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Accelerated High School Construction Schedule

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster1763-DR-IA
ApplicantAplington-Parkersburg Schools
Appeal TypeSecond
PA ID#023-01F68-00
PW ID#4674
Date Signed2012-09-21T04:00:00

Citation:          FEMA-1763-DR-IA, Aplington-Parkersburg Schools, Accelerated High School Construction Schedule, Project Worksheet (PW) 4674

Cross-

Reference:     Insurance, Improved Project

Summary:       On May 25, 2008, a tornado destroyed Aplington-Parkersburg Community High School.  Shortly after the disaster, the Aplington-Parkersburg Schools (Applicant) negotiated a compromise settlement with its insurance company for $10,879,552.  FEMA prepared PW 4674 for a replacement facility estimated at $13,066,724. FEMA determined that insurance proceeds would fully cover replacement costs, and obligated PW 4674 for $5,000 in Direct Administrative Costs (DAC).  PW 4674 Version 1 adjusted for the Applicant’s revised estimate and identified additional costs of $772,477 over and above insurance proceeds for accelerated construction costs, as well as an additional $4,812 in DAC, but FEMA maintained that insurance should cover all costs.  FEMA prepared PW 4674 Version 2 to document the Applicant’s improved project request.  The Applicant pursued an accelerated construction schedule to rebuild the facility, with improvements, in time for the 2009-2010 school year.  The Applicant contended that due to the compressed timeline, it incurred additional costs that insurance did not cover, including construction management fees, and heating and dehumidification of concrete during the winter months.  The Applicant stated that the insurance settlement was based on normal, rather than expedited, construction costs and no further insurance was available under its policy.  FEMA denied the first appeal and maintained that insurance coverage was available for all construction costs.  The second appeal review confirms that the insurance policy did not cover accelerated construction costs, the compromise settlement was both reasonable and in accordance with the policy, and the Applicant may apportion its Extra Expense coverage to both ineligible and eligible costs.

Issues:            1.  Was additional insurance, beyond the amount of the settlement reached with the insurer, available to the Applicant?

                        2.  Are the project costs for the accelerated construction schedule that are in excess of the insurance settlement eligible for reimbursement by FEMA?

Finding:          1.  No.

                        2.  No, but the Applicant may apportion its Extra Expense coverage to both ineligible and eligible costs.  Therefore, the Applicant is allowed to apply a portion of this coverage to the accelerated construction costs, which had previously been applied to temporary facilities in PW 596.

Rationale:       Robert T. Stafford Disaster Relief and Emergency Assistance Act Section 312, Duplication of Benefits; 44 CFR §206.250(c), 44 CFR §206.253; 44 CFR §206.203(d)(1), Improved projects; and Disaster Assistance Fact Sheet DAP 9580.3, Insurance Considerations for Applicants.


Appeal Letter

September 21, 2012

Mark Schouten
Administrator
Iowa Homeland Security and Emergency Management Division
7105 NW 70th Avenue
Camp Dodge, Bldg. W-4
Johnston, Iowa 50131-1824

Re:     Second Appeal-Aplington-Parkersburg Schools, PA ID 023-01F68-00, Accelerated High School Construction Schedule, FEMA‑1763‑DR‑IA, Project Worksheet (PW) 4674

Dear Mr. Schouten:

This letter is in response to a letter from your office dated November 2, 2011, which transmitted the referenced second appeal on behalf of Aplington-Parkersburg Schools (Applicant).  The Applicant is appealing the Department of Homeland Security's Federal Emergency Management Agency's (FEMA) denial of funding for building construction costs that exceed the Applicant’s insurance settlement.

As explained in the enclosed analysis, I have determined that the Applicant may apportion its Extra Expense insurance coverage to both the ineligible costs associated with the accelerated construction, and the eligible costs of the temporary facilities.  These insurance proceeds are currently applied to temporary facilities in PW 596.  FEMA will document in each PW that $280,000 of the insurance proceeds that were applied to temporary facilities in PW 596 may be applied to the ineligible costs requested under PW 4674.  Therefore, the appeal is granted in the amount of $280,000 to be obligated to PW 596.  By copy of this letter, I am requesting that the Regional Administrator take appropriate action to implement this determination.

Please inform the Applicant of my decision.  This determination is the final decision on this matter pursuant to 44 CFR §206.206, Appeals.

Sincerely,

/s/

Deborah Ingram
Assistant Administrator
Recovery Directorate

Enclosure

cc:    Beth Freeman
        Regional Administrator
        FEMA Region VII

Appeal Analysis

Background

On May 25, 2008, an Enhanced Fujita (EF)-5 tornado destroyed the Aplington-Parkersburg Community High School (APCHS) main building, storage building, and ancillary classroom facilities.  FEMA prepared Project Worksheet (PW) 4674 on October 27, 2008, to capture the cost of replacing the destroyed facilities.  Using the Cost Estimating Format (CEF), FEMA estimated the in-kind replacement cost of the 72,738 square foot (SF) high school facility at $13,066,724.  In addition to construction costs, the PW also included line items for demolition, asbestos testing, and Direct Administrative Costs (DAC).  Aplington-Parkersburg Schools (Applicant) had insurance coverage on its school facilities through EMC Insurance Companies (EMCC).  Based on the policy, FEMA determined that the school was fully covered by insurance and deducted the anticipated insurance proceeds from the eligible amount.  FEMA obligated PW 4674 for $5,000 to fund DAC on December 1, 2008.

The State of Iowa granted the Applicant permission to modify normal bidding procedures in order to expedite construction of a new high school on June 2, 2008.  The Applicant hired a construction management firm, Larson Construction Company, Inc. (LCCI), to oversee an adjusted bidding process and expedited construction schedule.  On July 1, 2008, approximately one month after the loss, the Applicant and EMCC reached a compromise settlement agreement for replacement of the high school in the amount of $10,879,552.  The Applicant also intended to expand the footprint of and incorporate improvements to the new high school with funding from an April 8, 2008, bond issuance.  FEMA prepared PW 4674 Version 1 on July 31, 2009, based on a revised estimate of $11,652,029 from the Applicant’s architect.  Version 1 identified an additional $772,477 in costs associated with accelerated construction, which were over and above the insurance settlement, as well as an additional $4,812 in DAC. 

The Applicant completed construction of the new school in August 2009, in time for the opening of the 2009-2010 school year.  Whereas the gymnasium doubled as a makeshift auditorium before the disaster, in March 2010, the Applicant requested an improved project to build a dedicated auditorium.  On October 4, 2010, FEMA approved the request, bringing the total floor area of the APCHS to 100,075 SF.  On August 25, 2010, FEMA prepared PW 4674 Version 2 to deobligate the $772,477 as an insured cost and document the revised CEF estimate of $14,753,181 for the improved project.  FEMA limited the eligible project amount on PW 4674 to the insurance settlement proceeds of $479,000 for demolition of the damaged facility, $506 for asbestos testing, and $10,879,552 for reconstruction of the APCHS.  Following the insurance reductions, the total amount funded under PW 4674 was $9,812 for DAC.

First Appeal

In the first appeal, dated January 2, 2011, the Applicant requested reconsideration of the costs associated with the compressed timeline for constructing the school.  The Applicant maintained that its insurance settlement was based on an estimate using normal construction costs under a standard timeframe (approximately three years) and did not fully represent the cost of construction assuming an accelerated timeline.  Additionally, the Applicant claimed the costs incurred in excess of the $10,879,552 insurance settlement were extra expenses that exceeded the Applicant’s $1 million limit for its Extra Expense insurance coverage.  The Extra Expense coverage was fully exhausted on the costs for temporary classrooms, a temporary gym, and a temporary weight room.

FEMA denied the Applicant’s first appeal in a letter dated June 27, 2011, on the basis that the costs incurred were considered usual and customary construction costs and should be covered by the policy.  FEMA also stated that the blanket policy limit of $23,811,923 for damage to buildings and personal property was available for the entire replacement of the damaged facility.

Second Appeal

In its August 8, 2011, second appeal letter, the Applicant reiterated its argument that the expenses associated with the accelerated construction timeline were not available under its insurance policy.  The Applicant claimed that pursuing the compressed reconstruction timeline was critical to return the students to an acceptable educational environment.  The Applicant also stated that the accelerated construction schedule reduced temporary facility costs that it would have incurred had they followed a standard three-year construction timeline.  The Applicant provided several letters, including correspondence from its insurance provider, describing the settlement with the Applicant.

Discussion

In accordance with Section 312 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), FEMA cannot duplicate benefits from other sources, such as proceeds from an insurance policy.  Additionally, 44 CFR §206.250(c) states that “Actual and anticipated insurance recoveries shall be deducted from otherwise eligible costs...”  In order to determine eligibility, FEMA reviews the insurance policy, all endorsements, and the schedule of insured property to determine insurance recoveries, as well as actual settlement documents, if available.  Once the amount and availability of coverage have been determined, an appropriate reduction in eligible project costs can be made based on anticipated insurance proceeds.  Or, as in this appeal, FEMA can review the actual settlement to determine if it is in accordance with the policy.  As stated in the FEMA Public Assistance Guide 322/June 2007, FEMA may limit funding if the applicant's policy provides coverage which should be pursued from the insurer.  Following these guidelines, this analysis discusses the primary issues related to the APCHS replacement costs: 1) eligible project costs; 2) the Applicant’s insurance policy coverage and blanket limit; 3) the Extra Expense coverage and its apportionment; and 4) the actual insurance settlement.

1)      Eligible Project Costs

As noted previously, the new APCHS is an improved project.  In accordance with 44 CFR §206.203(d)(1), federal funding for an improved project is limited to the federal share of the approved estimate of eligible costs.  The Applicant provided information in a January 17, 2011, letter that the final costs for the high school were $20,280,812.  The Applicant is not appealing costs associated with improvements to the high school, but requests those costs incurred, over and above the insurance settlement, related to the compressed timeline for replacing the high school based on its pre-disaster design and capacity.

The Applicant stated that its extra expenses that were the result of the compressed timeline totaled $884,333.  This figure appears to be based on the entire square footage of the improved project, or 100,075 SF.  FEMA prorates this for the original square footage of 72,738 SF, which is approximately 73 percent of the improved project.  Applied to the requested amount, the prorated total is $645,563 for the costs related to the accelerated construction.   

The accelerated construction costs exceed what was necessary and reasonable to restore the school to pre-disaster condition and, therefore, are ineligible for Public Assistance funding.  However, the Applicant may apportion its Extra Expense insurance coverage of $1 million to this cost as well as to the eligible costs associated with the temporary facilities in PW 596, based on a ratio of ineligible to eligible costs.  As described in below, the Applicant may apply $280,000 to the costs associated with the accelerated construction (ineligible costs) and $720,000 to the temporary facilities (eligible costs).

2)    Insurance Policy Coverage and Blanket Limit

APCHS was covered, along with other school facilities, under the Applicant’s buildings and personal property insurance policy which had a blanket limit of $23,811,923.  A blanket limit alone does not determine the available insurance benefits for a single facility, but combines a number of separate property coverages and/or coverages at two or more locations under a single combined limit of insurance.  The blanket limit in the Applicant’s policy was based on a statement of insured values (100 percent replacement) for 16 building locations and other property.  With regard to the high school, the APCHS facility’s insured value according to the October 24, 2007, “Statement of Values” was $7,121,530.  The policy also included an “agreed value option” which, when used with a blanket limits policy, means the insured warrants the stated values are true and fair representations of the total replacement cost values for all assets insured.  This elective coverage also waives the standard co-insurance clause at the time of loss which means no loss adjustment penalties are applied if any building is under insured.  Because APCHS was underinsured (stated value of $7.1 million), this option allowed the Applicant to receive the full replacement cost value determined by the insurer (settlement of $10.8 million), rather than a significantly lower adjusted loss.  The full blanket limit of $23 million, however, was not available for the high school alone.

In addition to building and personal property coverage, the Applicant’s policy had Extra Expense coverage with a limit of $1 million.  In terms of insurance, Extra Expense means necessary costs the insured incurs during the "period of restoration" that would not have been incurred had there been no loss, such as the cost of temporary facilities.  This type of coverage will also pay costs to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under the Extra Expense coverage.  An example of such a cost might be construction management fees to accelerate construction, which reduces the need for temporary facilities that are covered under Extra Expense.  In a letter dated May 4, 2009, the Applicant’s insurer advised it that Extra Expense coverage may be available for certain costs of expedited construction, such as the LCCI management fees.  However, any and all costs applied to the Extra Expense coverage would be capped at the $1 million limit in the policy.  The Applicant and the insurance company decided to apply the costs of temporary relocation facilities to the Extra Expense coverage.  As of May 4, 2009, the policy limit had been exhausted and further insurance monies were not available.

3)         Extra Expense Coverage Apportionment

The Applicant’s insurance policy states in its School Building and Personal Property Coverage Form—CP7123, Section A(4)(i)(3), Extra Expense, that it has $1 million available in Extra Expense coverage for costs such as temporary facilities and costs associated with an accelerated construction timeline, such as construction management costs.  The policy and the insurance company indicate that this $1 million Extra Expense coverage is the only coverage available to the Applicant for such costs; these costs would not otherwise be covered under the Applicant’s policy.  Under FEMA’s Disaster Assistance Fact Sheet DAP 9580.3, Insurance Considerations for Applicants, Frequently Asked Question Number 3 sets forth the process for apportioning insurance proceeds to eligible and ineligible costs.  Pursuant to the Fact Sheet, “If the Applicant’s insurance covers eligible and ineligible damage…without specifying limits for each type of loss, the proceeds will be apportioned based on the ratio of the Applicant’s eligible to ineligible damage.” 

As this applies here, the costs in question are $645,563 for costs associated with the accelerated construction timeline that are ineligible for Public Assistance funding.  FEMA derived this figure based on the total compressed timeline cost that the Applicant requested.  The Applicant requested $884,333, which FEMA prorated to 73 percent to reflect only the original square footage of 72,738 SF and not the improved project total of 100,075 SF.  This total is $645,563.  Eligible costs (excluding DAC) associated with this coverage are those for the temporary facilities captured in PW 596 ($1,534,987) and PW 10552 ($106,494), totaling $1,641,481.

The current application of the $1 million Extra Expense coverage is as follows: under PW 596, $500,000 was applied to the temporary gymnasium facility and $394,224 was applied to the temporary classroom facilities.  Under PW 10552, $105,776 was applied to renovations necessary for a temporary weight room.  None of the Extra Expense coverage was applied to costs associated with the accelerated timeline.  However, under FEMA’s Fact Sheet (DAP 9580.3), the appropriate application of the $1 million coverage would be to apply the respective ratios to ineligible and eligible damage.  The ineligible costs of $645,563 compared to the total of $2,287,044 of eligible costs ($1,641,481 for PW 596 and PW 10552) and ineligible costs represent a ratio of 28 percent ineligible costs to 72 percent eligible costs.  This means that $280,000 of the $1 million coverage can be applied to the $645,563 of ineligible costs requested under PW 4674, requiring FEMA to adjust $280,000 of the insurance proceeds that were applied to the temporary facilities.  Because FEMA applied insurance proceeds of $394,224 to the temporary classrooms in PW 596, FEMA will adjust PW 4674 and PW 596 to reflect that $280,000 in insurance proceeds will now be applied to PW 4674.  Effectively, FEMA will be taking $280,000 of insurance proceeds that were applied to PW 596 and allowing the Applicant to apply them to the ineligible costs requested under PW 4674.  Since these will no longer be insurance proceeds applied to the temporary classrooms in PW 596, FEMA will obligate $280,000 of Public Assistance funding to PW 596 toward the eligible classroom facilities.  The Extra Expense coverage will then be apportioned as follows:

 

PW

Total Cost

Insurance Proceeds Applied to Project

Total Eligible Funding

Instructions for New PW Versions

596

$1,534,987

(excluding DAC)

 

 

$500,000 to gym

$114,224 to classroom facilities

$681,568

 

($1,534,987-$614,224

insurance proceeds &

$247,500 proportionate equity value + $8,305 DAC)

 

 

·         Indicate in PW that insurance apportionment is being adjusted so that only $114,224 of insurance proceeds are applied to classrooms

·         Obligate $280,000 PA funding toward classrooms

10552

$106,494

(excluding DAC)

$105,776

$2,030

No change to PW

4674

$20,280,812 (total cost, most of which is covered by other funding)

 

$655,375 (costs at issue: $645,563 accelerated construction costs + $9,812 DAC)

$280,000

$9,812

·         Indicate in PW that Applicant is allowed to apply $280,000 of Extra Expense coverage to this PW

·         No change in actual funding; only DAC obligated

 

4)      Actual Insurance Settlement

Following the disaster, EMCC offered the Applicant $10,638,592 for the replacement of the high school.  The Applicant rejected the offer.  With the assistance of its architect, the Applicant and insurer negotiated a compromise settlement of $10,879,552.  The insurer acknowledged in its May 4, 2009, letter, that the agreed settlement was adequate to replace the high school as it existed prior to the tornado including applicable code upgrades, but that it would not provide additional payments for the costs incurred to compress the timeframe in which to complete repairs.

While FEMA may limit funding for a project that it believes should be available from the insurer, it appears that the Applicant’s $10,879,552 insurance settlement was a commercially reasonable settlement that any prudent and responsible person would have made given the same circumstances.  The Applicant settled the insurance claim months before it knew whether and how much FEMA assistance would be available.  The Applicant negotiated a higher settlement than was initially proposed.  The Applicant also made several attempts after the settlement, at the recommendation of FEMA, to seek additional payments from the insurer and was denied on the basis of the agreed compromise settlement and the limits of the policy.  Furthermore, based on a review of the policy, costs to expedite construction of damaged buildings were not explicitly covered, and as such, EMCC was not obligated to account for an accelerated construction timeline in estimating the replacement building settlement.

Conclusion

Based on a comprehensive review of the Applicant’s insurance policy, coverage, and settlement costs, FEMA has determined that the Applicant made a commercially reasonable settlement with its insurance company.  Additionally, the Extra Expense coverage in the Applicant’s insurance policy allows it to be applied to both costs that are considered eligible and ineligible under the Public Assistance Program.  Because FEMA determined that the Applicant may apply $280,000 of this coverage to costs associated with the accelerated construction that are ineligible for FEMA funding, FEMA will reduce the amount of deduction for insurance proceeds for temporary classroom facilities by $280,000 from PW 596.  Thus, FEMA will obligate $280,000 of Public Assistance funding to PW 596, because those costs are eligible for FEMA funding.  Both PW 4674 and PW 596 will document this reapportionment of insurance proceeds.  Therefore, this appeal is partially granted in the amount of $280,000 which FEMA will obligate to PW 596.