Public Entities: How Insurance and FEMA Work Together

Prior to Superstorm Sandy, several local governments and public structures had reduced insurance expenditures by either lowering their policy limits or reducing critical coverage sublimits in response to budget deficits. Consequently, in the aftermath of Sandy, many of these entities are facing far greater uninsured property losses than insured losses and are relying on assistance from the Federal Emergency Management Agency (FEMA) to pay for most of their storm-related damage. It is critical for public entities to understand the interplay between insurance and FEMA and to establish claim accounting protocols that satisfy the requirements of both.

As a condition for receiving FEMA public assistance, an applicant must obtain and maintain insurance to cover the facility (i.e., buildings, equipment, contents, and vehicles) for the specific hazard that caused the damage. Under Title 44 of the Code of Federal Regulations, if the damage was caused by any peril other than flood, the coverage commitment must be, at a minimum, equal to the eligible project costs indicated by FEMA’s “permanent work” project worksheets. If damages were caused by flood, the coverage required is based on FEMA recoveries, not on total eligible damages. A significant difference exists between the two, so understanding that coverage commitment levels are variable depending on the cause of loss is a critical first step in satisfying FEMA’s insurance purchase requirements.

FEMA regulations state that if a facility does not meet these insurance purchase requirements, the agency will not provide assistance for that facility in future disasters of the same type. Thus, it is vitally important that public entities verify that their property risk programs comply with FEMA’s insurance purchase requirements.

FEMA’s ‘Successive Disasters of the Same Type’ Regulations

FEMA’s approach to public entities that suffer property damage in successive disasters of the same type could result in drastic reductions of federal aid available to these entities. Public institutions located in high-risk areas prone to flooding, windstorms, or earthquakes may be most affected by FEMA’s position, as insurance coverage for these catastrophic perils may be costly and difficult to secure.

FEMA has stated that this policy is an effort to apply the Robert T. Stafford Disaster Relief and Emergency Response Act of 2000 uniformly and as Congress intended.

Insurance Requirements, Damages, and FEMA Claim Recovery

The significance of insurance protection, which forms the basis for calculating any recovery from FEMA, becomes apparent from the onset of a regional disaster. Anticipated or actual insurance proceeds are subtracted from FEMA’s total eligible damages to arrive at the starting point for FEMA recovery. FEMA considers itself only a means of last resort and requires entities sustaining damages in a disaster to pursue all available insurance recoveries as a condition for receiving its assistance.

For example, if a university sustained $10 million of property damage after a declared named windstorm loss but had only $6 million of insurance, FEMA’s recovery starting point would be $4 million, assuming that all damages are eligible for reimbursement. Although the applicant may receive less than $4 million from FEMA, the total eligible damages were calculated at $10 million, which is an important principle for insurance commitment purposes.

FEMA also enforces insurance purchase requirements to help prevent public entities from being underinsured for losses sustained in subsequent disaster events. Before FEMA funding is approved, an applicant must demonstrate that adequate insurance coverage will be obtained and maintained going forward. Thus, $10 million of insurance coverage specifically for the peril that caused the damages must be in place in order to initiate the recovery process. The insurance commitment is based on total eligible damages – not on actual FEMA recoveries.

Self-insurance may be used to satisfy FEMA’s “obtain and maintain” insurance requirements for state governments, but not for local governments and private nonprofit organizations. Those entities (except nonprofit organization whose buildings are located in a flood zone) are not required to purchase insurance prior to a disaster if they have not previously received disaster assistance from FEMA. The insurance requirements apply only to applicants that have received public assistance related to previous disasters, are based on eligible permanent work, and are calculated on a building-by-building basis.

Emergency work does not factor into FEMA’s insurance requirements, and the requirements do not apply to buildings that have eligible damages of less than $5,000.

Successive Disasters

Under FEMA’s insurance commitment regulations, what would happen if the same university suffered damages from another declared named windstorm event two years later? In such instances, FEMA may arrive on-site and request all pertinent insurance information and a detailed description of the damage sustained at each facility. Accuracy is critical in advising FEMA of past assistance and related insurance requirements so that the FEMA recovery process can be expedited and credibility can be established. FEMA deployed its National Emergency Management Information System (NEMIS) in 1998 to record such information.

In the example described in the previous section, in order to receive FEMA assistance for a subsequent loss of the same type, an entity’s total loss must exceed $10 million (the limit of insurance obtained after the first disaster). If a second, declared, named windstorm disaster caused $13 million in damages, FEMA’s starting point in calculating the recovery amount will be $3 million (the amount in excess of available insurance). Under this scenario, $13 million of flood insurance coverage would need to be obtained and maintained going forward.

If the university failed to carry the $10 million of insurance coverage, no FEMA assistance would be available for the second, same peril disaster. Inadequate insurance for the same peril damages will be considered ineligible for public assistance unless certification is granted by the state insurance commissioner and agreed to by FEMA waiving the insurance purchase requirements.

The insurance requirement may be waived only if the state insurance commissioner certifies that the type and extent of insurance required by FEMA is not reasonably available. For practical purposes, the premium costs for adequate insurance coverage requirements would have to represent a significant portion of the public entity’s global operating budget in order to justify this waiver ruling. FEMA then must approve the insurance commissioner’s findings before waiver authorization is granted.

During an entity’s first disaster, insurance deductibles are considered uninsured and eligible for public assistance. However, most deductibles are not recoverable after a second disaster of the same type.

For example, a university’s health and science building has stated values of $40 million; a deductible of 3% of stated values, or $1.2 million; and a blanket named windstorm policy for $50 million. If a hurricane caused $4 million of damages to the building and the disaster was declared, FEMA assistance would be available to cover the uninsured loss – the $1.2 million deductible. FEMA’s insurance purchase requirements would be met since the blanket windstorm coverage exceeds the total eligible damages ($50 million versus $4 million). No additional insurance coverage would be required.

However, the university decides for the next policy period to reduce premium costs and increase its deductible from 3% to 5% of stated values. If a hurricane caused $5 million of damages to the health and science building one year later, only $1 million of FEMA assistance would be available ($5 million of eligible damages less $4 million of prior eligible damages from prior FEMA assistance). In this instance, the university may recover $3 million from insurance ($5 million less the new 5% stated value deductible of $2 million). Although the university’s uninsured losses would technically be $2 million (the deductible or 5% of $4 million), only $1 million of assistance would be considered by FEMA.

Because FEMA provided prior disaster assistance at this location, only damages in excess of the total eligible damages from the first disaster are available for recoveries during a second, same peril disaster. The health and science building loss of $5 million would be funded using $3 million from insurance, $1 million from FEMA, and $1 million of self-funding sources (unrecoverable losses).

The bottom line is that FEMA will provide financial aid to reduce uninsured losses following a declared disaster. However, FEMA expects public entities to be accountable for subsequent disasters caused by the same peril. If a public entity has received FEMA assistance in the past, it should not rely on FEMA to cover the same types of damages in the future. Identifying FEMA’s insurance purchase requirements and verifying that those requirements are satisfied will allow public entities favorable FEMA recovery opportunities in subsequent disasters.