[Federal Register Volume 62, Number 142 (Thursday, July 24, 1997)]
[Rules and Regulations]
[Pages 39908-39914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19497]
[[Page 39907]]
_______________________________________________________________________
Part III
Federal Emergency Management Agency
_______________________________________________________________________
44 CFR Part 62
National Flood Insurance Program; Assistance to Private Sector Property
Insurers; Final Rule
Federal Register / Vol. 62, No. 142 / Thursday, July 24, 1997 / Rules
and Regulations
[[Page 39908]]
=======================================================================
-----------------------------------------------------------------------
FEDERAL EMERGENCY MANAGEMENT AGENCY
44 CFR Part 62
RIN 3067-AC62
National Flood Insurance Program; Assistance to Private Sector
Property Insurers
AGENCY: Federal Insurance Administration (FEMA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This rule amends the National Flood Insurance Program (NFIP)
regulations establishing the Financial Assistance/Subsidy Arrangement.
This Arrangement may be entered into by and between the Administrator
and private sector insurers under the Write Your Own (WYO) program. The
amendments to the Arrangement: reduce the range between the minimum and
maximum amount of premium income a company may retain as an expense
allowance as a result of its marketing performance; restructure the
Arrangement so that under no circumstance would a company have to
return any portion of the expense allowance; reformat the Arrangement
to make it easier to read; standardize references throughout the
document, and add details to clarify responsibilities of private sector
insurers under the Arrangement with regard to reporting requirements,
litigation, and ``errors and omissions.''
EFFECTIVE DATE: October 1, 1997.
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 May 1, 1997, FEMA published in the
Federal Register, 62 FR 23736, a proposed rule to amend the 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. FEMA received
five sets of comments on the proposed rule.
One WYO company considered the reference to WYO companies as
insurers to be ``ambiguous.'' The commenter added that this perceived
ambiguity potentially transfers risk to the WYO companies. As FEMA
responded last year on this issue, the Arrangement is a financial
assistance/subsidy agreement that FEMA shall honor with its industry
partners as it has for the past fourteen years--within the scope of
Congressional authorization and the safeguards built into the enabling
legislation to facilitate continued operation of the NFIP. Those
safeguards include: 1. the agency's borrowing authority for the
National Flood Insurance Fund which operates independently of fiscal
year authorization, and 2. financial assistance of the Federal
Government for the WYO companies as spelled out in the Arrangement. In
addition to those safeguards and the Federal financial backing of the
private insurers participating in the Arrangement, the quid pro quo of
sound mitigation in return for public backing of flood insurance is at
the very foundation of the NFIP. It was the express wish of Congress
that in time the private sector would assume more of a share of the
risk, as the NFIP's mitigation programs and activities reduce the
exposure of properties to flood loss. In FEMA's view, the references in
Article I to the evolution of risk-sharing by participating companies
are appropriate in the light of both the Congressional intent for the
program and FEMA's continuing success in partnership with State and
local governments in achieving more effective flood hazard mitigation.
To place these concerns in clearer perspective, FEMA and the companies
understand that participation on the part of private insurers in the
program is voluntary, and, as with any risk venture, the insurer will
weigh the advantages of the WYO program against any uncertainties--
regardless of how remote--before making an informed decision to
participate.
Three companies expressed concern that the marketing guidelines are
not in the Arrangement and are only referred to in Article II. G. One
of the commenters believed that, since companies do not know until the
Arrangement is published as a final rule what the marketing guidelines
are, this absence could affect a company's decision to enter into the
Arrangement. In a related concern about Article III, the same commenter
said ``without knowing the ``marketing goal'' for 1998, it's impossible
to know whether we can earn more than the minimum expense allowance.
Such uncertainty is patently unfair, a violation of the insurer's due
process and not suitable for either party to the Arrangement.''
FEMA acknowledges the concern but does not agree with the
commenter's conclusions concerning due process or fairness.
Simultaneous with the publication of this rule, marketing goals will be
distributed by FEMA. Hence, a company will have approximately two
months to make an informed decision whether it wishes to sign the
Arrangement for the coming year. Historically, providing marketing
guidelines after publication of the final Arrangement for the coming
year has given companies enough time and has not proved to be an
obstacle for participation in the WYO program. Companies for this year,
as in the past, will continue to have complete information on marketing
guidelines--the basis for the amount of premium income a company may
retain--before being asked to sign the Arrangement. FEMA does not
foresee any problems developing on this score.
Another company that expressed concerns about the program's
marketing goals recommended that a company's marketing efforts and
expenditures should be analyzed and considered by FIA in addition to
the company's actual growth results as the basis for determining the
percentage of premium income to be retained by the company. FEMA
acknowledges that in order to achieve marketing goals a company will
have to invest its own resources; however, unlike accomplishments,
which can be measured, there is no way to measure effort or activity
per se. FEMA believes however that the increase in the expense
allowance that a company may retain under this year's Arrangement takes
into account any increased efforts that companies will make to market
flood insurance. Hence, the Arrangement for this year will continue to
tie a WYO company's retention of premium income to performance, i.e.,
actual growth in flood insurance policies. FEMA will however review any
relevant data during the 1997-8 Arrangement year that would warrant
further adjustment to the percentages of retained premium income for
subsequent Arrangements.
The third company commenting on the marketing goals recommended
that under ``Article III--Loss Costs, Expenses, Expense Reimbursement,
and Premium Refunds'' of the Arrangement, the maximum expense allowance
a company may retain be increased from 32.9 percent to 33.6 percent.
This company claimed that ``having a maximum recovery of 32.9 percent
is just too low to justify the expense involved achieving the necessary
new policy growth targets'' and recommended 33.6 percent as the maximum
expense allowance a company may retain based on its performance.
FEMA disagrees with this recommendation. The minimum level of
premium income a company may retain for the 1997-8 Arrangement year has
been increased from 30.6 percent to 31.6
[[Page 39909]]
percent while the maximum earning of 32.9 percent of retained premium
also represents a substantial increase. It should be emphasized that
under former Arrangements, the maximum a company in the WYO program
could earn was equivalent to the average expense ratios for ``Other
Acq.,'' ``General Exp.,'' and ``Taxes,'' as published in the latest
available ``Best's'' Aggregates and Averages: Property Casualty
Insurance Underwriting--by Lines for Fire, Allied Lines, Farmowners
Multiple Peril, Homeowners Multiple Peril Combined. The ``Best's''
average for this year is 31.9 percent. Hence, the maximum earning for
companies participating in the WYO program for the 1997-8 Arrangement
year--32.9 percent--is one percent above the ``Best's'' average--the
former maximum WYO companies could earn under the NFIP.
FEMA believes therefore that the increases in the percentage of
premium a WYO company may retain in connection with its performance
proposed for this year's Arrangement are appropriate and have been
retained in the final rule. FEMA plans to revisit the expense allowance
percentages vis-a-vis performance prior to the Arrangement Year for
1998-9.
The issue of surcharges on flood insurance premium and guaranty
fund assessments was raised in several comments. A change was made in
last year's Arrangement regarding surcharges on flood insurance premium
and guaranty fund assessments. That provision has been retained. FIA
will review the issue during the next Arrangement year and propose any
further adjustments regarding such surcharges during the rulemaking
process in connection with the 1998-9 Arrangement.
One commenter objected that the percentage (3.3 percent) paid to
WYO companies for unallocated loss adjustment expenses is inadequate--
one that has not changed since the program's inception. As FEMA
indicated in the publication of last year's Arrangement, ``the matter *
* * warrants review, and any modification to the loss adjustment
expense will be considered at the end of the current Arrangement
year.'' FEMA has been reviewing this matter, and we expect to have a
final determination on this issue before the 1998-9 Arrangement year.
The 3.3 percent for unallocated loss adjustment expense has been
retained in this year's Arrangement until our review is complete.
One commenter recommended that the fee schedule be restored as
Exhibit A to the Arrangement. The fee schedule was removed last year
from the Arrangement in the interest of flexibility and expedition.
Since any change to the fee schedule will be closely coordinated with
participating WYO companies, the decision to remove the fee schedule
from last year's Arrangement will be followed this year as well.
One commenter cited an inconsistency in ``Article II.B. Time
Standards'' in which the standards are referred to as both ``guidance''
and ``requirements.'' We agree that there is an inconsistency and have
deleted the reference to ``guidance'' from ``Article II. Time
Standards.''
Two companies asked whether the impact of claims for loss under
Increased Cost of Compliance (ICC) coverage on company's adhering to
time standards has been taken into consideration. It should be noted
that the claim under ICC coverage is a separate claim from the claim
for direct physical loss from flood under the policy and is usually
filed after the insured has done some preliminary coordination with
local officials and contractors. The ``clock'' for ICC claims will not
begin until the loss is reported by the insured. Also, a WYO company
will not be penalized because of any inaction or delays by the insured
or the local government. However, since ICC is a new product, FEMA will
evaluate the program's experience with ICC claims during the 1997-8
Arrangement year and propose any appropriate changes to the time
standards before the next Arrangement year.
One commenter expressed concern that the reference to ``litigation
and/or claim'' in Article III.D.3. is confusing and should be changed
to ``notice of claim in litigation'' or ``claim in litigation.'' FEMA
agrees and has changed the phrase in the last sentence of the first
paragraph of Article III.D.3 to read, ``claim in litigation.''
Another company expressed concern over the requirement for the
company to notify both the FIA Administrator and FEMA's OGC of claims
in litigation. The company recommends that the reporting requirements
of claims in litigation be limited to the FIA Administrator. The reason
for the Arrangement's dual reporting requirement is that the
notification to the FIA Administrator is for the purpose of prompt
payment of bills to the company assuming that all required information
has been submitted. The reason for a separate notification of FEMA's
Office of General Counsel, however, is to ensure that FEMA's Office of
General Counsel will be involved in the review of any litigation as
soon as possible should assistance be requested or needed by the
company. FEMA agrees that it would be more appropriate for the company
to submit notice of litigation in duplicate to the FIA Administrator
who will then ensure that the Office of General Counsel receive its
copy. The language of the second paragraph of Article III. D. 3 has
been changed to read, ``Prompt notice, in duplicate, of any such claim
for damages within the scope of this section (D) shall be sent to the
Administrator along with a copy of any material pertinent to the claim
for damages. The Administrator shall furnish one copy of all such
claims to the Associate General Counsel for Litigation, FEMA OGC, 500 C
St. SW, Washington, DC 20472. Following the initial notice of claims in
litigation, the company must submit all pertinent material and billing
documentation as it becomes available. Within 60 days of the receipt of
a claim in litigation by the Company, the company must submit an
initial case analysis and legal fee estimate. Failure to meet these
notice requirements may result in the Administrator's decision not to
reimburse expenses for which FIA and the FEMA OGC have not been
notified in a timely manner.''
This change does not prevent a company, if it so chooses, in the
interest of expedition, to follow the procedure as proposed in the May
1, 1997 proposed rule and submit notices of claims in litigation
simultaneously to both the FIA Administrator as well as the FEMA's
Office of General Counsel.
The same company also claimed that revised language in ``Article
IX--Errors and Omissions'' could be construed ``as an ambiguity
allowing for a challenge to the doctrine of federal preemption for the
National Flood Insurance Program.'' The following language was cited by
the company as the cause for ambiguity and concern. ``In the event that
steps are not taken to rectify the situation and such action leads to
claims against the company, the NFIP, or other related entities, the
responsible parties shall bear all liability attached to that delay,
error, or omission to the extent permissible by law.'' This change to
the text does not affect the policy regarding errors and omissions nor
will it affect the doctrine of Federal preemption to the extent Federal
preemption would be applied to a particular issue. The change clarifies
that a party will not be held responsible for inadvertent errors and
omissions until those errors became known to that party and are ignored
and that party or parties do not take steps to rectify the situation.
Furthermore, the party at fault will bear liability only to the extent
permissible by law.
[[Page 39910]]
In addition to the comments submitted by WYO companies, one
commenter asked three specific questions about the WYO Arrangement. The
correspondent asked whether the 32.6 percent expense allowance includes
reimbursement for insurers' loss adjustment expenses. Unallocated loss
adjustment expenses are not included in the 32.6 percent expense
allowance and are in addition to that expense allowance. The same
correspondent asked if there is a separate provision to reimburse for
loss adjustment expenses. There is such a provision at Article III. C,
titled ``Loss Adjustment Expenses.'' For unallocated loss adjustment
expenses, the fee is 3.3 percent. For unallocated loss adjustment
expenses, there is a separate fee schedule which is distributed
separately to the private companies participating in the WYO program.
Those not participating in the WYO program may receive a copy of the
fee schedule for allocated loss adjustments upon written request to the
FIA Administrator, 500 C Street SW., Washington, DC 20472.
The FIA received two inquiries regarding the language of Article
III--Loss, Costs, Expenses, Expense Reimbursement, and Premium Refunds.
One Write Your Own Company requested clarification regarding the
determination by FEMA under Article III, D., 4. that a case in
litigation is ``grounded in actions by the company that are
significantly outside the scope of this Arrangement.'' Article III D.
4. of the Arrangement provides that such a determination means that
``any award or judgement for damages arising out of such actions will
not be recognized under Article III of this arrangement as a
reimbursable loss cost expense reimbursement.''
Any determination that a case in litigation is ``grounded in
actions by the company that are significantly outside the scope of this
Arrangement'' would be made on a case-by-case basis based on sufficient
information to make a reasonable determination and would also involve
an examination of typical business practices in the insurance industry.
What is considered sufficient information and typical business
practices will depend on the case in question.
Another Write Your Own Company requested a ``time standard
guideline'' for FEMA to make this determination. FEMA is committed to
make such a determination as promptly as possible after receipt of
sufficient information to make an informed decision.
Finally, in the proposed rule, the ``Effective Date'' was
incorrectly listed as October 1, 1996. The ``Effective Date'' in the
final rule has been corrected to read October 1, 1997.
National Environmental Policy Act
This rule is categorically excluded from the requirements of 44 CFR
Part 10, Environmental Consideration. No environmental assessment has
been prepared.
Executive Order 12898, Environmental Justice
The socioeconomic conditions to this rule were reviewed and a
finding was made that no disproportionately high and adverse effect on
minority or low income populations would result from this final rule.
Executive Order 12866, Regulatory Planning and Review
This rule is not a significant regulatory action within the meaning
of sec. 2(f) of E.O. 12866 of September 30, 1993, 58 FR 51735, and has
not been reviewed by the Office of Management and Budget. Nevertheless,
this final rule adheres to the regulatory principles set forth in E.O.
12866.
Paperwork Reduction Act
This rule does not contain a collection of information and is
therefore not subject to the provisions of the Paperwork Reduction Act.
Executive Order 12612, Federalism
This rule involves no policies that have federalism implications
under Executive Order 12612, Federalism, dated October 26, 1987.
Executive Order 12778, Civil Justice Reform
This 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
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 to 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, 1997.
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'' or ``NFIP'') ``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, overtime, 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:
Article II--Undertaking of the Company
A. Eligibility Requirements for Participation in the NFIP:
1. Policy Administration. All fund receipt, recording, control,
timely deposit
[[Page 39911]]
requirements, and disbursement in connection with all Policy
Administration and any other related activities or correspondences,
must meet all requirements of the Financial Control Plan. The
Company shall be responsible for:
a. Compliance with the Community Eligibility/Rating Criteria
b. Making Policyholder Eligibility Determinations
c. Policy Issuance
d. Policy Endorsements
e. Policy Cancellations
f. Policy Correspondence
g. Payment of Agents' Commissions
2. Claims Processing. All claims processing must be processed in
accordance with the processing of all the companies' insurance
policies and with the Financial Control Plan. Companies will also be
required to comply with FIA Policy Issuances and other guidance
authorized by FIA or the Federal Emergency Management Agency
(``FEMA'').
3. Reports.
a. Monthly Financial Reporting and Statistical Transaction
reporting requirements. All monthly financial reporting and
statistical transaction reporting shall be in accordance with the
requirements of the NFIP Transaction Record Reporting and Processing
Plan for the Company Program and the Financial Control Plan for
business written under the WYO (Write Your Own) Program. 44 CFR part
62, appendix B. These data shall be validated/edited/audited in
detail and shall be compared and balanced against Company reports.
b. Monthly financial reporting procedure shall be in accordance
with the WYO Accounting Procedures.
B. Time Standards. Time will be measured from the date of
receipt through the date mailed out. All dates referenced are
working days, not calendar days. In addition to the standards set
forth below, 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 field.
Continual failure to meet these requirements may result in
limitations on the company's authority to write new business or the
removal of the Company from the program. Applicable time standards
are:
1. 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 moneys shall
be mailed within 10 days);
2. Renewal Processing--7 days.
3. Endorsement Processing--15 days.
4. Cancellation Processing--15 days.
5. Claims Draft Processing--7 days from completion of file
examination.
6. Claims Adjustment--45 days average from the receipt of Notice
of Loss (or equivalent) through completion of examination.
C. Single Adjuster Program. To ensure the maximum responsiveness
to the NFIP policy holders 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 using procedures issued by the Administrator. The
Single Adjuster procedure shall be followed in the following cases:
1. Where the flood and wind coverage is provided by the Company;
2. 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. 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. 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. The Company shall issue policies under the regulations
prescribed by the Administrator in accordance with the Act.
3. 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. 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. 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,
agents' commissions or any other expense of whatever nature incurred
by the Company in the performance of its obligations under this
Arrangement but excluding other taxes or fees, such as surcharges on
flood insurance premium and guaranty fund assessments.
B. The Company shall be entitled to withhold, 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 expenses, except for
allocated and unallocated loss adjustment expenses described in
Section C. of this Article, which amount shall be a minimum of 31.6%
of the Company's written premium on the policies covered by this
Arrangement.
The amount of expense allowance retained by the company may be
increased to a maximum of 32.9%, depending on the extent to which
the company meets the marketing goals for the 1997-1998 Arrangement
year contained in marketing guidelines established pursuant to
Article II.G. The amount of any increase shall be paid to the
company after the end of the 1997-1998 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. Loss Payments.
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 include payments as a result of litigation
which arises under the scope of this Arrangement, and the
Authorities set forth above. All such loss payments must meet the
documentation requirements of the Financial Control Plan and of this
Arrangement. The Company will be reimbursed for errors and omissions
only as set forth at Article IX of this Arrangement.
3. Notification of claims in litigation against the company. To
ensure
[[Page 39912]]
reimbursement of costs expended to defend a claim in litigation
against the Company, the Company must promptly notify FIA.
Prompt notice, in duplicate, of any such claim in litigation
within the scope of this section (D) shall be sent to the FIA along
with a copy of any material pertinent to the claim in litigation.
FIA shall forward one copy of all such claims to the Associate
General Counsel for Litigation, FEMA OGC, to ensure that the FEMA
OGC is aware of all pending litigation. Following the initial notice
of claims in litigation, to ensure expeditious reimbursement, the
company must submit all pertinent material and billing documentation
as it becomes available. Within 60 days of the receipt of a notice
of claim in litigation by the Company, the Company must submit an
initial case analysis and legal fee estimate for billing support.
Failure to meet these notice requirements may result in the
Administrator's decision not to reimburse expenses for which FIA and
the FEMA OGC have not been notified in a timely manner.
4. Limitation on Litigation Costs. Following receipt of notice
of such claim, the Office of General Counsel (OGC), FEMA, shall
review the information submitted. If it is determined that the claim
is grounded in actions by the Company that are outside the scope of
this Arrangement, the National Flood Insurance Act, and 44 CFR
chapter 1, subchapter B, and/or involve issues of insurer/agent
negligence as discussed in Article IX of this Arrangement, the OGC
shall make a recommendation to the Administrator as to whether the
claim is grounded in actions by the Company that are significantly
outside the scope of this Arrangement. In the event the
Administrator determines that the claim is grounded in actions by
the Company that are significantly outside the scope of this
Arrangement, the Company will be notified, in writing, within thirty
(30) days of the Administrator's decision, 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 the
determination 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.
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 canceled
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 canceled 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, and property address,
location, and/or site 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
[[Page 39913]]
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
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, 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 inadvertent delay, error, or omission made in connection with any
transaction under this Arrangement. In the event of such actions,
the responsible party must attempt to rectify that error as soon as
possible after discovery of the error and act to mitigate any costs
incurred due to that error. In the event that steps are not taken to
rectify the situation and such action leads to claims against the
company, the NFIP, or other related entities, the responsible party
shall bear all liability attached to that delay, error or omission
to the extent permissible by law.
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
[[Page 39914]]
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 18, 1997.
Spence W. Perry,
Executive Administrator, Federal Insurance Administration.
[FR Doc. 97-19497 Filed 7-23-97; 8:45 am]
BILLING CODE 6718-03-P
