Insurance Companies Made Millions on Hurricane Sandy

If you still wonder why many blue-collar and middle-class voters are gravitating toward Donald Trump and Bernie Sanders this election season, the aftermath of Hurricane Sandy is a microcosm of why many Americans are disgusted with huge corporations — and a government that appears to cave too easily to big business interests.

As a year-long NPR and PBS Frontline investigation revealed last week, many citizens who lost their homes during Hurricane Sandy insist that they were shortchanged when it comes to rebuilding their homes and lives. Meanwhile, insurance companies made an alleged profit of approximately $325 million annually from 2011 to 2014 from claims filed after Sandy, thanks to a federal government-run program that promised to compensate policy holders up to $350,000 depending on their policies.

But over three years after that massive storm’s wrath, many homeowners in New York and New Jersey are frustrated with local bureaucrats, agencies in Trenton and Albany, and of course, the federal government. The general consensus is that insurers are unprepared to cope with risks related to climate change, but in this case, they were clearly profiting from these risks.

Part of the problem is local bureaucracy, with the left hand not knowing what the right hand is doing. In New York City, for example, a city-federal program designed to launch reconstruction in neighborhoods affected by Sandy received 20,000 applications. But by summer 2014, only 960 of approximately 20,000 applicants received any benefits.

But what has fomented a lot of anger in New Jersey and New York is how the federal government and insurers managed the National Flood Insurance Program (NFIP), which was established in 1968. Congress passed legislation with the idea that the federal government would provide flood insurance in low-lying areas if those communities created floodplain management plans to minimize flood losses. In return for communities taking action to reduce the risk of property damage from floods, this supplemental program would protect both consumers and insurers in the event such a disaster occurred. Like many government programs, this plan was conceptualized to be self supporting with premiums, not with taxpayer dollars.

The U.S. Government Accountability Office (GAO), however, has long complained that the Federal Emergency Management Agency (FEMA), which administers the NFIP, owed the U.S. Treasury approximately $20 billion around the time Hurricane Sandy hit the East Coast. Years of disasters, from river flooding and hurricanes such as Katrina, contributed to NFIP’s woes. But management and operational challenges (which most people would describe as “incompetence”), are partially why NFIP has made the GAO’s “High Risk” list since 2006.

So while FEMA’s website boasts about “Voices 10 Years Later,” which describes the agency’s success stories a decade after the 1993 Great Midwest Flood, the agency is silent about the angry voices along the Jersey Shore and in New York communities such as Staten Island. FEMA’s communications office, however, boasted about how most of New Jersey’s boardwalks were rebuilt, what the private sector has done to lead post-Sandy recovery, and how FEMA provided almost $7 billion in funds to New Jersey.

But as the NPR/Frontline investigation reveals, many locals, and observers, want to know where the money went. Some examples are bizarre, such as the head-scratching case of $600,000 spent on a home appraised at $80,000. The funds were reportedly used to rehabilitate that house and then elevate it 15 feet to protect it from future flooding.

Many other citizens, however, are fuming as they believe they have only received a fraction of the claims they submitted. The problem is that while FEMA administers this federal flood protection program, it pays private insurance companies to write out the policies. Those flood insurance premiums are held in a “basket” that remains separate from other insurance premiums, and FEMA pays out those funds with the insurance companies acting as the third-party administrator. In the event the NFIP runs dry, which has happened in the past, taxpayers kick in the difference.

The problem is that insurers have made money on the program, while assuming none of the risk. But insurance companies are understandably worried about a program that as of 2014 is $23 billion in the red. A recalcitrant Congress could finally say it has had enough and refuse to bail out FEMA and the NFIP.

What journalists at NPR and Frontline found was a pattern of inspection reports that rejected claims of damages from floods due to Hurricane Sandy. Instead, a typical report concluded that flooding did not cause damage or destruction to a home, but instead, a phenomenon such as “long-term differential earth movement” was responsible for most of the damages. A homeowner could appeal, but FEMA often sided with the insurer — because instead of sending an appeal through a third party, FEMA often sent the records to the insurance company directly and asked the insurance company to review them. Of course, out of self-interest, the insurance company would reply to FEMA with a “no” recommendation, and this investigation revealed that FEMA sided with insurers 75 percent of the time.

If FEMA looked pitiful after Hurricane Katrina, its performance has hardly improved a decade later, according to critics. In March, a government audit slammed FEMA’s oversight of NFIP, saying the agency has inadequate internal controls, and that these funds are at further risk of abuse, fraud and waste. Earlier this month, FEMA finally responded to this cascading criticism and announced it would reform the program.

Part of the problem with disaster such as Sandy is that government tends to waste money by being reactive, not proactive. FEMA and other government agencies often tout the statistic that for every $1 spend on mitigation, $4 is saved on future benefits such as insurance payouts. But as Frontline pointed out, of the $300 billion in applications received for such climate mitigation projects, the agency was only able to fund less than half that amount.

Some may say the foundation of this problem is the “moral hazard” of building too densely along our coasts. But the bottom line is that those hit the hardest were often the most vulnerable — they were not the owners of Victorians in Cape May or mansions in the Hamptons. These citizens often had no choice but to buy these supplemental insurance policies in order to protect their homes, and government and the insurers colluded to deny them the chance to rebuild. Hence, sagas like this are why many U.S. citizens are convinced that no matter how hard they work, the deck is stacked very highly against them.

Image credit: Pamela Andrade/Flickr