00-4246. Disaster Assistance; Insurance Requirements for the Public Assistance Program

AGENCY:

Federal Emergency Management Agency (FEMA).

ACTION:

Advance notice of proposed rulemaking.

SUMMARY:

As a means to achieve a nationally consistent level of responsibility among public and certain private non-profit entities for natural disaster risks, we (FEMA) are considering making a minimum amount of building insurance coverage a criterion for eligibility for Public Assistance. In order to encourage the purchase of such insurance, we are considering whether and how to make uninsured buildings ineligible for Public Assistance. We have sought out the advice of numerous insurance experts and program stakeholders on this, but believe we will benefit by sharing our thinking on these issues to the widest audience possible and seeking their views and comments before we publish a proposed rule. We also have various specific questions for your consideration.

DATES:

We invite written comments on this and will accept them until April 10, 2000.

ADDRESSES:

Please send written comments to the Rules Docket Clerk, Office of the General Counsel, Federal Emergency Management Agency, 500 C Street SW., room 840, Washington, DC 20472, (facsimile) 202-646-4536, or (email) [e-mail].

FOR FURTHER INFORMATION CONTACT:

Curtis Carleton, Chief, Community Services Branch, Federal Emergency Management Agency, 500 C Street SW., room 713, Washington, DC 20472, 202-646-4535, (facsimile) 202-646-3147; or (email) [e-mail].

SUPPLEMENTARY INFORMATION:

I. Background

The Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 et seq. (Stafford Act), authorizes the President to pay at least 75 percent of the costs to repair infrastructure damaged by a presidentially declared major disaster. The Public Assistance Program provides grants to applicants—including State and local governments, Native Americans or authorized tribal organizations, Alaskan Native villages and organizations, as well as certain eligible private non-profit organizations—for emergency protective measures, for debris removal, and for disaster-damaged infrastructure.

Our objective with this advance notice of proposed rulemaking (ANPR) is to focus on natural disaster-damaged infrastructure, and more specifically, building damage. The Stafford Act has directives and requirements on insurance. Our information up to this point is that, with a few exceptions, insurance is available for buildings. Therefore, we have interpreted that these directives and requirements can be applied to that category of public infrastructure.

It is clear from the Stafford Act and from its supporting and background materials that the Congress views the purchase of insurance as an effective risk management device.

• The Stafford Act encourages obtaining insurance in its preamble, § 101.
• Further, it says in § 311 that an applicant must agree to obtain and maintain insurance as a condition of receiving a Public Assistance grant.
• Insurance is defined as a benefit under § 312, and as such, a Public Assistance grant may not be awarded so as to duplicate it.

Our current regulations, found in 44 CFR, Subchapter D, Part 206, Subpart I, translate the insurance purchase requirement to mean that the amount of insurance to be purchased must be at least up to the amount of eligible damage under the Public Assistance program. If the eligible damage is far less than the replacement value of the building, and if the corresponding minimal level of insurance coverage can actually be purchased, this may result in a vastly underinsured building. The current regulations do not speak to the type of insurance required—actual cash value or replacement cost value—and they do not address deductibles. This is important both from the standpoint of the insurance purchase requirement and the amount of the Public Assistance grant awarded. Most importantly, the current regulations do not have any mechanism to encourage insurance on public buildings that have not yet received disaster assistance. The absence of meaningful encouragement for the purchase of property insurance on buildings is a deeply important issue to the program. There are critical fairness and fiscal issues involved with this, as we will discuss below. Our interest with this Notice centers on this issue.

II. Statement of the Problem

The preamble to the Stafford Act directs us to encourage “individuals, States, and local governments to protect themselves by obtaining insurance coverage to supplement or replace governmental assistance.” The Public Assistance program fails to do this. The program has no mechanism to encourage public entities to purchase property insurance before a disaster strikes.

(A) Current disincentives to insurance. (i) Building repair costs. In fact, by paying for building repair costs whether or not the building had property insurance, we currently provide a disincentive to carry insurance. Many potential Public Assistance applicants have told us, in so many words: Why carry insurance on our buildings when we know that FEMA will be there to pick up the costs when the disaster hits?

(ii) High deductibles. A corollary issue here deals with an applicant who may have insurance, but has opted to reduce the premium by selecting a very high deductible. Because our current policy is to reimburse the applicant for that portion of the loss not covered by insurance, including any deductible—whatever the amount—the program tends to encourage high levels of retained risk, even for those insured. The program has clear disincentives to carry low or moderate deductibles.

(B) Fairness. Once a presidential disaster has been declared, the program pays the federal cost share (usually 75 percent) for all eligible building repair costs to the extent that insurance does not. Is it fair that the applicant who has paid premiums throughout the years and the applicant who has no insurance and saved these expenses over the years are treated equally? Many risk managers and other stakeholders have raised this fairness issue with us.

(C) Other issues. In addition to this issue, the current program regulations dealing with insurance fail to address other issues.

(i) We do not say what we mean by the term “insurance.” How we define insurance is important because it governs the circumstances under which we will reimburse an applicant where there may be something similar to insurance in place, and it governs what is acceptable for the purpose of meeting the insurance purchase requirement.

(ii) Our current regulations do not say whether we will provide assistance for insured losses that fall within the deductible limits of a policy, and if so, up to what limits, if any.

(iii) We do not say what type of insurance—replacement cost value or actual cost value—is needed to satisfy the insurance purchase requirement.

(iv) We do not say whether a local government or private non-profit organization could qualify as a self-insurer for the purposes of meeting the insurance purchase requirement, and

(v) We do not provide any policies or guidance regarding the State insurance commissioners' determination under the Stafford Act that insurance is not reasonably available. Section 311(a)(2) allows an applicant not to obtain and maintain insurance if the State insurance commissioner determines that it is not reasonably available.

III. Standards

We have in mind several principles we would like to adhere to for the eventual insurance proposal. Please frame your views with these standards in mind.

(A) Affordability. Any new policy should not require entities to substantially re-order their spending priorities. We are considering setting not only maximum premium levels, but also maximum coverage amounts.

(B) Availability. Any new policy should not deny assistance to entities that cannot obtain the required product. We are considering establishing minimum coverage amounts that are offered by private insurers, obtained by being self-insured, or achieved by using a combination of both.

(C) Private Sector. We believe that a federally directed program of insurance is neither desired nor practical. We believe that the private sector has in place the appropriate resources and mechanisms to provide property insurance to the public sector.

(D) Fairness. Similarly situated entities should not feel the program discriminates against them for wise investment strategies.

IV. Possible Options

Over the last several years we have considered various approaches to dealing with these problems. This activity started with internal work groups, and evolved into a collaborative effort with insurance experts and many stakeholder groups. There have been many variations, but the basic options considered may be condensed into three approaches:

Option 1. Make the repair or replacement of public buildings ineligible for federal disaster assistance. The underlying concept is that insurance for buildings is readily available, and that, therefore, supplemental federal assistance might not be necessary for this category of public facility. This approach would eliminate the disincentive to insure and to reduce and prevent future building damage; it would eliminate the fairness issue; and it would eliminate other deficiencies with the current program regulations.

Option 2. Maintain the current eligibility of public buildings for Public Assistance funding whether they are insured or not. At the same time, eliminate funding for deductibles, define insurance, and address other technical issues.

Option 3. Make the repair of public buildings eligible for federal disaster assistance only if insured at the time of the disaster. Also, define limits on program payments for deductibles, define insurance, and address other policy issues that the current program regulations are silent on. This approach would speak to both the fairness and disincentive issues, and it would deal with troublesome ambiguities.

V. Tentative Conclusions

Option 1

We have tentatively concluded that the approach of eliminating reimbursements for building damage would be unreasonable. Even if they have insurance, many buildings will suffer catastrophic losses that will far exceed the insurance settlements. There is a legitimate need for the federal government to supplement what the insurance industry can provide for building repairs in severe natural disasters. In addition, this approach runs counter to the partnership and shared responsibility approach upon which the Nation's emergency management system is based. We tentatively rejected option 1.

Option 2

We also tentatively rejected option 2 because it would not encourage applicants to insure their buildings. By eliminating funding for deductibles, and in the absence of any pre-disaster conditioning of Public Assistance on insurance coverage, we would cause the applicant with insurance to receive less in repair dollars than the applicant with no insurance. The applicant with insurance would receive Public Assistance funding for the amount of the damage less the deductible and insurance recovery. The applicant without insurance would receive funding for the entire amount of the damage. In both cases, the federal funds would be cost shared. Even with various policy improvements and clarifications, this option clearly would not begin to fix the basic problems of fairness and the disincentives for buying insurance.

Option 3.

In our view, option 3 best promises to meet the intent and specific provisions of the Stafford Act in a fair and reasonable way. We are seeking your thoughts as to how we can best deal with the issues identified, whether they be in the context of one of these options, or in one of your own. But, since we have concentrated our attention in recent months on option 3, we are particularly interested in your views on this approach. We are, therefore, providing below some detail on this concept of redesigning our Public Assistance insurance considerations.

VI. Option 3. The Insurance Option

Under the current program regulations, the purchase of insurance only affects program eligibility for federal disaster assistance of a facility damaged by a presidentially declared disaster if that very same facility was previously damaged by and received federal assistance after a prior presidentially declared disaster. The current regulations require a public building to have insurance as a condition of receiving assistance under Stafford Act §§ 406 and 422 but this insurance can be purchased after the disaster in order to cover the “next” damaging event. Our purpose is to add a strong incentive for entities to purchase insurance before the damaging event. The change would apply only to buildings, since insurance for all perils is available for this category of public facilities. And in order to provide adequate time for public risk managers to purchase the needed insurance, the change would not be effective until 36 months after the publication date of the final rule on this issue.

(A) Adequate Insurance. (i) The key feature of this concept would be to stipulate that the eligibility of buildings for assistance under §§ 406 and 422 in the future would be contingent on their being covered by adequate insurance policies. One possibility we came up with for defining “adequate insurance” is the following, described separately for four categories of insurance:

Table 1.—Insurance Amounts

Categories of insurance	Individual building by building policy	Blanket policy
ALL-RISK	Minimum of 80% Replacement Cost Value (RCV)	Minimum of 80% RCV, or 110% of the total building value at the applicant's highest-valued single location.
EARTHQUAKE	35% of total building value of $1M or less;	35% of the total insurable building values of $1M or less;
	25% of the next $9M of building value;	10% of the next $9M building value;
	20% of the building value over $10M, with a maximum coverage limit of $125 M.	5% of the building value over $10M, with a maximum coverage limit of $125M.
FLOOD	Maximum offered by NFIP per building.	Total limit equal to or greater than the combined total limits obtained under separate NFIP policies.
WIND	Minimum of 80% of its insurable value up to $125M.	Not less than 80% of the total insurable values at the applicant's highest-valued single location up to $125M.

(ii) In advancing this idea, it would be our intention that no applicant would be burdened with exorbitant insurance premiums. Therefore, we would qualify this schedule of insurance amounts with the proviso that premiums, expressed as a percentage of building replacement cost value, would be capped on that basis. The cap we are considering is $0.30 per $100. In order to meet the condition of having adequate insurance, the applicant would have at minimum, coverage to this cap. We developed this level by consulting with insurance experts in various areas of the country.

(iii) Note that we do not attempt to specify which types of insurance are necessary. The applicant is in the best position to determine the perils for which it would need to purchase insurance. If the applicant did not have the type of insurance that covered the disaster damage, its damaged building would not be eligible for federal disaster assistance.

(B) Deductibles. (i) Deductibles play an important role in the cost and settlement value of insurance policies. The Public Assistance Program needs to make clear its position on eligible costs for insured buildings where deductibles are involved—yet current program regulations do not address. While there are no formal policies addressing eligible costs for insured buildings, the practice throughout the FEMA regions has been to treat deductible amounts in insurance policies as if there were no insurance policy at all—that is, to “fund” the deductibles. This has the effect of promoting higher deductibles. Our intent in considering a maximum level on eligible deductible costs for insured buildings is to reverse this unintended consequence.

(ii) Under option 3, the maximum deductible amounts eligible for Public Assistance funding would vary by the type of insurance. Based on this concept, the table below shows the numbers we are considering:

Table 2. —Insurance Deductibles

Categories of insurance	Individual building by building policy	Blanket policy
ALL-RISK	0.1% of the building's insurable value with a maximum of $100,000 per occurrence.	0.1% of the building's insurable value with a maximum of $100,000 per occurrence for all buildings involved.
EARTHQUAKE	Maximum of 7.5% of the insurable value of the building.	Maximum of 7.5% of the insurable value of the building(s).
FLOOD	Maximum of $1,000.	2% of the total insurable values of the building(s) involved with a maximum of $25,000.
WIND	Maximum 5% of the insurable value of the building with a maximum value of $100,000 per occurrence.	Maximum 5% of the total insurable value of the building(s) involved with a maximum value of $100,000 per occurrence for all buildings involved.

(iii) These proposed maximum eligible amounts resulted from our efforts to balance cost considerations with a minimal standard of sound insurance coverage, and were developed in consultation with outside insurance experts. We selected values that reflect common insurance industry practices. We would like to learn your thoughts on the reasonableness of these percentages and amounts.

(C) Role of the State Insurance Commissioner. (i) We would offer new language to address this section. Section 311(a)(2) states that “* * * the President shall not require greater types and extent of insurance than are certified to him as reasonable by the appropriate State Insurance Commissioner responsible for regulation of such insurance.”

(ii) The current program regulations provide no guidance or criteria on how the State insurance commissioner should undertake this role. Under §§ 206.252 and 206.253, the regulations simply state that “* * * the Regional Director shall not require greater types and extent of insurance than are certified as reasonable by the State Insurance Commissioner.” The absence of any definition of the word “reasonable” and the absence of any guidance regarding the State insurance commissioner's role have led to confusion about the intent of this provision. This deficiency could seriously diminish the effectiveness of the Stafford Act's fundamental goal of encouraging applicants to provide for their own financial protection against future disasters. We need to provide specific guidance to correct this deficiency.

(iii) Under option 3 we would establish boundaries where the cost of insurance is the factor under consideration. In order to effect some degree of uniformity throughout the country with regard to the certifications, and in order to ensure a basic level of compliance with the intent of the Stafford Act that encourages “* * * States and local governments to protect themselves by obtaining insurance coverage to supplement or replace governmental assistance * * *”, we would suggest the following:

(A) The State insurance commissioner would grant a certification for a specific peril if commercial insurance is not available from licensed insurance carriers—or surplus lines carriers, or

(B) The State insurance commissioner could grant the certification based on cost.

(iv) In this case, the applicant could request a certification due to financial hardship. Financial hardship would be defined as the cost of combined annual property insurance premiums exceeding 0.3% of the insurable value of a building, or if a blanket policy, 0.3% of the total insurable values (See VI(A)(ii)). To approve such a request, the State insurance commissioner could grant a certification limiting the amount of insurance needed but not relieving the applicant from purchasing insurance. At a minimum, the applicant would have to purchase insurance with a premium cost up to the 0.3%. The applicant could elect to purchase a policy having a lower replacement cost percentage, a higher deductible, or both.

(VII) Questions

We are interested in your ideas as to how the Public Assistance program could be improved with regard to its insurance requirements and considerations. Please do not limit your comments to our option 3; we are interested in any and all ideas that you might have. Additionally, we do have specific questions about the approach that we outlined above.

(A) Economic impacts and impacts on small entities. As required by Executive Order 12866, we are currently looking at the economic impacts of this approach. We welcome any information that will help us in our analysis. Many of the following questions focus specifically on the costs; however any ideas or information about its benefits would be helpful as well. In addition, the Regulatory Flexibility Act deals with impacts on small entities. As defined in the Regulatory Flexibility Act, small governmental jurisdictions are “governments of cities, counties, towns, townships, villages, school districts, or special districts, with a population of less than fifty thousand.” Likewise, the Act defines a small organization as “any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.” Therefore, we pose several questions in order to gain a better understanding of the impacts this approach would have on small private non-profit organizations and small local governments.

(i) Is commercial property insurance available to insure public buildings in your area?

(ii) Is commercial property insurance available at what you would consider to be an affordable price in your area?

(iii) If you are a potential applicant with buildings, can you tell us whether and for what you are insured, as well as, how our proposal, if adopted, would affect those insurance premiums? If you are a small private non-profit organization or small local government, please identify that fact, as we will be doing a separate analysis of the effects on small entities. If there would be an increase involved, it would be most helpful if you would tell us what that increase would be, expressed as a percentage above your current premium.

(iv) Would it be appropriate to allow qualifying local governments and private non-profit organizations to be considered as self-insurers? If so, what criteria should we use to qualify them?

(v) We suggest $0.30 per $100 both as a guideline for State insurance commissioners in determining the reasonableness of insurance premiums, and as a threshold above which insurance would not need to be purchased to satisfy our condition for Public Assistance eligibility. Do you consider this reasonable? If not, what level would you suggest, and for what reasons?

(vi) What are your thoughts as to the reasonableness of the schedule of insurance amounts and deductibles shown in option 3? Have we set the maximum amount of insurance needed too low?

(vii) If you have information on building insurance coverage for potential Public Assistance applicants, would you please tell us, either for your type of organization or for your area, what percentage of buildings you believe is currently covered.

(viii) If you are a small private non-profit organization or small local government, can you tell us more about your current risk analysis practices and insurance policies. We appreciate your interest in this issue, and will look forward to receiving your comments and answers.

(B) Executive Order 13132, Federalism. In keeping with the principles embodied in this Executive Order, signed on August 4, 1999, FEMA has consulted with State and local officials as well as private non-profit organizations that might be affected by the approach suggested, and plans to convene additional meetings and discussions. If you have any questions or comments about our plans for these additional meetings and discussions we would welcome receiving them.

Dated: February 17, 2000.

James L. Witt,

Director.