FEMA insurance rules change surprises local governments
Posted by The Times-Picayune August 17, 2007 9:46PM
By Rebecca Mowbray
Business writer
In a little-noticed memo issued in June, the Federal Emergency Management Agency
changed the insurance requirements that local governments and nonprofits must
meet to be eligible for public assistance in times of disaster, putting groups
such as hospitals, schools and parish governments on the hook for millions of
dollars should another storm strike the New Orleans area.
The changes set much higher requirements for insurance coverage and essentially
leave nonprofits and local governments solely responsible for paying their own
insurance deductibles. Those deductibles, which FEMA used to pay, in some cases
now cost tens of millions of dollars, and could leave many of these bodies
financially vulnerable in the wake of a natural disaster. The regulatory
changes, discovered by a New Orleans insurance agent, have public officials
scrambling to intervene.
State Insurance Commissioner Jim Donelon has written to President Bush trying to
get the new insurance requirements waived. Sen. Mary Landrieu's office has
requested a briefing with FEMA on the issue Monday. And the local insurance
agent, Hartwig Moss III, has organized a meeting Wednesday afternoon for public
officials to help groups figure out what steps they need to take in advance of
another hurricane to try to be exempted from the new rules.
"We believe that the vast majority of those in the not-for-profit and
governmental communities are completely unaware of these issues and the
potential for extremely serious consequences for their organization and indeed,
for our community, as a result of these changes," said Moss, president of the
Hartwig Moss Insurance Agency Ltd., which has been around for 135 years.
Dan Jilek, public assistance insurance specialist at the Governor's Office of
Homeland Security and Emergency Preparedness, said state government is exempt
from the issue because it is allowed to have a formal program of self-insurance.
But parish governments, nonprofit hospitals, museums, libraries, universities,
schools, fire stations, police stations, sanitation districts, animal rescue
facilities and others all need to be aware of the new rules, which come in to
play with events that result in a disaster declaration from the president.
"It wasn't well-known," Jilek said.
'Safety net' at issue
In the tough insurance market in South Louisiana and coastal areas around the
country, where deductibles on commercial policies start at 5 percent and can
reach as high as 15 percent of the value of a property, the shift will be
expensive for any entity affected by a hurricane or flood a second time.
A nonprofit institution that is a client of Moss', for example, used to have a
deductible of 2 percent of the value of the property, which resulted in a
deductible of $6.8 million on the group's Katrina insurance claim.
But now, with the limited availability and rising price of commercial insurance,
that same institution has a 5 percent deductible on its insurance policy and
would have to pay $26 million to $30 million itself before its insurance
coverage and any FEMA public assistance kicked in.
"If you take that safety net out, they're gone," Moss said. "All of that
infrastructure in this community is toast. I don't know how they would ever come
back."
FEMA Fact Sheet DAP9580.3, issued June 4 just as hurricane season was getting
under way, says that if the disaster agency has paid a deductible once, it won't
pay the same type of deductible again. In other words, if a group has ever in
its history received help from FEMA in paying a deductible, that body is no
longer eligible for such assistance on the same building.
While the deductible rules would affect essentially every governmental or
nonprofit entity in New Orleans because of Katrina, the rule change also will
affect similar groups anywhere else in the country that have experienced a
disaster, because FEMA sets no time parameters on when such deductibles might
have been paid. Nowhere does the memo say the policy is limited to hurricanes
and floods; the policy could conceivably apply to other disasters such as
earthquakes, too.
James Walke, FEMA's director of the Public Assistance Division, said in an
e-mail that FEMA will not pay a deductible a second time on the same building up
to the amount of assistance that was provided the first time. Walke said the
measure would affect any previous disaster in which FEMA has paid public
assistance, such as Hurricane Andrew back in 1992.
Hurdles raised
The new regulations also create strict requirements for having adequate
insurance coverage. The rules require that public entities have insurance
coverage up to the level of whatever public assistance grant they received in
the past, whether for wind damage or flood damage, essentially requiring
coverage on the full value of the property, Jilek said.
That is problematic on regular commercial property insurance. Groups have
routinely reported after Katrina that not enough wind coverage is available in
the Gulf South to fully cover their buildings, and that the coverage is so
expensive that it's not worth buying coverage.
But it is especially problematic on flood coverage, Jilek and Moss said. The
National Flood Insurance Program only sells up to $500,000 in building coverage
and $500,000 in contents coverage per building -- not enough for large buildings
such as schools, hospitals, museums or city hall -- and the market for excess
flood coverage essentially dried up after Hurricane Katrina.
"It's the excess flood that's the problem. It's very expensive and not
available," said Warren Byrd, executive counsel for the Louisiana Department of
Insurance, who is working on the issue with Jilek and Moss.
Nonetheless, FEMA now requires it. "Regardless of the NFIP maximum policy
amount, insurance is required at least up to the amount of eligible damage.
Commercial flood insurance policies are readily available for this excess
coverage," the memo reads.
Walke said that in developing the rules, FEMA circulated a draft to the National
Emergency Management Association, the National Governors Association, the
National Association of Counties and other national trade organizations for
comment, and then posted it on the FEMA.gov Web site.
But Moss said that insurance agents he's contacted with nonprofit clients were
unaware of the rules, and neither were two insurance agent trade associations.
He said he wouldn't have known about it if his firm hadn't stumbled on it while
doing work with the nonprofit institution.
"As far as I know, FEMA made no effort to disseminate this information to the
affected parties," Moss said.
Seeking solutions
The rules say the insurance requirements can be waived by the FEMA regional
administrator if the state insurance commissioner certifies that the type and
extent of insurance required is not reasonably available.
Because thousands of nonprofits and governmental entities could be affected by
the new FEMA insurance requirements the next time disaster strikes, the
Louisiana Department of Insurance and the Governor's Office of Homeland Security
and Emergency Preparedness, the local liaison for FEMA public assistance grants,
have drafted procedures they hope will be acceptable to FEMA in spelling out
what groups need to do to be exempted from the new requirements.
The Stafford Act, the law that governs federal disaster assistance, says that
state insurance commissioners have the power to determine whether insurance
coverage is "reasonably available, adequate and necessary."
On Aug. 10, Donelon wrote a letter to Bush saying that insurance is not
available in Louisiana. "As the Commissioner of Insurance for the State of
Louisiana, I hereby certify that commercial insurance coverage for the perils of
flood and wind is not reasonably available to Applicants in order for Applicants
to procure property insurance coverage for the full amount of their eligible
disaster assistance to be received under the Stafford Act for damages sustained
as a result of Hurricanes Katrina and Rita," the letter reads.
"To require Applicants purchase coverage to the full extent of available
disaster assistance, if such coverage were even available at all, would impose
such excessive expense on Applicants as to substantially impair their ability to
carry out missions to provide necessary and desirable public, educational and
charitable services," it continues.
Donelon's letter then spells out what are reasonable expenditures for insurance
coverage, and says that if a group has been successful in getting coverage, it
needs to keep it. The letter further says that anyone seeking a waiver should
write a letter and provide documentation of Donelon's criteria to the Governor's
Office of Homeland Security and Emergency Preparedness.
Byrd is optimistic that it will work. "I don't know that FEMA can reject the
commissioner's call. He has been given authority by the Stafford Act to make
this call, and he has done so," he said.
But Jilek said that FEMA has not responded yet. "The insurance commissioner has
drafted a procedure, but it's under review at FEMA," he said.
Donelon or Byrd and other state officials will be at Moss' meeting on the issue
Wednesday to advise groups what to do to seek a waiver. The meeting is at 1:30
p.m. in the Jefferson Orleans South function hall at 2536 Edenborn Ave. in
Metairie, and is expected to last about 90 minutes.
Because the FEMA memo does not say that waiver requests on insurance
requirements can be filed after a disaster strikes, Moss says he assumes that
they cannot. "Time is very much of the essence as we are now in the heart of
hurricane season," he said.
ADV-NEWS, FEMA insurance rules change surprises local governments. "All of that infrastructure in this community is toast. I don't know how they would ever come back." 
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