More than 500 families who received grants to rebuild their homes from the state's superstorm Sandy recovery program may be required to repay the money if they succeed in negotiating larger insurance settlements.

After months of fighting in court, lawyers for nearly 1,000 New Yorkers who filed lawsuits over flood insurance claims after the 2012 storm have reached tentative deals to settle many of the cases in exchange for more money to fix the homes.

Yet those increased insurance payouts could trigger a federal law requiring storm victims to return grants they received from the state recovery program, New York Rising.

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"Homeowners might wind up walking away from these settlements with nothing but more aggravation and paperwork," said Kevin Reilly, founder of the grassroots recovery group Long Beach Rising. "It's ugly and harsh."

Lawyers estimate that 55 percent of New Yorkers with pending lawsuits over flood insurance claims received money from New York Rising, which is forbidden from paying for anything covered by insurance.

The issue, however, is unresolved.

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A panel of federal judges has scheduled a hearing for Monday to restart the stalled negotiations to settle the lawsuits over flood claims.

The hearing, in Brooklyn, will explore whether there is a way for homeowners to keep the grants, which in some cases are more than $100,000. It will also focus on whether storm victims will be obligated to pay their own legal bills, which could account for a third of their settlements.

 

FEMA initiated talks

The Federal Emergency Management Agency, which runs the National Flood Insurance Program, initiated the settlement talks in February after months of fighting storm victims in court. The about-face came after homeowners presented evidence suggesting companies hired by FEMA had forged documents to underpay claims.

Those allegations have led to a criminal investigation by the New York State attorney general. Last week, a congressional aide confirmed that the U.S. Senate Banking Committee was launching an inquiry of its own.

The settlement talks on flood claims, meanwhile, have led to tentative agreements to resolve about 650 lawsuits in New York and New Jersey. But the deals are not final. And it's unclear if Monday's hearing will rekindle the talks, which stalled two weeks ago.

New York Rising was launched to help distribute the $50.5 billion Sandy relief package signed by President Barack Obama in 2013. The funding, from the U.S. Department of Housing and Urban Development, included grants of as much as $400,000 for homeowners to rebuild and protect homes from future storms.

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Those grants are subject to a federal law called the Stafford Act. It prohibits disaster victims from receiving government assistance for expenses already covered by insurance, loans or other sources.

So if a homeowner receives a $1,000 grant to fix a roof -- but later receives an insurance settlement to pay for the job -- the grant must be returned. Every storm victim who received a New York Rising grant signed an agreement to abide by that rule.

Now the prospect of receiving larger flood insurance settlements makes the ramifications of that agreement painfully clear.

To be sure, some homeowners across Long Island who received New York Rising grants have built bigger homes than those they owned before Sandy. In many instances, they built taller to comply with floodplain building codes. In some, they added bedrooms or bathrooms, sometimes by augmenting disaster grants and insurance proceeds with their own money.

Yet lawyers for homeowners say few, if any, storm victims profited from flood insurance or New York Rising. After paying for a home's key structural elements, adding a room isn't prohibitively expensive. And even combined, they said, flood insurance and New York Rising paid too little relative to Long Island building costs for anyone to get rich.

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"I don't think anyone is getting a tremendous windfall," said Denis Kelly, a Long Beach attorney who is among those leading the settlement negotiations with FEMA.

Homeowner Vanessa Sarmuksnis didn't see the settlement her lawyer negotiated as a windfall. Instead, for one euphoric moment, she thought she was finally going home.

The mother of three from Long Beach got a call in March from her lawyer with news of a cash settlement over her flood insurance claim from superstorm Sandy. At last, Sarmuksnis thought, she and her husband could afford to finish rebuilding their house.

The lawyer, however, said there was a catch.

The Sarmuksnises had accepted a $114,000 grant from New York Rising. So if their settlement is approved, the Sarmuksnises may need to return the grant.

"I'm not asking for a handout," Sarmuksnis said in an interview at the house she and her husband rent, their third address since the 2012 storm. "But honestly, I wish they would let me keep the money so we could go home."

 

Sandy deluge

The night Sandy hit, Sarmuksnis' three-bedroom bungalow was deluged with 2 feet of water. An engineer recommended she and her husband, Roger Sarmuksnis, rebuild from scratch.

Yet the company that adjusted their flood insurance claim offered to pay just $90,000 on their $250,000 policy. So Vanessa, 39, and Roger Sarmuksnis, 41, a high school teacher and soccer coach, applied to New York Rising. They also sued the company that handled their flood claim.

The Sarmuksnises demolished their home in June and began rebuilding. The new house is significantly taller to comply with flood standards. And they added a fourth bedroom and a second bathroom.

After spending roughly $200,000 -- including $10,000 they borrowed for the roof -- the family ran out of money. The house remains a half-built shell, with tattered construction wrap blowing in the wind.

The Sarmuksnises estimate they need at least $120,000 to finish. It's unclear how much FEMA will pay to resolve their lawsuit, but the maximum would be $160,000.

Yet a third of that may go toward attorney's fees. And unless something changes, the family may have to return the $114,000 to New York Rising.

Lawyers for homeowners say there may be precedent for HUD to make an exception. After Hurricane Katrina, the agency allowed storm victims in Mississippi who sued over insurance claims to keep their rebuilding grants.

Yet the Mississippi program was structured differently than New York Rising. And the lawsuits after Katrina were primarily over private wind claims, rather than government-issued flood policies. So it's unclear if the precedent will apply.

"I try not to get my hopes up anymore," Sarmuksnis said. "I feel like someone keeps dangling a carrot and pulling it away."