Posted on: 8/20/2008
PRIMA Position Statement: FEMA Deductible and Insurance Requirements
As an advocate for public entity risk management, PRIMA makes every effort to keep its members up-to-date on news and legislation effecting risk management in the public sector. This is one of the most valuable benefits of PRIMA membership.
In June 2007, the Federal Emergency Management Agency (FEMA) released a fact sheet, DAP9580.3, regarding deductible reimbursement and minimum insurance requirements of the Stafford Act. There were significant concerns about the impact FEMA's interpretation of the Stafford Act (as described in the 2007 fact sheet) would have on PRIMA's members. PRIMA acted by issuing a statement calling for FEMA to rescind the fact sheet and work with PRIMA and its members to address FEMA's concerns but retaining important support for public entities that face disasters.
PRIMA has been carefully monitoring developments surrounding these requirements.
On May 29, 2008, FEMA reissued Disaster Assistance Fact Sheet DAP9580.3 with minor changes. The fact sheet continues to raise serious concerns and accordingly, PRIMA hereby releases the following statement in response to FEMA's reissued reimbursement and deductible requirements:
All of PRIMA's members have exposures to natural catastrophes of varying degrees and many members deal with the specter and risk of floods. With these facts in mind, we feel compelled to respond to recent news from FEMA regarding deductible reimbursement and minimum insurance requirements.
FEMA's reissued document, final Disaster Assistance Fact Sheet DAP9580.3, contains two items that cause concern. Both items are found in the frequently asked questions (FAQ) section of the document. The first is Item 4, which answers questions concerning the reimbursement of deductibles. It states, "In the first disaster, FEMA deducts the total insurance proceeds received or anticipated from the total eligible cost of the project. The remaining amount is reimbursed, which usually includes deductibles, non-recoverable costs, or uninsurable losses. However, a deductible, up to and including the amount of eligible damages incurred in a previous disaster, is not eligible for the same facility in a subsequent disaster of the same type. The portion of a deductible in excess of the previous disaster damages is eligible."
In our judgment, this statement implies that if FEMA has previously reimbursed an entity for a deductible following a disaster (hurricane, earthquake, etc.), it would not repeat this process if the same type of disaster hits the entity again unless the deductible exceeds the entire prior loss and then only that portion of the deductible that exceeds the entire prior loss would be reimbursed.
We urge FEMA to be sensitive to the fact that many public entities have limited options when it comes to deductible levels, and typically elect those amounts and types of deductibles available based on their financial capacity, risk tolerance and (more often than not) what the insurance marketplace dictates to them as respect to the amounts and types of deductibles available. For example, in many catastrophe-prone areas of the country, insurance underwriters mandate percentage deductibles of 5 percent or 10 percent based on insured amounts per location for specified perils. A public entity has little choice but to accept these deductible terms if it intends to maintain insurance limits that are reasonable and adequate above these forced retention levels. It is important that the public entity members of PRIMA are able to continue to receive adequate funding from the public assistance programs of FEMA to help them recover financially from these often large forced retentions. Without adequate public assistance funding, some public entities may not be able to fully recover and the programs and services they provide to local economies will suffer as a result.
The second concern is Item 13 in the FAQs, which states, "Regardless of the National Flood Insurance Program (NFIP) maximum policy amount (currently $500,000), insurance is required at least up to the amount of eligible damage. Commercial flood insurance policies are readily available for this excess coverage." This interpretation has the potential to create severe financial challenges for public entities that could affect many of our members in adverse ways. Experienced risk managers have had difficulty locating excess flood coverage in catastrophe-prone areas. For many sections of the nation, there is no capacity, and whatever capacity there is comes at an exorbitant price.
PRIMA acknowledges that the federal government has legitimate concerns in not wanting to be the "insurer of first resort" when disaster strikes. When possible, it is preferable for the marketplace to address insurance coverage needs. PRIMA supports FEMA in the development of realistic insurance requirements. PRIMA encourages FEMA to do the following:
- Broadcast future fact sheets and bulletins consistent with the original intent and language of the Stafford Act that clearly communicate to grantees or subgrantees that they will be required to maintain insurance for facilities damaged by disasters other than floods and by flood, but only when it is reasonably available, adequate and necessary, and not require greater types and extent of insurance than are certified as reasonable by the appropriate state insurance commissioner responsible for regulation of such insurance.
- Immediately rescind the current position on excess flood insurance purchase requirements immediately, and to maintain a flood insurance requirement as a condition of receiving federal assistance that requires a grantee or subgrantee to obtain and maintain flood insurance in the amount of the eligible disaster assistance, or the maximum amounts available under the National Flood Insurance Program; but only when it is reasonably available, adequate, and necessary, and not require greater types and extent of flood insurance than are certified as reasonable by the appropriate state insurance commissioner responsible for regulation of such insurance.
- Invite increased input from public risk managers, insurance brokers, underwriters and other risk management professionals before setting policy and broadcasting fact sheets that could have unintended negative consequences for public entities.
PRIMA will continue to monitor and disseminate information regarding this situation and encourages its membership to do the same. PRIMA also extends an offer to FEMA to work with FEMA officials on an acceptable revision of this fact sheet and on future fact sheets prior to their issuance.
The Association's mission is to promote effective risk management in the public interest as an essential component of public administration. Headquartered in Alexandria, VA, PRIMA is the largest risk management association dedicated solely to the practice of risk management in the public sector. PRIMA's membership is made up of more than 2,000 entities in over 1,800 jurisdictions.
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