Insurance – 705(c)

Appeal Brief

Summary Paragraph

As a result of Hurricane Wilma, the Broward County School Board of Florida suffered strong winds and flooding from October 23 through November 18, 2005.  Consequently, FEMA obligated Version 0 of Project Worksheet (PW) 467 on January 19, 2006, approving $186,948.86 in total project costs.  On May 16, 2006, FEMA then obligated Version 1, approving an additional $9,162.00 in project costs, thus amounting to $196,110.86 in approved costs.  Although FEMA obligated two additional versions of PW 467 in January (Version 2) and June 2007 (Version 3), neither changed the total of approved project costs; they simply revised the federal share cost allocation percentage.  In 2013, the Grantee then transmitted a final reconciliation report to FEMA, requesting $101,941.97 in additional costs due to overrun expenses.  While preparing Version 4 to account for the overrun costs, FEMA found through a review of prior disasters that FEMA previously reimbursed costs in excess of the total requested costs, for the same facility which was damaged by a disaster other than flood.  Therefore, pursuant to 44 C.F.R. § 206.253(b)(2), FEMA deobligated the previously awarded funding and additionally denied the overrun costs.  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 a prior disaster.  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 denied the appeal, (1) upholding the deobligation and denial of costs per 44 C.F.R. § 206.253(b)(2) on the basis that the Applicant had utilized a blanket insurance policy and had received funding in at least the same amount to the same facility in a prior disaster other than flood, and (2) concluding 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 §§ 312(a), 705(c).
• 44 C.F.R. § 206.253(b)(2).
• FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, at 4-5.
• PA Guide, at 97.
• 44 Fed. Reg. 64560.
• Terrebonne Par. Consol. Gov’t, FEMA-1786-DR-LA, at 3-4.
• Fla. Insurance Guaranty Ass’n v. B.T. of Sunrise Cond. Ass’n, Inc., 46 So. 3d 1039 (Fla. App. Ct. 2010); S. Fla. Water Mgmt. Dist. v. FEMA, 2014 U.S. Dist. LEXIS 133153 (S.D. Fla. Sept. 17, 2014).

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 $298,052.83 in costs to repair the facility in PW 467 are ineligible because the Applicant utilized a blanket insurance policy at the time of the disaster and the same facility sustained eligible damage in excess of $400,000.00 in a 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 $196,110.86.

Conclusion

The appeal is partially granted, and $196,110.86 in costs will be reinstated in PW 467.

Appeal Letter

Appeal Analysis

Background

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 multiple versions of Project Worksheet (PW) 467, providing Public Assistance (PA) funding for permanent work to restore the Coconut Creek High Campus.  FEMA first obligated Version 0 of PW 467 on January 19, 2006, approving $186,948.86 in total project costs.[1]  Then, on May 16, 2006, FEMA obligated Version 1, approving an additional $9,162.00 in project costs, thus, amounting to $196,110.86 in total approved project costs.[2]  FEMA later obligated Versions 2 and 3, which changed the federal share allocations percentages, but kept the total project costs the same.[3]  However, after the Applicant completed the project, it requested $101,941.97 in additional costs due to overrun expenses.[4]  While preparing Version 4 to account for the overrun costs, FEMA conducted a final insurance review.  FEMA found through a review of prior disasters that under disaster FEMA-1545-DR-FL,[5] in PW 5071, FEMA reimbursed costs for repairs resulting from a windstorm, which was the same peril that caused the present damages to the facility.[6]  Consequently, due to the prior loss reduction provision of Title 44 Code of Federal Regulations (44 C.F.R.) § 206.253, FEMA deobligated the $196,110.86 in previously awarded funding and denied the requested overrun costs in the amount of $101,941.97 (which combined, did not exceed the previous eligible damage sustained in the prior disaster).[7]  FEMA approved the deobligation and denial of overrun costs effectuated in Version 4 on September 7, 2016.

Through an email transmitted on November 1, 2016, the State of Florida Division of Emergency Management (Grantee) notified the Applicant of FEMA’s final determinations concerning PW 467 (Version 4), and included a letter dated October 10, 2016, which advised the Applicant of its appeal rights and appeal procedural requirements concerning the determinations.  In addition, the Grantee transmitted FEMA’s Project Application Summary for Version 4 to the Applicant, which outlined the aforementioned deobligation and denial of overrun costs.

First Appeal

In a letter dated December 8, 2016, the Applicant appealed the deobligation of funding and disallowance of the overrun expenses effectuated in PW 467 (Version 4).  The Applicant requested FEMA reinstate the previously awarded and paid costs of $196,110.86, and also approve the overrun costs in the amount of $101,941.97, for a total combined project cost of $298,052.83.  The Applicant stated that FEMA denied the requested funding because it fell within the Applicant’s insurance deductible, and funding in at least the requested amount was reimbursed under a prior disaster for the same facility.  However, the Applicant disputed FEMA’s denial, arguing that: (1) there was no policy in effect at the time of this disaster requiring the denial of costs; and (2) section 705(c) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act)[8] precluded the deobligation of the previously paid funding. 

The Applicant argued there was no FEMA policy in effect at the time of the 2005 disaster that prevented FEMA from reimbursing the insurance deductible, even though similar amounts were reimbursed for the insurance deductible associated with the prior disaster.  It noted that: (1) DAP 9580.3, Insurance Considerations for Applicants, effective August 23, 2000, specifically authorized general PA funding for deductibles; and (2) FEMA’s 1999 PA Guide, in effect at the time of the disaster, did not include language that would have prevented FEMA reimbursement of insurance deductibles in subsequent disasters.  It asserted that FEMA enacted specific policy relevant to the issue on appeal only after the disaster.   On May 29, 2008, FEMA issued Disaster Assistance Fact Sheet DAP 9580.3, Insurance Considerations for Applicants, stating that a deductible, up to and including the amount of eligible damages incurred in a previous disaster, was not eligible for the same facility in a subsequent disaster of the same type.  The Applicant noted FEMA rescinded that policy in a February 8, 2013 memorandum.[9]  In the 2013 memorandum, FEMA stated that the 2008 DAP 9580.3 would not be applied to any disaster declared on or after February 8, 2013, and that FEMA would no longer reduce eligible funding by insurance deductibles paid in a prior disaster, applicable to any project still open at the time of the policy’s rescission.  Notwithstanding the 2013 memorandum, the Applicant acknowledged that FEMA Recovery Policy FP 206-086-1, Public Assistance Policy on Insurance, enacted June 29, 2015, clarified FEMA’s most recent position concerning deductibles in terms of subsequent disasters.  It states that: (1) upon proof that an applicant maintained its required insurance (from a prior disaster), FEMA will reduce assistance in the subsequent disaster by the amount of insurance required in the previous disaster, regardless of the amount of any deductible; and (2) it applies only to disasters declared on or after June 29, 2015.  The Applicant’s description of the evolution of FEMA’s policy concerning prior loss reductions for deductibles in subsequent disasters did not alter its argument that ultimately, there was no policy in effect at the time of the disaster that prevented FEMA from awarding PA funding for the deductible.

Next, the Applicant argued that Stafford Act section 705(c) barred the deobligation of $196,110.86 as it was paid to the Applicant per an approved agreement specifying the costs (i.e., Versions 0 and 1 of PW 467), the costs were reasonable, and the purpose of the grant, permanent restoration work, was accomplished.  The Applicant contended the facts of this appeal are identical to those present in S. Fla. Water Mgmt. Dist. v. FEMA,[10] in which a federal district court held that section 705(c) prohibited FEMA from deobligating funding to correct errors resulting from its misapplication of regulations and policies, when all three conditions of the section had been previously met.  It asserted that similar to S. Fla. Water Mgmt. Dist. v. FEMA, FEMA’s deobligation in this instance was merely an attempt to correct its error in not properly addressing the perceived insurance issue prior to the completion of the three conditions present in section 705(c).  Therefore, the Applicant argued FEMA’s discovery of its alleged error relating to the funding applicable to the insurance deductible during closeout is not relevant.  Lastly, while the Applicant acknowledged that section 705(c) should not operate to impede FEMA’s recovery of a duplication of benefits,[11] it stated that issue was simply not present in this appeal.  It argued that the issue at hand did not involve a duplication of benefits as the issue only involved the deductible paid to the insurance company; no third-party funds were received that duplicated the applicable funding.  Therefore, it contended the deobligation merely related to FEMA’s desire to correct an arguable oversight that should have been easily determined and corrected before the three criteria of section 705(c) were satisfied.

The Grantee recommended FEMA approve the appeal through a letter dated February 6, 2017.  It argued that FEMA policy explicitly allowed for the payment of damages under the Applicant’s insurance deductible, and that FEMA did not follow applicable law and policy when it deobligated funding.

FEMA issued a Final Request for Information (RFI) on October 19, 2017.  FEMA notified the Applicant and the Grantee that the Applicant had not demonstrated the inapplicability of 44 C.F.R. § 206.253(b)(2), which permits blanket insurance policies for damages other than flood, but which also states that if the same facility is damaged in a similar future disaster, eligible costs will be reduced by the amount of eligible damage sustained in the previous disaster.  The Applicant responded in a November 7, 2017 letter.  The Applicant raised two arguments.  First, the Applicant noted that 44 C.F.R. § 206.253(b) does not include any language pertaining to insurance deductibles, even though the regulation has existed since approximately 1991.  The Applicant asserted that 44 C.F.R. § 206.253(b) applies to insurance deductibles only as a result of the distinct policy that was enacted by FEMA after this disaster, which is not retroactively applicable to the disaster.  Second, the Applicant argued that even if an applicable FEMA policy allowed the application of 44 C.F.R. § 206.253(b) to insurance deductibles, section 705(c) nonetheless prohibited each deobligation of funding because all three conditions of the section had been satisfied prior to FEMA’s deobligation, similar to what occurred in S. Fla. Water Mgmt. Dist. v. FEMA.

On March 26, 2018, the FEMA Region IV Regional Administrator (RA) denied the appeal.  The RA discussed a note contained in the 1991 Federal Register pertaining to PA insurance requirements, which stated, in part, that “. . . [blanket policies] may be accepted for other than flood damages, but if the same facility is damaged in a similar future disaster, eligible costs will be reduced by the amount of eligible damage sustained in the previous disaster since that amount should have been covered by insurance.”[12]  Consequently, the RA determined that the clear intent underlying 44 C.F.R. § 206.253(b)(2) was to permit the use of blanket insurance policies only when future claims are reduced by the amount of eligible damage sustained in order to offset the application of a pooled deductible.  Therefore, the RA upheld the deobligation and denial of overrun costs on the basis that: (1) the Applicant utilized a blanket insurance policy; and (2) FEMA’s database indicated that the Applicant had received funding in that same amount for damages to the same facility in a prior disaster other than flood. 

Regarding the Applicant’s section 705(c) argument, the RA stated that insurance reductions are one of the project cost adjustments that can be made prior to determining whether section 705(c) applies.  To reach this conclusion, the RA relied on FEMA Recovery Policy FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, which states:

Project Cost Adjustments: Prior to determining whether Section 705(c) applies, FEMA will adjust and correct project funding based on properly supported actual costs for the approved and completed scope of work, duplications of benefits (e.g., insurance reductions), improperly duplicated costs documented on one or more PWs, math errors, scrivener’s errors, and accounting errors, as appropriate.[13]

Accordingly, the RA determined the insurance reduction was a project cost adjustment not subject to the provisions of section 705(c).

Second Appeal

The Applicant appeals FEMA’s denial by letter dated May 22, 2018.  It seeks reinstatement of the $196,110.86 in deobligated funding plus eligible administrative costs, as well as approval of the $101,941.97 in overrun expenses.[14]  The Applicant first argues that FEMA’s noncompliance with 44 C.F.R. § 206.206(c)(3), i.e., issuing both the Final RFI and first appeal determination outside the 90 day timeline outlined in the regulation, constitutes regulatory violations that render the Applicant’s first appeal ineligible for denial. 

The Applicant next argues its insurance policy is not in fact a blanket insurance policy, as there was no pooled insurance deductible.[15]  It states that because each of the Applicant’s facilities had a deductible equal to three percent of each building’s value, the separate deductible schedules constitute specific, not blanket, insurance coverage under Florida law.[16]  Alternatively, even if the Applicant’s insurance policy constituted a blanket insurance policy, the Applicant contends FEMA still erred in denying the funding.  It argues against the RA’s reliance on 1991 Federal Register note, stating a Federal Register does not constitute an enforceable regulation or policy, particularly when the relevant federal regulation is actually silent on the matter discussed in the note.  Accordingly, since the language is not present in the actual regulation, FEMA erred in relying on 44 C.F.R. § 206.253(b)(2) as a basis for denial.  Moreover, the Applicant contends there was no written policy in effect at the time of the disaster that prevented FEMA from awarding funding within an insurance deductible when similar assistance was awarded under an insurance deductible for the same facility in a prior disaster.  The Applicant emphasizes that only after the disaster did FEMA issue specific policy that precluded funding the type of assistance at issue in the appeal.[17] 

Next, the Applicant discusses section 705(c), and notes that even though there was a specific insurance review process in existence at the time FEMA prepared the PW awarding funding, FEMA nonetheless did not properly conduct the insurance review to identify the prior loss funding before funding under the instant disaster was obligated.  It also emphasizes that FEMA did not correct this error prior to the payment of funds and the completion of the project.  Thus, the Applicant asserts that even if FEMA’s initial decision (i.e., the obligation) did not comply with FEMA policy, under the precedent of S. Fla. Water Mgmt. Dist. v. FEMA, FEMA is statutorily prohibited from deobligating the funding at issue because all three conditions of section 705(c) are satisfied. 

The Applicant then addresses the RA’s reliance on FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, in determining the insurance reductions were permitted cost adjustments that could be applied regardless of section 705(c).  The Applicant concedes that the policy allows cost adjustments for a duplication of benefits.  However, it contends the policy references insurance reductions merely as an example of what could constitute a duplication of benefits when there has been an insurance payment that needs to be reduced.  It states the policy does not advise that FEMA may adjust all insurance-related matters, and argues that any insurance-related adjustment beyond a duplication of benefits conflicts with section 705(c) if completed after the three criteria of the section have been satisfied.  For the instant appeal, the Applicant states it was not entitled to any insurance proceeds for the damaged facilities; therefore, there was never an issue of duplication of insurance benefits.  Consequently, the Applicant asserts the RA incorrectly applied the policy in such a manner that directly conflicts with section 705(c).

The Grantee forwarded the Applicant’s appeal by way of a support letter dated July 20, 2018, which recommended approval of the appeal.  The Grantee reiterates the Applicant’s argument that there was no FEMA policy in effect at the time of the disaster that stated deductibles would be included in prior loss deductions.  In addition, the Grantee disputes the RA’s finding that the 1991 Federal Register note demonstrates an intent to include deductibles in prior loss deductions under 44 C.F.R. § 206.253(b)(2).  It points out that the note states, “Because of deductibles, . . . [a blanket policy, insurance pool arrangement, or some combination of these actions] . . . may be the most efficient arrangement when considered from a risk management viewpoint.  Such arrangement may be accepted for other than flood damages, but if the same facility is damaged in a similar future disaster, eligible costs will be reduced by the amount of eligible damage sustained in the previous disaster . . . .”[18]  Therefore, it contends because a deductible is not part of eligible damage, there is no evidence to support the RA’s conclusion that the deductible, itself, would be included in a prior loss deduction.  Finally, the Grantee supports the Applicant’s assertion that section 705(c) statutorily prohibits FEMA from deobligating the funding at issue in both appeals as it asserts all three prongs of the section are met.

Discussion

Insurance

Generally, under Public Assistance policy in effect at the time of the disaster, eligible costs for insurable facilities may include deductibles.[19]  However, if a facility that is insured under a blanket insurance policy, insurance pool arrangement, or some combination thereof, 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.[20]  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.[21] 

The reasoning underlying the above is described in a 1991 Federal Register note that explained, while sometimes a blanket insurance policy, insurance pool arrangement, or some combination of these options may be the most efficient arrangement when considered from a risk management viewpoint, because of deductibles, such an arrangement may not fully cover the damaged facility in all future cases.[22]  Therefore, in those (other than flood) instances, when the same facility is damaged in a similar future disaster, eligible costs will be reduced by the amount of eligible damage sustained in the prior disaster since that amount should have been covered by insurance.[23]

The International Risk Management Institute defines a blanket policy as simply “[a] single insurance policy that covers several different properties, shipments, or locations.”[24]  FEMA expands this definition by also noting that a policy is a blanket policy when it covers multiple properties to a level less than their full value.[25] 

Based on the aforementioned FEMA policy, in effect at the time of the disaster, reimbursement of deductibles was generally an eligible cost.  However, the plain language of 44 C.F.R. § 206.253(b)(2) makes clear that when an applicant insures a facility under a blanket insurance policy, otherwise eligible costs are reduced by the amount of eligible damage that was sustained in the prior, similar, other than flood disaster.

Here, the Applicant’s facilities were insured under a blanket insurance policy because the policy covered several different properties, for a coverage that was less than the total insured value.[26]  Therefore, pursuant to 44 C.F.R. § 206.253(b)(2), otherwise eligible costs (regardless of whether they represent deductibles), must be reduced by the amount of eligible damage sustained in the previous disaster.  Consequently, it is immaterial that there was no policy in effect at the time of the disaster explicitly stating the deductibles were included in the prior loss reduction requirement of 44 C.F.R. § 206.253(b)(2).[27]

In this appeal, the otherwise eligible costs resulting from the instant disaster did not exceed the eligible damage sustained in the prior disaster.  Specifically, the same facility sustained eligible damage in excess of $400,000.00 in a prior, similar, other than flood disaster as documented in PW 5071.[28]  Thus, the $298,052.83 in costs to repair the facility in PW 467 are ineligible for PA funding in accordance with 44 C.F.R. § 206.253(b)(2).[29]

Stafford Act section 705(c)

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 by an approved agreement specifying the costs, (2) the costs were reasonable, and (3) the purpose of the grant was accomplished.  FEMA issued FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, to establish the criteria necessary to implement section 705.[30]  If all three conditions of section 705(c) are met, FEMA is prohibited from recouping grant funds even if it later determines that it made an error in determining eligibility.[31]  However, prior to determining whether section 705(c) applies, FEMA may adjust and correct project funding for various reasons, including insurance reductions.[32]

Here, the Applicant disputes the first appeal determination that the deobligation of $196,110.86 was an allowed project cost adjustment.  It notes that in FP 205-081-2, Stafford Act Section 705, Disaster Grant Closeout Procedures, the example of an insurance reduction is used specifically in relation to when there is a duplication of benefits, which was not the basis of the insurance reduction effectuated in this project.  As a result of an independent review, FEMA concurs with the Applicant’s argument.  Therefore, FEMA determines the deobligation that resulted from the prior loss insurance reduction does not fall within the category of a project cost adjustment that is exempt from a section 705(c) analysis. 

Consequently, FEMA must perform a substantive analysis of section 705(c) to determine whether all three conditions have been met.  First, with respect to examining the first condition, the “approved agreement specifying the costs,” the Applicant correctly points out that FEMA approved $186,948.86 in total project costs through Version 0 of PW 467 on January 19, 2006, and then approved an additional $9,162.00 in project costs for Version 1 on May 16, 2006.  FEMA also reaffirmed the eligibility of the $196,110.86 in total costs through Versions 2 and 3, approved on January 18, 2007 and June 18, 2007, respectively.  As a result, from March 2006 through June 2016, the Grantee drew down the project’s funds.[33]  Therefore, the payment was made pursuant to an approved agreement, satisfying the first condition.[34]

Regarding the second condition of section 705(c), that costs be reasonable, FEMA observes that through the closeout process for this project: (1) it completed 100 percent validation of contract costs; and (2) inspection of the supporting documentation had substantiated the total eligible amount of $298,052.83.[35]  As FEMA has not questioned this finding on appeal, it concludes this second condition of section 705(c) is satisfied.

Finally, for the third condition, whether the purpose of the grant was accomplished, FEMA notes that it conducted a site visit on February 14, 2012, resulting in all work being verified as complete and within the project’s scope of work.[36]  Similar to the second condition of section 705(c), FEMA has not questioned this finding on appeal.  Additionally, since FEMA determines that the Applicant did not fail to comply with a post-award term or condition of the Federal award, it finds the third condition has been met.[37]

Based on the above, FEMA finds that all three conditions of section 705(c) are satisfied.  Therefore, although FEMA erred in originally approving the costs as eligible without implementing the required regulatory insurance reduction,[38] FEMA is prohibited from recouping those ineligible grant funds.[39]  Consequently, because section 705(c) and FEMA’s implementing policy prevent the Agency from deobligating the $196,110.86 in previously awarded funding, those costs will be reinstated.

Conclusion

The Applicant’s insurance coverage is a blanket policy.  Therefore, pursuant to 44 C.F.R. § 206.253(b)(2), FEMA properly determined that both the originally awarded funding, as well as the requested overrun costs, were ineligible for PA funding because the combined amount of the otherwise eligible costs did not exceed the amount of prior eligible damage that was sustained to the same facility in a prior, similar, other than flood disaster.  However, section 705(c) of the Stafford Act prohibits FEMA from recovering the $196,110.86 in previously obligated funds.  Accordingly, the appeal is partially granted, and $196,110.86 in costs will be reinstated in PW 467.[40]