Insurance, 705(c)

Appeal Brief

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) Stoneman Douglas High School (Facility).  On June 23, 2006, FEMA obligated Version 0, approving total project costs in the amount of $608,885.16.[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) confirmed through a final reconciliation report, that there was a project underrun in the amount of $385,710.83.[2]  FEMA conducted a final insurance review, which resulted in FEMA noting that in addition to the deobligation of $385,710.83 in underrun costs identified in the closeout documentation, it was also deobligating $28,415.26 based on a prior loss reduction.[3]  FEMA formalized this determination on December 8, 2016, when it approved PW 2805 (Version 3). 

On February 3, 2017 the Grantee transmitted FEMA’s Project Application Grant Report for Version 3 to the Applicant and included a letter dated January 6, 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 $28,415.26 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,[4] 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 2805 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 February 20, 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 March 2, 2018 letter, reiterating its previous arguments.  On May 15, 2018, the FEMA Region IV Regional Administrator (RA) denied the appeal.  The RA found that the prior loss reduction was properly applied in accordance 44 C.F.R. § 206.253(b)(2) because the Applicant used blanket coverage to meet its insurance requirement from prior similar other than flood disasters.  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.[5]

Second Appeal

On second appeal, the Applicant reiterates its previous arguments, and requests that FEMA reinstate the $28,415.26  prior loss reduction and any eligible administrative expenses.[6]  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 September 10, 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.[7]  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.[8]  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.[9]  The International Risk Management Institute defines a blanket policy as “[a] single insurance policy that covers several different properties, shipments, or locations.”[10]  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.[11] 

FEMA previously placed an insurance requirement on the Facility for $28,415.26 in damage sustained in a prior disaster,[12] 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.[13]  Accordingly, the RA correctly determined that FEMA was required to reduce eligible costs by $28,415.26 pursuant to 44 C.F.R. § 206.253(b)(2) for prior eligible damage sustained at the Facility in a prior similar other than flood disaster 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.[14]  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.[15]  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).[16] 

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 2805.  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 $608,885.16 in total costs for the project (which included the $28,415.26 in costs at issue in this appeal) through Version 0 of PW 2805 on June 23, 2006.  FEMA also reaffirmed the eligibility of the total project cost through Versions 1 and 2, approved on January 18, 2007 and June 17, 2007, respectively.  As a result, from April 2007 through June 2016, the Grantee drew down all the project’s funds.[17]  Therefore, the payment of the $28,416.26 was made pursuant to an approved agreement, satisfying the first condition.[18]  With respect to the second condition, FEMA previously found that the costs were reasonable during the closeout process,^[19] 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 19, 2012, verifying the completion of the project’s eligible scope of work, and FEMA 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 $28,415.26 in costs without implementing the required regulatory prior loss reduction,[20] Stafford Act § 705(c) prohibits FEMA from recovering the costs at issue because all three conditions of the subsection are satisfied.[21]  Accordingly, $28,415.26 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 a prior similar other than flood disaster 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 $28,415.26 in costs will be reinstated in PW 2805.