Insurance deductable on facilities damaged by tornado
Appeal Brief
Appeal Letter
N/A
Appeal Brief
| Disaster | FEMA-1215-DR |
| Applicant | Tennessee Department of General Services |
| Appeal Type | Second |
| PA ID# | 000-00000 |
| PW ID# | 09813 |
| Date Signed | 1999-02-24T05:00:00 |
Appeal Letter
February 24, 1999
Mr. John D. White Jr.
Director
Tennessee Emergency Management Agency
3041 Sidco Drive
Nashville, TN 37204
Dear Mr. White:
This is in response to your letter of December 29, 1998, to the Federal Emergency Management Agency (FEMA) which transmitted a second appeal from the Tennessee Department of General Services. The appeal concerns a request for approval of costs paid by the State within the deductible of their insurance policy which the State incurred as a result of damages suffered in the tornadoes of April 16, 1998 (FEMA-1215-DR-TN). This request has been previously denied by the Disaster Recovery Manager on May 21, 1998, and the Regional Director on November 2, 1998.
The State has a blanket insurance policy with the Royal and Sunalliance Insurance Company covering buildings, structures and personal property. The policy has an annual loss aggregate deductible of $5,000,000 and a per loss retained (occurrence) deductible of $5,000. When losses above the $5,000 for each occurrence accrue to $5,000,000 in any one year, Royal will pay losses in excess of that amount. The $5,000 per occurrence and any amounts received from other sources do not count towards the $5,000,000 deductible. The State appropriates $5,000,000 annually for a "retention fund" to cover the deductible amount. State agencies which are responsible for individual properties absorb the $5,000 within their budgets when they have a loss.
Before the tornadoes of April 1998, State properties covered by this insurance policy suffered some damages in events that were not declared disasters. Additional damages were suffered as a result of the April event. The total damages to insured State properties for all of 1998 did not reach the $5,000,000 threshold. Therefore, a request was made for the total eligible damages incurred in this disaster. The per occurrence deductible of $5,000 was allowed on Damage Survey Report (DSR) 09813. Actually the DSR was written and approved for $10,000. (As will be seen later in this letter, this deductible should not be separately approved.) However, the remainder of the request was denied because the deductible amount was considered to be self-insurance and thus ineligible under Section 312 of the Stafford Act (Act), Duplication of Benefits. The self-insurance allowed in Section 311(c) of the Act also was considered as "insurance" referred to in Section 312 which then duplicated FEMA's assistance.
The State argument is as follows: The retention fund which is used to pay the deductible amount of the Royal policy is not "insurance" or "other source" in the words of Section 312, because these funds come from within State resources and not from an outside source. The retention fund is not the "self-insurance" of Section 311(c) because such self-insurance is only required to be available for application against future losses after a first time grant of assistance under the Act. This requirement is only levied on individual properties. Section 311(a) requires that a recipient of a grant for restoration of facilities purchase and maintain insurance as a condition of receiving assistance under the Act. Since Section 311(a) only applies after the first grant and self-insurance can satisfy its requirement, self-insurance is only considered insurance for the second or subsequent occurrences. The operation of the fund is like insurance in that it uses a "claims" process where individual State agencies make claims against the fund when they have a loss. However, this is done primarily to verify to their primary insurance carrier, Royal Sunalliance, that losses being credited against the $5,000,000 deductible are legitimate losses.
The State further explains that true insurance requires a transfer of risk to another party. Their fund does not do that and therefore, it is not true insurance. Insurance is a subset of the larger universe of "other sources which they claim their fund is not.
In calculating eligible costs in a disaster assistance application, FEMA starts with total eligible damage repair costs to facilities and subtracts amounts received from insurance companies. If an applicant has received a FEMA grant previously for a particular facility, insurance in the amount of the damages in the first disaster is required to be purchased. Records available to us indicate that none of the facilities damaged in 1215-DR had prior assistance requiring an insurance commitment. We have determined that the $5,000,000 fund which the State sets aside to pay the deductible amounts required by its insurance carrier is not considered as true insurance or other sources and therefore, it is eligible. In this case, because the deductible amount was not reached and there was no required insurance, the repair of damages suffered in 1215-DR is all eligible work. Therefore, the appeal is granted. By copy of this letter, I am requesting that the Regional Director prepare a supplemental DSR to approve the eligible costs incurred by the State.
A note of explanation is required concerning the treatment of the $5,000 per occurrence deductible. The actual insurance proceeds (if any) would be subtracted from FEMA's estimate of eligible damage repair costs. The resulting number which is the eligible costs, will include the $5,000 per occurrence deductible and the appropriate portion of the aggregate deductible. The per occurrence deductible does not have to be separately obligated. The fact that a DSR for $10,000 was individually approved in this case should be accounted for when the supplemental DSR is calculated. The DRM will then prepare a DSR for the resulting amount.
For all of the facilities receiving repair assistance as a result of 1215-DR, Section 311(a) of the Act requires the purchase and maintenance of insurance in at least the amount of the damages from 1215-DR. If any of these facilities is involved in a declared major disaster in the future, the current arrangement of insurance, consisting of commercial insurance combined with a deductible covered by their own resources, will satisfy that requirement. However, FEMA will not provide assistance for any portion of either the per occurrence or the aggregate deductibles for such a facility.
Please inform the subgrantee of my determination.
Sincerely,
/S/
Lacy E. Suiter
Executive Associate Director
Response and Recovery Directorate
cc: John B. Copenhaver
Regional Director
FEMA Region IV
Mr. John D. White Jr.
Director
Tennessee Emergency Management Agency
3041 Sidco Drive
Nashville, TN 37204
Dear Mr. White:
This is in response to your letter of December 29, 1998, to the Federal Emergency Management Agency (FEMA) which transmitted a second appeal from the Tennessee Department of General Services. The appeal concerns a request for approval of costs paid by the State within the deductible of their insurance policy which the State incurred as a result of damages suffered in the tornadoes of April 16, 1998 (FEMA-1215-DR-TN). This request has been previously denied by the Disaster Recovery Manager on May 21, 1998, and the Regional Director on November 2, 1998.
The State has a blanket insurance policy with the Royal and Sunalliance Insurance Company covering buildings, structures and personal property. The policy has an annual loss aggregate deductible of $5,000,000 and a per loss retained (occurrence) deductible of $5,000. When losses above the $5,000 for each occurrence accrue to $5,000,000 in any one year, Royal will pay losses in excess of that amount. The $5,000 per occurrence and any amounts received from other sources do not count towards the $5,000,000 deductible. The State appropriates $5,000,000 annually for a "retention fund" to cover the deductible amount. State agencies which are responsible for individual properties absorb the $5,000 within their budgets when they have a loss.
Before the tornadoes of April 1998, State properties covered by this insurance policy suffered some damages in events that were not declared disasters. Additional damages were suffered as a result of the April event. The total damages to insured State properties for all of 1998 did not reach the $5,000,000 threshold. Therefore, a request was made for the total eligible damages incurred in this disaster. The per occurrence deductible of $5,000 was allowed on Damage Survey Report (DSR) 09813. Actually the DSR was written and approved for $10,000. (As will be seen later in this letter, this deductible should not be separately approved.) However, the remainder of the request was denied because the deductible amount was considered to be self-insurance and thus ineligible under Section 312 of the Stafford Act (Act), Duplication of Benefits. The self-insurance allowed in Section 311(c) of the Act also was considered as "insurance" referred to in Section 312 which then duplicated FEMA's assistance.
The State argument is as follows: The retention fund which is used to pay the deductible amount of the Royal policy is not "insurance" or "other source" in the words of Section 312, because these funds come from within State resources and not from an outside source. The retention fund is not the "self-insurance" of Section 311(c) because such self-insurance is only required to be available for application against future losses after a first time grant of assistance under the Act. This requirement is only levied on individual properties. Section 311(a) requires that a recipient of a grant for restoration of facilities purchase and maintain insurance as a condition of receiving assistance under the Act. Since Section 311(a) only applies after the first grant and self-insurance can satisfy its requirement, self-insurance is only considered insurance for the second or subsequent occurrences. The operation of the fund is like insurance in that it uses a "claims" process where individual State agencies make claims against the fund when they have a loss. However, this is done primarily to verify to their primary insurance carrier, Royal Sunalliance, that losses being credited against the $5,000,000 deductible are legitimate losses.
The State further explains that true insurance requires a transfer of risk to another party. Their fund does not do that and therefore, it is not true insurance. Insurance is a subset of the larger universe of "other sources which they claim their fund is not.
In calculating eligible costs in a disaster assistance application, FEMA starts with total eligible damage repair costs to facilities and subtracts amounts received from insurance companies. If an applicant has received a FEMA grant previously for a particular facility, insurance in the amount of the damages in the first disaster is required to be purchased. Records available to us indicate that none of the facilities damaged in 1215-DR had prior assistance requiring an insurance commitment. We have determined that the $5,000,000 fund which the State sets aside to pay the deductible amounts required by its insurance carrier is not considered as true insurance or other sources and therefore, it is eligible. In this case, because the deductible amount was not reached and there was no required insurance, the repair of damages suffered in 1215-DR is all eligible work. Therefore, the appeal is granted. By copy of this letter, I am requesting that the Regional Director prepare a supplemental DSR to approve the eligible costs incurred by the State.
A note of explanation is required concerning the treatment of the $5,000 per occurrence deductible. The actual insurance proceeds (if any) would be subtracted from FEMA's estimate of eligible damage repair costs. The resulting number which is the eligible costs, will include the $5,000 per occurrence deductible and the appropriate portion of the aggregate deductible. The per occurrence deductible does not have to be separately obligated. The fact that a DSR for $10,000 was individually approved in this case should be accounted for when the supplemental DSR is calculated. The DRM will then prepare a DSR for the resulting amount.
For all of the facilities receiving repair assistance as a result of 1215-DR, Section 311(a) of the Act requires the purchase and maintenance of insurance in at least the amount of the damages from 1215-DR. If any of these facilities is involved in a declared major disaster in the future, the current arrangement of insurance, consisting of commercial insurance combined with a deductible covered by their own resources, will satisfy that requirement. However, FEMA will not provide assistance for any portion of either the per occurrence or the aggregate deductibles for such a facility.
Please inform the subgrantee of my determination.
Sincerely,
/S/
Lacy E. Suiter
Executive Associate Director
Response and Recovery Directorate
cc: John B. Copenhaver
Regional Director
FEMA Region IV
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