National Flood Insurance Program; Assistance to Private Sector Property Insurers

FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 62

RIN 3067-AC26

National Flood Insurance Program; Assistance to Private Sector

Property Insurers

AGENCY: Federal Insurance Administration (FIA), Federal Emergency

Management Agency (FEMA).

ACTION: Final rule.

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SUMMARY: This final rule amends National Flood Insurance Program (NFIP)

regulations establishing the Financial Assistance/Subsidy Arrangement

that may be entered into by and between the Administrator and private

sector insurers under the Write Your Own (WYO) program. The amendments:

(1) Simplify the Arrangement by streamlining the format; (2) reflect

recent policy changes regarding loss adjustment and financial operation

of the private insurers in the WYO program; and (3) delete references

to obsolete operating manuals and handbooks. The amendments also

improve the flexibility of the Arrangement and provide information to

permit WYO participants to discharge their responsibilities for

underwriting, claims adjustment, and financial control procedures

established by the Federal Insurance Administration.

EFFECTIVE DATE: October 1, 1996.

FOR FURTHER INFORMATION CONTACT: Edward T. Pasterick, Federal Emergency

Management Agency, Federal Insurance Administration, 500 C Street SW.,

Washington, DC 20472, (202) 646-3443.

SUPPLEMENTARY INFORMATION: On April 3, 1996, FEMA published in the

Federal Register, 61 FR 14709, a proposed rule to amend NFIP

regulations establishing the Financial Assistance/Subsidy Arrangement

that may be entered into by and between the Administrator and private

sector insurers under the WYO program.

FEMA received two sets of written comments on the proposed rule.

The comments were submitted by two separate Write Your Own companies.

One company expressed concerns over seven (7) issues in the

Arrangement. The first concern questioned the Arrangement's incentive

system, i.e., adjusting the percentage of retained premium relative to

the Company's performance in achieving production goals. The proposed

Arrangement provides a minimum of 30.6% of premium income to be

retained by a WYO Company for operating and administrative expenses,

including marketing expenses. When a WYO company achieves its

production or marketing goals, the amount of retained premium income

increases from the minimum of 30.6% up to a maximum of 32.6%. The

commenter felt that such a provision was punitive and amounted to a

retroactive penalty since the marketing goals are tied to the retention

of current policies as well as the production of new business.

First of all, the amount of premium income retained by a WYO

company (32.6%) includes allowances for marketing activities.

Therefore, it is not unreasonable to condition a portion of the

retained premium on the success of such marketing activities. Secondly,

the unprecedented growth in the number of flood insurance policies

during the last two years as a result of this very incentive system is

a compelling reason to continue it under the Arrangement. Thirdly, the

marketing goals are tied to retention of current policies only to the

extent that such policies leave the NFIP entirely. If they go from one

WYO company to another, the loss does not adversely affect the first

company's goals. Furthermore, policy retention is a commonly accepted

component of marketing strategies. In sum, the principle of relating

financial incentives to performance is simply a sound business practice

and has been retained in the Arrangement.

The commenter expressed a related concern that a standard

percentage is unfair to larger companies that carry more policies on

their book of business. FEMA has retained the same percentage for all

companies participating in the WYO program for the current Arrangement

believing that a consistent

[[Page 37688]]

standard is the most equitable approach for all participants since it

is applied uniformly, regardless of a company's size. However, in

calculating goal accomplishment, we will employ a formula that will

recognize not only the percentage increase in the numbers of policies

but also absolute numbers of new policies. This will be explained

further in the offer letter for the Arrangement.

The overall issues of growth goals for companies in the WYO

program, the appropriate level of the expense allowance, and the

relationship between the two, all warrant a detailed review by the FIA.

For the current Arrangement, however, the levels of retained premium

reflected in the April 3, 1996 proposed rule remain in effect.

The second concern raised by this WYO company focused on the

appropriate roles with respect to risk bearing by the Federal

Government and the insurance companies participating in the

Arrangement. (The heading in the company's submission reads

``Continuing Shift of Risk-Bearing.'') The commenter expressed concern

that if Congressional authorization or appropriation for the program is

ever withdrawn the WYO company would still be liable for its policies

in force that are allowed to run their term under the Arrangement. The

company recommended that the purpose statement be revised to emphasize

the Federal Government's continuing financial assistance role--

regardless of circumstances. The same company also recommended that

Article V.E. should reaffirm that the FIA will reimburse expenses and

ultimately be responsible for claim payment for the duration of the

Arrangement even though financial assistance under the Arrangement is

canceled for any new or renewal business. In the absence of that, the

company recommended that a WYO company be permitted to cancel all

policies in force with 45 days notice should financial assistance be

terminated for any reason.

First, the Arrangement may not obligate the Federal Government in

any way beyond Congressional authorization. Congress has built into the

Act, however, a number of safeguards for policyholders--the ultimate

beneficiaries of the National Flood Insurance Program--and private

insurance companies that participate in the NFIP. One of the major

safeguards for consumers and private insurance companies is FEMA's

borrowing authority for the National Flood Insurance Fund which

operates independently of fiscal year authorization. Furthermore, the

WYO program has operated for thirteen years and all have benefited--the

consumer, the taxpayer, and participating WYO companies that have not

had to absorb or share losses even in recent heavy loss years in spite

of their active involvement in the NFIP. While FIA cannot speak for

Congress relative to the authorization for the NFIP, FIA has recognized

the commenter's concern by revising the purpose statement of Article I

to emphasize that all flood policies issued are done so under

prescribed conditions pursuant to the Arrangement and authorization

granted by Congress for the program.

The same commenter also expressed concern over certain details in

the Arrangement for the single adjuster program for catastrophic losses

such as hurricanes when property owners suffer combined wind and flood

losses but have separate insurance carriers for these perils.

Specifically, Article II.C.3.0 of the proposed Arrangement requires

using a single adjuster when the flood coverage is provided by the WYO

company and the wind coverage is provided by another WYO company.

Article II.C.4.0 requires the use of a single adjuster when the flood

coverage is by the WYO company, the wind coverage is by another

property insurer, and the State Insurance Regulator deems it in the

interests of the policyholder that a single adjuster be used to handle

both losses.

FIA finds some merit in the commenter's concerns relative to: 1.

Article II.C.3.0, such as the potential exposure of a WYO company's

proprietary information through the use of a single adjuster.

Consequently, the Arrangement has been revised by deleting Article

II.C.3.0. Article II. C.4.0, which requires the use of a single

adjuster when the State Insurance Regulator requires one, has been

retained in the Arrangement and renumbered as Article II.C.3.0. FIA

believes strongly that at the heart of the single adjuster approach is

an overriding public benefit since claims on the same property

involving separate perils are adjusted in a coordinated manner.

Therefore, whenever a State Insurance Regulator deems it in the

interest of the public that a single adjuster be used for an event

involving wind and flood, the program will support the Regulator's

decision and require the use of a single adjuster by participating WYO

companies.

The company also expressed concern that it no longer has an

understanding with one Joint Underwriting Association and would run the

risk in Article II.C.2.0 of breach of contract or misrepresentation

since Joint Underwriting Associations are one of the wind carriers that

would require the use of a single adjuster. The commenter indicated

that Article II.C.2.0 represented only a small percentage of its

business, and Joint Underwriting Associations are in fact only one of a

number of property insurance mechanisms listed in Article II.C.2.0.

While the company may no longer act as a servicing agent for a

particular State Joint Underwriting Association, this would certainly

not preclude the use of a single adjuster when the coverage for flood

is offered by the company and the wind coverage is offered by the

underwriting association. Accordingly, Article II.C.2.0 of the

Arrangement has not been revised.

The same company also recommended that State premium tax surcharges

for flood insurance and guaranty fund assessments be excluded from

liability from a participating Company. The company believed that the

wording in the proposed Arrangement could be an impediment to

marketing. FIA agrees with this comment, and Article III.A. has been

revised to read, ``The Company shall be liable for operating,

administrative and production expenses, including any State premium

taxes, dividends, agent's commissions or any other expense of whatever

nature incurred by the Company in the performance of its obligations

under the Arrangement, but excluding surcharges on flood insurance

premium and guaranty fund assessments.''

The first commenter also objected that the percentage (3.3%) paid

to WYO companies for unallocated loss adjustment expenses is

inadequate--one that has not changed since the inception of the

program. While loss adjustment expenses, as the commenter mentioned,

will on the average be higher for catastrophic events than for smaller

events, the 3.3% contained in the Arrangement is an average percentage

for all loss adjustment scenarios, including catastrophic disasters as

well as moderate and small events where allocated loss expenses are

lower. FEMA has determined that the current 3.3% should be retained in

the current Arrangement. The matter however warrants review, and any

modification to the loss adjustment expense will be considered at the

end of the current Arrangement year.

The commenter also objected to the removal of the adjuster fee

schedule from the Arrangement and recommended that the fee schedule be

modified to reflect higher limits of coverage. FEMA agrees that

additional changes need to be made to the fee

[[Page 37689]]

schedule; however, in the interest of expedition and flexibility, FEMA

believes that any changes to the fee schedule should be made outside

the rule making process in close coordination with the participating

WYO companies. Therefore, the fee schedule has not been included in the

final Arrangement.

This commenter's final recommendation involved offering greater

flexibility in the Arrangement regarding cash management procedures and

oversight. The commenter recommended that Article VII.B. be revised to

read ``The Company shall remit all funds, including interest, not

required to meet current expenditures to the United States Treasury, in

accordance with the provisions of the WYO Accounting Procedures Manual

or procedures approved by the FIA.'' FEMA agrees with that

recommendation provided that FIA's approval of accounting procedures is

in writing. The purpose underlying the revisions in the latest

Arrangement is to streamline the document and to achieve greater

flexibility in managing the program without sacrificing essential

operational and financial controls. We have modified the Arrangement to

reflect the company's recommendation.

A second WYO company objected also to the fixed percentage of 32.6%

of retained premium only when companies achieve their marketing or

production goals and to the limitation of 30.6% when that goal is not

achieved. The company cited its extensive service and outreach programs

to its agents in an effort to achieve the growth goals for the National

Flood Insurance Program. In spite of this effort, the company indicated

that increased competition from the independent agency system has

prevented the company from achieving its goals. FEMA concludes however

that the experience of the WYO program as a whole, with these

percentages in place, has been responsible in large part for the

unprecedented growth of the program. As explained above, the percentage

rates of 30.6% (the minimum amount of premium that a company may

retain) and 32.6% (the amount of premium retained by a company when it

achieves its marketing goals) have been retained in this Arrangement

but will be reviewed by FIA for future Arrangements.

National Environmental Policy Act

This final rule is categorically excluded from the requirements of

44 CFR Part 10, Environmental Consideration. No environmental impact

assessment has been prepared.

Executive Order 12866, Regulatory Planning and Review

This final rule is not a significant regulatory action as defined

under Executive Order 12866 of September 30, 1993, Regulatory Planning

and Review, 58 FR 51735, October 4, 1993. To the extent possible, this

rule adheres to the principles of regulation as set forth in Executive

Order 12866. This rule has not been reviewed by the Office of

Management and Budget under the provisions of Executive Order 12866.

Paperwork Reduction Act

This final rule does not contain a collection of information and is

therefore not subject to the provisions of the Paperwork Reduction Act

of 1995.

Executive Order 12612, Federalism

This final rule involves no policies that have federalism

implications under Executive Order 12612, Federalism, dated October 26,

1987.

Executive Order 12778, Civil Justice Reform

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

of Executive Order 12778.

List of Subjects in 44 CFR Part 62

Claims, Flood insurance.

Accordingly, 44 CFR part 62 is amended as follows:

PART 62--SALE OF INSURANCE AND ADJUSTMENT OF CLAIMS

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 of part 62 is revised to read as follows:

Appendix A of 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, 1996.

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 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 enable any interested qualified insurer 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 under prescribed policy conditions and pursuant to this

Arrangement and 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:

[[Page 37690]]

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. Other technical and policy material

published by FEMA and FIA will 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.

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--15 days;

1.3 Cancellation Processing--15 days;

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

examination;

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

Loss (or equivalent) through completion of examination.

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

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

means working days, 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 and the marketing guidelines provided

for in Section G. below can be a factor considered by the Federal

Insurance Administrator (the Administrator) in requiring corrective

action by the Company, in determining the continuing participation of

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

the Company's authority to write new business.

C. To ensure maximum responsiveness to the National Flood Insurance

Program's (NFIP) policyholders following a catastrophic event, e.g., a

hurricane, involving insured wind and flood damage to policyholders,

the Company shall agree to the adjustment of the combined flood and

wind losses utilizing one adjuster under an NFIP-approved Single

Adjuster Program in the following cases and under procedures issued by

the Administrator:

1.0 Where the flood and wind coverage is provided by the Company;

2.0 Where the flood coverage is provided by the Company and the

wind coverage is provided by a participating State Property Insurance

Plan, Windpool Association, Beach Plan, Joint Underwriting Association,

FAIR Plan, or similar property insurance mechanism; and

3.0 Where the flood coverage is provided by the Company and the

wind coverage is provided by another property insurer and the State

Insurance Regulator has determined that such property insurer shall, in

the interest of consumers, facilitate the adjustment of its wind loss

by the adjuster engaged to adjust the flood loss of the Company.

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 discontinue

issuing policies subject to this Arrangement immediately in the event

Congressional authorization or appropriation for the National Flood

Insurance Program is withdrawn.

E. The Company shall separate Federal flood insurance funds from

all other Company accounts, at a bank or banks of its choosing for the

collection, retention and disbursement of Federal 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 State premium taxes, dividends,

agent's commissions or any other expense of whatever nature incurred by

the Company in the performance of its obligations under this

Arrangement but excluding surcharges on flood insurance premium and

guaranty fund assessments.

B. The Company shall be entitled to withhold, on a provisional

basis, as operating and administrative expenses, including 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

[[Page 37691]]

expenses, except for allocated and unallocated loss adjustment expenses

described in Section C. of this Article, which amount shall be 32.6% of

the Company's written premium on the policies covered by this

Arrangement. The final amount retained by the Company shall be

determined by an increase or decrease depending on the extent to which

the Company meets the marketing goals for the 1996-1997 Arrangement

year contained in marketing guidelines established pursuant to Article

II. G.

The adjustment in the amount retained by the Company shall be made

after the end of the 1996-1997 Arrangement year. Any decrease from

32.6% made as a result of a Company not meeting its marketing goals

shall be directly related to the extent to which the Company's goal was

not achieved, but shall not exceed two (2) percentage points (providing

for a minimum of 30.6%).

The increase, which shall be distributed among the Companies

exceeding their marketing goals, shall be drawn from a pool composed of

the difference between 32.6% of all WYO Companies' written premium in

Arrangement year 1996-1997 and the total amount, prior to the increase,

provided to the Companies on the basis of the extent to which they have

met their marketing goals. A distribution formula will be developed and

distributed to WYO Companies that will consider the extent to which the

Company has exceeded its goal and the size of the Company's book of

business in relation to the total number of WYO policies. The amount of

any increase shall be paid promptly to the Company after the end of the

1996-1997 Arrangement year.

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 a ``Fee Schedule'' coordinated with the Company and

provided by the Administrator.

3. Special allocated loss expenses shall be reimbursed to the

Company in accordance with guidelines issued by the Administrator.

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

by the Company from funds retained in the bank account(s) 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 Administrator 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 that are

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

reviewing the General Counsel's recommendation, the Administrator will

make his/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

Federal flood insurance funds referred to in 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

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;

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.

[[Page 37692]]

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 a period not

to exceed one (1) year following the original term of this Arrangement,

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

1. 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

2. 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

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

receipts and disbursements that 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. 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.

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 that 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 FEMA such summaries and analyses of

information including claim file 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 that 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, including interest, not

required to meet current expenditures to the United States Treasury, in

accordance with the provisions of the WYO Accounting Procedures Manual

or procedures approved in writing by the FIA.

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 that 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 that 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, then 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,

[[Page 37693]]

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 that 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, the National Flood Insurance Reform Act of 1994, 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.

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

Insurance'').

Dated: July 12, 1996.

Harvey G. Ryland,

Deputy Director.

[FR Doc. 96-18352 Filed 7-18-96; 8:45 am]

BILLING CODE 6718-03-P