The flow of money from the National Flood Insurance Program may be helping New Yorkers with property rebuild from Superstorm Sandy, but there’s fresh cause to question the wisdom of these subsidies.
A federal jury in Mississippi has just found that State Farm Fire and Casualty Co. fraudulently shifted $250,000 in Hurricane Katrina claim payments to the National Flood Insurance Program. In other words, off their books and onto you, the taxpayer.
Jurors found the insurer falsely reported that a house at the center of the lawsuit was destroyed by flood waters when in fact it was wrecked by fierce winds. Based on the bogus report, the company billed the federal program — saving itself a fortune, since it would otherwise have been on the hook for the wind damage.
We don’t mean to suggest here that insurance companies are generally crooked, and State Farm says it might appeal. What strikes us about this case, however, is the great difference between the way private and public insurers approach claims.
Like all businesses, insurers try to contain their losses. By contrast, the government barely ever tries to limit its payouts. Indeed, the State Farm fraud didn’t come to light because the government’s accountants were looking closely at claims. It came to light because two whistleblowers who had worked as adjusters for State Farm came forward.
Our point is that when the government makes cash available, inevitably someone will find a way to go after it. And unlike a private company, a huge public-sector bureaucracy has scant incentive to watch the public’s cash closely, which means it isn’t well-suited to weed out undeserving or fraudulent claims.
The federal flood-insurance program suffers from an even bigger problem: It encourages folks to invest in flood-prone areas they’d likely avoid if they had to pay the full tab for any insurance themselves.
That the program is administered by cost-indifferent bureaucrats only makes it worse.