National Flood Insurance policyholders are left to sink or swim on their own.

Maryland retirees Bill and Dana Davis were awakened by their son in the predawn of Sept. 19, 2003, to flee their home.

Nearby waterways were flooding the area, engorged with rain by Hurricane Isabel, which had hit the day before. The Davises' son, Bill, had stayed up that night in his parents' living room, watching the creek across the street creep closer to the yard, then to the house, then under the door.

The flood did more than $70,000 worth of damage to the Davis home. More than a foot of contaminated water soaked into the floor, walls, heating and air conditioning. Luckily, the Davises were insured through the federal government's National Flood Insurance Program.

Or so they thought.

They didn't foresee that their settlement would cover only a quarter of the flood damage-even though they were insured for more than 10 times that amount. Nor did they know they would have to spend months fighting a tangled public-private bureaucracy to get reimbursed enough to repair their house.

Despite the extensive damage, an insurance adjuster declared that the elderly Davises-Bill was 74, and Dana, 61-were entitled to only about $20,000. The couple repeatedly called their insurance company, New Jersey-based Selective Insurance, to find out why, but got nowhere. "That's when the problem started," says Dana. "We couldn't get answers to anything."

As fall turned into winter, the couple lived in their ruined, moldy, unheated house, trying to get a fair settlement from their flood insurance policy. "We probably shouldn't have" stayed in the house, Dana recalls. "The floodwater was really dirty, contaminated water. But we cleaned up the best we could." The lack of heat, she says stoically, wasn't a big deal. "We wore sweaters."

The Davises weren't alone in their dilemma, although they didn't know it at the time. Thousands of NFIP policyholders have since complained of being shortchanged and poorly treated by a program designed to help them-a program their premiums fund. As insured victims of 2005 hurricanes Katrina and Rita file a record number of claims with NFIP, concern is growing about the program.

Costs Less, Does More?

Created by Congress in 1968, the National Flood Insurance Program has been called "ingenious" for doing so much and costing so little. The program's mission is straightforward: insure properties in flood-prone areas that private companies won't.

NFIP, which is part of the Federal Emergency Management Agency, is fiscally smart-premiums paid by homeowners cover just about all of the costs of administering the program, including paying claims. In fact, the program actually saves taxpayers money. Every penny it pays out to flood victims takes the place of a federal penny that would have bailed out the same people. That's a lot of pennies: Along with mitigation efforts, the federal government estimates NFIP saves a billion dollars a year in disaster relief payments.

Even the indirect effects of the program are laudable. Because the law requires most people buying property in flood zones to hold an NFIP policy, it discourages people from living in flood-prone areas. And it requires communities to take steps to mitigate flood damage so residents are eligible for flood insurance.

That's if NFIP works as intended. But a Government Executive review of dozens of documents along with conversations with policyholders, watchdog groups and people inside and outside NFIP reveals the program often doesn't work the way it was meant to.

Hurricanes Katrina and Rita have hit the program hard. To date, policyholders have filed a record $22 billion in damage claims. For a program that has paid out less than $15 billion in its entire 36-year history, the claims deluge is overwhelming.

But most experts say Katrina-related claims won't sink the organization-even though they will far surpass the program's roughly $1 billion in reserves. Congress will have little choice but to appropriate more money to cover Katrina claims. "I think Congress will write off most of that debt," says Douglas J. Elliott, president and founder of the Washington-based fiscal watchdog Center on Federal Financial Institutions. "Congress isn't going to want to force the insured to come up with the money."

But NFIP also faces problems largely of its own devising: It has hindered policy- holders hit by floods from receiving payouts they deserve. A multibillion-dollar suit has been filed against the program by policyholders who say they've been shorted. As evidence of mismanagement and wasteful spending mounts, powerful senators, the Homeland Security Department's inspector general and other government investigators are increasing their scrutiny of the program.

After Hurricane Isabel had passed, The Davises shared their frustrations with their neighbors, the Kanstorooms, who also had difficulty wresting a fair payment from their insurance company. The husband, Steve, offered to help the Davises get a fair settlement. The Kanstorooms offered to let the Davises live in their home until repairs were completed.

Steve Kanstoroom went to work, haranguing insurance companies, FEMA officials and politicians. He talked to other families that had been shortchanged by FEMA. And he researched NFIP with meticulous earnestness, memorizing the smallest details of the program.

NFIP is an unusual animal of federal bureaucracy. When it was created in 1968, Congress decreed it should be "carried out to the maximum extent practicable by the private insurance industry." It was an early example of outsourcing: Scores of salespeople from private insurance companies sell and service identical, government-backed flood policies. Meanwhile, a handful of government bureaucrats oversee the program.

With minor tinkering, the program's structure is largely the same today as it was then. Ninety-five insurance companies sell and service NFIP policies. About 100 employees at Computer Sciences Corp., the El Segundo, Calif.-based defense and homeland security contracting giant, administer NFIP, processing premiums and damage claims. (To help handle Katrina-related claims, CSC has brought on 45 temporary staff members.) Meanwhile, 40 FEMA employees oversee the program.

In the Davis case, Kanstoroom discovered that the insurance company's adjuster had used the wrong set of figures to calculate the cost of repairs. In addition, the adjuster omitted several significant pieces of damage. The errors accounted for the discrepancy between the adjuster's assessment and what contractors found.

Lessons From Isabel

Mistakes like this constitute evidence of conspiracy, according to 140 Marylanders who last June filed suit in federal court charging acting NFIP Director David I. Maurstad of systematically lowballing damage assessments on flooded homes and using high-pressure tactics to force policyholders to accept lower payments. "As a result, these families are being destroyed," Martin Freeman, a lawyer representing the group, told The Washington Post last June. They are seeking $2 billion in damages. Maurstad declined further comment on the lawsuit because it was still in progress.

After months of back-and-forth with the insurance company and FEMA, the Davises finally received payment in full. "If it wasn't for Steve Kanstoroom, I don't know what would have happened," Dana Davis recalls. Hundreds, even thousands of families could soon find that out. Now, NFIP's team of 40 is overseeing the payment of claims expected to reach almost $30 billion, three-quarters of the Homeland Security Department's annual budget. Maurstad says his team is up to the task. "It's a pretty efficient operation," he says. "It needs to be." Others have reservations.

"Regrettably, I have had experience dealing with FEMA and the National Flood Insurance Program over the past two years," Sen. Paul Sarbanes, D-Md., told Maurstad at a hearing last October. "Given these interactions, I am very deeply concerned about FEMA's ability to handle not only flood insurance claims, but the other needs of the people affected by hurricanes Katrina and Rita."

After Hurricane Isabel, the program failed to properly compensate hundreds, perhaps thousands, of Maryland policyholders. Responding to public outcry, FEMA belatedly established a process to review damage assessments. It found that NFIP had shorted close to half of those who had filed for an assessment review.

Maurstad says concerns that NFIP will repeat its post-Isabel mistakes are unfounded. "There were a lot of reasons for difficulties with Isabel," he says. "It was the first significant flooding event Maryland had had in a number of years. I think there were agents that were caught off guard. Policyholders' expectations didn't match the limitations in the policy."

The program has improved since then, he says. "We changed some of the information we provided, [and] we provided additional information to help people file their claim." The results are clear, he says: NFIP has successfully closed more than 98 percent of claims from the 2004 hurricane season. With more than 74,000 claims, it was the program's worst year, until Katrina.

Kanstoroom, who since helping the Davises has become a one-man, self-funded watchdog to the flood insurance program, disagrees. " 'Closed' doesn't mean 'fairly settled,' " he says. He asserts that many adjusters and carriers warn victims that their files will be closed if they contest their settlements. "With a gun to their heads, the victims sign off, and NFIP considers the claim closed." Kanstoroom says he has interviewed "thousands" of flood victims about NFIP, many of whom found him through his Web site, www.femainfo.us.

The special NFIP review after Isabel found more than 1,000 victims-5 percent of all claims-had been shorted. Kanstoroom believes the actual figure is much higher. Many insured flood victims didn't hear of the review, he says, because NFIP contractor CSC mailed notices of the review to abandoned properties.

Others did not suspect adjusters had made mistakes. "Most people thought that their adjuster was a government official, so they had no reason to doubt," explains Kanstoroom.

There were other problems, too. Operators at a CSC-run call center set up to handle review inquiries didn't always give callers good information; Kanstoroom says they were poorly trained. As well, the operators informed policyholders at the beginning of each call that if their claim was reviewed, it could result in their damage estimate being lowered, not raised. "In many cases, the call ended right there," he says.

Maurstad declines to respond to Kanstoroom's concerns. "Mr. Kanstoroom is advising the law firms that are suing NFIP, and so I'm really not in a position to comment," he says.

Kanstoroom says that when asked, he has provided information to a number of lawyers and plaintiffs suing FEMA over problems with flood insurance and has never received money to do so.

'Go to Court'

Despite the problems with the Isabel review board, it was a first. Until then, NFIP policyholders' only option was to sue in federal court, an expensive proposition that bore little fruit. Damages are capped so a claimant can win only their correctly adjusted damage amount. "Attorneys tell victims that they're better off settling now than fighting it in court and paying legal fees," says Kanstoroom.

Some don't follow that advice. Texas lawyer Christopher Leonard represented a client whose property was destroyed by floods in 2001 and felt her insurance company had shorted her by more than $50,000. By law, however, NFIP pays for insurance companies-in Leonard's case, Allstate-to defend against such suits. Allstate hired a team of lawyers, led by Gerald Nielsen, a Louisiana lawyer who is the legal giant of NFIP and represents all 95 insurance companies that write NFIP policies. Leonard estimates Allstate spent $150,000 of NFIP's money fighting his client's claim.

In the end, they won. And since NFIP covered Allstate's legal bills, Leonard's client had the dissatisfaction of knowing her premiums had paid for some small part of Allstate's victory. Company spokesman Mike Siemienas says Allstate does not disclose attorneys fees. When asked about defending Allstate against Leonard, Nielsen says, "I'm not at liberty to discuss particular matters of litigation."

In an effort to help policyholders resolve disputes without going to such lengths, Congress ordered FEMA in 2004 to develop a formal appeals process to handle complaints from policyholders and set a Dec. 30, 2004, deadline for completion. To date, there is no appeals process.

"We're doing all we can to get [appeals processes] in place as quickly as we can," Maurstad says. "I try not to make excuses," he adds, "but the president signed the [bill] on June 30, 2004, and less than 60 days later we headed into what was at the time the worst hurricane season FEMA had had to deal with and the largest number of claims we've ever had.

"That carried into 2005, and then of course we've had the hurricane season," he continues. "The scope of these events is beyond anything in the history of our country. They've taken time and resources to deal with the response and recovery. That needs to be considered."

That explanation goes down easier in the dry comfort of a congressional hearing room than in the moldy ruins of a former home. In Chalmette, La., Lisa Wilkes' two-unit rental house was flooded with more than 7 feet of water from Hurricane Katrina. One adjuster told her the top floor was fine, but the bottom floor was "totaled," and the damage assessment would reflect that. "I said, 'How will you repair upstairs if downstairs is totaled?' She said she wasn't sure, she didn't know how they did that."

Wilkes disputed that assessment with Allstate, to no avail. She received the correct settlement only after writing letters to her state attorney general and insurance commissioner about the matter-and sending copies to the insurance company. In January, four months after her home was destroyed, she received a check for the full cost of her house's damage. Allstate's Siemienas says the company could not comment on Wilkes' case because it could not locate the paperwork.

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