Insurance, 705(c)

Appeal Brief

Summary Paragraph

As a result of Hurricane Wilma, the Broward County School Board of Florida (Applicant) suffered strong winds and flooding from October 23 through November 18, 2005.  Consequently, FEMA obligated Version 0 of Project Worksheet (PW) 7753 on June 14, 2006, approving $465,255.00 in total project costs.  FEMA then obligated Versions 1 and 2 on January 18 and June 17, 2007, respectively, which both increased the federal share cost allocation percentage; neither version altered the total approved project costs.  In 2013, the Florida Division of Emergency Management transmitted closeout documentation to FEMA, noting an overrun of $26,250.22.  While preparing Version 3 to account for the overrun, FEMA conducted a review of prior disasters and discovered that FEMA previously reimbursed costs in the amount of $25,758.49 for the same facility funded in PW 7753, in three prior non-flood disasters.  Therefore, pursuant to 44 C.F.R. § 206.253(b)(2), FEMA deobligated the $25,758.49 in previously awarded funding for PW 7753.  In its first appeal, the Applicant argued there was no policy in effect at the time of the disaster that prevented FEMA from reimbursing the insurance deductible, even though funding was reimbursed for the insurance deductible to the same facility in prior disasters.  Moreover, the Applicant asserted section 705(c) precluded the deobligation as all three conditions of the section were satisfied.  The FEMA Region IV Regional Administrator partially granted the appeal.  The RA approved the reinstatement of $11,599.61 due to a finding that two of the reductions that were associated with two of the prior disasters were made in error, but upheld the deobligation of the remaining $14,158.88 per 44 C.F.R. § 206.253(b)(2), and moreover, concluded that pursuant to FEMA Recovery Policy FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, the prior loss insurance reduction was a project cost adjustment not subject to the provisions of section 705(c).  On second appeal, the Applicant argues that FEMA erred in relying on 44 C.F.R. § 206.253(b)(2) to reduce funding.  Next, it contends that FEMA incorrectly concluded the insurance reduction was a permitted project cost adjustment, as FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures only speaks of insurance reductions as permitted project cost adjustments in the context of a duplication of benefits. 
 

Authorities and Second Appeals

• Stafford Act §§ 406(f)(1), 705(c).
• 44 C.F.R. §§ 206.206(c)(3), 206.228(a)(2)(ii), 206.253(b)(2).
• FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 4-5.
• PA Guide, at 97.
• Terrebonne Par. Consol. Gov’t, FEMA-1786-DR-LA, at 3-4.
   

Headnotes

• 44 C.F.R. § 206.253(b)(2) provides that if a facility that is insured under a blanket insurance policy is damaged in a similar (other than flood) future disaster, eligible costs will be reduced by the amount of eligible damage sustained on the previous disaster.
  • Here, the $14,158.88 in costs to repair the facility in PW 7753 are ineligible because the Applicant utilized a blanket insurance policy at the time of the disaster and the same facility that had funding reduced in PW 7753, sustained that amount in eligible damage in  prior, similar, other than flood disaster.
• Section 705(c) of the Stafford Act bars FEMA from deobligating any payment to a State or local government if: (1) the payment was authorized in an approved agreement specifying the costs, (2) the costs were reasonable, and (3) the purpose of the grant was accomplished.  Further, FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, states that this section applies even if FEMA later determines that it made an error in determining the eligibility of the previously awarded funding.
  • FEMA concurs with the Applicant that the deobligation resulting from a prior loss insurance reduction is not a permitted project cost adjustment that is exempt from a section 705(c) analysis.  Therefore, even though FEMA has determined that the previously awarded funding is ineligible, because all three conditions of section 705(c) are satisfied, it will reinstate the $14,158.88.
     

Conclusion

The appeal is granted, and $14,158.88 in costs will be reinstated in PW 7753.

Appeal Letter

Appeal Analysis

Background

From October 23 through November 18, 2005, Hurricane Wilma caused damage to the Broward County School Board of Florida’s (Applicant) Dillard High School (Facility).  On June 14, 2006, FEMA obligated Version 0, approving total project costs in the amount of $465,255.00.[1]  FEMA later obligated Versions 1 and 2, which changed the federal share allocation percentage to a combined 100 percent, but kept the total project costs the same.  During the closeout process, the State of Florida Division of Emergency Management (Grantee) requested a project overrun of $26,250.22.[2]  FEMA conducted a final insurance review, which resulted in FEMA noting that the Applicant had sustained prior losses in previous disasters in the total amount of $25,758.49.[3]  Therefore, even though FEMA stated that an inspection of the supporting documentation had substantiated the total requested overrun of $26,250.22,[4] a prior loss reduction of $25,758.49 resulted in the deobligation of that previously awarded funding, and the final approved costs for PW 7753 totaled $465,746.73.  FEMA formalized this determination on January 24, 2017, when it approved PW 7753 (Version 3).  On February 16, 2017, the Grantee transmitted FEMA’s Project Application Grant Report for PW 7753 to the Applicant, and additionally included a letter dated February 9, 2017, which advised the Applicant of its appeal rights and appeal procedural requirements concerning the determinations contained therein.

First Appeal

The Applicant submitted its first appeal on March 31, 2017, requesting that FEMA reinstate the $25,758.49 in prior loss reductions, plus applicable administrative fees.  The Applicant argued that the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) § 705(c) prohibits FEMA from recovering the funds at issue because all three prongs of the subsection were satisfied,[5] and that any issues related to the Applicant’s compliance with insurance requirements should have been addressed more than 11 years ago when FEMA prepared Version 0.  The Applicant also emphasized that it received no insurance proceeds for PW 7753 because the project costs did not reach the insurance deductible amount, and that the restrictions on reimbursement of insurance deductibles described in FEMA policies issued in 2008 and 2015 do not apply retroactively to this disaster. 

FEMA issued a Final Request for Information (RFI) on June 14, 2018, explaining that the appeal would likely be denied because the administrative record lacked support for the Applicant’s claim that FEMA erred in applying the prior loss reduction pursuant to Title 44 Code of Federal Regulations (44 C.F.R.) § 206.253(b)(2).  FEMA also provided the Applicant a final opportunity to submit documentation in support of its appeal.  The Applicant responded in a July 10, 2018 letter, reiterating its previous arguments.  It further stated that FEMA arguably lost its right to render a first appeal determination because it did not transmit its RFI within the 90 day timeline outlined in 44 C.F.R. § 206.206(c)(3), which should result in validation of the Applicant’s claim.  In addition, the Applicant argued its insurance policy in effect at the time of the disaster was not in fact a blanket insurance policy because each of its facilities had a separate deductible equal to three percent of each building’s value.  Finally, it disputed any assertion that the insurance reduction at issue in this appeal fell within that category of section 705(c)-exempt adjustments. 

On July 31, 2018, the FEMA Region IV Regional Administrator (RA) partially granted the appeal.  The RA found that the Applicant had utilized a blanket insurance policy thereby requiring a prior loss insurance reduction pursuant to 44 C.F.R. § 206.253(b)(2).  The RA also concluded that Stafford Act § 705(c) does not bar FEMA from recovering funds for prior loss reductions because FEMA Recovery Policy FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures (FEMA Recovery Policy FP 205-081-2) specifically states that insurance reductions are taken prior to determining whether Stafford Act § 705(c) applies.[6]  However, the RA also determined that two of the previous insurance reductions were made in error.  First, with respect to the $5,639.43 reduction associated with Hurricane Katrina, the RA observed that FEMA did not place the obtain and insurance requirement associated with that disaster on the facility until after the instant disaster’s incident period.  Therefore, the RA concluded FEMA would reinstate the $5,639.43 in previously reduced funding.  Second, the RA determined FEMA had effectuated erroneous cumulative reductions related to Hurricanes Irene and Jeanne.  The RA stated that FEMA applies only the greater amount of a prior insurance requirement that has been placed on a facility following multiple previous disasters.  Consequently, the RA concluded that FEMA effectuated the $5,960.18 reduction associated with Hurricane Irene in error, since it also reduced funding in PW 7753 by the $14,158.88 in prior losses connected with Hurricane Jeanne.  Thus, the RA confirmed FEMA would reinstate a total of $11,599.61 in previously deobligated funding.[7]

Second Appeal

On second appeal, the Applicant reiterates its previous arguments, and requests that FEMA reinstate the $14,158.88 prior loss reduction and any eligible administrative expenses.[8]  The Applicant contends the RA incorrectly interpreted FEMA Recovery Policy FP 205-081-2 to exclude all insurance-related cost adjustments from the protections of Stafford Act § 705(c).  The Applicant argues that the only type of insurance-related cost adjustments this exclusion actually applies to are insurance reductions to prevent duplicated benefits.  The Grantee submitted the appeal to FEMA with a recommendation letter dated November 25, 2018.

Discussion

Insurance

According to Public Assistance (PA) policy in effect at the time of the disaster, eligible costs for insurable facilities may include deductibles.[9]  However, if a facility that is insured under a blanket insurance policy, insurance pool arrangement, or some combination thereof, is damaged in a future similar other than flood disaster, eligible costs will be reduced by the amount of eligible damage sustained on the previous disaster.[10]  Thus, when an applicant uses one of, or a combination of, the aforementioned insurance policies, reimbursement of eligible costs, that may include deductibles, is reduced by the amount of eligible damage sustained to the same facility in a prior disaster, regardless of whether any of the costs are used to pay an insurance deductible.[11]  The International Risk Management Institute defines a blanket policy as “[a] single insurance policy that covers several different properties, shipments, or locations.”[12]  FEMA expands this definition by explaining that an insurance policy is a blanket policy when it covers multiple properties to a level less than their full value.[13] 

FEMA previously placed an insurance requirement on the Facility for $14,158.88 in damage sustained in a prior disaster,[14] and the Applicant does not dispute that it met this insurance requirement with coverage that insured multiple properties under shared coverage limits set below those properties’ total insured value.[15]  Accordingly, the RA correctly determined that FEMA was required to reduce eligible costs by $14,158.88 pursuant to 44 C.F.R. § 206.253(b)(2) for prior eligible damage sustained at the Facility in Hurricane Jeanne because the Applicant used blanket insurance coverage to meet its previous insurance requirement.

Stafford Act § 705(c)

Section 705(c) of the Stafford Act bars FEMA from recovering any payment to a State or local government if: (1) the payment was authorized by an approved agreement specifying the costs, (2) the costs were reasonable, and (3) the purpose of the grant was accomplished.[16]  FEMA Recovery Policy FP 205-081-2 establishes guidelines used to determine whether Stafford Act § 705 prohibits recovery of payments made under the PA program.  If all three conditions of Stafford Act § 705(c) are met, FEMA is precluded from recovering the funding at issue, even if FEMA later discovers that it made an error in determining eligibility.[17]  However, prior to determining whether Stafford Act § 705(c) applies, FEMA will adjust and correct project funding based on properly supported costs (e.g., insurance reductions related to duplicate benefits).[18] 

In the first appeal decision, the RA concluded that the prior loss reduction at issue is considered an insurance reduction, and thus falls within the category of cost adjustments that FEMA Recovery Policy FP 205-081-2 specifically excludes from the application of Stafford Act § 705(c).  The Applicant challenges that interpretation, arguing that the policy mentions insurance reductions only to provide an example of a cost adjustment the policy would allow to prevent duplicate benefits, which is not the basis for the prior loss reduction applied in PW 7753.  On second appeal, FEMA agrees with the Applicant, and finds that FEMA Recovery Policy FP 205-081-2 does not exclude the prior loss reduction applied in Version 3 from the protections of Stafford Act § 705(c) because the policy exclusion only applies to insurance reductions that are taken for the purpose of preventing duplicate benefits.  Accordingly, FEMA must perform a substantive analysis to determine if all three conditions of Stafford Act § 705(c) have been met. 

Regarding the first condition requiring payment authorized by an approved agreement specifying the costs, the Applicant correctly points out that FEMA initially approved $465,746.73 in total costs for the project (which included the $14,158.88 in costs at issue in this appeal) through Version 0 of PW 7753 on June 14, 2006.  As a result, the Grantee drew down the project’s funds for Version 0 on April 17, 2007.[19]  Therefore, the payment was made pursuant to an approved agreement, satisfying the first condition.[20]  With respect to the second condition, FEMA previously found that the costs were reasonable during the closeout process,^[21] and does not question this finding.  Thus, the second condition of Stafford Act § 705(c) is satisfied.  As for the third condition requiring that the purpose of the grant was accomplished, FEMA conducted a site visit on October 29, 2013, verifying the completion of the project’s eligible scope of work, and does not question this finding.  Furthermore, nothing in the record indicates that the Applicant has failed to comply with any post-award term or condition of the Federal award.  Therefore, the third condition of Stafford Act § 705(c) has been met.

While FEMA erred in initially approving the $14,158.88 in costs without implementing the required regulatory prior loss reduction,[22] Stafford Act § 705(c) prohibits FEMA from recovering the costs at issue because all three conditions of the subsection are satisfied.[23]  Accordingly, $14,158.88 in previously awarded costs will be reinstated.

Conclusion

The RA correctly determined that FEMA was required to reduce eligible costs by the amount of prior eligible damage sustained at the Facility in Hurricane Jeanne pursuant to 44 C.F.R. § 206.253(b)(2) because the Applicant used blanket insurance coverage to meet its previous insurance requirement.  However, Stafford Act § 705(c) prohibits FEMA from recovering the costs at issue.  Accordingly, the appeal is granted, and $14,158.88 in costs will be reinstated in PW 7753.