At a time when some Connecticut shoreline residents are still dealing with their flood insurance claims resulting from Hurricane Irene, Hurricane Sandy has reinforced the need for a greater understanding of the Standard Flood Insurance Policy — a policy created by our United States government.

National Flood Insurance Program

In 1968, U.S. Congress enacted the National Flood Insurance Act, 42 U.S.C. § 4001 et seq., thereby creating the National Flood Insurance Program. The NFIP was created because of the recognition by Congress that private insurers would not provide adequate flood insurance without federal assistance. See Palmieri v. Allstate Ins. Co., 445 F.3d 179 (2nd Cir. 2006). Administered by the Federal Emergency Management Agency (FEMA), the NFIP allows private insurers to issue and administer flood insurance policies, although claims are ultimately paid from the federal treasury.

Standard Flood Coverage

The Standard Flood Insurance Policy issued under the NFIP consists of a standard federally authorized flood insurance policy form. The basic coverage grant under the Dwelling Form for the Standard Flood Insurance Policy provides that the insurer will pay for “direct physical loss by or from flood” to the insured property. As flood policyholders should be aware, regular non-flood property insurance policies, such as homeowners policies, include flood exclusions, and therefore, the Standard Flood Insurance Policy complements these regular policies.

However, the Standard Flood Insurance Policy is not going to afford coverage for everything a policyholder may encounter after their property has sustained flood damage. Compared to the coverage afforded under some regular property insurance policies, the Standard Flood Insurance Policy affords limited coverage (e.g., exclusions regarding loss of use of the insured property and additional living expenses, and limited coverage for costs incurred complying with ordinances and laws during the repair or rebuilding process). In some instances, limitations on coverage under the Standard Flood Insurance Policy may be based solely on the location of the particular insured property.

Flood Claim Process

When a policyholder has a claim under the Standard Flood Insurance Policy, the private insurer will likely send an “independent adjuster” to investigate the damage to the insured property. This adjuster will also make a recommendation to the insurer regarding how much the policyholder should be paid. Flood policyholders should be aware that these adjusters are hired by the private insurers and do not represent the interests of the policyholders. Therefore, the involvement of these adjusters does not relieve policyholders of the responsibility of protecting their own interests under the Standard Flood Insurance Policy. Most notably, policyholders should submit their own proofs of loss, including a signed and sworn statement regarding the amount claimed and supporting invoices and/or estimates.

Appraisal And Appeal

Unfortunately, flood policyholders are not always going to be paid the full amount of what they believe they are owed under the Standard Flood Insurance Policy. In some instances, they may not be paid anything. Policyholders do have options to exercise in the event that they disagree with the decision of the insurer regarding their claim.

One such option is appraisal, whereby the policyholder and the insurer each choose, and pay for, their own appraiser who individually calculates the amount of the loss. The insurer must pay any amount agreed upon by these appraisers. If they do not agree, a jointly, or court, selected, and jointly funded, umpire is used to determine the amount to be paid by the insurer. Appraisal can be a useful method of resolving disputes when the policyholder and the insurer disagree regarding the amount of a loss which is otherwise covered under the Standard Flood Insurance Policy. Appraisal may be less useful, however, when issues of causation and policy interpretation exist.

Flood policyholders are also given the opportunity to appeal the insurer’s decision directly to FEMA. If a policyholder wishes to appeal, they must do so within 60 days from the date of the insurer’s written denial of all or part of the policyholder’s claim. Although, to the extent a flood policyholder initiates litigation, or the disputed amount was subject to appraisal, appeal is no longer an option for the policyholder.

Flood Coverage Litigation

Finally, flood policyholders may also seek to enforce their rights under the Standard Flood Insurance Policy through litigation. The Standard Flood Insurance Policy provides that such litigation must be brought in the U.S. District Court where the insured property is located, and within one year after the insurer’s written denial of all or part of a policyholder’s claim.

The United States does not need to be a party to litigation when a private insurer issued the relevant policy, but the private insurer will be entitled to reimbursement of its litigation costs from the United States. See 44 C.F.R. § 62.23. Private insurers may not be similarly entitled to reimbursement with respect to certain claims brought by flood policyholders, such as bad faith or unfair trade or insurance practices claims in connection with a private insurer’s handling of a policyholder’s claim.

As to the law applicable to the Standard Flood Insurance Policy, the policy provides that it is governed by flood insurance regulations issued by FEMA, the National Flood Insurance Act, and federal common law. Nevertheless, federal courts still apply state law principles regarding insurance contracts. See Palmieri, supra.

As evidenced by Sandy and Irene, flood damage can be devastating. This is why it is important for flood policyholders to understand their rights and responsibilities under the Standard Flood Insurance Policy. While the Standard Flood Insurance Policy’s relationship to the U.S. government involves some nuances not found with regular property insurance policies, flood policyholders are no less entitled to be paid the full amount owed for their claims.•