Flood insurance policy providers now face a new competitor: the federal government.

The Federal Emergency Management Agency (FEMA) took control of about 800,000 flood insurance policies State Farm decided to dump last year. Unlike other Obama administration bailouts, FEMA did not legally have the choice to either take over those policies or force State Farm to sell them to competitors, according to House Financial Services Committee spokesman Jeff Emerson.

Because of a loophole in the law, FEMA was forced to take on the 800,000 policies and, as a result, the federal government is now competing with the private flood insurance market behind the scenes.

Emerson points out that State Farm did have a choice on whether the federal government or private sector would take up those policies. The reason FEMA was forced to pick them up is because of legal loopholes in the National Flood Insurance Program (NFIP). The NFIP is a government-subsidized program FEMA administers with the goal of keeping flood insurance premiums at a low, affordable cost for homeowners.

Before taking on State Farm’s 800,000 dumped plans, FEMA already managed about 130,000 policies. But, those were for policies that were too risky for the private market to handle — many of them houses in floodplains that regularly flood or in other hazard-prone areas.

Ben McKay, senior vice president of federal government relations for the Property Casualty Insurers Association of America (PCI), told The Daily Caller there are plenty of private sector insurance companies who would have liked to have a chance to get those plans. (House passes amendment prohibiting chaplains from performing same-sex marriages on military bases)

“What’s happened here is they [FEMA] have changed from being a residual market to being a primary insurer,” McKay said in a phone interview. “That means [the federal government] has gone from being a residual market to being a competitor in the marketplace. So, the reality is, you can’t compete with the federal government because they hold all the cards and they can change the rules.”

Those 800,000 policyholders also likely don’t know FEMA is now managing their plans because there’s no current legal requirement forcing FEMA or State Farm to notify them that the federal government is now managing their plan. That’s where the term “secret” comes into this bailout.

In the House, there’s an ongoing bipartisan effort to stop this. Rep. Judy Biggert, Illinois Republican, is sponsoring a bill, HR 1309, that would require FEMA to notify policyholders within 60 days of a government takeover that their plans are being run by FEMA. Biggert’s bill also reauthorizes the NFIP program, which is scheduled to expire on September 30. If it isn’t renewed, the insurance market freezes.

Biggert spokesman Zachary Cikanek told TheDC that the congresswoman’s legislation aims to, among other things, cut through that loophole that forced FEMA to take control of those 800,000 policies from State Farm, adding that it isn’t FEMA’s fault the government takeover happened.

“Rep. Biggert’s NFIP reform measure is targeted at protecting taxpayers and increasing private market participation in the flood insurance market,” Cikanek said in an email. “It phases-in actuarially sound rates for policies, cuts government subsidies, and allows for an increase in private sector involvement.”

Cikanek said Biggert’s bill forces FEMA to make a plan to send more than half of those former State Farm policies back to the private market, too. (Unemployment rose to 9.2 percent as hiring stalls)

Biggert’s legislation passed the House Financial Services Committee on a 54-0 vote. Emerson, a spokesman for Committee Chairman Spencer Bachus, Alabama Republican, told TheDC he expects “strong bipartisan support” for the bill when it hits the floor next week. Emerson said Bachus also expects bipartisan support for an amendment to the bill that he and two Democrats are sponsoring.

Along with Democratic Reps. Greg Meeks of New York and Brad Sherman of California, Bachus is pushing an amendment to Biggert’s bill that would limit the percent of total insurance policies market wide that FEMA can control to 10 percent. Because there are about 5.6 million insurance policies in the market right now, the Meeks/Sherman/Bachus amendment would limit the amount of policies FEMA could manage to about 560,000.

Sherman told TheDC that the amendment is a “pro-privatization measure” aimed at keeping private insurance companies responsible for and in control of these policies.

“The purpose of the Sherman-Bachus-Meeks Amendment is to reduce taxpayers’ exposure to the risk of carrying over a million flood insurance policies on FEMA’s books,” the congressman told TheDC in an email, adding that he thinks “[i]t’s reasonable to expect that the private sector will be responsible for administering at least 90% of the nation’s flood insurance policies, not the taxpayer.”

State Farm spokesman Phil Supple told TheDC that, though there’s bipartisan support for the amendment that would send several hundred thousand policies back to the private sector, the company thinks of the amendment as a “scheme” that “makes no changes in the federal government’s risk exposure under NFIP.” Supple also cites a letter FEMA sent to Rep. Randy Neugebauer, Texas Republican, in late May saying FEMA expects the government taking over the 800,000 policies will save the NFIP program $50 million.

“This amendment is not about depopulating the NFIP Direct program,” Supple said in an email. “It is one group of insurance companies trying to ‘poach’ business from another group of agents.”

*This story has been updated to reflect a response from State Farm, which didn’t immediately respond to TheDC’s request for comment.