Insurance Reductions

Appeal Brief

Conclusion:  The Applicant’s insurance policy does not provide coverage for the damaged elements of water system tunnels and a recreation trail for which three Project Worksheets were written; therefore, the reductions in the PWs for anticipated insurance proceeds should be reinstated. DAC remains ineligible.

Summary Paragraph

Between April 30, 2010 and May 18, 2010, severe storms, flooding, straight-line winds, and tornadoes caused damage throughout the state of Tennessee, resulting in a major disaster declaration (FEMA-DR-1909-TN).  Floodwaters caused damage to electrical components of water system tunnels and a recreation trail operated by the Metropolitan Government of Nashville-Davidson County (Applicant).  FEMA prepared two Project Worksheets (PWs) to address the damage to the tunnels, and one PW to address the damage to the recreation trail and Direct Administrative Costs (DAC).  During project formulation, FEMA determined that the Applicant’s property insurance policy provided coverage for the damage to the tunnels and trail and, accordingly, determined that the Applicant was not eligible for Public Assistance funding to restore the damage. FEMA also adjusted DAC costs for PW 4669.  The Applicant appealed these decisions, asserting that, under its insurance policy, the tunnels and trails should be considered “Infrastructure” and that the policy does not afford “Infrastructure” coverage when the damage is caused by flood.  The Region IV Regional Administrator denied the appeals, concluding that policy covered the damage because the damage was located at an “Insured Location” and/or “Miscellaneous Unnamed Location” under the policy and that “Infrastructure” coverage includes damage caused by flood.  The RA also denied DAC as unreasonable and not supported. On second appeal, the Applicant reasserts that its policy does not provide coverage for “Infrastructure” when the damage is caused by flood.

Authorities

• Stafford Act § 312(a), 42 U.S.C. § 5155(a)
• Public Assistance Guide, FEMA 322 at 119 (June 2007)
• DAP9525.9, Section 324 Management Costs and Direct Administrative Costs, at 6.

Headnotes

• Under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, an applicant for federal disaster assistance cannot obtain assistance with respect to any part of a loss if the applicant has received financial assistance “under any other program or from insurance or any other source.”  Thus, under the Public Assistance Program, FEMA is required to reduce the amount of assistance for eligible work by the amount of any actual or anticipated insurance proceeds available for that work.
  • The Applicant’s insurance policy does not provide coverage for the damage under the two PWs written for the tunnels and the PW written for the recreation trail.  Therefore, the reductions in the PWs for anticipated insurance proceeds was not warranted.
• DAP9525.9 states that administrative   costs must be directly attributable to the project and must be reasonable.

Appeal Letter

Appeal Analysis

Background

Between April 30, 2010 and May 18, 2010, severe storms, flooding, straight-line winds, and tornadoes caused damage throughout the state of Tennessee. A major disaster (FEMA-DR-1909-TN) was declared on May 4, 2010.  Floodwaters from the Cumberland River caused damage to a water system tunnel and recreation trail operated by the Metropolitan Government of Nashville-Davidson County (Applicant). 

The floodwaters entered the Applicant’s steam and chilled water system tunnels located approximately 30 feet under the streets of Nashville, Tennessee. The tunnels supply steam and chilled water energy to businesses in downtown Nashville. The tunnels also contain  a “leaky feeder” communication system required by federal standards for the safety of personnel that enter the tunnels.  The floodwaters damaged splitters, repeaters, a transmitter, a PCB assembly, a handset, a rack assembly, a radio, and cable associated with the communication system.  The Cumberland River flooding also damaged the tunnels’ main power system, ventilation systems, lighting systems, sump pumps, and a meter that monitors energy use.

FEMA prepared two Project Worksheets (PWs) addressing the damage to the tunnels: PW 2244 for the leaky feeder communications system and PW 2636 for the tunnels’ power, lighting, and ventilation systems.  During project formulation, FEMA determined that the Applicant’s property insurance policy provided coverage for the damage on the PWs and, accordingly, determined that the Applicant was not eligible for Public Assistance funding to restore the damage.  FEMA deducted $41,272.44 in anticipated insurance proceeds from PW 2244, leaving only direct administrative costs applicable to the PW, and deducted $170,256.00 in anticipated proceeds from PW 2636.

Separately, floodwaters from Mill Creek overtopped the Mill Creek Greenway Trail, a 10-foot-wide trail with two inches of asphalt surface and six inches of aggregate base. The floodwaters washed out the trail embankment and the aggregate base at four locations, leaving the asphalt surface unsupported, causing it to collapse.  FEMA prepared PW 4669 to address the damage to the trail, and, again, during project formulation, determined that the Applicant’s property insurance policy provided coverage for the damage.  FEMA deducted $1,873.19 in anticipated insurance proceeds from PW 4669, as well as $1,385.06 in direct administrative costs (DAC), leaving $576.59 in eligible DAC. 

First Appeal

On May 27, 2011, the Applicant submitted separate first appeals to the Grantee challenging FEMA’s reductions to PWs 2244 and PW 2636 for anticipated insurance proceeds. On May 27 and June 8, 2011 the Applicant submitted two additional appeals challenging FEMA’s $1,385.06 DAC reduction and $1,873.19 anticipated insurance proceeds reduction for PW 4669.  In the appeals for PWs 2244 and 2636, the Applicant asserted that its insurance policy did not cover the damage to the water system tunnels because the tunnels should be considered “Infrastructure” under the policy and that the policy does not afford “Infrastructure” coverage when the damage is caused by flood.  In the appeal for PW 4669, the Applicant asserted the same argument—that the damage to the recreation trail should be considered “Infrastructure” under the policy and, therefore, not covered.

The Region IV Regional Administrator (RA) denied the appeals for PWs 2244 and 2363 in a single response dated November 10, 2011.  The RA determined that the policy covered the damage because it was located at an “Insured Location” and/or “Miscellaneous Unnamed Location” under the policy.  The RA also cited an analysis prepared by the Applicant’s insurance adjuster indicating that the policy does allow coverage for “Infrastructure” damage caused by flood—when the damage is at a “Location” under the policy’s “Schedule of Locations.”  The RA also issued two responses to the PW 4669 appeals. The first response was dated November 10, 2011, similarly noting that the policy allows for coverage for “Infrastructure” damage caused by flood and that the policy provides this coverage for “Infrastructure” when the damage is located within 1,000 feet of a location listed on the “Schedule of Locations.”  The RA concluded that the damage to the Mill Creek Greenway Trail was located within 1,000 feet of such a location and, therefore, covered by the policy. The second response, addressing DAC, was dated April 23, 2012. The RA concluded that the total claimed amount of $1,961.64 for DAC was unreasonable for asphalt surface failures on a project estimated at $2,677.88. The RA also stated that based on its appeal letter, the Applicant requested DAC to track procurement and payment activities, payments to vendors and similar procurement actions that were not directly attributable to preparing and documenting the PW and, therefore, not eligible for DAC reimbursement.

Second Appeal

The Applicant submitted a second appeal for PWs 2244 and 2636 and a second appeal for PW 4669 in letters dated July 23, 2012.  The Applicant asserts that the damaged tunnels are “Infrastructure” not located at a “Location” listed in the policy’s “Schedule of Locations” and that the Regional Administrator’s conclusion that being within 1,000 feet of a listed location is sufficient for coverage does not apply to “Infrastructure.”  The Applicant states that there is only coverage for damage to “Infrastructure” caused by flood when the “Infrastructure” is located at a “Location” listed on the policy’s “Schedule of Locations.”  Because the tunnels are not so listed, the Applicant argues, the policy does not cover the damage addressed in PWs 2244 and 2636.  The Applicant’s second appeal for PW 4669 asserts the same argument—that because the recreation trail is not a “Location” listed on the policy’s “Schedule of Locations,” there is no coverage for the flooding damage to the trail.

The Tennessee Emergency Management Agency (Grantee) transmitted the second appeal for PWs 2244 and 2636 and the second appeal for PW 4669 to the FEMA Region IV Regional Administrator in letters dated September 18, 2012.  The Grantee supports the appeal.

Discussion

Under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, an applicant for federal disaster assistance cannot “receive such assistance with respect to any part of [a] loss as to which he has received financial assistance under any other program or from insurance or any other source.”[1]  Therefore, under the Public Assistance Program, “FEMA is required to reduce the amount of assistance for eligible work by the amount of any actual or anticipated insurance proceeds available for that work.”[2]

A review of the Applicant’s insurance policy and associated materials submitted with its appeal indicates that the policy does not cover the damage captured in PWs 2244, 2636, and 4669 and, therefore, reductions for anticipated insurance proceeds should not have been applied.

Insured Location

The policy insures property, including real property in which the insured has an insurable interest, “located at an Insured Location or within 1,000 feet thereof, to the extent of the interest of the insured in such property.”  The policy also states that coverage under it applies to an “Insured Location” unless otherwise provided.  Relevant here, an “Insured Location” is a location (1) listed on “Schedule of Locations” on file with the insurer or (2) “covered as a Miscellaneous Unnamed Location.” 

The “Schedule of Locations” lists sixteen specific locations on two appendixes.  The tunnels for the leaky feeder communications system and power, lighting, and ventilation systems are not included on the lists, nor is the Mill Creek Greenway Trail.  Therefore, they are not “Insured Locations” stemming from inclusion on the “Schedule of Locations.”

Under the policy, a Miscellaneous Unnamed Location is a “Location” that is “owned, leased, or rented by the Insured, but not specified in the Schedule of Locations.”  The policy further defines a “Location” as either “as specified in the Schedule of Locations” or, if not so specified, “a building, yard, dock, wharf pier or bulkhead (or any group of the foregoing) bounded on all sides by public streets, clear land space or open waterways, each not less than fifty feet wide.”  As discussed, the tunnels and recreation trail are not included on the “Schedule of Locations,” and they are not a building, yard, dock, wharf pier or bulkhead.  Therefore, they are not “Insured Locations” nor are they an insured location through the “Miscellaneous Unnamed Locations.”

Infrastructure

The policy provides “Additional Coverages” for physical loss or damage insured by the policy under several different types of categories, including “Infrastructure.”  “Infrastructure” under the policy includes “street lighting, traffic signals, and control systems,” “underground piping,” “streets, roads, highways, sidewalks, bridges, tunnels, trestles, piers and docks,” and “street signs, traffic signs, and signs not attached to buildings.”  The types of damage elements addressed in PWs 2244, 2636  and 4669—a communication system and power, lighting, and ventilation systems within tunnels, as well a recreation trail (i.e., a “sidewalk”)—fall under the “Infrastructure” definition set forth in the policy.

Coverage for “Infrastructure” only applies to “physical loss or damage to Infrastructure caused by or resulting from fire, lightening, explosion, riot or civil commotion, vandalism or malicious mischief, aircraft, or vehicles.”  Thus, the “Infrastructure” coverage does not include coverage for physical loss or damage caused by flood because flood is not a listed peril associated with coverage for “Infrastructure.”  In addition, the “Infrastructure” coverage applies only when such “Infrastructure” is “not at a Location per the Schedule of Locations on file with the Company.”

According to a 2010 coverage analysis provided to the Applicant by an adjuster for the insurer, the “net effect” of (1) the policy’s omission of the flood peril in the general grant of coverage for “Infrastructure” and (2) the requirement that the “Infrastructure” not be at a “Location” on the “Schedule of Locations” is that “there is coverage for infrastructure due to Flood that is otherwise insured, while at a Location per the Schedule of Locations on file with the Company.” (Emphasis in original.)  Applying this reasoning, there is no coverage for the flood-damaged tunnel systems and recreation trail, as neither the tunnels nor the trail are listed on the policy’s “Schedule of Locations.”  Whether any elements of the tunnels or trail are located within 1,000 feet of a “Location” listed on the “Schedule of Locations” is irrelevant; because neither item of infrastructure is listed on the schedule.

DAC

The Applicant requests DAC for PW 4669, but provides no new justification or documentation to support their request. Applicable FEMA policy states that “[d]irect administrative costs include costs that can be tracked, charged, and accounted for directly to a specific project, such as staff time to complete field inspections and preparation of a PW. Direct costs are limited to actual reasonable costs incurred for a specific project.”[3] As such, the RA’s conclusion that DAC totaling $1,961.64 for asphalt surface failures on a project estimated at $2,677.88 are unreasonable is correct.

Conclusion

The damaged elements of the water system tunnels’ leaky feeder communications system and power, lighting, and ventilation systems, as well as the Mill Creek Greenway Trail, constitute “Infrastructure” under the Applicant’s insurance policy.  However, coverage for infrastructure only applies to flood-related damage when the infrastructure is at a “Location” listed in the policy’s “Schedule of Locations;” and the tunnels and trail are not so listed.  The Applicant’s policy does not provide coverage for the damaged tunnels and recreation trail and, therefore, the reductions in PWs 2244, 2636, and 4669 for anticipated insurance proceeds should be reinstated. In addition, the Applicant’s request for reinstatement of $1,385.05 in DAC in PW 4669 is not substantiated and, therefore, is denied.