A class action has been filed against seven insurance companies on behalf of residents of Maryland, North Carolina, Virginia, West Virginia, Delaware, New Jersey and the District of Columbia who held flood insurance policies and suffered damage to their houses in September 2003 from Hurricane Isabel. The action alleges that the companies violated their contracts by failing to deliver benefits promised to policyholders. The action seeks an accurate recalculation of all claims, restitution of all flood insurance premiums paid for policies in force during September 2003, and disgorgement of all profits made by the defendants in issuing and servicing the policies.

Named as defendants in the action are the State Farm Insurance Companies, Omaha Property and Casualty, Travelers Property Casualty Corporation, USAA General Indemnity Company, Selective Insurance Company of the Southeast, Indemnity Insurance Company of North America, and Harleysville Mutual Insurance Company. The plaintiffs were insured against flood losses by the companies, all of which were participants in the National Flood Insurance Program-- a federal program designed to protect homeowners from losses associated with a flood catastrophe. After the massive storm, the insurers allegedly mishandled claims from thousands of victims and ultimately failed to pay proceeds to which the policyholders were entitled. Delays and failures in the handling of these claims have left thousands of people living for months in trailers, temporary shelters and rental apartments while their homes sit uninhabitable.

The action alleges that flood victims were uniformly told that they would not be paid if they did not sign the insurance company’s adjuster’s proof of loss within 60 days. As a result, many policyholders signed proofs of loss prepared by insurance company adjusters even though they strongly believed that the adjusters had underestimated both the scope of damage and the associated costs of repair on their properties. The insurers then allegedly settled claims using price data and construction estimating software that did not reflect the actual cost of repair and renovation work following a natural disaster. As a result, many Hurricane Isabel victims have been forced to settle their claims at a fraction of the actual cost of repair.

The lawsuit names seven plaintiffs from Anne Arundel, Baltimore, and Talbot, Maryland counties, but the suit could possibly affect 24,000 people from six states and the District of Columbia who filed claims after the storm.

The suit also claims that because adjusters are only paid after a claim is settled, they have an incentive to push flood victims into quick settlements and to err on the side of caution in deciding how much to offer, for fear that their work would be overruled by the third-party administrators who review claims.

Flood insurance is a federal government program, but in the 1980s, in an effort to encourage more people to buy coverage, the National Flood Insurance Program created a system in which private insurance companies sell and service policies. This suit comes amid the largest re-evaluation of claims in the history of the NFIP. Recognizing the widespread complaints from flood victims in the wake of Isabel, NFIP Director Anthony S. Lowe said in March 2004 that the agency would re-evaluate any Isabel claim in which the policyholder was dissatisfied.