Legal action taken against several insurance companies in the wake of
Superstorm Sandy stalled this week after government officials declined
to pay the plaintiffs’ legal fees, citing federal law.
According to a Newsday report, attorneys for the Department of
Homeland Security – which oversees FEMA – concluded the government was
prohibited from covering legal fees for roughly 2,000 home and business
owners involved in the lawsuit. The ruling means plaintiffs will now owe
their lawyers as much as one-third of any settlement from the National
Flood Insurance Program and affiliated private insurance companies.
Talks, however, are still ongoing and attorneys working on the
lawsuits say they are optimistic about reaching a deal. So, too, are
government regulators.
“We remain committed to reaching a settlement with policyholders,” FEMA spokesman Rafael Lemaitre told Newsday.
The lawsuits were filed after flood insurance claims from the 2012
storm were rejected with engineering companies associated with private
NFIP-backed carriers filed bogus reports eliminating flooding as the
cause of property damage. Policyholders allege insurance companies and
engineering firms were engaging in a racketeering scheme, driving up
claims handling costs and exploiting the storm’s damages for their own
financial benefit.
The accusations have led to a criminal probe by the New York attorney
general’s office, as well as a federal order for insurance companies to
turn over to home and business owners all copies of claims reports made
after Sandy.
Perhaps most significantly, reforms to the flood insurance program
were made shortly after the lawsuits were filed. As of December 2014,
FEMA is authorized to penalize insurers just as much when they underpay a
legitimate flood insurance claim as when they overpay a claim.
Additionally, a flood insurance advocate’s office will be installed
within FEMA to protect consumer rights.
The news comes at an already difficult time for NFIP, as the program
faces backlash following significant premium spikes for flood insurance
policyholders.
As part of a renegotiation of the Biggert-Waters Act, gradually
higher premiums and new surcharges are asking home and business owners
to pay an average 15% to 18% on their flood policies. Premiums will
increase 25% per year, reducing the number of NFIP policies receiving
premium subsidies, until they reflect the building’s actual flood risk.