Insurance

Appeal Brief

Appeal Letter

Appeal Analysis

Background

Between May 25, 2008 and August 13, 2008, severe storms and heavy rains affected the University of Iowa (Applicant).  Stormwater caused the Iowa River to overflow its banks and flood the Applicant’s campus.  These floodwaters inundated the lower levels of the Applicant’s music building and the first floor of its theatre building—making those buildings unusable until the completion of permanent repairs.  Portions of the academic programs once conducted in the buildings were subsequently housed in temporary facilities installed in a nearby parking lot.

FEMA prepared Project Worksheet (PW) 5246, documenting the Applicant’s costs to install and lease 22 modular mobile facilities, and categorizing the work as an emergency protective measure (Category B).[1]  Installation of these temporary facilities included the following: site preparation, delivery, electrical service hook up, data cable installations, and site restoration upon removal.  While FEMA personnel did not estimate costs for builder’s risk insurance premium, the PW did note that insurance premiums for temporary facilities are not eligible for Public Assistance (PA) funding.  In April of 2014, during project closeout, FEMA denied $1,008.00 in increased premium paid by the Applicant for a portion of its builder’s risk policy related to the installation, pointing to the Public Assistance Guide (PA Guide), which states premiums for temporary facilities are not eligible for reimbursement.[2]

First Appeal

In a June 16, 2014 letter, the Applicant submitted its first appeal to request the previously denied $1,008.00 in PA funding.  On February 18, 2015, the FEMA Region VII Regional Administrator (RA) sent a request for information (RFI); in response, the Applicant amended the amount it seeks to $924.00, abandoning its request for an $84.00 administrative fee.

The Applicant’s first appeal submission attempted to distinguish and clarify the nature of two separate types of insurance policies—builder’s risk and property.  While arguing the premium associated with the builder’s risk policy is eligible for funding, the Applicant recognized premium associated with the property policy is not.  The submission noted the builder’s risk policy covered risks from fire, wind, theft, lightning, hail, explosions, and vandalism to equipment during installation of temporary facilities—while the Applicant’s property policy, in contrast, provided coverage for the temporary facilities only after the construction period ended.  Based on the above assertions, the Applicant argued that the builder’s risk premium is an eligible expense allocable to preparing the site and installing the temporary facilities.        

The RA, through a letter dated April 3, 2015, denied the Applicant’s first appeal and made the following determinations: the builder’s risk premium is an increased operating expense ineligible for funding; the contractor installing the temporary facilities had legal responsibility not the applicant; and premiums paid to insure temporary facilities are not eligible for funding.  The RA based its determination largely on its assessment of documents provided in response to the RFI. 

The RA determined that the builder’s risk policy was part of a larger insurance policy—a policy the Applicant paid premium on as part of its ongoing operations.  Because the Applicant paid a single premium pertaining to this larger insurance policy, the RA reasoned that any builder’s risk policy and resulting premium costs could not be allocated to this specific project; thus making the premium ineligible for funding.

Further, the RA analyzed legal responsibility under the framework of 44 CFR § 206.223(a), a provision requiring “the work in question be the legal responsibility of an eligible applicant.”  The RA reasoned that legal responsibility for the installation site and the temporary facilities remained with the contractor during the installation process, making the builder’s risk premium ineligible for funding.  The RA also referred to the PA guide, which states that premium paid to insure temporary facilities is not eligible for funding.[3] 

Second Appeal

In a letter dated June 2, 2015, the Applicant submitted its second appeal, requesting funding for a portion of its builder’s risk premium in the amount of $924.00.  The Applicant again highlights differences between the coverage provided by its property policy and the coverage provided by its builder’s risk policy, stating that it is not seeking funding for premium pertaining to its property policy.  The Applicant points to the PA Guide, where guidance as to Part D of the Cost Estimating Format (CEF)[4] is provided.  The PA Guide specifically states contractor’s insurance is reimbursable as a project cost.  Pointing to Part D of the CEF, the Applicant argues its builder’s risk premium is such an insurance cost.  The Applicant concedes insurance on temporary facilities is ineligible but argues the builder’s risk premium is an eligible cost that was incurred to install the temporary facilities.

In response to the RA’s legal responsibility determination, the Applicant argues that a builder’s risk policy protects from perils such as fire, wind, theft, and vandalism which are not the fault of the contractor or the owner.  Referencing a legal treatise on insurance,[5] the Applicant points out that a builder’s risk policy protects an organization’s insurable interests in the property while it is under construction.  Builder’s risk premium would be an expense of the installation of the temporary facilities regardless of whether the contractor or the Applicant had paid the premium and regardless of which entity had legal responsibility for potential damages during the installation process.  The Applicant also argues that the builder’s risk premium was not an increased operating expense, stating it pertains to the installation of the temporary facilities not their use.

Through an e-mail dated April 28, 2016, FEMA sent a Request for Information to the Applicant, wherein additional documentation associated with the policy in place at the time of installation was requested to ascertain whether it established allocation of builder’s risk premium costs to this project.  The Applicant provided its response in an e-mail dated May 26, 2016.[6]  

Discussion

Pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) § 403, FEMA may provide assistance that is essential to meet immediate threats to life and property resulting from a major disaster.  Specifically, FEMA is authorized to reimburse eligible applicants for expenses incurred to protect and preserve property or public health and safety through the “provision of temporary facilities for schools.”[7] 

Eligible Work

The Applicant has sufficiently demonstrated that it, not the contractor, is legally responsible for installing the temporary facilities and obtaining the builder’s risk policy.  To be eligible for PA funding, an eligible applicant must be responsible for the work.[8]  The provision of essential temporary facilities for public and PNP schools is well recognized as eligible work and is well recognized as an eligible emergency protective measure.[9]  Here, the Applicant had a legal responsibility to its theatre and art students to provide instruction in facilities that were safe and not inundated with floodwaters.  It accomplished this by relocating classrooms to temporary facilities.

While the contractor may have had certain responsibilities for installing the temporary facilities, those responsibilities do not make the work ineligible for funding.  Moreover, the written contract between the Applicant and contractor stipulated that the Applicant was responsible for purchasing the builder’s risk policy.[10]  Therefore, the Applicant had legal responsibility for installing the temporary facilities and obtaining the builder’s risk policy.

Eligible and Allocable Costs

Eligible costs are costs that can be directly tied to the performance of eligible work.[11]  FEMA policy clearly prohibits, as an ineligible cost, the reimbursement of premium to maintain insurance for temporary facilities.[12]  However, neither the PA Guide nor the Disaster Assistance Policy 9523.3, Provision of Temporary Relocation Facilities (Dec. 14, 2010) prohibits the reimbursement of builder’s risk premium costs incurred during the installation of temporary facilities.  Regardless, all eligible costs must also be allowable in accordance with cost principles outlined by the Office of Management and Budget (OMB).  The Applicant, a public institution of higher education, must follow the OMB Circular A-21 cost principles to ensure that costs charged to the federal award are allowable.[13]  Allowable costs must be allocable to the PA grant[14] and tied to a specific cost objective.[15]  Accordingly, only if the builder’s risk premium is allocable to the installation of the temporary facilities can it be eligible for funding.

Each year the Applicant pays one single yearly insurance premium to FM Global on September 1^st.[16]  The Applicant’s FM Global policy includes both property coverage as well as builder’s risk coverage for all ongoing construction projects.  The builder’s risk component provides coverage for the installation process in the event of hazards or perils causing damages to materials during the installation process, while the property component provides coverage on the temporary facilities after construction has ended.[17]  The installation of the temporary facilities took place between November 2008 and January 2009.[18]  Accordingly the 2008-2009 policy insured the actual installation.

Prior to the FM Global policy’s yearly renewal on September 1^st, the policy requires the Applicant  to submit, on July 1^st of each year, a list of property values, which would include construction projects that have begun in the last 12 months and/or are still ongoing.[19]  To meet this requirement, the Applicant submits a spreadsheet to FM Global with a list of the project values for each construction project.[20]  Builder’s risk premium is paid with the yearly insurance premium on September 1^st.  Accordingly, that premium pays for the coverage provided in the next policy period.    

The Applicant asserts that premium paid for the 2009-2010 policy is allocable to the installation work occurring in 2008—essentially asserting it paid the premium in arrears.[21]  However, the Applicant has not provided any documentation that supports the existence of a payment in arrears system.  There is no explanation of such a payment system in the insurance policy or in any other documentation provided by the Applicant.  In fact, in its response to the RFI, the Applicant plainly asserts no such documentation exists.[22]  Accordingly, FEMA cannot allocate the 2009-2010 premium increase to the installation because the installation was completed in 2008 and covered by the 2008-2009 policy.  To accept the Applicant’s argument, FEMA would essentially be paying for premium increases for the 2009-2010 policy period that resulted from activities that occurred during the 2008-2009 policy period.  The RA correctly identified that such an action essentially represented an increased operating cost and therefore was ineligible.  Reimbursing an applicant for premium increases for a subsequent policy period is beyond FEMA’s statutory authority to provide supplemental aid[23] and the increase is far removed from being an additional cost that directly relates to accomplishing specific emergency health and safety tasks.[24]  Thus, because the 2008-2009 premium was paid before the installation, it was not a cost tied to work resulting from the disaster event.[25]  Accordingly, the costs are not eligible for funding.  

Conclusion

While, the Applicant has provided adequate documentation to demonstrate that it is legally responsible for the installing the temporary facilities and obtaining the builder’s risk policy, the Applicant’s documentation does not establish the $924.00 portion of builder’s risk premium is allocable to the project or that it can be directly tied to the performance of installing the temporary facilities.  Therefore, the requested builder’s risk premium is not eligible for PA funding.  For these reasons, the appeal is denied.