Insurance

Appeal Brief

Appeal Letter

Appeal Analysis

Background

 Prior to the declared event applicable to this appeal—Tropical Storm Fay in 2008—Hurricanes Frances and Jeanne caused wind driven water damage to the St. Lucie County School Board’s (Applicant) Administration Building (Facility) in September 2004.  As a result, in accordance with the Stafford Act, FEMA awarded Public Assistance (PA) funding conditioned on the requirement that the Applicant obtain and maintain an adequate wind insurance policy to cover future damage.^[1] 

From August 18 to September 12, 2008, the Applicant’s Facility was damaged due to flooding caused by Tropical Storm Fay and compounded by a nearby creek overflowing its banks.  FEMA prepared Project Worksheet (PW) 2013, Version 0, to document restoration work for the Facility.^[2]  The PW also documented that, for three days, the parking lot of the Facility had 16 inches to 2 feet of standing floodwater, which entered the Facility through the thresholds of the doors.  FEMA obligated $556,116.09, which represented the sum of estimated restoration costs and direct administrative costs, reduced by the amount of anticipated insurance proceeds from a blanket commercial policy and a National Flood Insurance Program (NFIP) policy.[3] 

In the PW, FEMA recognized that its regulations require a reduction in assistance by the amount of eligible damage to a facility from a prior similar disaster when the Applicant uses a blanket insurance policy to comply with its obtain and maintain insurance requirements for that facility.  However, FEMA chose not to apply this reduction because it determined that it had previously only imposed an insurance requirement “for the peril of Wind,” and did not require insurance on the Facility for the flood peril as documented in PW 2013.[4]  Although the PW did not define these perils, the Applicant’s commercial insurance policy defined a flood peril to mean “surface water, . . . and the rising (including the overflowing or breaking of boundaries) of . . . rivers, streams, harbors, and similar bodies of water,” and further defined “surface water” to mean “seepage, leekage, or influx of water (immediately derived from natural sources) through sidewalks, driveways, foundations, walls or floors.”^[5]

On June 7, 2017, FEMA deobligated $553,650.70 of PA funding in Version 1 of PW 2013, bringing total PA funding to $2,465.39.^[6]  The deobligated amount represents a prior loss reduction based on the amount of the eligible damage to the Facility caused by the September 2004 disasters.  In a reversal of its earlier determination, FEMA now applied this prior loss reduction “for the peril of Named Windstorm,” per 44 Code of Federal Regulations (44 C.F.R) § 206.253(b)(2) (2007), after determining that PW 2013 involved “Named Windstorm damages to [the] same facility.”^[7]

Further, the PW documented additional insurance adjustments, based on actual proceeds that did not result in changes to PA funding.  The Applicant received $1,078,990.80 in insurance proceeds from its blanket commercial insurance policy, after the insurer applied a deductible for the “peril of flood from [a] named storm” amounting to 5 percent of the replacement cost value of the Facility;[8] but, the Applicant did not receive $500,000.00 in proceeds from an NFIP policy, as anticipated, and FEMA could not locate any such policy.  Therefore, Version 1 of PW 2013 was originally written to obligate $500,000.00 due to actual insurance proceeds being less than anticipated.  However, because the Applicant’s Facility was located in a Special Flood Hazard Area, FEMA determined that the lack of an NFIP policy or otherwise adequate standard flood insurance policy triggered a mandatory reduction in assistance under section 406(d) of the Robert T. Stafford Disaster Relief and Emergency Assistance (Stafford) Act by the maximum amount of assistance that would have been available from such policy, which in this case was $500,000.00.[9]  Therefore, the $500,000.00 reduction for anticipated NFIP proceeds in Version 0 of the PW was replaced by a $500,000.00 reduction for the lack of an NFIP policy in Version 1, resulting in no further net obligation or de-obligation.^[10]

First Appeal   

In a first appeal letter dated September 1, 2017, and transmitted by the Florida Division of Emergency Management (Grantee) on September 27, 2017, the Applicant argued that the 44 C.F.R. § 206.253(b)(2) prior loss reduction was improper, because this Facility was not damaged in a disaster similar to the ones that caused the previous eligible damage to the Facility, as per the regulation’s requirement.^[11]  Instead, as recognized in Version 0 of the PW, the Facility was damaged by flooding in 2008, and wind in 2004.  The Applicant also argued that FEMA’s deobligation violated Stafford Act § 705(c), which prohibits FEMA from recovering payments made under the Stafford Act if reasonable and authorized by an approved agreement specifying the costs, and if the purpose of the grant was accomplished.^[12] 

On January 30, 2018, FEMA Region IV sent a Final Request for Information (RFI) which warned of a potential denial of the first appeal and asked the Applicant to provide supporting documentation that the appealed Facility was not damaged by a “named windstorm.”^[13]  In response, the Applicant argued that the type of damage caused by disasters should be taken into account in determining whether they are similar under 44 C.F.R. § 206.253(b)(2), and “[w]ind damage and flood damage are not ‘similar.’”^[14]  The Applicant conceded that Tropical Storm Fay, like Hurricanes Frances and Jeanne, was declared as a windstorm, but argued that a “windstorm” includes several different disaster elements such as wind, flood, and wind driven rain; accordingly, the Applicant contrasted Hurricanes Frances and Jeanne’s “strong and devastating winds” with Tropical Storm Fay’s “mass flooding.”[15] 

The Regional Administrator (RA) upheld FEMA’s initial decision in a First Appeal decision letter dated April 10, 2018.  In her analysis, the RA affirmed the prior loss reduction for a “similar future disaster” because, in both the prior (2004) and subsequent (2008) disasters, the Applicant’s “insurer characterized and reimbursed damages to the administrative complex as hurricane/windstorm losses” and “applied coverage associated with that peril category.”^[16]  Although the RA recognized that the Applicant’s “Statement of Loss [for the 2008 damage] documents [the] cause of loss at the administrative complex as ‘T.S. Fay – Flood,’” the RA also noted that the insurer “applie[d] . . . [a] deductible of 5 percent of the replacement cost value of each unit of insurance,” which the RA found to be consistent with the deductible applied for named hurricane/windstorm perils in the 2009 insurance policy cited by the RA, not the deductible applied for flooding perils in that same policy.  Thus, the RA concluded that “the insurer identified the peril as a hurricane/windstorm for coverage purposes.” ^[17]  The RA also determined that under FEMA policy the deobligation at issue on appeal was a project cost adjustment, for which Stafford Act section 705(c) does not apply.^[18]

Second Appeal

On August 7, 2018, FEMA received the Applicant’s second appeal letter, dated June 7, 2018, and a letter of support from the Grantee.  While the Applicant’s second appeal was identical to its first, the Grantee’s letter raises the additional argument that FEMA should not base its prior loss reduction on the insurance carrier’s classification of the damage, as the insurer “obviously erred” in applying its windstorm policy terms rather than its flooding terms.^[19]

Discussion

44 C.F.R. § 206.253(b)(2), which is contained in a section entitled “Insurance requirements for facilities damaged by disasters other than flood,” requires a reduction in PA funding by the amount of eligible damage sustained in a previous disaster when a facility is damaged in a “similar future disaster.”  To determine whether a facility has been damaged in a similar future disaster, FEMA examines the similarity of the disaster perils that caused the damage.^[20]   

Tropical Storm Fay, like Hurricanes Frances and Jeanne, was a named windstorm.  However, the eligible damage to the Facility from Hurricanes Frances and Jeanne in 2004 was caused by wind driven disaster elements.  In contrast, FEMA acknowledged in PW 2013, Version 0, that the Tropical Storm Fay damage to the Facility in 2008 was caused by flooding from heavy rain, an overflowing creek, and 16 inches to 2 feet of standing water in the parking lot that seeped into the building, and therefore, FEMA originally chose not to apply a § 206.253(b)(2) prior loss reduction for the separate peril of wind.[21]  The description of this damage in the PW is also consistent with the flood definition contained in the Applicant’s commercial insurance policy, which includes the overflowing of rivers, streams, and similar bodies of water, as well as the seepage of water from natural sources through driveways, foundations, walls, or floors.[22]  FEMA further categorized the Tropical Storm Fay disaster as a flood by first reducing assistance by anticipated flood insurance proceeds, and then preserving this reduction in Version 1 of the PW by citing to Stafford Act § 406(d)(1)-(2), which only applies if a facility is “damaged or destroyed . . . by flooding in a major disaster.”^[23]  Additionally, in a Statement of Loss, the Applicant’s insurance adjuster characterized the cause of loss as “flood,” and applied a deductible for the “peril of flood from [a] named storm,” consistent with the insurance policy’s deductible terms for flood perils, including a “Flood resulting from Named Storms.”^[24]

Although on first appeal FEMA recognized these Statement of Loss findings, FEMA then incorrectly cited to the Applicant’s 2009 insurance policy and accordingly determined that the insurer had in fact “applied coverage associated with [the] peril category” of “named hurricane/windstorm,” rather than “flood.” ^[25]  As FEMA noted, the Statement of Loss documents a 5 percent deductible for this claim, which is the deductible applied exclusively for named hurricane/windstorm perils in the 2009 policy.[26]  However, unlike the 2009 policy, the 2008 policy in effect at the time of the loss applies a 5 percent deductible for both flood and windstorm perils, and does not identify “named hurricanes/windstorms” as a separate peril category.^[27]  Therefore, FEMA erred in relying on the 2009 insurance policy terms for “named hurricane/windstorm” perils to justify the prior loss reduction. 

After taking into consideration the terms of the 2008 insurance policy rather than the 2009 policy initially relied on, FEMA finds that all of the evidence in the record, including the Statement of Loss and the description of the damage contained in the PW, supports the Applicant’s position that the 2004 and 2008 disasters that damaged the Applicant’s Facility were not “similar” to each other, under 44 C.F.R. 206.253(b)(2), and, thus, the sub-section’s mandatory prior loss reduction does not apply.

Conclusion

FEMA should not have reduced funding for the restoration of the Applicant’s Facility under 44 C.F.R. 206.253(b)(2) by the amount of eligible damage to that Facility in a prior disaster, because the flooding that caused the damage at issue on appeal was not similar to the hurricane wind perils that caused the previous damage.  Therefore, the Applicant’s appeal is granted.  Further, the Stafford Act § 705(c) issue is now moot, as FEMA is fully reinstating the deobligated amount of $553,650.70.