FEMA's Proposed New Insurance RequirementsMay Cause Hardship to Small Governments and Non-Profit Organizations

On February 23, 2000, the Federal Emergency Management Agency ("FEMA") published an Advanced Notice of Proposed Rulemaking ("Advanced Notice") for its Public Assistance Program. In the Advanced Notice, FEMA proposed that state and local governments and non-profit organizations be required to maintain a certain level of defined insurance on public or non-profit buildings ("building(s)") in order to receive disaster relief funding. Under the current Public Assistance Program, state and local governments and non-profit organizations are eligible for federal disaster assistance to rebuild or repair public buildings if: (1) the damaged uninsured building received FEMA assistance for a federally declared disaster; or (2) the damaged building previously received FEMA assistance from a federally declared disaster and was later insured at the time of a subsequent natural disaster.

Background on the Current Program
The Public Assistance Program has its origins in the Robert T. Stafford Disaster Relief and Emergency Assistance Act ("Stafford Act").1 The Stafford Act, 42 U.S.C. § 5121, et seq. (2000), authorizes the federal government to pay a substantial percentage2 of the costs necessary to repair or rebuild buildings damaged by a federally declared disaster. The Act also encourages public and non-profit entities to carry insurance and further requires the entities to obtain and maintain insurance as a condition, in most circumstances, to receiving assistance for a federally declared disaster. See 44 C.F.R. §206.253(b)(1) (2000). In interpreting the Stafford Act, the current Public Assistance Program requires a building to maintain property insurance after a disaster has occurred, thereby ensuring that the building will be covered in the event of future disasters. Id. In instances where a state government or non-profit organization has been the recipient of federal assistance, the Public Assistance Program, as currently drafted, requires the entity to purchase insurance based on the prior disaster loss history for each building. Id. Therefore, if the disaster-related damage to a building is less than the replacement cost of the building, the public entity or non-profit organization can currently underinsure the building (e.g., insure only to the amount of prior disaster related damage or repair) and yet still qualify for future federal assistance from FEMA.

Proposed FEMA Regs
FEMA's proposed changes for the Public Assistance Program would allow it to provide federal disaster assistance to public entities only if the buildings were insured at the time of the disaster. In addition, the new regulation would require public entities and non-profit organizations to carry a minimum level of insurance with a maximum cap for the deductible. FEMA's purpose in proposing this regulation is to encourage public buildings to carry insurance before the occurrence of federally declared disasters.

The proposed regulation would not only require that a building be insured but would stipulate that any federal assistance be contingent on the building maintaining an "adequate insurance" policy. In determining what constitutes "adequate insurance," FEMA has proposed various minimum insurance levels corresponding to the type of insurance. 3 FEMA contends that they do not intend to burden public buildings with overly high insurance premiums and, therefore, is considering instituting an insurance policy premium cap of $0.30 per $100.00 as it relates to the building replacement cost. In order to receive future assistance, FEMA would require each applicant to maintain property insurance in accordance with the new minimum level requirements.

The proposed regulation would also place a maximum level on deductible costs that FEMA would be required to fund. Therefore, depending on the type of insurance, the maximum deductible amount eligible for the Public Assistance program will vary among public entities and non-profit organizations.4 FEMA asserts that these maximum deductibles reflect common insurance industry practices and were proposed to balance cost considerations with a minimum standard of sound insurance coverage.

Impact of Proposed Guidelines
FEMA's proposed changes in the Public Assistance Program are of particular interest to states or territories prone to hurricanes, flooding or earthquakes. The threat of devastation due to hurricanes is particularly critical to states in the southeastern seaboard and the United States territories in the Caribbean. The impact of FEMA's proposed changes will have a greater burden on small governments or small private non-profit organizations. The likely increase in insurance premiums for many of the small governments will ultimately prove cost prohibitive, particularly in light of the caps to be placed on the insurance policy deductible levels. It therefore follows that special programs must be implemented to address the needs of disaster prone small governments or small private non-profit organizations. Premium financing alternatives unfortunately have proven unsuccessful due to the harsh penalties for late payment found in many premium financing agreements.

One of FEMA's goals, in proposing the new insurance requirements for the Public Assistance Program, is to encourage complete insurance coverage for public buildings. One of the problems, however, is that insurance companies have historically been slow to satisfy the indemnity obligations when claims are reported. For example, Los Angeles county was required to sue its insurers to resolve the damage issues it suffered in the January 17, 1994 Northridge earthquake. In the Caribbean, federal aid has historically been prompt, however, delays in federal funding for hurricane related repairs have frequently occurred due in large part to loss adjustment disputes between the carrier and the insured government. Such delays in the settlement of insurance claims have a direct impact on the rebuilding process and psyche of the population affected by the disaster.

Part of the problem in adjusting losses for events requiring federal aid is that the damage estimates for FEMA funding are based largely on Disaster Survey Reports ("DSRs") while the insurance companies historically rely upon traditional claims adjusting methods. To require state and territorial governments, prone to natural disasters, to meet the burden of an increase in insurance premiums, without addressing the interplay between the public and private loss adjustment procedures, will create a situation that fails to meet FEMA's insurance goals.

FEMA's proposed regulation(s) will take into account the public's response to the recent Advanced Notice. One of the concerns that FEMA is aware of, but has not yet proposed a final solution to, is the cost of the insurance premium to certain distressed public or non-profit entities. Faced with the prospects of future federally declared disasters, small governments, territories and small non-profit organizations may find compliance to the proposed new insurance guidelines a difficult financial obligation to meet.

H. Marc Tepper is a shareholder with the Philadelphia office of the law firm of Buchanan Ingersoll. He is a member of the firm's Corporate Insurance Group and the firm's Litigation Group, and has represented the Government of the United States Virgin Islands in disaster-relief related matters involving contract negotiations, insurance coverage and construction.

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