Saturday, June 5, 2010

State Farm leaving flood insurance program

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State Farm leaving flood insurance program
By Paige St. John
Published: Friday, June 4, 2010 at 1:00 a.m.

State Farm Mutual confirmed Thursday that it will stop administering federal flood insurance policies this fall, leaving government officials to find a new home for 800,000 customers nationwide who bought their coverage through the company.

State Farm does not insure property against floods or storm surge. But it is the nation's largest administrator of such policies written by the National Flood Insurance Program.

In exchange for administrative fees and commissions, State Farm writes federal flood policies and handles claims, including sending adjusters to homes to assess damage.

"Eliminating this work will allow us to focus our resources on the coverage we do write," said Phil Supple, a State Farm spokesman at the company's corporate headquarters in Bloomington, Ill.

The decision further disengages State Farm from Florida's hurricane-prone coastline. The company already had withdrawn its own policies from storm surge zones, leaving it responsible only for administering flood claims in many coastal areas.

State Farm's latest withdrawal could be particularly disruptive in Florida, which was home to 40 percent of the federal program's 2.2 million policies as of 2008, according to state disaster officials.

It was unclear Thursday how government officials would respond. A spokesperson in the Federal Emergency Management Agency's Washington office said she was unaware of State Farm's withdrawal.

Starting Oct. 1, State Farm will begin dropping the flood policies as they come up for renewal, Supple said. Customers will be given 90 days notice that they will be redirected by FEMA to another servicing agent to handle their policies.

Supple said premiums would not change.

The federal government began partnering with private companies in the 1980s to administer the National Flood Insurance Program.

State Farm's participation in the flood program has earned the company managerial fees, as well as policy commissions for its agents. Its handling of those policies was criticized after Hurricane Katrina, when the company classified many homes as flood-damaged, a designation that ensured the federal government, not State Farm, would have to pay.

Payments to other insurers also have come under fire.

A 2009 report by the General Accounting Office concluded some companies had been overpaid. The report found that companies kept an average of 30 to 40 percent of the total flood premium for their own overhead and management expenses. Agents received 15 percent commissions. The insurance companies were paid based on estimates of their administrative costs and also could collect bonuses for adding policies.

The federal flood program has stopped writing new policies, at least until June 7, because Congress failed to pass legislation extending it another year. It has suffered similar suspensions in the past, embroiled in debates including whether to expand the program to cover hurricanes.

Supple said the current suspension did not convince State Farm to withdraw from the program. But Congressional infighting has raised the cost of participation because of "numerous" delays in the program's reauthorization. "It challenges our ability to meet the changes," Supple said.
This story appeared in print on page A1
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