Eastside Reservoir Project Insurance Deductibles

September 25, 2000

Mr. D.A. Christian
Governor's Authorized Representative
Governor's Office of Emergency Services
Post Office Box 419023
Rancho Cordova, California 95741

Re: Second Appeal - FEMA-1203-DR-CA; Metropolitan Water District of Southern California; P.A. ID 000-91043; Log # LA/65218.2.
DSRs 94817, 94818, 94819 and 94820.

Dear Mr. Christian:

This is in response to your February 28, 2000, letter forwarding the January 21, 2000, second appeal from the Metropolitan Water District of Southern California (Metropolitan). The applicant is appealing the Federal Emergency Management Agency's (FEMA's) determination that it was not eligible to receive disaster assistance in the form of reimbursement of insurance deductibles assessed on its Eastside Reservoir Project. Metropolitan is claiming that not only should it be reimbursed the insurance deductible amounts assessed by its insurance carrier, but also that FEMA must be prepared to reimburse the applicant for all other deductibles the insurance carrier determines are applicable for the different events during the incident period.

In the aftermath of the early 1998 storms and flooding caused by El Ni?o, Metropolitan applied for disaster assistance for damages that its Eastside Reservoir Project incurred. The applicant requested FEMA to reimburse it for insurance deductibles it had been assessed on its settlement with its insurance carrier, The Hartford Insurance Group. FEMA conducted an inspection on November 4, 1998, and prepared Damage Survey Reports (DSRs) 94817-94820 for damages the applicant's facility sustained. The DSRs, however, were approved for $0 because it was determined that the facility was under construction and was not the legal responsibility of Metropolitan.

Metropolitan submitted a March 22, 1999, first appeal of FEMA's determination of the four DSRs followed by a May 6, 1999, submission of documentation to support the appeal. Metropolitan claimed that since it provided an Owner-Controlled Insurance Program (OCIP) to cover the entire project, it had legal responsibility for the facility. Therefore, repairing the storm damages was eligible for federal funding. The Regional Director denied the appeal on November 10, 1999, in spite of the existence of the OCIP because the facility, which was under construction by contractors, was not yet the legal responsibility of Metropolitan.

In this second appeal, Metropolitan asserted that the Public Assistance Guide recognizes circumstances under which legal responsibility for a facility under construction could be placed on the owner during the construction period. Metropolitan stated that as part of the risk management planning for the project, it implemented an OCIP under which Metropolitan procured certain insurance coverages for all contractors and subcontractors. These coverages included workers' compensation, general liability and property insurance. Under the terms of the policy, Metropolitan was responsible for a deductible of $250,000 per occurrence. Within that deductible, the subcontractors were responsible for deductibles of $15,000 for occurrences of fire, extended coverages, vandalism and malicious mischief and $25,000 for all other perils. Metropolitan argued that because it was contractually responsible for providing the insurance coverage, it was entitled to relief in the form of federal funds to reimburse the insurance deductibles that were assessed.

I have carefully considered the representations of the applicant and the Regional Director's first appeal determination and have reviewed the contract documents. Article 19 of the General Conditions (Document 00700) makes the contractor(s) responsible for all risks except as otherwise provided in the contract documents. Article 8 of the OCIP (Document 00825) reiterates the contractor's responsibility to repair all damages at its cost provided that Metropolitan will make available to the contractor all proceeds from the Builder's Risk policy. Article 18d states in part "If Metropolitan-provided OCIP policies described in Articles 5 and 6 have deductible amounts greater than the Contractor deductible amounts, such excess amounts will be paid by Metropolitan provided that the Contractor shall be responsible for losses greater than OCIP policy limits."

It is clear from the above citations that Metropolitan-an eligible applicant-assumed responsibility for the overall project while it was under construction and further, that Metropolitan was obligated to pay to the contractors the deductible amount that was withheld by the insurance carrier in its settlement for damages. A Summary of Loss document enclosed in the OCIP Administrator's letter dated March 10, 1999, to one of the contractors shows eligible damage claims of $1,228,965 for five events during the disaster incident period. The Insurance Carrier defined five separate events while Metropolitan claimed that only one continuous event was responsible for the damages. That point of contention is being litigated in the United States District Court, Central District of California.

I have determined that Metropolitan is correct in its position that only one event was responsible for the damages during the incident period. Therefore, based on the $1,228,965 claim, I have determined that the insurance deductible is $250,000. Each of the contractors Atkinson-Washington-Zachary (AWZ) and Kiewit-Granite (K-G) is responsible for a deductible of $25,000 and Metropolitan is responsible for the balance of $200,000. Therefore, I have determined that the funding of $200,000 to Metropolitan is an eligible expense. By copy of this letter, I am requesting the Regional Director to implement my determination.

Please inform the subgrantee of my determination. In accordance with the appeal procedure set forth in 44 CFR 206.206, my decision constitutes the final decision on this matter.

Sincerely,
/S/
Lacy E. Suiter
Executive Associate Director
Response and Recovery Directorate

cc: Martha Whetstone
Regional Director
FEMA Region IX