GAO questions adding wind damage to flood insurance

WASHINGTON — Congressional investigators cast a skeptical eye on a House of Representatives proposal to expand the federal flood insurance program by adding coverage for wind damage, saying the Federal Emergency Management Agency would need to complete "certain challenging steps."

The opinion issued Tuesday by the Government Accountability Office, which reflects the Bush administration's criticism of the proposal, could further complicate efforts by lawmakers in hurricane-prone states such as Florida, Mississippi and Louisiana to control the spiraling cost of homeowners' insurance.

The House passed legislation in September that calls on the National Flood Insurance program to cover damage from wind, including hurricanes and tornadoes.

But the congressional investigators said the federal agency would face several obstacles in implementing the program. It notes that FEMA already is facing a $17.3 billion deficit and is trying to address problems with the flood insurance program and that "balancing those demands" while overseeing a new program "could further strain FEMA's ability to effectively manage" the flood insurance program.

The GAO also questioned whether FEMA would be able to set premium rates without borrowing from the U.S. Treasury.

"Under the proposed legislation, if FEMA ever needed to borrow to pay claims — something that could occur in any year given the variability of wind and flood losses — regardless of the rate-setting process, the program would have to stop renewing or selling new policies and thus would effectively terminate," the GAO wrote.

The GAO noted that private insurers generally use reinsurance to cover potential catastrophic losses, "but it is not clear that reinsurers would be willing to sell such coverage to a federal program" because of the risk that the federal pool would cover mostly high-risk properties.

The House passed the wind measure in September largely at the urging of Rep. Gene Taylor, D-Miss., who said that after Hurricane Katrina many insurers refused to recognize wind damage, saying the losses were due to flooding, which is covered by the federal government.

Taylor's policy director, Brian Martin, said the report ignored "the current market failure and the current crisis in these coastal areas."

But he noted that the report "didn't say it's something that can't be done."

The GAO acknowledged that for some property owners the program could reduce the delay in processing claims for wind damage by not requiring adjusters to distinguish between wind and flood damage, "potentially avoiding the wind-related payment delays and disputes that followed the hurricanes of 2005."

But it said that the benefits could be limited if FEMA needed to borrow money to pay claims, "potentially shutting down the program and leaving property owners without coverage following a catastrophic event."

The White House has threatened to veto the legislation, and consideration of a similar measure has been stalled in the Senate. But a similar amendment sponsored by Mississippi's two Republican senators is expected to be taken up as early this week.

Sen. Roger Wicker, R-Miss., acknowledged the criticism of the proposal Tuesday on the Senate floor but said homeowners along the coast need relief.

"We should not let the perfect be the enemy of the good," he said. "I would ask my colleagues to remember all the places along the coast of North America ... and see for themselves why action is needed now."