Everything looked fine from the outside when Fran Adelson returned to her house the morning after Sandy hit in October 2012. Then she opened the front door.
“Everything was in a different place,” she said. “Why is that piece of furniture over here? Why was that—you couldn’t wrap your mind around it.”
Sandy pushed four-and-a-half feet of water through her house in Long Beach, New York. It washed in and out, destroying everything.
Every year for 27 years, Adelson paid premiums for a $250,000 flood policy. But all she got after Sandy was $56,000 to rebuild her entire house.
“I started to cry, because I was like we lost everything,” she recalled recently.
Adelson was one of thousands of Sandy victims who say they were ripped off by insurance companies. A total of 1,633 people sued in federal court in the first two years after the storm; their proceedings revealed widespread fraud and overt attempts to underpay homeowners. Congress grilled the Federal Emergency Management Agency, which oversees the nation's flood program. Finally, in the spring of 2015, FEMA officials made the decision to reopen any Sandy claim if the policy holder wasn’t happy with the award they received. FEMA said the process would be easy and wouldn’t require a lawyer.
But that’s not what happened.
Two-and-a-half years later, Adelson calls FEMA’s Sandy Claims Review a public relations stunt. “You feel like you were teased and it felt like it was a sham. That’s what it felt like, it was a sham.”
Nearly 20,000 Sandy victims asked to have their claim reviewed by FEMA. During a three-month-long investigation, public radio stations WSHU and WNYC uncovered a slow, mismanaged process that gamed homeowners into accepting lower payments while private companies profited.
Zero to $31,000.
Adelson’s story was typical.
She took FEMA at its word and did not hire a lawyer at first. Her review was bounced among three different caseworkers, who kept losing her paperwork. They told her, yes, she deserved more money. But after FEMA processed her claim, it mailed a letter stating it wasn’t going to pay anything additional.
“I just remember being really pissed off,” she said in an interview this fall.
Fed up, Adelson decided to hire a lawyer, knowing full well that he’d take a cut, but she figured at this point she had nothing else to lose. The lawyer pushed her case to an arbitration hearing, at which point the judge awarded her another $31,000.
Same paperwork, same house.
Of course, now she had to pay the attorney about a quarter of that.
“Why should a homeowner have to go through an attorney if FEMA’s opening it up?” Adelson asked in disbelief. “I could have used that extra $7,000-$8,000. I’m out that money.”
No one disputes that the Sandy claims process was sloppy the first time around, as homeowners battled with insurance companies to get enough money to repair their homes. FEMA was supposed to quickly right those wrongs, without forcing policyholders to hire lawyers. But people who trusted FEMA and didn’t go to arbitration hearings—which for the most part, meant they did not hire lawyers—received 30 percent less than those who did, according to FEMA data.
That works out to almost $4,500 less per homeowner.
To some advocates, what was more troubling than low offers were “zero offers.” According to federal statistics, 2,700 people asked for a review, but FEMA gave them nothing extra on top of what they may have received directly from their insurance companies.
“I think those zero offers were from adjusters who had no clue what they were doing,” said Melissa Luckman, who represented about 115 homeowners with Touro Law Center’s Disaster Law Clinic in Central Islip, NY. “They just wanted to offer $0 to close out files.”
FEMA’s Sandy review process had two stages. In the first stage caseworkers took in documents and information from policyholders and then offered a settlement. The second stage, arbitration, would only occur if the homeowner was unhappy with FEMA’s first offer. Arbitration typically required a lawyer who would represent the homeowner in a telephone hearing with a neutral arbitrator, who would go line by line through the claim.
Lawyers and other representatives for Sandy victims say FEMA frequently offered lower settlement amounts unless a homeowner pushed to arbitration.
“When FEMA realized that homeowners meant business then they would take a closer look,” Luckman said, “as opposed to just a fly-by-night, BS initial offer.”
Despite its pledge to do things right, FEMA often relied on the same fraudulent damage reports that private companies used to cheat homeowners during the first round of insurance wrangling. FEMA says those reports were the only ones available; Luckman says the unwillingness to send out another adjuster to take a fresh assessment meant the homeowner had to hire his or her own engineer to get an honest damage report.
“It’s absolutely unfair,” Luckman said. “Our homeowners should not have been forced to spend $1,000, $2,000, $3,000.”
The McKinsey Tool
Adjusters working for FEMA point to another reason why payments to victims were low. It was a spreadsheet called “the McKinsey Tool.” (It was designed, in part, by McKinsey & Company, the elite consulting firm.) Instead of doing a detailed review of the original claim, FEMA workers only had to fill out this simple form, which would then spit out a total damage amount.
“It’s grossly and intentionally leaving stuff out that is money for homeowners,” said Jeff Major, a public adjuster who represents policyholders who want to challenge an insurance company’s assessment.
Major was troubled at the relative simplicity of the spreadsheet. For example, there was nothing in the spreadsheet that asked what kind of wood floors the homeowner may have had.
“If it’s just a wood floor that’s just slats of pine, that’s different from a parquet mahogany floor,” he explained. “There could be a $20,000 swing in a house on that number.”
Gamesmanship and “Last Resort”
If homeowners had the time, energy and money to push past the obstacles of fraudulent damage reports and the McKinsey Tool, they could eventually go to an arbitration hearing before a neutral judge. But FEMA had a couple of tactics that would keep them from getting there.
One method of gamesmanship was to withhold “undisputed losses.” Usually in the insurance world, if a case is disputed, the company pays the undisputed amount up front, and then pays however much more it might owe after the case is finally decided. But FEMA withheld even the undisputed amount. This practice angered federal lawmakers because it was a way to hold victims hostage to FEMA’s opinion.
Another FEMA tactic was to make higher offers at the last minute.
“You would say, ‘No, no. I just want to go to a neutral,’” Major, the public adjuster explained, referring to the neutral arbitration judges. “And the day before or two days before the neutral, you got a real offer.”
These games angered advocates for homeowners. They say FEMA should have been fair to begin with, and not forced people to hire a lawyer and go all the way to arbitration, sometimes called JAMs, judicial arbitration meditation services.
“JAMs were never supposed to be used,” said Luckman, using the name of the firm that supplied arbitration judges, Judicial Arbitration and Mediation Services. “JAMs were there especially as a last resort if FEMA didn’t get it right during the entire settlement process.”
Despite all these complaints, FEMA stands by the results. Deputy associate administrator of the flood insurance program, Roy Wright, said the scope of reopening Sandy claims was unprecedented.
“I do look at our performance over the last two-and-a-half years and I believe that we have delivered for policy holders,” he said in an interview.
But that performance was not always delivered willingly. Back in 2015, FEMA resisted the idea of third party arbitration judges. But, after the Sandy claims process got underway, about 2,500 policyholders hired lawyers and pursued arbitration because they wanted more money than FEMA had been willing to pay. Now, Wright acknowledges that arbitration was necessary to, in his words, “fill in the gaps.”
He added, “I think that was a good and right thing for us to do to ensure that everyone got a fair shake.”
Despite the rocky road, the federal lawmakers who prompted FEMA to offer policyholders a second chance to get satisfaction say the review did help many people finally get paid fairly. FEMA ended up giving victims an extra $240 million above what insurance companies had paid out the first time around, according to the agency’s data.
But policyholders were not the only ones who benefitted from the claims review.
Private contractors did also. More on that in part two of this story.