Insurance

Appeal Brief

Appeal Letter

Appeal Analysis

Background

Prior to the declared event applicable to this appeal—Hurricane Ike—several hurricanes, including Hurricane Rita, struck Jefferson County (Applicant) damaging numerous facilities.  FEMA provided Public Assistance (PA) funding to the Applicant for those disasters.  As a result, in accordance with the Stafford Act, FEMA conditioned PA funding with the requirement that the Applicant obtain and maintain adequate insurance to cover future damage.   

In May of 2008, FEMA issued Disaster Assistance Factsheet DAP9580.3, Insurance Considerations for Applicants, which stated, among other things, that in a subsequent disaster, FEMA would no longer reimburse an applicant for insurance deductibles up to and including the amount of eligible damage incurred in a previous disaster for damage incurred at the same facility.[1]  FEMA would still reimburse the portion of the deductible in excess of the previous disaster damage.[2]

On September 7, 2008, Hurricane Ike occurred, causing windstorm damage to the Applicant’s facilities.  FEMA subsequently prepared multiple Project Worksheets (PWs) to provide PA funding.  According to the Applicant, insurance policies available to the Applicant for these facilities that would meet the obtain and maintain requirement carried deductibles ranging from 2 – 10 percent of the property’s total insurable value.[3]  At the time of the declared event, the Applicant had insurance with a three (3) percent ($6.8 million) deductible and premiums amounting to approximately one (1) percent of its revenues.[4]  The large deductibles created a gap in coverage that the Applicant could not afford.[5]   In many of the PWs, FEMA reduced funding by deductibles, in accordance with DAP 9580.3, Insurance Considerations for Applicants, since FEMA had previously reimbursed deductibles in past disasters. 

On November 10, 2009, the County Judge, on behalf of the Applicant, requested a certification from the State Insurance Commissioner (SIC) certifying that the Applicant’s insurance  was reasonable and thus satisfied  the obtain and maintain requirement for Hurricanes Rita and Ike.  The request included a letter from the Applicant’s representative detailing the basis for the certification request.[6] 

As a basis for certification, the Applicant claimed that insurance to fill the “gap” created by the high deductibles was, for the most part, “unavailable at a reasonable cost.”[7]  The Applicant could not afford the approximately $1.5 million in increased premiums necessary to achieve an acceptable deductible level.  The Applicant’s research indicated that local government entities of comparable size spent, on average, 0.34 percent of revenue on insurance expenditures.  Whereas, the Applicant’s insurance expenditures were one (1) percent of its revenues—nearly thrice the amount of its peers.  In addition, the Applicant’s research showed that, while the actual insurance policy amounts had relatively remained unchanged, premiums increased drastically from $256,000.00 in 2005, prior to Hurricane Rita, to $1,196,955.00—a 467 percent increase.[8]   As a result of this research, the Applicant requested the SIC’s certification.

The SIC certified the Applicant’s windstorm insurance coverage as reasonable on May 11, 2010.[9]  Specifically, the SIC found that insurance premiums required to cover the high deductibles—approximately $6.8 million—were unreasonable.[10]  There was no indication that the SIC had certified the insurance prior to Hurricane Ike. 

On September 10, 2010, the Applicant requested that FEMA defer to the SIC’s certification and waive the obtain and maintain requirement.  The Applicant alleged that the certification was not storm specific and should be applied “to all prior storm grants” and funding for Hurricane Ike “should not be reduced by prior grants either by limit of insurance or deductibles that were paid in prior storms.”[11] 

FEMA responded to the Applicant’s letter on April 19, 2011, declining the Applicant’s request for waiver of the obtain and maintain requirement, stating that reasonable windstorm coverage was readily available to the Applicant through the Texas Windstorm Insurance Association (TWIA) and Texas Municipal League (TML) Risk Pool as well as flood insurance through the National Flood Insurance Program (NFIP).  FEMA also advised the Applicant that it could resubmit its request for waiver if it obtained documentation from TWIA, TML, or NFIP that coverage was not available.  On April 25, 2011, FEMA responded to the SIC’s May 11, 2010 certification, declining the request for waiver because wind and flood insurance were available and reasonable through NFIP and TWIA.

First Appeal

The Applicant submitted its first appeal with the Texas Department of Public Safety (Grantee) on June 13, 2011.  The Applicant stated that the Stafford Act provides the SIC with authority to certify both the types and extent of insurance to be obtained and maintained by PA applicants and since the SIC certified that the Applicant’s one (1) percent insurance expenditure was the reasonable and responsible choice, it complied with the Stafford Act.  The Applicant reiterated its basis for certification, citing the market research which revealed that deductibles were high and additional insurance to cover the gap created by these deductibles was not reasonably available.  The Applicant also restated that its insurance expenditures were nearly thrice its peers’.  The first appeal also asserted that TML Risk Pool insurance is only available to political subdivisions and not readily available and that TWIA was an insurance of last resort and is not motivated to price insurance reasonably.

By letter dated February 21, 2011,[12] the Grantee sought a review of the obtain and maintain requirement from FEMA, arguing that the SIC certified the insurance as reasonable.  The Grantee asserted that the Stafford Act empowers the SIC to “certify both the type and extent of insurance to be maintained” and “does not mandate the types of coverage required, nor does it state what kind of deductible is reasonable.”[13]  Also, based on the Applicant’s research, as well as the fact that the Applicant’s insurance expenditures were well above its peers, the Grantee concurred with the SIC’s certification that the Applicant’s insurance coverage was the reasonable and responsible choice.  The Grantee especially refuted FEMA’s finding that reasonable insurance was available via TML, TWIA, and NFIP, reiterating the Applicant’s statement that TML Risk Pool insurance was only available to political subdivisions and not readily available, while TWIA is an insurance of last resort and is not motivated to price insurance reasonably.

Subsequent Actions by FEMA

By memorandum dated February 8, 2013, FEMA rescinded DAP 9580.3.[14]  The DAP9580.3 Rescission Memorandum stated, among other things, that FEMA would no longer reduce eligible funding by insurance deductibles “for any open projects or for determinations that the Applicant ha[d] the opportunity to appeal in accordance with 44 C.F.R. §206.206(c).”  Instead, consistent with the Stafford Act, FEMA would only reduce funding by insurance proceeds to prevent duplicate benefits.[15]

First Appeal Decision

On September 2, 2014, FEMA approved the first appeal, finding that the SIC’s certification was sufficient to show that the Applicant obtained and maintained adequate insurance.  However, FEMA found that, since the certification was not in effect before September 13, 2008—the disaster declaration date for Ike—it only applied to future disasters.  Therefore, FEMA still did not reimburse deductibles associated with Ike.  FEMA determined that the Applicant would be required to reapply for certification in the event of a subsequent event and that certification would be applied in a future similar disaster.  The decision rescinded the April 19 and April 25, 2011 waiver denials.

Second Appeal

The Applicant submitted a second appeal to the Grantee on November 7, 2014.  The Applicant alleges that FEMA’s reduction of PA funding by the amount of the deductibles is contrary to policy because DAP9580.3, which authorized FEMA to reduce funding by deductibles, was rescinded on February 8, 2013, and the rescission applies to all open projects.  According to the Applicant, the Regional Administrator failed to consider the DAP 9580.3 Rescission Memorandum.  Thus, the Applicant requests that all projects that were still open as of February 8, 2013, be revised to add back reductions based upon insurance deductibles.  The Grantee transmitted the second appeal to FEMA Headquarters on November 17, 2014, supporting the Applicant’s appeal.

Discussion

The Robert T. Stafford Disaster Relief and Emergency Assistance Act requires that, with respect to any property to be constructed, replaced, restored, or repaired with public assistance funds, an applicant must obtain and maintain such types and extent of insurance as may be reasonably available, adequate, and necessary to protect against future loss to such property.[16]  Such types and amounts of insurance must be reasonable and necessary to protect the facility against future damage from a similar storm.[17]  Specifically, an applicant must obtain and maintain insurance to cover the eligible facility for the same type of disaster that caused the damage, which must, at a minimum, be in the amount of the estimated eligible damage for the facility.[18]  Failure to obtain and maintain adequate insurance coverage will result in denial of PA funding, unless an SIC certifies that the type and extent of insurance is not reasonably available.[19]  The Stafford Act delegates the authority to determine the type and extent of insurance reasonably available, adequate, and necessary to the SIC and FEMA may not require greater types and extent of insurance than that certified as reasonable by the SIC.[20]  Where the SIC issues a certification, the certification will be effective until the next major disaster.[21] 

The SIC’s certification is only applicable to the obtain and maintain requirements that are attributable to Hurricane Ike because the SIC, pursuant to the authority granted by the Stafford Act, certified the type and extent of the insurance following Hurricane Ike.  The certification, issued May 11, 2010, applied to the current disaster at the time, which was Hurricane Ike.  In the event of a subsequent disaster, the Applicant must request new certification.

However, deductibles are a separate issue from certification.  Even where an applicant is compliant with obtain and maintain requirements, the policy in effect at the time of the disaster—DAP 9580.3, Insurance Considerations for Applicants—barred reimbursement of deductibles up to and including the amount of eligible damage incurred in a prior disaster for the same facility.[22]  A subsequent rescission of DAP 9580.3, Insurance Considerations for Applicants—DAP 9580.3 Rescission Memorandum— issued February 8, 2013, states that FEMA will no longer reduce eligible funding by insurance deductibles paid in a prior disaster.  In other words, FEMA will reduce funding by insurance proceeds, in accordance with Stafford Act § 312, to avoid duplication of benefits.  The Rescission Memorandum applied to “all open projects or determinations that the Applicant ha[d] the opportunity to appeal in accordance with 44 C.F.R. § 206.206(c).”[23] 

Consequently, FEMA should not have reduced funding by deductibles for PWs open or appealable as of February 8, 2013 and must correct those reductions.  In doing so, however, FEMA must still ensure that appropriate regulatory reductions are applied to eligible costs.[24]     Consistent with the Rescission Memorandum, this determination does not apply to any PWs for which the Applicant had exhausted its first and second appeal rights by February 8, 2013, or closed PWs and determinations which were no longer appealable on February 8, 2013, based on timeliness issues. 

Conclusion

The SIC’s certification is only applicable to the obtain and maintain requirements that are attributable to Hurricane Ike.  As FEMA cannot reduce funding by deductibles for all open or appealable PWs as of February 8, 2013, in accordance with the DAP9580.3 Rescission Memorandum, this appeal is granted with regard to the issue of deductibles.  This decision does not obviate FEMA’s responsibility to apply appropriate regulatory reductions to eligible costs.  The Regional Administrator will review the applicable projects and will make any adjustments in funding necessary to implement this determination.