Flood insurance fraud usually occurs in the aftermath of natural disasters, in which a combination of weather factors causes major damage to structures. There are virtually no private underwriters of flood insurance in the US, as it’s been deemed too risky by almost every major insurer. As a result, most flood insurance policies are issued by the Federal Emergency Management Agency (FEMA).
These policies are meant to insure property owners against the damage caused by floods only, and do not cover damage caused by other destructive natural forces like wind, hail, and rain, even though they frequently coincide with major flooding, for instance in the case of hurricanes.
Damage from forces like wind is generally covered by private property insurance policies. In the wake of a complex natural disaster, private insurers can defraud the government by casting blame for structural damage on flooding, rather than on wind or other forces that fall within their policies. In so doing, such insurers falsely redirecting insurance claims away from themselves and onto FEMA, causing FEMA to pay for damage for which private insurers are truly responsible.
Examples of Flood Insurance Fraud:
- State Farm: Two whistleblowers, both former claims adjusters, brought suit over State Farm’s post hurricane Katrina conduct, alleging the insurance giant shifted claims within their responsibility to Federal insurance programs. The whistleblowers claimed they witnessed State Farm pressure engineers to rule that property damage was caused by floodwaters rather than wind. State Farm was ordered to pay $750 thousand, $225 of which was allocated to the whistleblowers. State Farm appealed, and the whistleblowers won the right to expand the scope of their case in the Fifth Circuit. The Supreme Court will hear another appeal of the case in the 2016-2017 term.