National Flood Insurance Program; Assistance to Private Sector Property Insurers

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC25

National Flood Insurance Program; Assistance to Private Sector

Property Insurers

AGENCY: Federal Insurance Administration, FEMA.

ACTION: Interim rule.

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SUMMARY: This interim rule amends the National Flood Insurance Program

(NFIP) regulations for the ``Write Your Own'' (WYO) Program relating to

the marketing of flood insurance policies. This interim rule modifies

the Arrangement to encourage increases in the policyholder base and to

increase the financial stability of the NFIP.

DATES: Effective date: This interim rule and the offer are effective

May 25, 1994. The Financial Assistance/Subsidy Arrangement is

applicable with respect to flood insurance policies written under the

Arrangement with an effective date of October 1, 1994, and later.

Comment Date: July 25, 1994.

ADDRESSES: Comments are requested and should be sent to the Rules

Docket Clerk, Office of the General Counsel, Federal Emergency

Management Agency, 500 C Street, SW., room 840, Washington, DC 20472,

(fax) (202) 646-4536.

FOR FURTHER INFORMATION CONTACT: Charles M. Plaxico, Jr., Federal

Emergency Management Agency, Federal Insurance Administration, 500 C

Street, SW., Washington, DC 20742, (202) 646-3422.

SUPPLEMENTARY INFORMATION: The Write-Your-Own (WYO) Program

(established in 1983) was authorized pursuant to Subpart C, part 62 of

the National Flood Insurance Program (NFIP) regulations and section

1345 of the National Flood Insurance Act of 1968, as amended (Pub. L.

90-448, 42 U.S.C. 4001, et seq.).

Under the WYO Program, the Standard Flood Insurance Policy (the

form and substance of which is approved by the Federal Insurance

Administrator (the Administrator)) may be issued in their own names by

insurers signatory to Financial Assistance/Subsidy Arrangements.

Insurers then are responsible for all aspects of service, including

policy issuance to new policyholders and to policyholders insured by

them under other lines of property insurance; endorsement and renewal

of policies; and the adjustment of claims brought under the policies.

The insurers retain a specified amount of the premium for their

expenses, including the commissions of agents. Under the Arrangement,

the Government provides such additional funds as may be required, over

and above the net premium income, for the payment of claims.

Once the Arrangement is signed by the authorized official of the

private insurer and the Government, it is effective at the beginning of

the Government's Fiscal Year on October 1 and runs through the

following September 30. Also, in accordance with Article V--

Commencement and Termination of the Arrangement, the Federal Insurance

Administration (FIA) is required, by June 1 of each year, to publish in

the Federal Register the terms for the re-subscription of the

Arrangement for the next Arrangement Year.

This interim rule amends the National Flood Insurance Program

(NFIP) regulations dealing with the marketing of flood insurance

policies, at Article II--Undertakings of the Company, paragraph G. of

the Arrangement, by requiring the WYO Company to follow marketing

guidelines established by the Federal Insurance Administration (FIA).

FIA is currently developing marketing guidelines which will then be

established in consultation with representatives of the WYO Companies.

As a result of the heavy flood losses which occurred in recent

years (i.e., Hurricanes Andrew and Iniki in August and September 1992,

the Northeaster storm in December 1992, the blizzard of March 1993, and

the Midwest flooding in the summer of 1993), FEMA recently had to

exercise its borrowing authority for the first time in eight years.

While the Program has been growing modestly, greater increases in the

policyholder base are needed to provide additional premium dollars to

build up the reserves to meet future catastrophic flooding events.

Further, large numbers of the victims of recent flood disasters were

not protected by flood insurance. Therefore, FEMA has determined that

sufficient cause exists for making this rule effective immediately so

the revised Arrangement can be the basis of the Offer required by June

1 and that delaying the effective date until after a comment period

would be impracticable and contrary to the public interest. However,

comments are requested and will be considered before further

regulations are issued.

Publication of the Arrangement in this interim rule also

constitutes, for the WYO Program Arrangement year of October 1, 1994--

September 30, 1995, the Administrator's ``Offer to Assist Insurers in

Underwriting Flood Insurance Using the Standard Flood Insurance

Policy.''

Method of Acceptance of Offer

1. Acceptance of this offer shall be by mailed notice of acceptance

or signed Arrangement to the Administrator `prior to midnight EDT

September 30, 1994. The notice may be preceded by facsimile

transmission (202) 646-3445 which must be received by midnight EDT

September 30, 1994.

2. The facsimile transmission or mailed notice of acceptance to the

Administrator must be authorized by an official of the insurance

company who has the authority to enter into such arrangements.

3. A duly signed original copy of the Notice of Acceptance (see No.

6 below) must be on file with the Administrator by November 16, 1994.

4. If 1., 2., or 3. above are not satisfied, the acceptance will be

considered by the Administrator as conditional and the commitment of

NFIP resources to fulfill the ``Undertaking of the Government'' under

Article IV of the Arrangement will take a lower priority than those

needed to fulfill the requirement of the other participating insurance

companies.

5. Send all acceptances of this offer to: Federal Emergency

Management Agency, Attn: Federal Insurance Administrator, WYO Program,

Washington, DC 20472.

6. In accepting this offer, use the Notice of Acceptance Form set

forth below:

Notice of Acceptance Form 1994-1995; Federal Emergency Management

Agency; Federal Insurance Administration; Financial Assistance/Subsidy

Arrangement (Arrangement)

Whereas, in 1994, there was published a Notice of Offer by the

Federal Emergency Management Agency to enter into a Financial

Assistance/Subsidy Arrangement (hereafter the Arrangement).

Whereas, the above cited Arrangement, as published in and reprinted

from the Federal Register, does not provide sufficient space to type in

the name of the Company.

Whereas, the Arrangement may include several individual companies

within a Company Group and the Arrangement as published in and

reprinted from the Federal Register does not provide sufficient space

to type in a list of companies.

Therefore, the parties hereby agree that this Notice of Acceptance

form is incorporated into and is an integral part of the entire

Arrangement and is substituted in place of the signature block

contained in the Federal Register under Article XVI of the Arrangement.

The above mentioned Arrangement is effective in the States in which the

insurance company (ies) listed below is (are) duly licensed to engage

in the business of property insurance:

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In witness whereof, the parties hereto have accepted this

Arrangement on this__________ day of__________, ______.

By:__________________

Title:________________

The United States of America

Federal Emergency Management Agency

By:__________________

Title: Federal Insurance Administrator

National Environmental Policy Act

This rule is categorically excluded from the requirements of 44 CFR

part 10, Environmental Consideration. No environmental impact

assessment has been prepared.

Executive Order 12898, Environmental Justice

The socioeconomic conditions relating to this interim rule have

been reviewed and it has been found that no disproportionately high and

adverse effect on minority or low income populations result from this

interim rule.

Executive Order 12866, Regulatory Planning and Review

This interim rule is not a significant regulatory action within the

meaning of section 2(f) of E.O. 12866 of September 30, 1993, 58 FR

51735. Nevertheless, this interim rule adheres to the regulatory

principles set forth in E.O. 12866.

Paperwork Reduction Act

This rule does not contain a collection of information requirement

as described in section 3504(h) of the Paperwork Reduction Act.

Executive Order 12612, Federalism.

This rule involves no policies that have federalism implications

under Executive Order 12612, Federalism, dated October 26, 1987.

Executive Order 12778, Civil Justice Reform

This rule meets the applicable standards of section 2(b)(2) of

Executive Order 12778.

List of Subjects in 44 CFR Part 62

Flood insurance.

Accordingly, 44 CFR part 62 is amended as follows:

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

Subpart C--Write Your Own (WYO) Companies

1. The authority citation for part 62 continues to read as follows:

Authority: 42 U.S.C. 4001 et seq.; Reorganization Plan No. 3 of

1978, 43 FR 41943, 3 CFR, 1978 Comp., p. 329; E.O. 12127 of Mar. 31,

1979, 44 FR 19367, 3 CFR, 1979 Comp., p. 376.

2. Appendix A is revised to read as follows:

Appendix A to Part 62

Federal Emergency Management Agency, Federal Insurance

Administration, Financial Assistance/Subsidy Arrangement.

Purpose: To assist the company in underwriting flood insurance

using the Standard Flood Insurance Policy.

Accounting Data: Pursuant to Section 1310 of the Act, a Letter

of Credit shall be issued for payment as provided for herein from

the National Flood Insurance Fund.

Effective Date: October 1, 1994.

Issued By: Federal Emergency Management Agency, Federal

Insurance Administration, Washington, DC 20472.

Article I--Findings, Purpose, and Authority

Whereas, the Congress in its ``Finding and Declaration of

Purpose'' in the National Flood Insurance Act of 1968, as amended,

(``the Act'') recognized the benefit of having the National Flood

Insurance Program (the Program) ``carried out to the maximum extent

practicable by the private insurance industry''; and

Whereas, the Federal Insurance Administration (FIA) recognizes

this Arrangement as coming under the provisions of Section 1345 of

the Act; and

Whereas, the goal of the FIA is to develop a program with the

insurance industry where, over time, some risk-bearing role for the

industry will evolve as intended by the Congress (Section 1304 of

the Act); and

Whereas, the Program, as presently constituted and implemented,

is subsidized, and the insurer (hereinafter the ``Company'') under

this Arrangement shall charge rates established by the FIA; and

Whereas, this Arrangement will subsidize all flood policy losses

by the Company; and

Whereas, this Financial Assistance/Subsidy Arrangement has been

developed to involve individual Companies in the Program, the

initial step of which is to explore ways in which any interested

insurer may be able to write flood insurance under its own name; and

Whereas, one of the primary objectives of the Program is to

provide coverage to the maximum number of structures at risk and

because the insurance industry has marketing access through its

existing facilities not directly available to the FIA, it has been

concluded that coverage will be extended to those who would not

otherwise be insured under the Program; and

Whereas, flood insurance policies issued subject to this

Arrangement shall be only that insurance written by the Company in

its own name pursuant to the Act; and

Whereas, over time, the Program is designed to increase industry

participation, and, accordingly, reduce or eliminate Government as

the principal vehicle for delivering flood insurance to the public;

and

Whereas, the direct beneficiaries of this Arrangement will be

those Company policyholders and applicants for flood insurance who

otherwise would not be covered against the peril of flood.

Now, therefore, the parties hereto mutually undertake the

following:

Article II--Undertakings of the Company

A. In order to be eligible for assistance under this Arrangement

the Company shall be responsible for:

1.0 Policy Administration, including

1.1 Community Eligibility/Rating Criteria

1.2 Policyholder Eligibility Determination

1.3 Policy Issuance

1.4 Policy Endorsements

1.5 Policy Cancellations

1.6 Policy Correspondence

1.7 Payment of Agents Commissions

The receipt, recording, control, timely deposit and disbursement

of funds in connection with all the foregoing, and correspondence

relating to the above in accordance with the Financial Control Plan

requirements.

2.0 Claims processing in accordance with general Company

standards and the Financial Control Plan. The Write Your Own Claims

Manual, the Federal Emergency Management Agency Adjuster Manual, the

FIA National Flood Insurance Program Policy Issuance Handbook, the

Write Your Own Operational Overview, and other instructional

material also provide guidance to the Company.

3.0 Reports

3.1 Monthly Financial Reporting and Statistical Transaction

Reporting shall be in accordance with the requirements of National

Flood Insurance Program Transaction Record Reporting and Processing

Plan for the Write Your Own (WYO) Program and the Financial Control

Plan for business written under the WYO Program. These data shall be

validated/ edited/audited in detail and shall be compared and

balanced against Company financial reports.

3.2 Monthly financial reporting shall be prepared in accordance

with the WYO Accounting Procedures.

3.3 The Company shall establish a program of self audit

acceptable to the FIA or comply with the self audit program

contained in the Financial Control Plan for business written under

the WYO Program. The Company shall report the results of this self-

audit to the FIA annually.

B. The Company shall use the following time standards of

performance as a guide:

1.0 Application Processing--15 days (Note: If the policy cannot

be mailed due to insufficient or erroneous information or

insufficient funds, a request for correction or added monies shall

be mailed within 10 days);

1.1 Renewal Processing--7 days;

1.2 Endorsement Processing--7 days;

1.3 Cancellation Processing--15 days;

1.4 Correspondence, Simple and/or Status Inquiries--7 days;

1.5 Correspondence, Complex Inquiries--20 days;

1.6 Supply, Materials, and Manual Requests--7 days;

1.7 Claims Draft Processing--7 days from completion of file

examination;

1.8 Claims Adjustment--45 days average from receipt of Notice of

Loss (or equivalent) through completion of examination.

1.9 For the elements of work enumerated above, the elapsed time

shown is from date of receipt through date of mail out. Days means

working, not calendar days.

In addition to the standards for timely performance set forth

above, all functions performed by the Company shall be in accordance

with the highest reasonably attainable quality standards generally

utilized in the insurance and data processing industries.

These standards are for guidance. Although no immediate remedy

for failure to meet them is provided under this Arrangement,

nevertheless, performance under these standards can be a factor

considered by the Federal Insurance Administrator (the

Administrator) in determining the continuing participation of the

Company in the Program or other action, e.g., limiting the Company's

authority to write new business.

C. The Company shall coordinate activities and provide

information to the FIA or its designee on those occasions when a

Flood Insurance Catastrophe Office is established.

D. Policy Issuance

1.0 The flood insurance subject to this Arrangement shall be

only that insurance written by the Company in its own name pursuant

to the Act.

2.0 The Company shall issue policies under the regulations

prescribed by the Administrator in accordance with the Act;

3.0 All such policies of insurance shall conform to the

regulations prescribed by the Administrator pursuant to the Act, and

be issued on a form approved by the Administrator;

4.0 All policies shall be issued in consideration of such

premiums and upon such terms and conditions and in such States or

areas or subdivisions thereof as may be designated by the

Administrator and only where the Company is licensed by State law to

engage in the property insurance business;

5.0 The Administrator may require the Company to immediately

discontinue issuing policies subject to this Arrangement in the

event Congressional authorization or appropriation for the National

Flood Insurance Program is withdrawn.

E. The Company shall establish a bank account, separate and

apart from all other Company accounts, at a bank of its choosing for

the collection, retention and disbursement of funds relating to its

obligation under this Arrangement, less the Company's expenses as

set forth in Article III, and the operation of the Letter of Credit

established pursuant to Article IV. All funds not required to meet

current expenditures shall be remitted to the United States

Treasury, in accordance with the provisions of the WYO Accounting

Procedures Manual.

F. The Company shall investigate, adjust, settle and defend all

claims or losses arising from policies issued under this

Arrangement. Payment of flood insurance claims by the Company shall

be binding upon the FIA.

G. The Company shall market flood insurance policies in a manner

consistent with the marketing guidelines established by the Federal

Insurance Administration.

Article III--Loss Costs, Expenses, Expense Reimbursement, and

Premium Refunds

A. The Company shall be liable for operating, administrative and

production expenses, including any taxes, dividends, agent's

commissions or any board, exchange or bureau assessments, or any

other expense of whatever nature incurred by the Company in the

performance of its obligations under this Arrangement.

B. The Company shall be entitled to withhold as operating and

administrative expenses, other than agents or brokers commissions,

an amount from the Company's written premium on the policies covered

by this Arrangement in reimbursement of all of the Company's

marketing, operating and administrative expenses, except for

allocated and unallocated loss adjustment expenses described in C.

of this Article, which amount shall equal the average of industry

expense ratios for ``Other Acq.'' ``Gen. Exp.'' and ``Taxes'' as

published in the latest available (as of March 15 of the prior

Arrangement year) ``Best's'' Aggregates and Averages Property

Casualty, Industry Underwriting--by Lines for Fire, Allied Lines,

Farmowners Multiple Peril, Homeowners Multiple Peril, and Commercial

Multiple Peril combined (weighted average using premiums earned as

weights) calculated and promulgated by the Administrator. Premium

income net of reimbursement (net premium income) shall be deposited

in a special account for the payment of losses and loss adjustment

expenses (see Article II, Section E).

The Company shall be entitled to 15% of the Company's written

premium on the policies covered by this Arrangement as the

commission allowance to meet commissions and/or salaries of their

insurance agents, brokers, or other entities producing qualified

flood insurance applications and other related expenses.

The Company, with the consent of the Administrator as to terms

and costs, shall be entitled to utilize the services of a national

rating organization, licensed under state law, to assist the FIA in

undertaking and carrying out such studies and investigations on a

community or individual risk basis, and in determining more

equitable and accurate estimates of flood insurance risk premium

rates as authorized under the National Flood Insurance Act of 1968,

as amended. The Company shall be reimbursed in accordance with the

provisions of the WYO Accounting Procedures Manual for the charges

or fees for such services.

C. Loss Adjustment Expenses shall be reimbursed as follows:

1. Unallocated loss adjustment shall be an expense reimbursement

of 3.3% of the incurred loss (except that it does not include

``incurred but not reported'').

2. Allocated loss adjustment expense shall be reimbursed to the

Company pursuant to Exhibit A, entitled ``Fee Schedule.''

3. Special allocated loss expenses shall be reimbursed to the

Company for only those expenses the Company has obtained prior

approval of the Administrator to incur.

D.1. Loss payments under policies of flood insurance shall be

made by the Company from funds retained in the bank account

established under Article II, Section E and, if such funds are

depleted, from funds derived by drawing against the Letter of Credit

established pursuant to Article IV.

2. Loss payments will include payments as a result of awards or

judgments for damages arising under the scope of this Arrangement,

policies of flood insurance issued pursuant to this Arrangement, and

the claims processing standards and guides set forth at Article II,

Section A, 2.0 of this Arrangement. Prompt notice of any claim for

damages as to claims processing or other matters arising outside the

scope of this section (D)(2) shall be sent to the Assistant

Administrator of the FIA's Office of Insurance Policy Analysis and

Technical Services (OIPATS), along with a copy of any material

pertinent to the claim for damages arising outside of the scope of

the matters set forth in this section (D)(2).

Following receipt of notice of such claim, the General Counsel

(OGC), FEMA, shall review the cause and make a recommendation to FIA

as to whether the claim is grounded in actions by the Company which

are significantly outside the provisions of this section (D)(2).

After reviewing the General Counsel's recommendation, the

Administrator will make her decision and the Company will be

notified, in writing, within thirty (30) days of the General

Counsel's recommendation, if the decision is that any award or

judgment for damages arising out of such actions will not be

recognized under Article III of this Arrangement as a reimbursable

loss cost, expense or expense reimbursement. In the event that the

Company wishes to petition for reconsideration of the notification

that it will not be reimbursed for the award or judgment made under

the above circumstances, it may do so by mailing, within thirty days

of the notice declining to recognize any such award or judgment as

reimbursable under Article III, a written petition to the Chairman

of the WYO Standards Committee established under the Financial

Control Plan. The WYO Standards Committee will, then, consider the

petition at its next regularly scheduled meeting or at a special

meeting called for that purpose by the Chairman and issue a written

recommendation to the Administrator, within thirty days of the

meeting. The Administrator's final determination will be made, in

writing, to the Company within thirty days of the recommendation

made by the WYO Standards Committee.

E. Premium refunds to applicants and policyholders required

pursuant to rules contained in the National Flood Insurance Program

(NFIP) ``Flood Insurance Manual'' shall be made by the Company from

funds retained in the bank account established under Article II,

Section E and, if such funds are depleted, from funds derived by

drawing against the Letter of Credit established pursuant to Article

IV.

Article IV--Undertakings of the Government

A. Letter(s) of Credit shall be established by the Federal

Emergency Management Agency (FEMA) against which the Company may

withdraw funds daily, if needed, pursuant to prescribed procedures

as implemented by FEMA. The amounts of the authorizations will be

increased as necessary to meet the obligations of the Company under

Article III, Sections (C), (D), and (E). Request for funds shall be

made only when net premium income has been depleted. The timing and

amount of cash advances shall be as close as is administratively

feasible to the actual disbursements by the recipient organization

for allowable Letter of Credit expenses.

Request for payment on Letters of Credit shall not ordinarily be

drawn more frequently than daily nor in amounts less than $5,000,

and in no case more than $5,000,000 unless so stated on the Letter

of Credit. This Letter of Credit may be drawn by the Company for any

of the following reasons:

1. Payment of claim as described in Article III, Section D; and

2. Refunds to applicants and policyholders for insurance premium

overpayment, or if the application for insurance is rejected or when

cancellation or endorsement of a policy results in a premium refund

as described in Article III, Section E; and

3. Allocated and unallocated Loss Adjustment Expenses as

described in Article III, Section C.

B. The FIA shall provide technical assistance to the Company as

follows:

1. The FIA's policy and history concerning underwriting and

claims handling.

2. A mechanism to assist in clarification of coverage and claims

questions.

3. Other assistance as needed.

Article V--Commencement and Termination

A. Upon signature of authorized officials for both the Company

and the FIA, this Arrangement shall be effective for the period

October 1 through September 30. The FIA shall provide financial

assistance only for policy applications and endorsements accepted by

the Company during this period pursuant to the Program's effective

date, underwriting and eligibility rules.

B. By June 1, of each year, the FIA shall publish in the Federal

Register and make available to the Company the terms for the re-

subscription of this Financial Assistance/Subsidy Arrangement. In

the event the Company chooses not to re-subscribe, it shall notify

the FIA to that effect by the following July 1.

C. In the event the Company elects not to participate in the

Program in any subsequent fiscal year, or the FIA chooses not to

renew the Company's participation, the FIA, at its option, may

require (1) the continued performance of this entire Arrangement for

one (1) year following the effective expiration date only for those

policies issued during the original term of this Arrangement, or any

renewal thereof, or (2) the transfer to the FIA of:

a. All data received, produced, and maintained through the life

of the Company's participation in the Program, including certain

data, as determined by FIA, in a standard format and medium; and

b. A plan for the orderly transfer to the FIA of any continuing

responsibilities in administering the policies issued by the Company

under the Program including provisions for coordination assistance;

and

c. All claims and policy files, including those pertaining to

receipts and disbursements which have occurred during the life of

each policy. In the event of a transfer of the services provided,

the Company shall provide the FIA with a report showing, on a policy

basis, any amounts due from or payable to insureds, agents, brokers,

and others as of the transition date.

D. Financial assistance under this Arrangement may be cancelled

by the FIA in its entirety upon 30 days written notice to the

Company by certified mail stating one of the following reasons for

such cancellation: (1) Fraud or misrepresentation by the Company

subsequent to the inception of the contract, or (2) nonpayment to

the FIA of any amount due the FIA. Under these very specific

conditions, the FIA may require the transfer of data as shown in

Section C., above. If transfer is required, the unearned expenses

retained by the Company shall be remitted to the FIA.

E. In the event the Act is amended, or repealed, or expires, or

if the FIA is otherwise without authority to continue the Program,

financial assistance under this Arrangement may be cancelled for any

new or renewal business, but the Arrangement shall continue for

policies in force which shall be allowed to run their term under the

Arrangement.

F. In the event that the Company is unable to, or otherwise

fails to, carry out its obligations under this Arrangement by reason

of any order or directive duly issued by the Department of Insurance

of any Jurisdiction to which the Company is subject, the Company

agrees to transfer, and the Government will accept, any and all WYO

policies issued by the Company and in force as of the date of such

inability or failure to perform. In such event the Government will

assume all obligations and liabilities owed to policyholders under

such policies arising before and after the date of transfer and the

Company will immediately transfer to the Government all funds in its

possession with respect to all such policies transferred and the

unearned portion of the Company expenses for operating,

administrative and loss adjustment on all such policies.

Article VI--Information and Annual Statements

The Company shall furnish to the FIA such summaries and analyses

of information in its records as may be necessary to carry out the

purposes of the National Flood Insurance Act of 1968, as amended, in

such form as the FIA, in cooperation with the Company, shall

prescribe. The Company shall be a property/casualty insurer

domiciled in a State or territory of the United States. Upon

request, the Company shall file with the FIA a true and correct copy

of the Company's Fire and Casualty Annual Statement, and Insurance

Expense Exhibit or amendments thereof, as filed with the State

Insurance Authority of the Company's domiciliary State.

Article VII--Cash Management and Accounting

A. FEMA shall make available to the Company during the entire

term of this Arrangement and any continuation period required by FIA

pursuant to Article V, Section C., the Letter of Credit provided for

in Article IV drawn on a repository bank within the Federal Reserve

System upon which the Company may draw for reimbursement of its

expenses as set forth in Article IV which exceed net written

premiums collected by the Company from the effective date of this

Arrangement or continuation period to the date of the draw.

B. The Company shall remit all funds not required to meet

current expenditures to the United States Treasury, in accordance

with the provisions of the WYO Accounting Procedures Manual.

C. In the event the Company elects not to participate in the

Program in any subsequent fiscal year, the Company and FIA shall

make a provisional settlement of all amounts due or owing within

three months of the termination of this Arrangement. This settlement

shall include net premiums collected, funds drawn on the Letter of

Credit, and reserves for outstanding claims. The Company and FIA

agree to make a final settlement of accounts for all obligations

arising from this Arrangement within 18 months of its expiration or

termination, except for contingent liabilities which shall be listed

by the Company. At the time of final settlement, the balance, if

any, due the FIA or the Company shall be remitted by the other

immediately and the operating year under this Arrangement shall be

closed.

Article VIII--Arbitration

A. If any misunderstanding or dispute arises between the Company

and the FIA with reference to any factual issue under any provisions

of this Arrangement or with respect to the FIA's non-renewal of the

Company's participation, other than as to legal liability under or

interpretation of the standard flood insurance policy, such

misunderstanding or dispute may be submitted to arbitration for a

determination which shall be binding upon approval by the FIA. The

Company and the FIA may agree on and appoint an arbitrator who shall

investigate the subject of the misunderstanding or dispute and make

a determination. If the Company and the FIA cannot agree on the

appointment of an arbitrator, than two arbitrators shall be

appointed, one to be chosen by the Company and one by the FIA.

The two arbitrators so chosen, if they are unable to reach an

agreement, shall select a third arbitrator who shall act as umpire,

and such umpire's determination shall become final only upon

approval by the FIA.

The Company and the FIA shall bear in equal shares all expenses

of the arbitration. Findings, proposed awards, and determinations

resulting from arbitration proceedings carried out under this

section, upon objection by FIA or the Company, shall be inadmissible

as evidence in any subsequent proceedings in any court of competent

jurisdiction.

This Article shall indefinitely succeed the term of this

Arrangement.

Article IX--Errors and Omissions

The parties shall not be liable to each other for damages caused

by ordinary negligence arising out of any transaction or other

performance under this Arrangement, nor for any inadvertent delay,

error, or omission made in connection with any transaction under

this Arrangement, provided that such delay, error, or omission is

rectified by the responsible party as soon as possible after

discovery.

However, in the event that the Company has made a claim payment

to an insured without including a mortgagee (or trustee) of which

the Company had actual notice prior to making payment, and

subsequently determines that the mortgagee (or trustee) is also

entitled to any part of said claim payment, any additional payment

shall not be paid by the Company from any portion of the premium and

any funds derived from any Federal Letter of Credit deposited in the

bank account described in Article II, section E. In addition, the

Company agrees to hold the Federal Government harmless against any

claim asserted against the Federal Government by any such mortgagee

(or trustee), as described in the preceding sentence, by reason of

any claim payment made to any insured under the circumstances

described above.

Article X--Officials Not to Benefit

No Member or Delegate to Congress, or Resident Commissioner,

shall be admitted to any share or part of this Arrangement, or to

any benefit that may arise therefrom; but this provision shall not

be construed to extend to this Arrangement if made with a

corporation for its general benefit.

Article XI--Offset

At the settlement of accounts the Company and the FIA shall

have, and may exercise, the right to offset any balance or balances,

whether on account of premiums, commissions, losses, loss adjustment

expenses, salvage, or otherwise due one party to the other, its

successors or assigns, hereunder or under any other Arrangements

heretofore or hereafter entered into between the Company and the

FIA. This right of offset shall not be affected or diminished

because of insolvency of the Company.

All debts or credits of the same class, whether liquidated or

unliquidated, in favor of or against either party to this

Arrangement on the date of entry, or any order of conservation,

receivership, or liquidation, shall be deemed to be mutual debts and

credits and shall be offset with the balance only to be allowed or

paid. No offset shall be allowed where a conservator, receiver, or

liquidator has been appointed and where an obligation was purchased

by or transferred to a party hereunder to be used as an offset.

Although a claim on the part of either party against the other may

be unliquidated or undetermined in amount on the date of the entry

of the order, such claim will be regarded as being in existence as

of the date of such order and any credits or claims of the same

class then in existence and held by the other party may be offset

against it.

Article XII--Equal Opportunity

The Company shall not discriminate against any applicant for

insurance because of race, color, religion, sex, age, handicap,

marital status, or national origin.

Article XIII--Restriction on Other Flood Insurance

As a condition of entering into this Arrangement, the Company

agrees that in any area in which the Administrator authorizes the

purchase of flood insurance pursuant to the Program, all flood

insurance offered and sold by the Company to persons eligible to buy

pursuant to the Program for coverages available under the Program

shall be written pursuant to this Arrangement.

However, this restriction applies solely to policies providing

only flood insurance. It does not apply to policies provided by the

Company of which flood is one of the several perils covered, or

where the flood insurance coverage amount is over and above the

limits of liability available to the insured under the Program.

Article XIV--Access to Books and Records

The FIA and the Comptroller General of The United States, or

their duly authorized representatives, for the purpose of

investigation, audit, and examination shall have access to any

books, documents, papers and records of the Company that are

pertinent to this Arrangement. The Company shall keep records which

fully disclose all matters pertinent to this Arrangement, including

premiums and claims paid or payable under policies issued pursuant

to this Arrangement. Records of accounts and records relating to

financial assistance shall be retained and available for three (3)

years after final settlement of accounts, and to financial

assistance, three (3) years after final adjustment of such claims.

The FIA shall have access to policyholder and claim records at all

times for purposes of the review, defense, examination, adjustment,

or investigation of any claim under a flood insurance policy subject

to this Arrangement.

Article XV--Compliance with Act and Regulations

This Arrangement and all policies of insurance issued pursuant

thereto shall be subject to the provisions of the National Flood

Insurance Act of 1968, as amended, the Flood Disaster Protection Act

of 1973, as amended, and Regulations issued pursuant thereto and all

Regulations affecting the work that are issued pursuant thereto,

during the term hereof.

Article XVI--Relationship Between the Parties (Federal Government

and Company) and the Insured

Inasmuch as the Federal Government is a guarantor hereunder, the

primary relationship between the Company and the Federal Government

is one of a fiduciary nature, i.e., to assure that any taxpayer

funds are accounted for and appropriately expended.

The Company is not the agent of the Federal Government. The

Company is solely responsible for its obligations to its insured

under any flood policy issued pursuant hereto.

In witness whereof, the parties hereto have accepted this

Arrangement on this __________ day of __________, 1993.

----------------------------------------------------------------------

Company

by--------------------------------------------------------------------

(Title)---------------------------------------------------------------

The United States of America

Federal Emergency Management Agency

by--------------------------------------------------------------------

(Title)---------------------------------------------------------------

Exhibit A

Fee Schedule

------------------------------------------------------------------------

Range (by covered loss) Fee

------------------------------------------------------------------------

Erroneous Assignment........................................... $40

Closed Without Payment......................................... 125

Minimum for Upton-Jones Claims................................. 800

$0.01 to $600.................................................. 150

$600.01 to $1,000.............................................. 175

$1,000.01 to $2,000............................................ 225

$2,000.01 to $3,500............................................ 275

$3,500.01 to $5,000............................................ 350

$5,000.01 to $7,000............................................ 425

$7,000.01 to $10,000........................................... 500

$10,000.01 to $15,000.......................................... 550

$15,000.01 to $25,000.......................................... 600

$25,000.01 to $35,000.......................................... 675

$35,000.01 to $50,000.......................................... 750

$50,000.01 to $100,000......................................... 1,000

$100,000.01 to $150,000........................................ 1,300

$150,000.01 to $200,000........................................ 1,600

$200,000.01 to limits.......................................... 2,000

------------------------------------------------------------------------

Allocated fee schedule entry value is the covered loss under the policy

based on the standard deductibles ($500 and $500) and limited to the

amount of insurance purchased.

(Catalog of Federal Domestic Assistance No. 83.100, ``Flood

Insurance'')

Dated: May 17, 1994.

Elaine A. McReynolds,

Administrator, Federal Insurance Administration.

[FR Doc. 94-12627 Filed 5-20-94; 8:45 am]

BILLING CODE 6718-05-P