The Intersection of FEMA and Insurance Claim Reviews

This article reviews elements of the FEMA review and grant process under the PA Program that are relevant to those who participate in insurance claim presentation and review, and identifies opportunities for more effective information exchange between the two processes.

Scope of the Public Assistance Grant Program

The scope of the FEMA PA Program is broad. Those authorized to receive assistance from FEMA under the PA Program encompass a wide range of potential insured entities, including: state and local governments at all levels; private nonprofit organizations including ' but not limited to ' schools, hospitals, utilities, museums and libraries; and Native American tribes. The types of property eligible include virtually all property that is in active use by an eligible applicant and within a declared disaster area. Costs eligible may include both the cost of permanent work to repair damaged facilities as well as emergency work to include debris removal and “emergency protective work” ' whether before the loss (e.g., sandbagging to prevent flooding), during the loss, or after the loss (e.g., temporarily boarding up windows broken during a storm). These points are set out in the Stafford Act and implementing regulations contained in 44 C.F.R. ' 206 (2009).

Against the backdrop of the PA Program's broad scope, the number of disaster declarations has been on the rise in recent years. For disasters declared between 2007 and 2010, FEMA has reviewed nearly 200,000 grant projects under the PA program, totaling more than $10 billion.

The FEMA Project Worksheet Framework

The PA Program provides for a multi-part process by which applicants submit requests for grant funds, and FEMA reviews those applications. Although there are guidelines to standardize elements of the process, the process also is designed to permit flexibility. In practice, the process for application and review can vary widely from region to region, and event to event. However, a consistent feature at the core of the process is the Project Worksheet (“PW”).

FEMA describes a PW as: “the form used to document the scope of work and cost estimate for a project. This form supplies FEMA with the information necessary to approve the scope of work and itemized cost estimate prior to funding.” See www.fema.gov/public-assistance-frequently-asked-questions#Q15 (“What is a Project Worksheet?”).

In this context, a “project” is any logical method of performing work required as a result of a declared disaster event. Because there is no standardized definition of what constitutes a “project,” PWs may be organized to focus on only a specific form of expenditure (e.g., debris removal) at a particular facility, or, alternately, to include damage sustained at more than one facility (e.g., a temporary location set up in response to damage sustained at multiple buildings).

An applicant may have dozens or hundreds of projects associated with a single disaster event. And, although the expectation is that PWs will be generated promptly around the time of the insured event, in some instances new PWs are opened months or even years later. To assist in tracking all this, each PW is assigned its own unique reference number.

FEMA guidelines describe a standard format for providing the required elements of information in a PW, such as the project location, damage description, scope of work (including the percentage of work completed), costs (actual and/or estimated), documentation, and insurance information. See www.fema.gov/pdf/government/grant/pa/9580_5.pdf (Fact Sheet ' Elements of a Project Worksheet). In practice, information is not consistently entered in the manner described in FEMA guidelines. Comments from multiple authors (including representatives of both FEMA and the applicant) may be included in a single section, and FEMA's existing technology systems do not effectively support efforts to standardize data and make it readily searchable. See generally, Dept. of Homeland Sec., Office of Inspector General, Federal Emergency Management Agency Faces Challenges in Modernizing Information Technology, OIG-11-69 (April 2011).

Generally, when the PW is first created, it is referenced using its unique identifying number, plus a designation of version “0″ and “proposed.” When FEMA approves a proposed PW, a separate document is created with the same unique identifying number and an “approved” designation. Through this separate document, FEMA pledges funds to the applicant ' “obligates” funds in FEMA parlance ' which may then be spent and reimbursed in accordance with the Scope of Work described in the approved worksheet.

If, as the project develops, there are changes to the Scope of Work or other changes in the project, subsequent versions of the PW may be created ' i.e., version 1, version 2, etc. There are no fixed criteria for when a subsequent version of a PW must be created. Moreover, where warranted, FEMA may “de-obligate” funds from a project. For example, if funds are obligated for work that is later determined to be covered by insurance, or if there is a salvage recovery that reduces the estimated cost of a project, FEMA must de-obligate the funds from the project. 44 C.F.R. ' 13.51-13.52 (2012). See also, e.g., Public Util. Dist. No. 1 of Snohomish County, Washington v. FEMA, 371 F.3d 701 (9th Cir. 2004) (rejecting a challenge to FEMA's decision to de-obligate funds based on a post-grant-award audit).

Exchange of Facts Between FEMA and Insurance Claim Review Processes

Although the FEMA review process outlined above may be foreign to those involved in the process of presenting, investigating and reviewing insurance claims, there is a shared goal between the two processes: analyzing the damage sustained to determine the cost necessary to repair or replace the damaged property ' generally through the use of estimates at the outset and, as work is performed, through confirmation of actual expenditures.

To foster efficiency, then, there would be information-sharing between the two processes from the outset, focused on facts with respect to the property damage. The obvious conduit for such exchanges is the entity that is directly involved in presenting information to both FEMA and insurers: the “applicant/insured.”

Information Flow to Insurers

A proactive insured/applicant will identify at the outset those losses which are likely to entail both an insurance claim and an application to FEMA. For example, it may be prudent to consider how properties are insured when working with FEMA to define “projects” and create PWs, to set up a structure that facilitates cross-referencing from the outset.

As the processes move forward, those involved in the insurance claim presentation and review should recognize that a key step in effective information-transfer is for the insured/applicant to develop a complete and accurate index of the unique reference numbers for the PWs which also addresses losses submitted to insurers. Once such an index is in place, the insured/applicant should revisit the index periodically, to confirm that it is accurate and updated ' e.g., that it adds any new PWs generated.

The insured/applicant should also make its PWs available to insurers from the outset, so that if FEMA's review diverges from insurers', all involved parties can assess and understand why that is so. When the PWs are not timely disclosed to insurers, that lack of transparency tends to create inefficiency and may lead to unnecessary confusion. To the extent that an insured/applicant refuses to provide timely or complete access to those PWs with information relevant to the insurance claim, insurers may wish to consider issuing a request directly to FEMA under the Freedom of Information Act.

Information Flow to FEMA

Under the PA Program, an applicant/insured is obligated to provide information to FEMA regarding the insurance it has in place. Moreover, FEMA's guidelines explicitly invite the applicant/insured to make insurers' review and assessment of damages and costs to repair a part of, or cross-referenced in, the PW. See www.fema.gov/pdf/government/grant/pa/9580_5.pdf (Fact Sheet ' Elements of a Project Worksheet). Information to be provided in the PW's Insurance Information section “may include the Detailed Adjuster's Report, Statement of Loss, binders, settlement offers, insurance estimates, technical/engineering reports prepared by insurance company or adjuster, etc.” Id. at 3.

In practice, however, an applicant/insured may be disinclined to share with FEMA preliminary assessments of an adjuster or insurer which show that claimed amounts are overstated, and FEMA does not consistently require applicants to do so. When such information is not timely provided to FEMA, both FEMA's expectations and those of the applicant/insured may become skewed, setting up later disputes.

To address these concerns (among others), steps have been recommended for FEMA to implement expedited insurance assessments by FEMA personnel, quality control procedures, and improved databases to better capture insurance information. See Dept. of Homeland Sec., Office of Inspector General, FEMA's Process for Tracking Public Assistance Insurance Requirements, OIG-12-18, (Dec. 2011) at 2.

A proactive applicant/insured will also work affirmatively to ensure that FEMA has timely, accurate information regarding insurers' and adjusters' assessment of factual issues, concerning, e.g., the scope of damage, which are of direct relevance to FEMA's own review for PA Program eligibility. Though in some instances the facts may show that the amount eligible for insurance or grant under the PA Program is less than what was originally claimed, sharing such information early and openly will generally reduce uncertainty and transaction costs for the applicant/insured and all others involved, and should create conditions where FEMA can move quickly to authorize PWs, fully obligate all eligible funds, and confirm the amounts obligated through file-closing procedures.

Where FEMA and Insurance Claim Review Diverge

Although an exchange of information can be useful, there comes a point when the FEMA grant review and the insurance claim review will naturally diverge. Although the processes begin with a largely overlapping set of facts, there are a number of differences between FEMA assessment of eligibility for a grant under the PA Program and insurers' review to determine whether a claim falls within the coverage set out in the contracts of insurance.

First, there are several categories of loss which, though not insured, generally are deemed eligible by FEMA for grant dollars. For example, an insurance deductible amount which (by definition) is not paid by insurers generally would be considered eligible by FEMA. Similarly, certain perils, such as flood, and certain types of costs, such as debris removal, may be excluded or sublimited in insurance policies; the excluded amounts or those in excess of the applicable sublimits generally would be considered eligible by FEMA if spent on otherwise qualifying work. (Though not the focus of this article, it is worth noting the disincentives to insure broadly that are created by FEMA's policies in this regard ' see, e.g., OIG-12-18 at 12-14.)

Second, and conversely, there are certain types of coverage extensions common in commercial first-party property insurance ' such as business interruption and certain other forms of time element coverage ' that are not eligible for grant dollars under the FEMA-administered PA Program.

Third, there are categories of expenditures that may be considered by both insurers and FEMA, but that insurers and FEMA tend to categorize differently. For example, FEMA treats “emergency protective work” as an eligible category of expenditures, whether before the loss, during the loss, or after the loss. Although property insurance policies may cover elements of such expenditures, they tend to categorize them differently, and policy provisions must be reviewed to determine how insurance will respond to claims for preventative work (or “sue and labor”), extra expenses, expenses to reduce loss, etc., including consideration of any sublimits applicable to those coverages.

Fourth, differences exist in the measurements used by FEMA versus those used by insurers in assessing property damage. Property insurance policies may have specific contract language that governs the basis for recovery ' e.g., actual cash value of the property versus replacement cost value, and whether “code upgrade” work necessary to comply with building codes in force is insured. FEMA looks at measurement of property damage through a different prism. Of particular note is the so-called FEMA “50% Rule.” Under regulations applied by FEMA in its review of grant applications, “[a] facility is considered repairable when disaster damages do not exceed 50 percent of the cost of replacing a facility to its predisaster condition, and it is feasible to repair the facility so that it can perform the function for which it was being used as well as it did immediately prior to the disaster.” 44 C.F.R. ' 206.226(f)(1). If a facility is not “repairable” under this 50% rule, the cost of replacing the facility is deemed by FEMA to be eligible for grant assistance under the PA Program.

So, although information-exchange regarding underlying facts can be an avenue to increase efficiency for the applicant/insured, as well as FEMA and insurers, all involved must acknowledge that there are key differences in how FEMA and insurers must review and respond to that common set of underlying facts.

Coordination to Facilitate Timely File-Close-Out

As the FEMA and insurance claim processes move forward toward completion, good information flow, via the applicant/insured, once again becomes important to permit timely file-closing.

The FEMA review process is governed by regulations implementing the Stafford Act, which call for even the largest projects to be completed within 18 months, absent unusual or extenuating circumstances. 44 C.F.R. ' 206.204. (And, as the Stafford Act is directed at disaster recovery, disaster impact generally would not constitute an unusual or extenuating circumstance.) Among other things, this 18-month time frame is designed to avoid delays in closing out the FEMA review process, as such delays increase administrative costs to FEMA and prevent it from using unliquidated obligation balances for other purposes. See, e.g., Dept. of Homeland Sec., Office of Inspector General, Opportunities to Improve FEMA's Disaster Closeout Process, OIG-10-49, (Jan. 2010). However, in practice, “[p]rojects routinely stay open for years before insurance verification of final grant reconciliation occurs,” and a sample of 19 recent reviews conducted by the Department of Homeland Security, Office of Inspector General found that the average time from disaster declaration to audit was five years. OIG-12-18, at 5. Among the steps recommended to improve that performance are a set of revised and streamlined procedures relating to FEMA's assessment of available insurance proceeds, Id. at 6-7; see also OIG-10-49. Certainly, as insurance payments are made, that information should be timely communicated to FEMA by the applicant insured, together with information regarding the basis for the payment.

The time frame for the insurance claim review process is generally driven by practical and commercial concerns, and elements of the process may be subject to state regulations. However, certain applicant/insured entities may decline to enter into a final resolution of their insurance claim before FEMA has completed its final audit. The concern cited for deferring resolution is that FEMA may conclude in its final audit that the amount of insurance FEMA views as “available” was greater than what was obtained. Such concerns are unwarranted where the applicant/insured has acted in a commercially reasonable manner in reaching an agreement with its insurers. As the Ninth Circuit Court of Appeals confirms in an opinion citing the text of the Stafford Act, legislative history and broad public policy considerations, the PA Program requires only that the applicant/insured act in a “commercially reasonable” manner with regard to any resolution of its insurance claim. State of Hawaii ex rel. Atty. Gen. v. FEMA, 294 F.3d 1152 (9th Cir. 2002). Under this authority, where an insured makes a commercially reasonable choice to resolve a disputed claim with insurers ' even if that resolution entails a settlement that may reflect compromise on the part of the insured based on the cost, time and risk associated with attempting to pursue disputed insurance amounts ' FEMA must respect that decision, and honor the insurance proceeds obtained as the amount “available” in making its own calculations. Id. Of course, disputes will be minimized where the applicant/insured is proactive in timely communicating with both FEMA and insurers on these points.

Catherine A. Mondell, a member of this newsletter's Board of Editors, is a partner at Ropes & Gray LLP, and has handled a wide range of complex insurance coverage disputes and other commercial litigation matters. She has litigated in multiple jurisdictions cases involving first-party property claims with substantial time element and contingent time element components.

Increasingly, insureds, insurers, adjustment teams, claims consultants and others involved in the process of analyzing property insurance claims for damage sustained during catastrophic events must recognize the potential for their work to intersect with that of FEMA, the Federal Emergency Management Agency.

FEMA is authorized, under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. ' 5121 et seq. (2007) (the “Stafford Act”), to provide funds through a Public Assistance Grant Program (“PA Program”) to aid communities in responding to and recovering from major disasters or emergencies. The intent is for FEMA to promptly reimburse authorized applicants for certain types of loss arising from property damage, to the extent those losses are not insured or otherwise recoverable from other sources, such as through a salvage credit.

The structure of the PA Program dictates that FEMA's review of applications for grant funding must move forward alongside the typical insurance claim review process, and that the two processes must intersect at certain points, as FEMA seeks to confirm that grant amounts sought are for uninsured losses. However, the flow of information between participants in these two side-by-side processes often is not as robust as it could be to take advantage of potential efficiencies. And, when information is shared, important differences in substance or timing between FEMA's review and the insurance claim review are sometimes overlooked, leading to unnecessary confusion.

This article reviews elements of the FEMA review and grant process under the PA Program that are relevant to those who participate in insurance claim presentation and review, and identifies opportunities for more effective information exchange between the two processes.

Scope of the Public Assistance Grant Program

The scope of the FEMA PA Program is broad. Those authorized to receive assistance from FEMA under the PA Program encompass a wide range of potential insured entities, including: state and local governments at all levels; private nonprofit organizations including ' but not limited to ' schools, hospitals, utilities, museums and libraries; and Native American tribes. The types of property eligible include virtually all property that is in active use by an eligible applicant and within a declared disaster area. Costs eligible may include both the cost of permanent work to repair damaged facilities as well as emergency work to include debris removal and “emergency protective work” ' whether before the loss (e.g., sandbagging to prevent flooding), during the loss, or after the loss (e.g., temporarily boarding up windows broken during a storm). These points are set out in the Stafford Act and implementing regulations contained in 44 C.F.R. ' 206 (2009).

Against the backdrop of the PA Program's broad scope, the number of disaster declarations has been on the rise in recent years. For disasters declared between 2007 and 2010, FEMA has reviewed nearly 200,000 grant projects under the PA program, totaling more than $10 billion.

The FEMA Project Worksheet Framework

The PA Program provides for a multi-part process by which applicants submit requests for grant funds, and FEMA reviews those applications. Although there are guidelines to standardize elements of the process, the process also is designed to permit flexibility. In practice, the process for application and review can vary widely from region to region, and event to event. However, a consistent feature at the core of the process is the Project Worksheet (“PW”).

FEMA describes a PW as: “the form used to document the scope of work and cost estimate for a project. This form supplies FEMA with the information necessary to approve the scope of work and itemized cost estimate prior to funding.” See www.fema.gov/public-assistance-frequently-asked-questions#Q15 (“What is a Project Worksheet?”).

In this context, a “project” is any logical method of performing work required as a result of a declared disaster event. Because there is no standardized definition of what constitutes a “project,” PWs may be organized to focus on only a specific form of expenditure (e.g., debris removal) at a particular facility, or, alternately, to include damage sustained at more than one facility (e.g., a temporary location set up in response to damage sustained at multiple buildings).

An applicant may have dozens or hundreds of projects associated with a single disaster event. And, although the expectation is that PWs will be generated promptly around the time of the insured event, in some instances new PWs are opened months or even years later. To assist in tracking all this, each PW is assigned its own unique reference number.

FEMA guidelines describe a standard format for providing the required elements of information in a PW, such as the project location, damage description, scope of work (including the percentage of work completed), costs (actual and/or estimated), documentation, and insurance information. See www.fema.gov/pdf/government/grant/pa/9580_5.pdf (Fact Sheet ' Elements of a Project Worksheet). In practice, information is not consistently entered in the manner described in FEMA guidelines. Comments from multiple authors (including representatives of both FEMA and the applicant) may be included in a single section, and FEMA's existing technology systems do not effectively support efforts to standardize data and make it readily searchable. See generally, Dept. of Homeland Sec., Office of Inspector General, Federal Emergency Management Agency Faces Challenges in Modernizing Information Technology, OIG-11-69 (April 2011).

Generally, when the PW is first created, it is referenced using its unique identifying number, plus a designation of version “0″ and “proposed.” When FEMA approves a proposed PW, a separate document is created with the same unique identifying number and an “approved” designation. Through this separate document, FEMA pledges funds to the applicant ' “obligates” funds in FEMA parlance ' which may then be spent and reimbursed in accordance with the Scope of Work described in the approved worksheet.

If, as the project develops, there are changes to the Scope of Work or other changes in the project, subsequent versions of the PW may be created ' i.e., version 1, version 2, etc. There are no fixed criteria for when a subsequent version of a PW must be created. Moreover, where warranted, FEMA may “de-obligate” funds from a project. For example, if funds are obligated for work that is later determined to be covered by insurance, or if there is a salvage recovery that reduces the estimated cost of a project, FEMA must de-obligate the funds from the project. 44 C.F.R. ' 13.51-13.52 (2012). See also, e.g. , Public Util. Dist. No. 1 of Snohomish County, Washington v. FEMA , 371 F.3d 701 (9th Cir. 2004) (rejecting a challenge to FEMA's decision to de-obligate funds based on a post-grant-award audit).

Exchange of Facts Between FEMA and Insurance Claim Review Processes

Although the FEMA review process outlined above may be foreign to those involved in the process of presenting, investigating and reviewing insurance claims, there is a shared goal between the two processes: analyzing the damage sustained to determine the cost necessary to repair or replace the damaged property ' generally through the use of estimates at the outset and, as work is performed, through confirmation of actual expenditures.

To foster efficiency, then, there would be information-sharing between the two processes from the outset, focused on facts with respect to the property damage. The obvious conduit for such exchanges is the entity that is directly involved in presenting information to both FEMA and insurers: the “applicant/insured.”

Information Flow to Insurers

A proactive insured/applicant will identify at the outset those losses which are likely to entail both an insurance claim and an application to FEMA. For example, it may be prudent to consider how properties are insured when working with FEMA to define “projects” and create PWs, to set up a structure that facilitates cross-referencing from the outset.

As the processes move forward, those involved in the insurance claim presentation and review should recognize that a key step in effective information-transfer is for the insured/applicant to develop a complete and accurate index of the unique reference numbers for the PWs which also addresses losses submitted to insurers. Once such an index is in place, the insured/applicant should revisit the index periodically, to confirm that it is accurate and updated ' e.g., that it adds any new PWs generated.

The insured/applicant should also make its PWs available to insurers from the outset, so that if FEMA's review diverges from insurers', all involved parties can assess and understand why that is so. When the PWs are not timely disclosed to insurers, that lack of transparency tends to create inefficiency and may lead to unnecessary confusion. To the extent that an insured/applicant refuses to provide timely or complete access to those PWs with information relevant to the insurance claim, insurers may wish to consider issuing a request directly to FEMA under the Freedom of Information Act.

Information Flow to FEMA

Under the PA Program, an applicant/insured is obligated to provide information to FEMA regarding the insurance it has in place. Moreover, FEMA's guidelines explicitly invite the applicant/insured to make insurers' review and assessment of damages and costs to repair a part of, or cross-referenced in, the PW. See www.fema.gov/pdf/government/grant/pa/9580_5.pdf (Fact Sheet ' Elements of a Project Worksheet). Information to be provided in the PW's Insurance Information section “may include the Detailed Adjuster's Report, Statement of Loss, binders, settlement offers, insurance estimates, technical/engineering reports prepared by insurance company or adjuster, etc.” Id. at 3.

In practice, however, an applicant/insured may be disinclined to share with FEMA preliminary assessments of an adjuster or insurer which show that claimed amounts are overstated, and FEMA does not consistently require applicants to do so. When such information is not timely provided to FEMA, both FEMA's expectations and those of the applicant/insured may become skewed, setting up later disputes.

To address these concerns (among others), steps have been recommended for FEMA to implement expedited insurance assessments by FEMA personnel, quality control procedures, and improved databases to better capture insurance information. See Dept. of Homeland Sec., Office of Inspector General, FEMA's Process for Tracking Public Assistance Insurance Requirements, OIG-12-18, (Dec. 2011) at 2.

A proactive applicant/insured will also work affirmatively to ensure that FEMA has timely, accurate information regarding insurers' and adjusters' assessment of factual issues, concerning, e.g., the scope of damage, which are of direct relevance to FEMA's own review for PA Program eligibility. Though in some instances the facts may show that the amount eligible for insurance or grant under the PA Program is less than what was originally claimed, sharing such information early and openly will generally reduce uncertainty and transaction costs for the applicant/insured and all others involved, and should create conditions where FEMA can move quickly to authorize PWs, fully obligate all eligible funds, and confirm the amounts obligated through file-closing procedures.

Where FEMA and Insurance Claim Review Diverge

Although an exchange of information can be useful, there comes a point when the FEMA grant review and the insurance claim review will naturally diverge. Although the processes begin with a largely overlapping set of facts, there are a number of differences between FEMA assessment of eligibility for a grant under the PA Program and insurers' review to determine whether a claim falls within the coverage set out in the contracts of insurance.

First, there are several categories of loss which, though not insured, generally are deemed eligible by FEMA for grant dollars. For example, an insurance deductible amount which (by definition) is not paid by insurers generally would be considered eligible by FEMA. Similarly, certain perils, such as flood, and certain types of costs, such as debris removal, may be excluded or sublimited in insurance policies; the excluded amounts or those in excess of the applicable sublimits generally would be considered eligible by FEMA if spent on otherwise qualifying work. (Though not the focus of this article, it is worth noting the disincentives to insure broadly that are created by FEMA's policies in this regard ' see, e.g., OIG-12-18 at 12-14.)

Second, and conversely, there are certain types of coverage extensions common in commercial first-party property insurance ' such as business interruption and certain other forms of time element coverage ' that are not eligible for grant dollars under the FEMA-administered PA Program.

Third, there are categories of expenditures that may be considered by both insurers and FEMA, but that insurers and FEMA tend to categorize differently. For example, FEMA treats “emergency protective work” as an eligible category of expenditures, whether before the loss, during the loss, or after the loss. Although property insurance policies may cover elements of such expenditures, they tend to categorize them differently, and policy provisions must be reviewed to determine how insurance will respond to claims for preventative work (or “sue and labor”), extra expenses, expenses to reduce loss, etc., including consideration of any sublimits applicable to those coverages.

Fourth, differences exist in the measurements used by FEMA versus those used by insurers in assessing property damage. Property insurance policies may have specific contract language that governs the basis for recovery ' e.g., actual cash value of the property versus replacement cost value, and whether “code upgrade” work necessary to comply with building codes in force is insured. FEMA looks at measurement of property damage through a different prism. Of particular note is the so-called FEMA “50% Rule.” Under regulations applied by FEMA in its review of grant applications, “[a] facility is considered repairable when disaster damages do not exceed 50 percent of the cost of replacing a facility to its predisaster condition, and it is feasible to repair the facility so that it can perform the function for which it was being used as well as it did immediately prior to the disaster.” 44 C.F.R. ' 206.226(f)(1). If a facility is not “repairable” under this 50% rule, the cost of replacing the facility is deemed by FEMA to be eligible for grant assistance under the PA Program.

So, although information-exchange regarding underlying facts can be an avenue to increase efficiency for the applicant/insured, as well as FEMA and insurers, all involved must acknowledge that there are key differences in how FEMA and insurers must review and respond to that common set of underlying facts.

Coordination to Facilitate Timely File-Close-Out

As the FEMA and insurance claim processes move forward toward completion, good information flow, via the applicant/insured, once again becomes important to permit timely file-closing.

The FEMA review process is governed by regulations implementing the Stafford Act, which call for even the largest projects to be completed within 18 months, absent unusual or extenuating circumstances. 44 C.F.R. ' 206.204. (And, as the Stafford Act is directed at disaster recovery, disaster impact generally would not constitute an unusual or extenuating circumstance.) Among other things, this 18-month time frame is designed to avoid delays in closing out the FEMA review process, as such delays increase administrative costs to FEMA and prevent it from using unliquidated obligation balances for other purposes. See, e.g., Dept. of Homeland Sec., Office of Inspector General, Opportunities to Improve FEMA's Disaster Closeout Process, OIG-10-49, (Jan. 2010). However, in practice, “[p]rojects routinely stay open for years before insurance verification of final grant reconciliation occurs,” and a sample of 19 recent reviews conducted by the Department of Homeland Security, Office of Inspector General found that the average time from disaster declaration to audit was five years. OIG-12-18, at 5. Among the steps recommended to improve that performance are a set of revised and streamlined procedures relating to FEMA's assessment of available insurance proceeds, Id. at 6-7; see also OIG-10-49. Certainly, as insurance payments are made, that information should be timely communicated to FEMA by the applicant insured, together with information regarding the basis for the payment.

The time frame for the insurance claim review process is generally driven by practical and commercial concerns, and elements of the process may be subject to state regulations. However, certain applicant/insured entities may decline to enter into a final resolution of their insurance claim before FEMA has completed its final audit. The concern cited for deferring resolution is that FEMA may conclude in its final audit that the amount of insurance FEMA views as “available” was greater than what was obtained. Such concerns are unwarranted where the applicant/insured has acted in a commercially reasonable manner in reaching an agreement with its insurers. As the Ninth Circuit Court of Appeals confirms in an opinion citing the text of the Stafford Act, legislative history and broad public policy considerations, the PA Program requires only that the applicant/insured act in a “commercially reasonable” manner with regard to any resolution of its insurance claim. State of Hawaii ex rel. Atty. Gen. v. FEMA , 294 F.3d 1152 (9th Cir. 2002). Under this authority, where an insured makes a commercially reasonable choice to resolve a disputed claim with insurers ' even if that resolution entails a settlement that may reflect compromise on the part of the insured based on the cost, time and risk associated with attempting to pursue disputed insurance amounts ' FEMA must respect that decision, and honor the insurance proceeds obtained as the amount “available” in making its own calculations. Id. Of course, disputes will be minimized where the applicant/insured is proactive in timely communicating with both FEMA and insurers on these points.

Catherine A. Mondell, a member of this newsletter's Board of Editors, is a partner at Ropes & Gray LLP, and has handled a wide range of complex insurance coverage disputes and other commercial litigation matters. She has litigated in multiple jurisdictions cases involving first-party property claims with substantial time element and contingent time element components.