Insurance

December 20, 2010

David L. Smith

Disaster Assistance & Preparedness

Illinois Emergency Management Agency

1035 Outer Park Drive

Springfield, IL  62704-4462

Re:  Second Appeal–Catholic Bishop of Chicago, PA ID 031-U94DN-00, Insurance,

       FEMA-1800-DR-IL, 18 Project Worksheets (PW)

Dear Mr. Smith:

This letter is in response to your letter dated January 27, 2010, which transmitted the referenced second appeal on behalf of the Catholic Bishop of Chicago (Applicant).  The Applicant is appealing the Department of Homeland Security’s Federal Emergency Management Agency’s (FEMA) insurance deductions made on eighteen PWs, totaling $545,082.
Background

On September 13, 2008, a severe storm caused 8-10 inches of rain in approximately 12 hours in Cook County, Illinois.  The Applicant owns the 18 school buildings at issue in this appeal.  The storm and subsequent flooding damaged roofs and interiors of the school buildings, including floors, tiles, ceiling panels, and equipment.  The Applicant has two commercial insurance policies which are its primary and excess insurance policies (with Lloyd’s of London and Allianz Global, respectively).  The Applicant also has a Self-Insured Retention (SIR) of $1,000,000 per occurrence, under which it pays damages up to that amount, at which point its primary policy coverage is triggered.  Exhaustion of the primary policy triggers the excess policy coverage.  The applicant has a third-party administrator, Gallagher Bassett Services, Inc. (Gallagher Bassett), who administers the SIR, debiting the Applicant’s bank account as necessary to pay claims within the SIR amount.  The Applicant paid for repairs to the schools and replacement of equipment through its SIR, because the damage was less than $1,000,000.  FEMA prepared 18 PWs for this work as ineligible because it treated the funding associated with the Applicant’s SIR as anticipated insurance proceeds.

First Appeal

The Applicant submitted its first appeal July 27, 2009, arguing that FEMA erred in its interpretation of the Applicant’s SIR.  The Applicant stated that though it carries two commercial insurance policies, its SIR is a layer of risk retained by the Applicant below an amount at which the primary insurance coverage is triggered (here, $1,000,000 per occurrence).  The Applicant stated that the damage must exceed the SIR amount before the policy coverage is triggered.  The Lloyd’s policy then covers $1,000,000 for each loss occurrence after the Applicant pays the $1,000,000 SIR for each loss occurrence and a $100 maintenance deductible.  For each loss

occurrence, the Applicant must first pay damages incurred up to $1,000,000 before the Lloyd’s policy coverage is triggered.  The Allianz policy then covers $200,000,000 each loss occurrence, in excess of the Lloyd’s policy if the Lloyd’s policy coverage is exhausted.  The Applicant claimed that because the total damages are $545,082, the loss is within the SIR amount, and the Applicant is responsible for payment of these claims.  The Applicant stated that its SIR fund is not insurance proceeds and that the insurers are not responsible to pay any portion of the SIR.  

The Applicant also disagreed with FEMA’s comments in the PWs stating that the Applicant was required to obtain and maintain flood insurance coverage in the minimum amount of the eligible disaster assistance, pursuant to applicable laws and FEMA policy.  The Applicant stated that it is in compliance with 44 CFR §206.252(d) because of its policies with Lloyd’s and Allianz that together include $28,000,000 of coverage for flood damage.  FEMA denied the first appeal in a letter dated November 18, 2009, stating that this was a duplication of benefits because the Applicant had coverage for these losses through its SIR.  FEMA acknowledged that the SIR was not insurance in the “truest sense,” but it interpreted the SIR as a source of available credit to the Applicant which constituted a duplication of benefits.  FEMA additionally stated that the requirement to obtain and maintain flood insurance was met by the Applicant maintaining the SIR.

Second Appeal

The Applicant submitted its second appeal in a letter dated January 22, 2010, and the State forwarded it to FEMA in a letter dated January 27, 2010.  The Applicant reasserted its request for $545,082, and argued that the SIR is not a separate fund and is not insurance proceeds because it is the Applicant’s own money.  The Applicant provided copies of its insurance policies; a copy of its Service Agreement with its third-party administrator (Gallagher Bassett); copies of letters authorizing Gallagher Bassett to debit its bank account to pay amounts to repair property losses caused by occurrences within the SIR; and an affidavit signed by the Applicant’s Risk Manager stating that the Applicant uses its own general revenue funds for the account that the Applicant uses to pay for damages within the SIR.

 Discussion

A SIR is the amount of an otherwise covered loss that is not covered by an insurance policy and that usually must be paid before the insurer will pay benefits.  According to its insurance policies, the Applicant is required to pay for damages up to $1,000,000 per loss occurrence, as part of its SIR.  The flooding in question here is considered one loss occurrence, and the damage to the schools totaled $545,082.  Because this is below the threshold of the amount that triggers the Applicant’s policy coverage, it is within the SIR amount for which the Applicant is responsible for damage.  The funding from the SIR is neither insurance nor a duplication of benefits with FEMA assistance because the Applicant utilizes its own money for the SIR.  Because there is no duplication of benefits, the work is eligible for FEMA funding.  However, the Applicant is required pursuant to 44 CFR §206.252(d) to “obtain and maintain flood insurance in the amount of the eligible disaster assistance, as a condition of receiving Federal assistance…”  The Applicant argued that it meets this requirement because it carries its insurance policies with Lloyd’s and Allianz.  The Applicant cannot argue that the work is eligible for FEMA funding because it does not have insurance and also argue that it does not need to obtain

insurance because it already has coverage.  The Applicant’s second appeal letter states, “There are no insurance proceeds available to pay for any of the repairs for which funding is sought because all of the property losses fall within the Catholic Bishop’s (Applicant) SIR.”  As stated by the Applicant, the insurance that the Applicant carries does not apply to the damage at issue here, specifically, damage under $1,000,000 for which the Applicant is responsible.  Therefore, to be eligible for Public Assistance funding, the Applicant must comply with                               44 CFR §206.252(d). 

Conclusion

I have reviewed the information submitted with the appeal and have determined that funding provided from the SIR is not a duplication of benefits.  Accordingly, I am granting the second appeal, conditioned upon the Applicant meeting the insurance requirements of                           44 CFR §206.252(d).  By copy of this letter, I am requesting 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

Acting Assistant Administrator

Recovery Directorate

cc:     Andrew Velasquez, III

Regional Administrator

FEMA Region V