After months of stumbling negotiations, the Department of Housing and Urban Development last week backed out altogether from contract talks with the nation's private flood insurers.
The agency announced it would be taking new bids next month for someone else to manage the national flood insurance program.
The impasse threatens to disrupt, at least temporarily, the 9-year old program which now serves over 1.1 million policyholders and has more than $30 million of insurance in force.
"It may require some bailing wire because we'll be trying to put together a large, insurance service in a short time," said J. Robert Hunter, deputy administrator of the Federal Insurance Administration (FIA), the HUD unit which oversees federally, subsidized insurance coverage. "But there will be no break, no hiatus, in service."
Since the start of the program, flood coverage has been issued by the National Flood Insurance Association (NFIA), a pool of 132 insurance companies with combined assets topping $75 billion.
The relationship between the government and the pool has been a stormy one, marked by bickering over issues from policy interpretations to computer bids. But recently relations grew rancorous as HUD tried to exert greater control and industry talked. At the same time, the program itself was mushrooming as the result of a 1973 law making flood insurance mandatory for federally-supported of mortgages and construction loans in flood-prone areas.
The contracts between HUD and NFIA expires December 31. Negotiations for a new contract finally broke down when HUD Secretary Patricia Harris refused to accept anything less than absolute control over the flood program budget while the insurers continued to insist on a compromise. "We want to be in the program," said Peter Kramer, an NFIA spokesman, "We've tried in compromise. But the don't want to compromise."
Man earlier point in the talks, the insurers had threatened to pull out of the program over whether the Secretary of HUD could issue regulations changing the terms of their contract with the government. That dispute was settled when the insurers agreed to recognize the Secretary's rule-making authority. In return for a procedure under which they could appeal the rules.
Seeking another compromise this time on the budget issue. NFLA offered to reinburse the government for any expenses the Secretary might oppose. This means, thought, that HUD would have to allow the insurers to on ahead and spent money on a questionable item during the time an appeal on the expenditure was being heard. Only after the appeal process ends could the government then recover what was spent.
"It might be three years before we could get the money back," Hunter complained. "And the burden would be on us to prove the expenditure was unreasonable. But the presumption in case law is that it's reasonable if it's already spent."
Hunter said HUD would accept only prior budgetary approval. "As far as we're concerned, the negotiations are over," he stated.
Hunter said HUD had received several inquires from other companies interested in bidding for the program. He said the program might have to be restructured from one managed by a pool that shared in the risk to one managed by a fiscal agent with no risk. Also, under the original 1963 flood insurance act, HUD could decide to use government employees to run the program itself.
"Where are they going to get the $43 million in risk capital we pledged?" said NFLA's Kramer. "It will mean the shape of the program will change, and if it shifts back to more government involvement, taxpayers will be carrying the burden."
These questions are expected to be probed by Congress next month during two days of hearings before a House subcommittee on housing.