Insurance - Direct Administrative Costs & Management Costs

Appeal Brief Appeal Letter Appeal Analysis

Appeal Brief

Disaster	4241
Applicant	Sumter
Appeal Type	Second
PA ID#	085-70405-00
PW ID#	PW 457
Date Signed	2020-12-02T17:00:00

Summary Paragraph

From October 1 to 23, 2015, Hurricane Joaquin created 1,000-year event levels of rainfall in certain regions of South Carolina.  The City of Sumter’s (Applicant) Fire Department Training Facility (Facility) was flooded with several feet of water, which resulted in damage to the interior along with equipment and contents.  The Applicant filed an insurance claim with the South Carolina Municipal Insurance and Risk Financing Fund (SCMIRF) who inspected the Facility in October 2015 and noted up to 4 feet of flood related damage.  The Applicant’s architect engineers estimate $379,000.00 in repairs in a subsequent inspection.  SCMIRF paid out two amounts, $116,068.37 for permanent repairs and $42,739.00 for contents.  FEMA prepared PW 457 to reimburse the Applicant for permanent repair work, equipment and content replacement for $571,742.99.  The Applicant followed up with SCMIRF in October 2017 regarding possible additional claims, but SCMIRF denied any further claims in March 2018.  FEMA reduced the costs in the PW on July 25, 2018 to $0.00 for anticipated insurance proceeds.  The Applicant appealed, stating that the damages and costs claimed were eligible for reimbursement, and insurance would not pay additional proceeds to the claim.  The FEMA Region IV Regional Administrator partially approved the appeal on December 3, 2019.  FEMA found the Applicant did not take reasonable efforts to pursue insurance proceeds for permanent repair work.  The contents insurance payment, however, were applied to a different project, therefore contents in PW 457 were eligible for reimbursement.  FEMA also found no eligible direct administrative costs (DAC).  On second appeal, the Applicant reiterates its first appeal arguments and provides additional documentation for contractor DAC.

Authorities and Second Appeals

• Stafford Act §312
• 44 C.F.R. §§ 206.206(a), 206.252(c).
• FP 206-086-1 at 9; DAP 9525.9, at 1, 2, 3, 5
• University of Houston, PW 7021, FEMA-1791-DR-TX, at 3, July, 28, 2017.; Roman Catholic Bishop of Springfield, PW 249, FEMA-1994-DR-MA, at 10-12 (Apr. 4, 2019).; Univ. of Tex. Medical Branch, PWs 14834 & 15624, FEMA-1791-DR-TX, at 8 (Nov. 14, 2017).

Headnotes

• FEMA cannot provide assistance for disaster-related losses that would duplicate benefits available to an applicant from another source, including insurance.  FEMA reduces the eligible costs of a grant by the amount of anticipated proceeds.  Applicants must take reasonable efforts to maximize the potential benefits from insurance before receiving a Public Assistance (PA) grant.
  • The Applicant’s insurance policy covered the full cost of permanent repairs from the event.  The Applicant did not make a reasonable effort to maximize its insurance proceeds by not disputing the differences in the insurance estimate and the Applicant’s architect estimate until two years after the insurance inspection.    
• Per DAP 9525.9, FEMA may reimburse DAC that are reasonable and properly tracked, documented, and directly charged to a specific project.  Travel and per diem costs for contractor employees that work on eligible PA grants are eligible as direct costs only if they can be and are attributed to individual projects, rather than allocated to multiple PWs.
  • No documentation has been provided to substantiate the force account DAC for PW 457.
  • The contractor DAC is directly tied to the work in managing the grant for permanent work. 
  • The travel and per diem costs for contractor employees were allocated proportionally to multiple projects based on the documentation provided.  As such they cannot be considered direct costs eligible for reimbursement.

Conclusion

The Applicant did not take reasonable efforts to recover insurance proceeds nor did it demonstrate the force account DAC are eligible.  Additionally, the travel and per diem costs are indirect costs and likewise ineligible.  However, the claimed costs for contractor-related DAC are tied to the grant administration of PW 457 and are eligible for reimbursement in the amount of $9,262.50.  Therefore, this appeal is partially granted.

Appeal Letter

Appeal Analysis

Background

From October 1 to 23, 2015, Hurricane Joaquin created 1,000-year event levels of rainfall in certain regions of South Carolina.  The President declared a Federal disaster on October 5, 2015.  The City of Sumter’s (Applicant’s) Fire Department Training Facility (Facility) was flooded with several feet of water, damaging the Facility’s interior and the equipment and contents contained therein. 

The Applicant filed a claim with the South Carolina Municipal Insurance and Risk Financing Fund (SCMIRF).  SCMIRF completed an inspection of the damages to the Facility in October 2015 and estimated $116,068.37 in repair costs.[1]  That inspection showed the water level was 33 inches, but based on standard industry practice allowed repairs even higher, up to a 4 foot flood cut.[2]  On January 14, 2016, the Applicant’s engineers identified additional damages and provided a cost estimate of $379,000.00, which reflected costs for a more extensive repair of the Facility.  In Februrary 2016, FEMA inspected the Facility and prepared Project Worksheet (PW) 457 with an estimated cost of $571,742.99 to repair the Facility and equipment, and replace contents. The PW was based on the damages and repairs identified in the Applicant’s engineering estimates applied into FEMA’s Cost Estimate Format (CEF).

In March 2016, SCMIRF issued a check to the Applicant for $116,068.37 for repairs to the Facility, and a separate payment of $42,739.00 for damaged equipment.  The Applicant requested clarification from SCMIRF in October 2017 regarding the amount the insurer paid, which was lower than the Applicant’s engineering estimate.  SCMIRF replied to the request on November 7, 2017, clarifying that the estimate was prepared based on no more than “4 feet up from the floor” in flood damages.[3]  In a March 5, 2018 letter, SCMIRF denied any further claim payments related to the disaster event.  Additionally, SCMIRF noted several improvements to the Facility that were not covered by the Applicant’s insurance policy. 

On July 25, 2018, FEMA notified the South Carolina Emergency Management Division (Grantee) that FEMA found the Applicant’s costs to repair the Facility were fully covered by insurance.  Based on anticipated insurance proceeds, FEMA applied a mandatory insurance reduction to avoid duplicating anticipated proceeds, bringing total project costs in PW 457 to $0.00.  On July 31, 2018, the Grantee notified the Applicant of this determination.

 

First Appeal

In a letter dated September 19, 2018, the Applicant appealed FEMA’s reduction of funding for anticipated insurance proceeds.  The Applicant requested reimbursement of the difference between FEMA’s estimate for repairs and the actual insurance proceeds received (in this case $455,657.60).  The Applicant asserted that the damage and Scope of Work (SOW) were accepted by FEMA and were used in the CEF to develop the estimate for the PW.  As such, the costs should be accepted.  The Applicant also requested that FEMA fund $14,541.68 in direct administrative costs (DAC).[4]  With its appeal, the Applicant included copies of the obligated PW, various correspondence between the Applicant and all parties involved, and its 2015 insurance policy.  The Grantee forwarded the appeal to FEMA in a letter dated October 16, 2018, recommending approval by FEMA.

On March 25, 2019, FEMA issued a Request for Information (RFI) requesting documentation: (1) clarifying the amount in dispute; (2) supporting eligible damage and SOW; (3) identifying the Applicant’s insurance claim; and (4) demonstrating how the Applicant procured its DAC and that the rates claimed are reasonable for the work performed.   In a response letter dated May 24, 2019, the Applicant clarified the amount in dispute to be the cost based on the CEF estimate minus received insurance proceeds.  The Applicant explained that the damage discovered on inspection was exempt from the policy and therefore could not be claimed.  The Applicant requested the DAC claim be fully reimbursed due to the costs being tied to eligible work for the PW. 

The FEMA Region IV Regional Administrator (RA) partially approved the appeal on December 3, 2019, but denied the Facility repair costs as the Applicant had not properly pursued all available insurance proceeds.[5]  FEMA found that the Applicant did not contact SCMIRF regarding any possible adjustments to the claim based on additional damages found until two years post-inspection, and 17 months after the Applicant accepted payment.[6]  The denial letter sent by the insurer did not indicate that additional damages would not have been funded, as the Applicant claimed, rather SCMIRF was not informed of it.  Furthermore, FEMA determined that the Applicant did not supply sufficient documentation to support DAC costs; as such they could not be verified and reimbursed.  However, FEMA found the insurance proceeds for contents had already been accounted for by FEMA in a different project, and because the limit on the policy was exhausted, the RA approved $230,905.99.[7] 

 

Second Appeal

In a letter dated January 31, 2020, the Applicant appealed FEMA’s determination regarding the Facility repairs and the DAC denial.[8]  The Applicant reiterates its first appeal arguments that it had pursued the maximum insurance claims.  It assert that it “made reasonable efforts to recover insurance proceeds for interior damage of the [Facility] that the [p]olicy actually covered.”[9]  The Applicant emphasizes that the additional damages were the result of bacteria and mold not covered by the insurance policy.

Furthermore, the Applicant includes supporting documentation for the contractor DAC claimed, but states that the force account DAC was still being tabulated.  The Applicant reiterated it should receive all claimed DAC.

 

Discussion

Insurance

Section 312 of The Robert T. Stafford Disaster Relief and Emergency Assistance Act prevents FEMA from duplicating benefits from any source, including insurance.[10]  FEMA is required to reduce the eligible cost of a grant by the amount of an applicant’s actual or anticipated insurance proceeds.[11]  Applicants must take reasonable efforts to recover insurance proceeds that they are entitled to receive from their insurer(s).[12] 

SCMIRF’s October 2015 inspection accounted for damage up to 4 feet from the ground. [13]  The Applicant’s engineers identified additional moisture-related damage above the 4-foot mark in a January 2016 estimate,[14] but the Applicant did not forward this information to its provider until October, 2017.  The Applicant’s insurance policy provides a six-month window to dispute insurance claims, starting when the insurance inspection report was completed in October 2015. It states, “[i]n the event of a disagreement between SCMIRF and the [Applicant] regarding determination of coverage and/or defense, it is agreed that the [Applicant] must appeal the coverage determination to the board of Trustees within six months of such determination.”[15]

Documentation in the Administrative Record indicates that the Applicant contacted SCMIRF in October 2017 to dispute the insurance amount paid.  The Applicant states it did not dispute its insurance proceeds prior to this because its policy excluded costs to repair damages caused by mold and bacteria, and believed therefore that SCMIRF would not have adjusted the amount paid in the original claim.  However, the insurance estimate developed by SCMIRF included allowances for applying anti-microbial agents to walls.[16]  In the March 2018 denial letter provided by SCMIRF, the provider does not address any mold or mildew damages as the basis for a denial and indicated that additional payments could have been made. It stated, “[h]ad the level of flooding been higher and/or the flood waters remained in the building for an extended period of time, additional wall space would have required removal but this was not the case.”[17]  

It was the Applicant’s responsibility to provide additional information and file a supplemental claim for any additional proceeds that may have been available.  It did not provide the additional damage information to the insurer after its engineer’s inspection, which provided results in January 2016.  The Applicant was aware of the disparity in the insurer’s estimate and the its own within the six-month timeframe allowed to dispute it.  Such a disparity in the damage descriptions and repair costs warranted that the Applicant contact its insurance provider and submit a claims adjustment.[18]  Instead, the Applicant disputed the matter two years after the inspection and 17 months after accepting insurance proceeds in March 2016.  FEMA finds the Applicant did not take reasonable efforts to recover insurance proceeds that they may have been entitled to receive from their insurer.  As such, FEMA properly reduced funding by the anticipated insurance proceeds. 

 

Direct Administrative Costs & Management Costs

Per Disaster Assistance Policy (DAP) 9525.9, Section 324 Management Costs and Direct Administrative Costs, FEMA may reimburse DAC that are properly tracked, documented, directly chargeable on a PW for a specific project and reasonable. [19]  Where an applicant uses a contractor to perform administrative services, FEMA will consider certain factors when evaluating the reasonableness of requested DAC, such as the method for contracting the services, the skill level of the people performing the activities, and the amount of time to perform an activity.[20]   

Indirect costs are defined as “costs a grantee or [applicant] incurs for a common or joint purpose benefiting more than one cost objective that are not readily assignable to the cost objectives specifically benefitted.”[21]  An applicant may not assign costs to a PA project as DAC if those costs constitute indirect costs or if similar costs incurred for the same purpose in like circumstances have been allocated to indirect costs.[22]  Travel and per diem costs for contractor employees that work on eligible PA projects are eligible as direct costs if such costs can be and are attributed to individual projects.[23]  While FEMA reimburses travel expenses that can be attributed to specific projects, travel expenses allocated to multiple PWs in proportion to the hours worked are not eligible as DAC.[24]

The Applicant has not provided any documentation to substantiate the force account DAC claimed.  Without documentation to support work claimed up to this point, DAC cannot be reviewed and/or substantiated.  Accordingly, the force account DAC amounting to $4,325.00 is not eligible.

Alternatively, the activities conducted by the contractors were charged directly to PW 457, and were based on the complexity of the task, between a project manager (rate of $182 per hour) and a consultant II (rate of $125 per hour).  The descriptions of the task charged, and hours spent on these tasks are reasonable due to the complexity of the project.  Therefore, the contractor costs amounting to $9,262.50 are eligible for reimbursement as DAC.    

Finally, the Applicant submitted invoices along with a spreadsheet showing how travel costs were calculated to this project.[25]  The spreadsheet shows that costs have been allocated to various projects, with a portion of the full costs being claimed on PW 457 based on the spreadsheet provided.[26]  These costs cannot be attributed specifically to PW 457 and therefore are indirect costs.  Accordingly, additional travel costs of $360.68 are not eligible DAC.

 

Conclusion

The Applicant did not take reasonable efforts to recover insurance proceeds that they may have been entitled to receive from their insurer and did not demonstrate the force account DAC are eligible.  Additionally, the travel and per diem costs are indirect costs and likewise ineligible.  However, the claimed costs for contractor-related DAC are tied to the grant administration of PW 457 and are eligible for reimbursement in the amount of $9,262.50.  Therefore, this appeal is partially granted.

 

[1]  The Applicant notes the documented date of inspection is inconsistent.  See Letter from City Manager, City of Sumter, to Dir. Recovery Div., FEMA, and Dir., S.C. Emergency Mgmt. Div., at 2 (May 24, 2019) [hereinafter Applicant RFI Response] (“The Inspection Report notes October 14 as the inspection date, while a subsequent letter from SCMIRF identifies the inspection date as October 8.”). 

[2] See Letter from Claims Manager, S.C. Mun. Ins. & Reserve Fund (SCMIRF), to City of Sumter, at 1 (Mar. 5, 2018). [hereinafter SCMIRF Denial Letter].

[3] Letter from Senior Claims Adjuster, SCMIRF, to City of Sumter (Nov. 7, 2017). [hereinafter November 2017 Clarification Letter].  

[4] This amount includes $4,325.00 for Force Account, and $10,216.68 for Contract DAC.

[5] See First Appeal Analysis, City of Sumter, FEMA-4241-DR-SC, at 3-4 (Dec. 3, 2019).

[6] Id. at 3 (“It appears the [Applicant] did not contact SCMIRF regarding additional damage or the need to alter its insurance claim until October 2017, approximately two years after the disaster event and 17 months after the Subrecipient accepted the insurance payment.”) (emphasis added). 

[7] Id. (citing Project Worksheet 421, Sumter, Version 1 (June 06, 2017)).

[8] Letter from City Manager, City of Sumter, to Assistant Adm’r, FEMA, through Dir. S.C. Emergency Mgmt. Div., at 1-2 (Jan. 31, 2020) [hereinafter Applicant Second Appeal].

[9] Id. at 10

[10] The Robert T. Stafford Disaster Relief and Emergency Assistance Act § 312, 42 U.S.C. § 5155 (2012).

[11] Title 44 Code of Federal Regulations (44 C.F.R.) § 206.252(c) (2015).

[12] FEMA Recovery Policy FP 206-086-1, Public Assistance Policy on Insurance, at 9 (June 29, 2015).

[13] SCMIRF Estimate (Mar. 11, 2016). 

[14] See Applicant RFI Response, at 5 (footnote omitted).

[15] See Insurance Policy, at 7. 

[16] See SCMIRF Estimate.

[17] See SCMIRF Denial Letter, at 1.

[18] FEMA consulted with an Insurance specialist to review the insurance inspection report, the Applicant’s engineer report, and the administrative record.  They determined that the disparity of the damage descriptions and repairs would have alarmed an insured to at least contact their insurance provider and allow them to conduct their claims adjustment of a supplemental claim.  It would be reasonable for an insured to at least make this effort as soon as they were aware and ensure they met their due diligence in claiming any additional coverage the insurer may have allowed.

[19] Disaster Assistance Policy (DAP) 9525.9, Section 324 Management Costs and Direct Administrative Costs, at 1, 5 (Mar. 12, 2008).  

[20] FEMA Second Appeal Analysis, Roman Cath. Bishop of Springfield, PW 249, FEMA-1994-DR-MA, at 10-12 (Apr. 4, 2019).

[21] DAP 9525.9, at 2.

[22] Id.

[23] Id. at 3

[24] FEMA Second Appeal Analysis, Univ. of Tex. Medical Branch, FEMA-1791-DR-TX, at 8 (Nov. 14, 2017).

[25] See Applicant Second Appeal, at 12 & n.12 (citing Exhibit 4, Invoices 4424557, 4426711, 4456455, and noting the accompanying spreadsheet breaks down the method in which DAC was calculated to this project). 

[26] For example, Donald Smith in Invoice 4426711 has Lodging for May 9, 2016 at a total cost of $315.00.  However, the spreadsheet provided by the Applicant only claimed $33.25 for PW 457.