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After Sandy, Companies Profit From Flood Insurance Do-over

Charles Lane
One Long Island couple, Fran and Steven Adelson, had to gut and rebuild the interior of their house after Sandy. They managed to get another $31,000 out of FEMA only after hiring a lawyer.

Five years later, homeowners on the East Coast are still recovering from Superstorm Sandy. Even those with insurance are still struggling to get money to rebuild. That’s because thousands of them were systemically underpaid by their insurance companies. 

The Federal Emergency Management Agency, which oversees the nation’s flood insurance system, got involved two-and-a-half years ago. They offered to re-examine any claim that a homeowner brought to their attention. But flood insurance customers were shortchanged, yet again.

As FEMA scrambled to right the wrongs of flood insurance companies under its watch, it was paying some two hundred workers $750 a day to do nothing. “We’d be sitting around for days on end with nothing to do because the system would be down,” said Jeff Coolidge, an insurance adjuster who worked for FEMA on the effort. “We didn’t even have access to call these people,” he added, referring to the homeowners they were meant to help.

Coolidge was one of several current and former workers interviewed during a three-month-long investigation by WSHU and WNYC Public Radio. The employees described an office staffed with adjusters that included former nightclub bouncers and disbarred lawyers. They say the real intent of FEMA’s workers was to make as much money as possible.

“You’d hear the adjusters out there smoking their cigarettes and whatnot and they’d say we want to milk this cow for as long as we possibly can.”

But the scene at the contractors’ offices was just one symptom of a larger problem. After nearly two-and-a-half years, the review is still not complete. It’s been bogged down by lost files, unhappy homeowners, frequent management changes, even a fist fight instigated by a supervisor. More significantly, the contractors to which FEMA outsourced the work took home almost as much money as did the homeowners whom they were supposedly helping.

Revolving Door
After widespread criticism of sloppy Sandy claims where thousands complained of underpayment, FEMA offered in early 2015 to reopen any homeowner’s case who felt they deserved a higher payment. The contactor FEMA hired to oversee this review was Washington, D.C.-based OST, Optimal Solutions and Technologies.

OST had a history with FEMA. The inspector general for the Department of Homeland Security scrutinized the company in 2010, saying a FEMA contracting officer who once worked for OST still had allegiances that benefited the company. Currently, another former OST employee, David Maurstad, works for FEMA and oversees part of OST’s contract there.

Maurstad has gone back and forth between FEMA and OST since 2011. In his last year at OST, before he returned to FEMA, he made over $350,000, according to disclosure documents.

OST has so far been paid $149 million for reviewing Sandy claims, according to FEMA data.

OST and Maurstad did not return numerous messages. FEMA said Maurstad complies with all federal revolving door regulations. The agency added there is frequent overlap between government and the private sector because a “limited pool of qualified individuals with relevant experience.”

High-Priced Consultants
As cost overruns mounted, FEMA brought in McKinsey & Company, the elite consulting firm.

Rutgers Professor Jay Feinman wrote a book about McKinsey. He says the consulting firm is an expert at boosting profits at insurance companies

“We saw beginning in the 1990s and extending forward a number of insurance companies hired McKinsey to come in a figure out how to pay less on claims,” Feinman said.

It’s not clear whether McKinsey was hired to reduce payments to policyholders. The company declined to comment for this story.

According to FEMA, the consulting firm was brought in to “develop business processes.”

Either way, McKinsey and OST earned a lot of money: $190 million. That’s nearly as much as the $240 million the federal government gave property owners to make up for lowball payouts.

That ratio of the value of the claims versus the cost of processing them troubles Feinman. He says typically insurance companies spend 10 to 15 percent on claims processing.

“So the idea that FEMA needed to spend almost as much on processing as the claims suggests there were problems, and it’s very hard to understand,” he said.

And these amounts are just the expenses that FEMA was able to confirm. The agency says there were additional administrative costs above and beyond what was paid to OST and McKinsey, but was unable to detail those.

Yet FEMA officials say they are satisfied with the cost of the operation.  

“The costs of it, while expensive, are still only a portion of what was paid out,” says Roy Wright, FEMA’s head of insurance.

“My focus has been throughout this to ensure everything that I could do to pay every dollar they were entitled to under their policy would be fulfilled.”

Lawmakers were more critical.

“It’s outrageous and when you think about what these entities were charged with doing,” said Congressman Tom MacArthur, a Republican who represents parts of southern New Jersey hard hit by Sandy.

He says FEMA, OST, and McKinsey were supposed to help cheated homeowners, not spend millions of dollars to cheat them again.

“That’s just another marker to me that something went horribly wrong in this process,” he added, “that they were more focused on covering their back and making sure that they paid the least as possible.“

A Public Relations Stunt?
Largely, the problems and costs involved with reviewing Sandy claims are unknown to storm victims. Those with lawyers paid to have their process done for them. The vast majority who didn’t hire a lawyer had no direct avenue of communication with FEMA.

After being told of the cost of the review, Long Beach resident Fran Adelson was disgusted. She submitted her claim to be reviewed by FEMA. At first, she was told she would get nothing more. Only after hiring a lawyer did FEMA pay her $31,000.

“Why are you telling people that you’re going to help them, and making them promises basically, and then you’re just turning them down anyway? Was this just for PR?” she asked. “Was it just to say that you were going to do something to help people? What was the purpose of it?”

FEMA says they have increased oversight over insurance companies, but Congress wants more.

One bill sponsored by New Jersey Senator Bob Menendez would penalize insurance companies that underpay and would shift legal fees away from homeowners if they successfully sue for underpayment. A House GOP bill has similar, but fewer, reforms and is focused on encouraging more private companies into the flood insurance market.

Charles is senior reporter focusing on special projects. He has won numerous awards including an IRE award, three SPJ Public Service Awards, and a National Murrow. He was also a finalist for the Livingston Award for Young Journalists and Third Coast Director’s Choice Award.
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