Federal Register Volume 61, Number 140 (Friday, July 19, 1996)]
[Rules and Regulations]
[Pages 37687-37693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18352]
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FEDERAL EMERGENCY MANAGEMENT AGENCY
44 CFR Part 62
RIN 3067-AC26
National Flood Insurance Program; Assistance to Private Sector
Property Insurers
AGENCY: Federal Insurance Administration (FIA), Federal Emergency
Management Agency (FEMA).
ACTION: Final rule.
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SUMMARY: This final rule amends National Flood Insurance Program (NFIP)
regulations establishing the Financial Assistance/Subsidy Arrangement
that may be entered into by and between the Administrator and private
sector insurers under the Write Your Own (WYO) program. The amendments:
(1) Simplify the Arrangement by streamlining the format; (2) reflect
recent policy changes regarding loss adjustment and financial operation
of the private insurers in the WYO program; and (3) delete references
to obsolete operating manuals and handbooks. The amendments also
improve the flexibility of the Arrangement and provide information to
permit WYO participants to discharge their responsibilities for
underwriting, claims adjustment, and financial control procedures
established by the Federal Insurance Administration.
EFFECTIVE DATE: October 1, 1996.
FOR FURTHER INFORMATION CONTACT: Edward T. Pasterick, Federal Emergency
Management Agency, Federal Insurance Administration, 500 C Street SW.,
Washington, DC 20472, (202) 646-3443.
SUPPLEMENTARY INFORMATION: On April 3, 1996, FEMA published in the
Federal Register, 61 FR 14709, a proposed rule to amend NFIP
regulations establishing the Financial Assistance/Subsidy Arrangement
that may be entered into by and between the Administrator and private
sector insurers under the WYO program.
FEMA received two sets of written comments on the proposed rule.
The comments were submitted by two separate Write Your Own companies.
One company expressed concerns over seven (7) issues in the
Arrangement. The first concern questioned the Arrangement's incentive
system, i.e., adjusting the percentage of retained premium relative to
the Company's performance in achieving production goals. The proposed
Arrangement provides a minimum of 30.6% of premium income to be
retained by a WYO Company for operating and administrative expenses,
including marketing expenses. When a WYO company achieves its
production or marketing goals, the amount of retained premium income
increases from the minimum of 30.6% up to a maximum of 32.6%. The
commenter felt that such a provision was punitive and amounted to a
retroactive penalty since the marketing goals are tied to the retention
of current policies as well as the production of new business.
First of all, the amount of premium income retained by a WYO
company (32.6%) includes allowances for marketing activities.
Therefore, it is not unreasonable to condition a portion of the
retained premium on the success of such marketing activities. Secondly,
the unprecedented growth in the number of flood insurance policies
during the last two years as a result of this very incentive system is
a compelling reason to continue it under the Arrangement. Thirdly, the
marketing goals are tied to retention of current policies only to the
extent that such policies leave the NFIP entirely. If they go from one
WYO company to another, the loss does not adversely affect the first
company's goals. Furthermore, policy retention is a commonly accepted
component of marketing strategies. In sum, the principle of relating
financial incentives to performance is simply a sound business practice
and has been retained in the Arrangement.
The commenter expressed a related concern that a standard
percentage is unfair to larger companies that carry more policies on
their book of business. FEMA has retained the same percentage for all
companies participating in the WYO program for the current Arrangement
believing that a consistent
[[Page 37688]]
standard is the most equitable approach for all participants since it
is applied uniformly, regardless of a company's size. However, in
calculating goal accomplishment, we will employ a formula that will
recognize not only the percentage increase in the numbers of policies
but also absolute numbers of new policies. This will be explained
further in the offer letter for the Arrangement.
The overall issues of growth goals for companies in the WYO
program, the appropriate level of the expense allowance, and the
relationship between the two, all warrant a detailed review by the FIA.
For the current Arrangement, however, the levels of retained premium
reflected in the April 3, 1996 proposed rule remain in effect.
The second concern raised by this WYO company focused on the
appropriate roles with respect to risk bearing by the Federal
Government and the insurance companies participating in the
Arrangement. (The heading in the company's submission reads
``Continuing Shift of Risk-Bearing.'') The commenter expressed concern
that if Congressional authorization or appropriation for the program is
ever withdrawn the WYO company would still be liable for its policies
in force that are allowed to run their term under the Arrangement. The
company recommended that the purpose statement be revised to emphasize
the Federal Government's continuing financial assistance role--
regardless of circumstances. The same company also recommended that
Article V.E. should reaffirm that the FIA will reimburse expenses and
ultimately be responsible for claim payment for the duration of the
Arrangement even though financial assistance under the Arrangement is
canceled for any new or renewal business. In the absence of that, the
company recommended that a WYO company be permitted to cancel all
policies in force with 45 days notice should financial assistance be
terminated for any reason.
First, the Arrangement may not obligate the Federal Government in
any way beyond Congressional authorization. Congress has built into the
Act, however, a number of safeguards for policyholders--the ultimate
beneficiaries of the National Flood Insurance Program--and private
insurance companies that participate in the NFIP. One of the major
safeguards for consumers and private insurance companies is FEMA's
borrowing authority for the National Flood Insurance Fund which
operates independently of fiscal year authorization. Furthermore, the
WYO program has operated for thirteen years and all have benefited--the
consumer, the taxpayer, and participating WYO companies that have not
had to absorb or share losses even in recent heavy loss years in spite
of their active involvement in the NFIP. While FIA cannot speak for
Congress relative to the authorization for the NFIP, FIA has recognized
the commenter's concern by revising the purpose statement of Article I
to emphasize that all flood policies issued are done so under
prescribed conditions pursuant to the Arrangement and authorization
granted by Congress for the program.
The same commenter also expressed concern over certain details in
the Arrangement for the single adjuster program for catastrophic losses
such as hurricanes when property owners suffer combined wind and flood
losses but have separate insurance carriers for these perils.
Specifically, Article II.C.3.0 of the proposed Arrangement requires
using a single adjuster when the flood coverage is provided by the WYO
company and the wind coverage is provided by another WYO company.
Article II.C.4.0 requires the use of a single adjuster when the flood
coverage is by the WYO company, the wind coverage is by another
property insurer, and the State Insurance Regulator deems it in the
interests of the policyholder that a single adjuster be used to handle
both losses.
FIA finds some merit in the commenter's concerns relative to: 1.
Article II.C.3.0, such as the potential exposure of a WYO company's
proprietary information through the use of a single adjuster.
Consequently, the Arrangement has been revised by deleting Article
II.C.3.0. Article II. C.4.0, which requires the use of a single
adjuster when the State Insurance Regulator requires one, has been
retained in the Arrangement and renumbered as Article II.C.3.0. FIA
believes strongly that at the heart of the single adjuster approach is
an overriding public benefit since claims on the same property
involving separate perils are adjusted in a coordinated manner.
Therefore, whenever a State Insurance Regulator deems it in the
interest of the public that a single adjuster be used for an event
involving wind and flood, the program will support the Regulator's
decision and require the use of a single adjuster by participating WYO
companies.
The company also expressed concern that it no longer has an
understanding with one Joint Underwriting Association and would run the
risk in Article II.C.2.0 of breach of contract or misrepresentation
since Joint Underwriting Associations are one of the wind carriers that
would require the use of a single adjuster. The commenter indicated
that Article II.C.2.0 represented only a small percentage of its
business, and Joint Underwriting Associations are in fact only one of a
number of property insurance mechanisms listed in Article II.C.2.0.
While the company may no longer act as a servicing agent for a
particular State Joint Underwriting Association, this would certainly
not preclude the use of a single adjuster when the coverage for flood
is offered by the company and the wind coverage is offered by the
underwriting association. Accordingly, Article II.C.2.0 of the
Arrangement has not been revised.
The same company also recommended that State premium tax surcharges
for flood insurance and guaranty fund assessments be excluded from
liability from a participating Company. The company believed that the
wording in the proposed Arrangement could be an impediment to
marketing. FIA agrees with this comment, and Article III.A. has been
revised to read, ``The Company shall be liable for operating,
administrative and production expenses, including any State premium
taxes, dividends, agent's commissions or any other expense of whatever
nature incurred by the Company in the performance of its obligations
under the Arrangement, but excluding surcharges on flood insurance
premium and guaranty fund assessments.''
The first commenter also objected that the percentage (3.3%) paid
to WYO companies for unallocated loss adjustment expenses is
inadequate--one that has not changed since the inception of the
program. While loss adjustment expenses, as the commenter mentioned,
will on the average be higher for catastrophic events than for smaller
events, the 3.3% contained in the Arrangement is an average percentage
for all loss adjustment scenarios, including catastrophic disasters as
well as moderate and small events where allocated loss expenses are
lower. FEMA has determined that the current 3.3% should be retained in
the current Arrangement. The matter however warrants review, and any
modification to the loss adjustment expense will be considered at the
end of the current Arrangement year.
The commenter also objected to the removal of the adjuster fee
schedule from the Arrangement and recommended that the fee schedule be
modified to reflect higher limits of coverage. FEMA agrees that
additional changes need to be made to the fee
[[Page 37689]]
schedule; however, in the interest of expedition and flexibility, FEMA
believes that any changes to the fee schedule should be made outside
the rule making process in close coordination with the participating
WYO companies. Therefore, the fee schedule has not been included in the
final Arrangement.
This commenter's final recommendation involved offering greater
flexibility in the Arrangement regarding cash management procedures and
oversight. The commenter recommended that Article VII.B. be revised to
read ``The Company shall remit all funds, including interest, not
required to meet current expenditures to the United States Treasury, in
accordance with the provisions of the WYO Accounting Procedures Manual
or procedures approved by the FIA.'' FEMA agrees with that
recommendation provided that FIA's approval of accounting procedures is
in writing. The purpose underlying the revisions in the latest
Arrangement is to streamline the document and to achieve greater
flexibility in managing the program without sacrificing essential
operational and financial controls. We have modified the Arrangement to
reflect the company's recommendation.
A second WYO company objected also to the fixed percentage of 32.6%
of retained premium only when companies achieve their marketing or
production goals and to the limitation of 30.6% when that goal is not
achieved. The company cited its extensive service and outreach programs
to its agents in an effort to achieve the growth goals for the National
Flood Insurance Program. In spite of this effort, the company indicated
that increased competition from the independent agency system has
prevented the company from achieving its goals. FEMA concludes however
that the experience of the WYO program as a whole, with these
percentages in place, has been responsible in large part for the
unprecedented growth of the program. As explained above, the percentage
rates of 30.6% (the minimum amount of premium that a company may
retain) and 32.6% (the amount of premium retained by a company when it
achieves its marketing goals) have been retained in this Arrangement
but will be reviewed by FIA for future Arrangements.
National Environmental Policy Act
This final rule is categorically excluded from the requirements of
44 CFR Part 10, Environmental Consideration. No environmental impact
assessment has been prepared.
Executive Order 12866, Regulatory Planning and Review
This final rule is not a significant regulatory action as defined
under Executive Order 12866 of September 30, 1993, Regulatory Planning
and Review, 58 FR 51735, October 4, 1993. To the extent possible, this
rule adheres to the principles of regulation as set forth in Executive
Order 12866. This rule has not been reviewed by the Office of
Management and Budget under the provisions of Executive Order 12866.
Paperwork Reduction Act
This final rule does not contain a collection of information and is
therefore not subject to the provisions of the Paperwork Reduction Act
of 1995.
Executive Order 12612, Federalism
This final rule involves no policies that have federalism
implications under Executive Order 12612, Federalism, dated October 26,
1987.
Executive Order 12778, Civil Justice Reform
This final rule meets the applicable standards of section 2(b)(2)
of Executive Order 12778.
List of Subjects in 44 CFR Part 62
Claims, Flood insurance.
Accordingly, 44 CFR part 62 is amended as follows:
PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS
1. The authority citation for Part 62 continues to read as follows:
Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of
1978, 43 FR 41943, 3 CFR 1978 Comp., p. 329; E.O. 12127 of Mar. 31,
1979, 44 FR 19367, 3 CFR, 1979 Comp., p. 376.
2. Appendix A of part 62 is revised to read as follows:
Appendix A of Part 62--Federal Emergency Management Agency, Federal
Insurance Administration, Financial Assistance/Subsidy Arrangement
Purpose: To assist the company in underwriting flood insurance
using the Standard Flood Insurance Policy.
Accounting Data: Pursuant to Section 1310 of the Act, a Letter of
Credit shall be issued for payment as provided for herein from the
National Flood Insurance Fund.
Effective Date: October 1, 1996.
Issued By: Federal Emergency Management Agency, Federal Insurance
Administration, Washington, DC 20472.
Article I--Findings, Purpose, and Authority
Whereas, the Congress in its ``Finding and Declaration of Purpose''
in the National Flood Insurance Act of 1968, as amended, (``the Act'')
recognized the benefit of having the National Flood Insurance Program
(the Program) ``carried out to the maximum extent practicable by the
private insurance industry''; and
Whereas, the Federal Insurance Administration (FIA) recognizes this
Arrangement as coming under the provisions of Section 1345 of the Act;
and
Whereas, the goal of the FIA is to develop a program with the
insurance industry where, over time, some risk-bearing role for the
industry will evolve as intended by the Congress (Section 1304 of the
Act); and
Whereas, the insurer (hereinafter the ``Company'') under this
Arrangement shall charge rates established by the FIA; and
Whereas, this Arrangement will subsidize all flood policy losses by
the Company; and
Whereas, this Financial Assistance/Subsidy Arrangement has been
developed to enable any interested qualified insurer to write flood
insurance under its own name; and
Whereas, one of the primary objectives of the Program is to provide
coverage to the maximum number of structures at risk and because the
insurance industry has marketing access through its existing facilities
not directly available to the FIA, it has been concluded that coverage
will be extended to those who would not otherwise be insured under the
Program; and
Whereas, flood insurance policies issued subject to this
Arrangement shall be only that insurance written by the Company in its
own name under prescribed policy conditions and pursuant to this
Arrangement and the Act; and
Whereas, over time, the Program is designed to increase industry
participation, and, accordingly, reduce or eliminate Government as the
principal vehicle for delivering flood insurance to the public; and
Whereas, the direct beneficiaries of this Arrangement will be those
Company policyholders and applicants for flood insurance who otherwise
would not be covered against the peril of flood.
Now, therefore, the parties hereto mutually undertake the
following:
[[Page 37690]]
Article II--Undertakings of the Company
A. In order to be eligible for assistance under this Arrangement
the Company shall be responsible for:
1.0 Policy Administration, including:
1.1 Community Eligibility/Rating Criteria.
1.2 Policyholder Eligibility Determination.
1.3 Policy Issuance.
1.4 Policy Endorsements.
1.5 Policy Cancellations.
1.6 Policy Correspondence.
1.7 Payment of Agents' Commissions.
The receipt, recording, control, timely deposit and disbursement of
funds in connection with all the foregoing, and correspondence relating
to the above in accordance with the Financial Control Plan
requirements.
2.0 Claims processing in accordance with general Company standards
and the Financial Control Plan. Other technical and policy material
published by FEMA and FIA will also provide guidance to the Company.
3.0 Reports.
3.1 Monthly Financial Reporting and Statistical Transaction
Reporting shall be in accordance with the requirements of National
Flood Insurance Program Transaction Record Reporting and Processing
Plan for the Write Your Own (WYO) Program and the Financial Control
Plan for business written under the WYO Program. These data shall be
validated/edited/audited in detail and shall be compared and balanced
against Company financial reports.
3.2 Monthly financial reporting shall be prepared in accordance
with the WYO Accounting Procedures.
B. The Company shall use the following time standards of
performance as a guide:
1.0 Application Processing--15 days (Note: If the policy cannot be
mailed due to insufficient or erroneous information or insufficient
funds, a request for correction or added monies shall be mailed within
10 days);
1.1 Renewal Processing--7 days;
1.2 Endorsement Processing--15 days;
1.3 Cancellation Processing--15 days;
1.4 Claims Draft Processing--7 days from completion of file
examination;
1.5 Claims Adjustment--45 days average from receipt of Notice of
Loss (or equivalent) through completion of examination.
1.6 For the elements of work enumerated above, the elapsed time
shown is from the date of receipt through the date of mail out. Days
means working days, not calendar days.
In addition to the standards for timely performance set forth
above, all functions performed by the Company shall be in accordance
with the highest reasonably attainable quality standards generally
utilized in the insurance and data processing industries.
These standards are for guidance. Although no immediate remedy for
failure to meet them is provided under this Arrangement, nevertheless,
performance under these standards and the marketing guidelines provided
for in Section G. below can be a factor considered by the Federal
Insurance Administrator (the Administrator) in requiring corrective
action by the Company, in determining the continuing participation of
the Company in the Program, or in taking other action, e.g., limiting
the Company's authority to write new business.
C. To ensure maximum responsiveness to the National Flood Insurance
Program's (NFIP) policyholders following a catastrophic event, e.g., a
hurricane, involving insured wind and flood damage to policyholders,
the Company shall agree to the adjustment of the combined flood and
wind losses utilizing one adjuster under an NFIP-approved Single
Adjuster Program in the following cases and under procedures issued by
the Administrator:
1.0 Where the flood and wind coverage is provided by the Company;
2.0 Where the flood coverage is provided by the Company and the
wind coverage is provided by a participating State Property Insurance
Plan, Windpool Association, Beach Plan, Joint Underwriting Association,
FAIR Plan, or similar property insurance mechanism; and
3.0 Where the flood coverage is provided by the Company and the
wind coverage is provided by another property insurer and the State
Insurance Regulator has determined that such property insurer shall, in
the interest of consumers, facilitate the adjustment of its wind loss
by the adjuster engaged to adjust the flood loss of the Company.
D. Policy Issuance.
1.0 The flood insurance subject to this Arrangement shall be only
that insurance written by the Company in its own name pursuant to the
Act.
2.0 The Company shall issue policies under the regulations
prescribed by the Administrator in accordance with the Act;
3.0 All such policies of insurance shall conform to the
regulations prescribed by the Administrator pursuant to the Act, and be
issued on a form approved by the Administrator;
4.0 All policies shall be issued in consideration of such premiums
and upon such terms and conditions and in such States or areas or
subdivisions thereof as may be designated by the Administrator and only
where the Company is licensed by State law to engage in the property
insurance business;
5.0 The Administrator may require the Company to discontinue
issuing policies subject to this Arrangement immediately in the event
Congressional authorization or appropriation for the National Flood
Insurance Program is withdrawn.
E. The Company shall separate Federal flood insurance funds from
all other Company accounts, at a bank or banks of its choosing for the
collection, retention and disbursement of Federal funds relating to its
obligation under this Arrangement, less the Company's expenses as set
forth in Article III, and the operation of the Letter of Credit
established pursuant to Article IV. All funds not required to meet
current expenditures shall be remitted to the United States Treasury,
in accordance with the provisions of the WYO Accounting Procedures
Manual.
F. The Company shall investigate, adjust, settle and defend all
claims or losses arising from policies issued under this Arrangement.
Payment of flood insurance claims by the Company shall be binding upon
the FIA.
G. The Company shall market flood insurance policies in a manner
consistent with the marketing guidelines established by the Federal
Insurance Administration.
Article III--Loss Costs, Expenses, Expense Reimbursement, and Premium
Refunds
A. The Company shall be liable for operating, administrative and
production expenses, including any State premium taxes, dividends,
agent's commissions or any other expense of whatever nature incurred by
the Company in the performance of its obligations under this
Arrangement but excluding surcharges on flood insurance premium and
guaranty fund assessments.
B. The Company shall be entitled to withhold, on a provisional
basis, as operating and administrative expenses, including agents' or
brokers' commissions, an amount from the Company's written premium on
the policies covered by this Arrangement in reimbursement of all of the
Company's marketing, operating and administrative
[[Page 37691]]
expenses, except for allocated and unallocated loss adjustment expenses
described in Section C. of this Article, which amount shall be 32.6% of
the Company's written premium on the policies covered by this
Arrangement. The final amount retained by the Company shall be
determined by an increase or decrease depending on the extent to which
the Company meets the marketing goals for the 1996-1997 Arrangement
year contained in marketing guidelines established pursuant to Article
II. G.
The adjustment in the amount retained by the Company shall be made
after the end of the 1996-1997 Arrangement year. Any decrease from
32.6% made as a result of a Company not meeting its marketing goals
shall be directly related to the extent to which the Company's goal was
not achieved, but shall not exceed two (2) percentage points (providing
for a minimum of 30.6%).
The increase, which shall be distributed among the Companies
exceeding their marketing goals, shall be drawn from a pool composed of
the difference between 32.6% of all WYO Companies' written premium in
Arrangement year 1996-1997 and the total amount, prior to the increase,
provided to the Companies on the basis of the extent to which they have
met their marketing goals. A distribution formula will be developed and
distributed to WYO Companies that will consider the extent to which the
Company has exceeded its goal and the size of the Company's book of
business in relation to the total number of WYO policies. The amount of
any increase shall be paid promptly to the Company after the end of the
1996-1997 Arrangement year.
The Company, with the consent of the Administrator as to terms and
costs, shall be entitled to utilize the services of a national rating
organization, licensed under state law, to assist the FIA in
undertaking and carrying out such studies and investigations on a
community or individual risk basis, and in determining more equitable
and accurate estimates of flood insurance risk premium rates as
authorized under the National Flood Insurance Act of 1968, as amended.
The Company shall be reimbursed in accordance with the provisions of
the WYO Accounting Procedures Manual for the charges or fees for such
services.
C. Loss Adjustment Expenses shall be reimbursed as follows:
1. Unallocated loss adjustment shall be an expense reimbursement of
3.3% of the incurred loss (except that it does not include ``incurred
but not reported'').
2. Allocated loss adjustment expense shall be reimbursed to the
Company pursuant to a ``Fee Schedule'' coordinated with the Company and
provided by the Administrator.
3. Special allocated loss expenses shall be reimbursed to the
Company in accordance with guidelines issued by the Administrator.
D.1. Loss payments under policies of flood insurance shall be made
by the Company from funds retained in the bank account(s) established
under Article II, Section E and, if such funds are depleted, from funds
derived by drawing against the Letter of Credit established pursuant to
Article IV.
2. Loss payments will include payments as a result of awards or
judgments for damages arising under the scope of this Arrangement,
policies of flood insurance issued pursuant to this Arrangement, and
the claims processing standards and guides set forth at Article II,
Section A, 2.0 of this Arrangement. Prompt notice of any claim for
damages as to claims processing or other matters arising outside the
scope of this section (D)(2) shall be sent to the Administrator along
with a copy of any material pertinent to the claim for damages arising
outside of the scope of the matters set forth in this section (D)(2).
Following receipt of notice of such claim, the General Counsel
(OGC), FEMA, shall review the cause and make a recommendation to FIA as
to whether the claim is grounded in actions by the Company that are
significantly outside the provisions of this section (D)(2). After
reviewing the General Counsel's recommendation, the Administrator will
make his/her decision and the Company will be notified, in writing,
within thirty (30) days of the General Counsel's recommendation, if the
decision is that any award or judgment for damages arising out of such
actions will not be recognized under Article III of this Arrangement as
a reimbursable loss cost, expense or expense reimbursement. In the
event that the Company wishes to petition for reconsideration of the
notification that it will not be reimbursed for the award or judgment
made under the above circumstances, it may do so by mailing, within
thirty days of the notice declining to recognize any such award or
judgment as reimbursable under Article III, a written petition to the
Chairman of the WYO Standards Committee established under the Financial
Control Plan. The WYO Standards Committee will, then, consider the
petition at its next regularly scheduled meeting or at a special
meeting called for that purpose by the Chairman and issue a written
recommendation to the Administrator, within thirty days of the meeting.
The Administrator's final determination will be made, in writing, to
the Company within thirty days of the recommendation made by the WYO
Standards Committee.
E. Premium refunds to applicants and policyholders required
pursuant to rules contained in the National Flood Insurance Program
(NFIP) ``Flood Insurance Manual'' shall be made by the Company from
Federal flood insurance funds referred to in Article II, Section E.
and, if such funds are depleted, from funds derived by drawing against
the Letter of Credit established pursuant to Article IV.
Article IV--Undertakings of the Government
A. Letter(s) of Credit shall be established by the Federal
Emergency Management Agency (FEMA) against which the Company may
withdraw funds daily, if needed, pursuant to prescribed procedures
implemented by FEMA. The amounts of the authorizations will be
increased as necessary to meet the obligations of the Company under
Article III, Sections C, D, and E. Request for funds shall be made only
when net premium income has been depleted. The timing and amount of
cash advances shall be as close as is administratively feasible to the
actual disbursements by the recipient organization for allowable Letter
of Credit expenses.
Request for payment on Letters of Credit shall not ordinarily be
drawn more frequently than daily nor in amounts less than $5,000, and
in no case more than $5,000,000 unless so stated on the Letter of
Credit. This Letter of Credit may be drawn by the Company for any of
the following reasons:
1. Payment of claim as described in Article III, Section D;
2. Refunds to applicants and policyholders for insurance premium
overpayment, or if the application for insurance is rejected or when
cancellation or endorsement of a policy results in a premium refund as
described in Article III, Section E; and
3. Allocated and unallocated Loss Adjustment Expenses as described
in Article III, Section C.
B. The FIA shall provide technical assistance to the Company as
follows:
1. The FIA's policy and history concerning underwriting and claims
handling.
2. A mechanism to assist in clarification of coverage and claims
questions.
3. Other assistance as needed.
[[Page 37692]]
Article V--Commencement and Termination
A. Upon signature of authorized officials for both the Company and
the FIA, this Arrangement shall be effective for the period October 1
through September 30. The FIA shall provide financial assistance only
for policy applications and endorsements accepted by the Company during
this period pursuant to the Program's effective date, underwriting and
eligibility rules.
B. By June 1, of each year, the FIA shall publish in the Federal
Register and make available to the Company the terms for the re-
subscription of this Financial Assistance/Subsidy Arrangement. In the
event the Company chooses not to re-subscribe, it shall notify the FIA
to that effect by the following July 1.
C. In the event the Company elects not to participate in the
Program in any subsequent fiscal year, or the FIA chooses not to renew
the Company's participation, the FIA, at its option, may require (1)
the continued performance of this entire Arrangement for a period not
to exceed one (1) year following the original term of this Arrangement,
or any renewal thereof, or (2) the transfer to the FIA of:
1. All data received, produced, and maintained through the life of
the Company's participation in the Program, including certain data, as
determined by FIA, in a standard format and medium; and
2. A plan for the orderly transfer to the FIA of any continuing
responsibilities in administering the policies issued by the Company
under the Program including provisions for coordination assistance; and
3. All claims and policy files, including those pertaining to
receipts and disbursements that have occurred during the life of each
policy. In the event of a transfer of the services provided, the
Company shall provide the FIA with a report showing, on a policy basis,
any amounts due from or payable to insureds, agents, brokers, and
others as of the transition date.
D. Financial assistance under this Arrangement may be cancelled by
the FIA in its entirety upon 30 days written notice to the Company by
certified mail stating one of the following reasons for such
cancellation: (1) Fraud or misrepresentation by the Company subsequent
to the inception of the contract, or (2) nonpayment to the FIA of any
amount due the FIA. Under these very specific conditions, the FIA may
require the transfer of data as shown in Section C., above. If transfer
is required, the unearned expenses retained by the Company shall be
remitted to the FIA. In such event the Government will assume all
obligations and liabilities owed to policyholders under such policies
arising before and after the date of transfer.
E. In the event the Act is amended, or repealed, or expires, or if
the FIA is otherwise without authority to continue the Program,
financial assistance under this Arrangement may be cancelled for any
new or renewal business, but the Arrangement shall continue for
policies in force that shall be allowed to run their term under the
Arrangement.
F. In the event that the Company is unable to, or otherwise fails
to, carry out its obligations under this Arrangement by reason of any
order or directive duly issued by the Department of Insurance of any
Jurisdiction to which the Company is subject, the Company agrees to
transfer, and the Government will accept, any and all WYO policies
issued by the Company and in force as of the date of such inability or
failure to perform. In such event the Government will assume all
obligations and liabilities owed to policyholders under such policies
arising before and after the date of transfer and the Company will
immediately transfer to the Government all funds in its possession with
respect to all such policies transferred and the unearned portion of
the Company expenses for operating, administrative and loss adjustment
on all such policies.
Article VI--Information and Annual Statements
The Company shall furnish to FEMA such summaries and analyses of
information including claim file information in its records as may be
necessary to carry out the purposes of the National Flood Insurance Act
of 1968, as amended, in such form as the FIA, in cooperation with the
Company, shall prescribe. The Company shall be a property/casualty
insurer domiciled in a State or territory of the United States. Upon
request, the Company shall file with the FIA a true and correct copy of
the Company's Fire and Casualty Annual Statement, and Insurance Expense
Exhibit or amendments thereof, as filed with the State Insurance
Authority of the Company's domiciliary State.
Article VII--Cash Management and Accounting
A. FEMA shall make available to the Company during the entire term
of this Arrangement and any continuation period required by FIA
pursuant to Article V, Section C., the Letter of Credit provided for in
Article IV drawn on a repository bank within the Federal Reserve System
upon which the Company may draw for reimbursement of its expenses as
set forth in Article IV that exceed net written premiums collected by
the Company from the effective date of this Arrangement or continuation
period to the date of the draw.
B. The Company shall remit all funds, including interest, not
required to meet current expenditures to the United States Treasury, in
accordance with the provisions of the WYO Accounting Procedures Manual
or procedures approved in writing by the FIA.
C. In the event the Company elects not to participate in the
Program in any subsequent fiscal year, the Company and FIA shall make a
provisional settlement of all amounts due or owing within three months
of the termination of this Arrangement. This settlement shall include
net premiums collected, funds drawn on the Letter of Credit, and
reserves for outstanding claims. The Company and FIA agree to make a
final settlement of accounts for all obligations arising from this
Arrangement within 18 months of its expiration or termination, except
for contingent liabilities that shall be listed by the Company. At the
time of final settlement, the balance, if any, due the FIA or the
Company shall be remitted by the other immediately and the operating
year under this Arrangement shall be closed.
Article VIII--Arbitration
A. If any misunderstanding or dispute arises between the Company
and the FIA with reference to any factual issue under any provisions of
this Arrangement or with respect to the FIA's non-renewal of the
Company's participation, other than as to legal liability under or
interpretation of the standard flood insurance policy, such
misunderstanding or dispute may be submitted to arbitration for a
determination that shall be binding upon approval by the FIA. The
Company and the FIA may agree on and appoint an arbitrator who shall
investigate the subject of the misunderstanding or dispute and make a
determination. If the Company and the FIA cannot agree on the
appointment of an arbitrator, then two arbitrators shall be appointed,
one to be chosen by the Company and one by the FIA.
The two arbitrators so chosen, if they are unable to reach an
agreement, shall select a third arbitrator who shall act as umpire, and
such umpire's determination shall become final only upon approval by
the FIA.
The Company and the FIA shall bear in equal shares all expenses of
the arbitration. Findings, proposed awards,
[[Page 37693]]
and determinations resulting from arbitration proceedings carried out
under this section, upon objection by FIA or the Company, shall be
inadmissible as evidence in any subsequent proceedings in any court of
competent jurisdiction.
This Article shall indefinitely succeed the term of this
Arrangement.
Article IX--Errors and Omissions
The parties shall not be liable to each other for damages caused by
ordinary negligence arising out of any transaction or other performance
under this Arrangement, nor for any inadvertent delay, error, or
omission made in connection with any transaction under this
Arrangement, provided that such delay, error, or omission is rectified
by the responsible party as soon as possible after discovery.
However, in the event that the Company has made a claim payment to
an insured without including a mortgagee (or trustee) of which the
Company had actual notice prior to making payment, and subsequently
determines that the mortgagee (or trustee) is also entitled to any part
of said claim payment, any additional payment shall not be paid by the
Company from any portion of the premium and any funds derived from any
Federal Letter of Credit deposited in the bank account described in
Article II, section E. In addition, the Company agrees to hold the
Federal Government harmless against any claim asserted against the
Federal Government by any such mortgagee (or trustee), as described in
the preceding sentence, by reason of any claim payment made to any
insured under the circumstances described above.
Article X--Officials Not to Benefit
No Member or Delegate to Congress, or Resident Commissioner, shall
be admitted to any share or part of this Arrangement, or to any benefit
that may arise therefrom; but this provision shall not be construed to
extend to this Arrangement if made with a corporation for its general
benefit.
Article XI--Offset
At the settlement of accounts the Company and the FIA shall have,
and may exercise, the right to offset any balance or balances, whether
on account of premiums, commissions, losses, loss adjustment expenses,
salvage, or otherwise due one party to the other, its successors or
assigns, hereunder or under any other Arrangements heretofore or
hereafter entered into between the Company and the FIA. This right of
offset shall not be affected or diminished because of insolvency of the
Company.
All debts or credits of the same class, whether liquidated or
unliquidated, in favor of or against either party to this Arrangement
on the date of entry, or any order of conservation, receivership, or
liquidation, shall be deemed to be mutual debts and credits and shall
be offset with the balance only to be allowed or paid. No offset shall
be allowed where a conservator, receiver, or liquidator has been
appointed and where an obligation was purchased by or transferred to a
party hereunder to be used as an offset.
Although a claim on the part of either party against the other may
be unliquidated or undetermined in amount on the date of the entry of
the order, such claim will be regarded as being in existence as of the
date of such order and any credits or claims of the same class then in
existence and held by the other party may be offset against it.
Article XII--Equal Opportunity
The Company shall not discriminate against any applicant for
insurance because of race, color, religion, sex, age, handicap, marital
status, or national origin.
Article XIII--Restriction on Other Flood Insurance
As a condition of entering into this Arrangement, the Company
agrees that in any area in which the Administrator authorizes the
purchase of flood insurance pursuant to the Program, all flood
insurance offered and sold by the Company to persons eligible to buy
pursuant to the Program for coverages available under the Program shall
be written pursuant to this Arrangement.
However, this restriction applies solely to policies providing only
flood insurance. It does not apply to policies provided by the Company
of which flood is one of the several perils covered, or where the flood
insurance coverage amount is over and above the limits of liability
available to the insured under the Program.
Article XIV--Access to Books and Records
The FIA and the Comptroller General of the United States, or their
duly authorized representatives, for the purpose of investigation,
audit, and examination shall have access to any books, documents,
papers and records of the Company that are pertinent to this
Arrangement. The Company shall keep records that fully disclose all
matters pertinent to this Arrangement, including premiums and claims
paid or payable under policies issued pursuant to this Arrangement.
Records of accounts and records relating to financial assistance
shall be retained and available for three (3) years after final
settlement of accounts, and to financial assistance, three (3) years
after final adjustment of such claims. The FIA shall have access to
policyholder and claim records at all times for purposes of the review,
defense, examination, adjustment, or investigation of any claim under a
flood insurance policy subject to this Arrangement.
Article XV--Compliance With Act and Regulations
This Arrangement and all policies of insurance issued pursuant
thereto shall be subject to the provisions of the National Flood
Insurance Act of 1968, as amended, the Flood Disaster Protection Act of
1973, as amended, the National Flood Insurance Reform Act of 1994, and
Regulations issued pursuant thereto and all Regulations affecting the
work that are issued pursuant thereto, during the term hereof.
Article XVI--Relationship Between the Parties (Federal Government
and Company) and the Insured
Inasmuch as the Federal Government is a guarantor hereunder, the
primary relationship between the Company and the Federal Government is
one of a fiduciary nature, i.e., to assure that any taxpayer funds are
accounted for and appropriately expended.
The Company is not the agent of the Federal Government. The Company
is solely responsible for its obligations to its insured under any
flood policy issued pursuant hereto.
(Catalog of Federal Domestic Assistance No. 83.100, ``Flood
Insurance'').
Dated: July 12, 1996.
Harvey G. Ryland,
Deputy Director.
[FR Doc. 96-18352 Filed 7-18-96; 8:45 am]
BILLING CODE 6718-03-P
