I got a call yesterday from a member insurance agent located on Long Island. One of her clients had the foresight to buy flood insurance (good for him!) through a Write Your Own company. He suffered extensive flood damage during Superstorm Sandy. The insurance company investigated his claim and, to make a long story short, found out that the information on which it had based the premium calculation was incorrect. The homeowner's actual vulnerability to a flood loss was much greater than the company had been led to believe.
The company said it would honor the claim. However, it would also retroactively re-calculate the flood policy premium to what it should have been from the beginning. The homeowner's flood insurance premium effectively tripled for both the policy under which he made the claim and the renewal. The client's reaction (and the agent's) were what any ordinary person's reaction would be (after ingesting medication to reduce blood pressure to non-life threatening levels): "Can they do that?"
Yep. They sure can.
The answer is in Section VII. GENERAL CONDITIONS in the National Flood Insurance Program's Dwelling Form. Condition G., Reduction and Reformation of Coverage, states:
1. If the premium we received from you was not enough to buy the kind and amount of coverage you requested, we will provide only the amount of coverage that can be purchased for the premium payment we received.
2. The policy can be reformed to increase the amount of coverage resulting from the reduction described in G.1. above to the amount you requested as follows: ...
b. Discovery of insufficient premium or incomplete rating information after a loss.
(1) If we discover after you have a flood loss that your premium payment was not enough to buy the requested amount of coverage, we will send you and any mortgagee or trustee known to us a bill for the required additional premium for the current and the prior policy terms. If you or the mortgagee or trustee pay the additional premium within 30 days from the date of our bill, we will reform the policy to increase the amount of coverage to the originally requested amount effective to the beginning of the prior policy term.
In short, the policy language gives the insurance company the right to retractively bill for the correct premium. Obviously, this was an unwelcome surprise for the homeowner, but the good news is that he had the coverage. Too many others affected by Sandy didn't.
The NFIP's Dwelling Form is available for download from the program's Web site.