Bill for Collection (Duplication of Benefits)

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

DisasterFEMA-0961-DR
ApplicantState of Hawaii
Appeal TypeSecond
PA ID#000-00000
PW ID#N/A
Date Signed1999-03-06T05:00:00
Citation: FEMA-0961-DR-HI; State of Hawaii

Cross Reference: Duplication of Benefits, Insurance

Summary: Hurricane Iniki struck the Hawaiian islands September 11, 1992. At the request of the State, the United States Army Corps of Engineers (USACE) was tasked, by mission assignment, to make temporary emergency repairs to various schools, armories, a hospital and community college on the island of Kauai. USACE completed repairs to the facilities at a cost of $12,167,381. The state had an insurance policy that covered approximately 1,200 buildings of which 16% (200+/-) buildings were repaired by the USACE under mission assignments. The insurance settlement was for $45,722,167 for all the buildings covered within the state. The Office of Inspector General (OIG) conducted an audit of the facilities and determined that the $12,167,381 paid to the USACE was covered within the $45.7 million settlement. After an analysis of the audit, the Regional Director formally advised the State of Hawaii that FEMA concurred with the OIG regarding the duplication of benefits (DOB). A Bill for Collection (BFC) was issued and received by the state on August 6, 1997, for $12,167,381. In its first appeal, the state contended only $5,470,208 of the insurance proceeds could be apportioned to mission assignment costs. The Acting Regional Director denied the first appeal on all counts. In its second appeal, the state acknowledges an insurance DOB for the USACE work performed under mission assignment. However, the State contends the amount of duplication is $7,423,481.

Issues: Did the determination resulting from the OIG audit accurately reflect the portion of work performed by the USACE that was covered by insurance?

Findings: Yes. FEMA's review concluded that the work performed by the USACE was covered by the State's insurance. Therefore, a duplication of benefits exists in the amount of $12,167,381.

Rationale: Section 312 of the Stafford Act, Duplication of Benefits

Appeal Letter

March 6, 1999

Major General, Edward V. Richardson
Director of Civil Defense
Hawaii State Civil Defense
3949 Diamond Head Road
Honolulu, Hawaii 96816-4495

Dear General Richardson:

This letter is in response to your February 23, 1998, submittal of the State of Hawaii's second appeal of the Bill for Collection (BFC) DR-0961 MA COE -POD-1 dated July 10, 1997. The BFC for $12,167,381 is for FEMA payments to the USACE for work that was duplicated by insurance. Your appeal claims that only $7.4 million of the $12,167,381 was duplicated by insurance and requests that the BFC be reduced to $7.4 million.

I have reviewed the appeal and, as explained in the enclosed appeal analysis, have determined that the total cost associated with the work performed under the mission assignment to USACE was covered by insurance and represents a duplication of benefits. Accordingly, the second appeal is denied. The full amount of the BFC ($12,167,381), plus accumulated interest, is owed by the State of Hawaii.

In accordance with the appeal procedure governing appeal decisions made on or after May 8, 1998, my decision constitutes the final decision on this matter. The current appeal procedure was published as a final rule in the Federal Register on April 8, 1998. It amends 44 CFR 206.206.

Sincerely,

/S/

Lacy E. Suiter
Executive Associate Director
Response and Recovery Directorate

Enclosure

cc: Martha Z. Whetstone
Regional Director
FEMA Region IX

Appeal Analysis

BACKGROUND
Hurricane Iniki struck the Hawaiian islands September 11, 1992, with sustained winds clocked at 145 miles per hour (mph) and gusts to 227 mph. All of the Hawaiian islands were impacted. The island of Kauai suffered a direct hit.

At the request of the State for direct federal assistance, the United States Army Corps of Engineers (USACE) was tasked, by mission assignment, to make temporary emergency repairs to various schools, armories, a hospital and community college on the island of Kauai. The importance of re-establishing the continuity of the community became critical. USACE completed repairs to the facilities at a cost of $12,167,381. The State had an insurance policy that covered approximately 1,200 buildings of which 16% (200+/- buildings) were repaired by the USACE under mission assignment. The insurance settlement was for $45,722,167 for all the buildings covered within the state.

Office of Inspector General (OIG) Audit
The OIG conducted an audit of the facilities under the Inspector General Act of 1978, as amended. The audit report was released February 28, 1997. The audit concluded that a duplication of benefits (DOB) existed. The OIG determined that the $12,167,381 paid to the USACE was covered within the $45.7 million settlement and should be reimbursed to FEMA pursuant to Section 312 of the Stafford Act which prohibits duplication of benefits.

Technical Assistance Contractor (TAC) Analysis
The Pacific Area Office requested a TAC analysis of the audit determination related to the DOB. The TAC findings substantiated the OIG determination that a DOB existed and the entire $12,167,381 paid to the USACE was covered by insurance.

On April 22, 1997, the Regional Director formally advised the State of Hawaii that FEMA concurred with the OIG regarding the duplication of funds. A Bill for Collection (BFC) was issued and received by the State on August 6, 1997, for $12,167,381.

First Appeal
On September 19, 1997, the State submitted a First Appeal to FEMA disagreeing with the OIG report that the entire $12,167,381 represented a DOB. The State contended only $5,470,208 of the insurance proceeds could be apportioned to mission assignment costs. The State further claimed that FEMA did not follow the requirements of 44 CFR 206.208 (a), Direct Federal Assistance, therefore, FEMA is not entitled to reimbursement from the State.

On December 20, 1997, the Acting Regional Director, FEMA Region IX, denied the first appeal on all counts.

Second Appeal
On February 20, 1998, the State of Hawaii submitted their second appeal and provided additional information and supporting documentation. The State acknowledges an insurance DOB for the USACE work performed under mission assignment. The State contends the actual amount of duplication is $7,423,481, excluding emergency work performed by USACE on the Armory. The State submitted an estimate of the USACE repairs contained within the insurance settlement.

DISCUSSION
The $7.4 million that the State asserts in a DOB is the result of the claims adjustment process. The adjuster developed the damage estimate for each building and then divided the estimate between emergency work (USACE) and permanent work. The USACE work included some debris clearance, some general clean up and all items required to make the buildings operational on a temporary basis. The adjuster did not re-inspect after the USACE work was completed to ascertain what was actually done by the USACE. The adjuster has stated that he believes that the USACE did some permanent work, which would not be covered in the USACE portion of the estimate; however, no factual information was offered to support that opinion.

To determine how much work the USACE performed beyond the insurance estimate for emergency repairs, The Western Territorial Closeout Team (WTCT) compared the insurance adjustment with the USACE costs for 10 buildings. An item by item comparison was done, and it was found that USACE did less work than contemplated in the estimate on some buildings and more on others. The analysis was inconclusive and had no statistical validity. The 10-building-sample was based on the ready availability of data and was a very small sample for a 200-building universe.

In a letter dated August 31, 1998, to the WTCT Manager, Lacy Suiter, Executive Associate Director for Response and Recovery, requested that the State select a random sample of the buildings and compare actual USACE work and costs with the insurance estimate. Because the state statistician concluded that a statistically valid sample of the 200 buildings would have to include most of them, the State proposed looking at only buildings with repair costs over $40,000. This reduced the universe to 64. A valid sample with a 95% confidence level consisted of 55 buildings.

The WTCT proceeded to work with the USACE to recover the actual cost records, which would then be given to the State for analysis. The WTCT found that detailed breakouts of actual costs for the majority of buildings do not exist. There are detailed government estimates, but the estimates were not adjusted for actual contract prices, nor for change orders. The information available from the USACE was not sufficient to perform the desired comparison of insurance estimates and USACE work and costs.

The State elected to settle with the insurance company on a "loss estimate basis" in lieu of an "actual replacement costs basis." Out of an insurance settlement of $45,722,627 ($45,972,627 less $250,000 deductible), $19.7 million was for damages to buildings involved in the USACE work. Since there is no evidence that total costs of repair were greater than the insurance settlement, we must assume that the settlement was adequate for all work on the buildings in question. Although the USACE work may have gone beyond emergency repairs, there was enough in the insurance settlement to cover such costs.

CONCLUSION
We have not found a sufficient basis for reducing the BFC to the State of Hawaii. Accordingly, the appeal is denied, and the BFC for $12,167,381 remains in effect.
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