Insurance

Appeal Brief

Summary Paragraph

In 2008, Hurricane Ike damaged more than 100 buildings on the Applicant’s campus, including Power Plant #515 (Facility).  FEMA prepared Project Worksheet (PW) 7021 to address damage to the roof, and the PW’s scope of work stated that to restore to predisaster condition, the entire roof would need to be replaced because the damaged areas could not be restored without removing a substantial portion of the roof.    After the Applicant completed work on the Facility, FEMA amended the PW to account for anticipated insurance proceeds by reducing the obligated amount.  The Applicant appealed FEMA’s decision to reduce funding based on anticipated insurance proceeds, rather than the actual proceeds received from a settlement, and requested FEMA fund the difference.  On first appeal, the Regional Administrator determined the Applicant was required to secure the maximum insurance settlement from its insurance company, but instead negotiated a global settlement for over 100 of its campus buildings and accepted the insurance company’s lower repair estimate for the Facility’s roof.  Based upon this fact, FEMA declined to fund the cost difference.  In its second appeal, the Applicant argues that FEMA’s 50 Percent Rule is distinguishable from the Applicant’s insurance policy, and notes that its insurance company does not allow the 50 percent consideration in determining whether to repair or replace the roof.

Authorities and Second Appeals

• Stafford Act §§ 312 and 406.
• 44 C.F.R. §§ 11.75, 206.226, and 206.250.
• DAFS 9580.3.
• RRP9525.3.
• PA Guide, at 37, 83, 120, 122.
• Aplington-Parkersburg Schools, FEMA-1763-DR-IA, at 6.
• Daytona State College, FEMA-1539-DR-FL, at 4.

Headnotes

• The Stafford Act provides that an applicant will not receive assistance with respect to any part of a loss as to which it has received financial assistance under any other program or from insurance. 
• Before receiving a PA award, an applicant must first seek out and maximize the potential benefits from applicable insurance policies.  FEMA assesses whether an insurance settlement appears proper in terms of the provisions of the insurance policy. 
  • The Applicant acted in a reasonably prudent manner in its effort to maximize insurance proceeds.  The insurance policy only covered the repair costs and the Applicant was not entitled to the cost of replacement.

Appeal Letter

Appeal Analysis

Background

On September 13, 2008, Hurricane Ike made landfall on the Texas coast, which resulted in high winds and heavy rains.  The hurricane damaged over 100 buildings on the University of Houston’s (Applicant) campus, including the roof of Power Plant #515 (Facility).  FEMA prepared Project Worksheet (PW) 7021 to address damage to the roof of the Applicant’s Facility.[1]  PW 7021’s scope of work (SOW) stated that the damaged portions of the roof could not be repaired without removing a substantial area of the entire roof.  Therefore, FEMA approved replacing the roof rather than conducting spot repairs.[2]  In accordance with this SOW, the Applicant replaced the roof at a cost of $412,050.00.  However, the Applicant’s insurance company determined that coverage on the roof was limited to estimated repair costs totaling $218,855.64.  The Applicant’s deductible for the Facility was $116,334.00, so it received actual insurance proceeds of $102,521.64.  All of the buildings on the Applicant’s campus that were damaged were covered under a single insurance policy.  After pursuing claims with its insurer, the Applicant eventually reached a global settlement, precluding it from pursuing supplemental claims or litigation over the proceeds received for the Facility’s roof.  FEMA subsequently determined that only the amount of the deductible was eligible for reimbursement, stating that insurance costs above the deductible were the responsibility of the insurance company and it was the Applicant’s responsibility to secure payment for them.  Accordingly, FEMA obligated $116,333.59.[3] 

First Appeal

The Applicant appealed FEMA’s determination on December 18, 2015, objecting to the Agency’s limitation of reimbursement to the amount of the deductible.  The Applicant explained that while it strongly disagreed with its insurer, the company determined that the roof could be repaired without replacement, and accordingly, limited payment to the lower repair cost estimate.  The Applicant contended that, due to the extensive damage to the campus as a whole, with over 100 buildings damaged, it was in its best interest to reach a global settlement with its insurance company.  The global settlement represented the best possible insurance recovery for the Applicant in light of the complexity of the insurance claim.  The Applicant asserted that it weighed the cost of litigating the payment it received for the damaged roof against jeopardizing the global settlement and concluded the settlement provided the best financial option.  On February 21, 2016, the Grantee transmitted the appeal to FEMA, concurred with the Applicant’s rationale and requested that FEMA review the insurance applications.

On April 29, 2016, FEMA issued a Request for Information (RFI) requesting copies of invoices and proof of payment equaling the total cost of the roof replacement and proof the Applicant attempted to secure payment for all costs above the deductible from the insurance company.  The Applicant replied on May 19, 2016 and asserted it secured payment for all costs above the insurance deductible by reaching a favorable settlement with the insurance company, including five PWs where FEMA had not anticipated coverage.  In addition, the Applicant provided invoices and final payments representing the total cost of the roof replacement, its insurance policy, allocation of insurance proceeds received broken down by PW, and final proof of loss documents.

On June 17, 2016, FEMA sent a final RFI to the Applicant requesting a professional engineering report to support the claim that to repair the roof it required replacement, a copy of any supplemental claims filed with the insurance company, any denials, and other relevant documentation to support the Applicant’s appeal.  The Applicant responded on July 13, 2016 and stated that, eight years after the event, it could not locate the 2008 engineering report.  The Applicant did not have separate policies for each building, and instead all damaged buildings (over 100 on campus) were included in the insurance review and settlement.  The Applicant explained it utilized the same SOW in its insurance claim for the Facility that FEMA used in preparing PW 7021.  The Applicant did not file or provide supplemental claim packages to its insurer.  The Applicant noted that the extent of the damages to more than 100 buildings on campus necessitated a settlement process that was fluid in nature.  Finally, the Applicant explained that in order to successfully reach a global settlement, some compromises had to be reached, including accepting the insurance company’s lower estimate for roof repairs.  Based on how the settlement was reached, the Applicant confirmed that the insurance company did not provide individual denial documentation details for each building.

The FEMA Region VI Regional Administrator (RA) denied the Applicant’s appeal in a decision dated November 2, 2016, finding ineligible the difference between the insurance company’s repair estimate and its actual costs incurred to repair the roof by replacement.  He noted that the Applicant failed to provide the professional engineer’s roof inspection report, disputing the insurance company’s roof inspection findings, or other documentation to demonstrate it disputed the insurance company’s estimate.  The RA stated that the Applicant was required to secure payment above the deductible from the insurance company but instead agreed to an insurance settlement that incorporated the insurance company’s lower repair estimate.  Consequently, the RA concluded that FEMA could not fund the difference. 

Second Appeal

On February 10, 2017, the Applicant appealed the RA’s decision and requests the $193,194.36 difference between its actual costs to restore the roof by replacement ($412,050.00) and the insurance company’s roof repair estimate ($218,855.64).[4]  The Applicant cites to FEMA’s policy noting that where it is prudent and more cost effective, individual segments of a building may be segregated when applying FEMA’s 50 Percent Rule.[5]  It argues in this instance, it meets those requirements.  The Applicant also distinguishes the purpose behind the insurance policy and FEMA’s 50 Percent Rule, noting the insurance policy only covered the lesser of the repair or replacement costs.  The Grantee concurred in a letter dated February 28, 2017. 

Discussion

Restoration of the Roof

The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) Section 406 authorized FEMA to “make contributions to a State or local government for the repair, restoration, reconstruction or replacement of a public facility damaged or destroyed by a major disaster.”[6]  Here, when FEMA prepared PW 7021 it determined that restoration of the roof to predisaster condition required replacement, given the nature and extent of damage.[7]  Accordingly, FEMA approved replacement of the roof.  As such, costs incurred by the Applicant in furtherance of the authorized SOW are eligible.

Insurance

The Stafford Act states that “no such person, business concern, or other entity will receive such assistance with respect to any part of such loss as to which he has received financial assistance under any other program or from insurance or any other source.”[8]  Accordingly, disaster assistance will not be provided for damages covered by insurance because assistance provided by FEMA is intended to supplement assistance from other sources. [9]  Thus, insurance proceeds should be an applicant’s first avenue for disaster assistance.[10]  Both the actual and anticipated insurance proceeds will be deducted from otherwise eligible costs.[11]  Before receiving a Public Assistance (PA) award, an applicant must first seek out and maximize the potential benefits from applicable insurance policies.[12]

Applicants must make reasonable efforts to recover insurance proceeds that they are entitled to receive from their insurer(s).[13]  As such, an applicant needs to provide information concerning insurance recoveries to FEMA, including copies of all applicable policies.[14]  FEMA reviews the insurance information and determines whether the settlement appears proper in terms of the policy provisions.  Uninsured losses, which include those losses not covered by an applicant’s insurance policy, are generally paid by FEMA.[15] 

The Applicant and insurance company reached a global settlement for more than 100 damaged buildings.  As part of the negotiated compromise, the Applicant accepted the insurance company’s lower repair estimate for the Facility’s roof despite its initial claim for roof replacement to avoid additional costs of prolonging and potentially having to litigate the disagreement.  The Applicant’s acceptance of a repair estimate lower than that claimed is not, by itself, demonstrative of imprudence.  The administrative record demonstrates that overall the Applicant pursued the receipt of insurance proceeds in a reasonably prudent manner, as evident from its proof of loss claiming the Facility’s roof replacement and the securing of insurance proceeds for other eligible facilities where no insurance proceeds were anticipated.[16]  Therefore, FEMA finds that in this instance the Applicant appropriately maximized the amount it could receive from its insurer.

Conclusion

FEMA’s initial approval to restore the Facility’s roof to its predisaster condition by replacement was appropriate based on FEMA’s damage assessment performed prior to approving the PW appropriate given the nature and extent of damage.  In addition, the Applicant acted in a reasonably prudent manner in its effort to maximize insurance proceeds.  As such, the appeal is granted and FEMA awards $193,194.77 in PA funding.