[Federal Register Volume 65, Number 36 (Wednesday, February 23, 2000)]
[Proposed Rules]
[Pages 8927-8931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4246]


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FEDERAL EMERGENCY MANAGEMENT AGENCY

44 CFR Part 206

RIN 3067-AC90


Disaster Assistance; Insurance Requirements for the Public 
Assistance Program

AGENCY: Federal Emergency Management Agency (FEMA).

ACTION: Advance notice of proposed rulemaking.

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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) [email protected].

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) [email protected].

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, Sec. 101.
     Further, it says in Sec. 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 Sec. 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

[[Page 8928]]

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

[[Page 8929]]

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 Secs. 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 
Secs. 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
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                                    Individual building by building
     Categories of insurance                     policy                             Blanket policy
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ALL-RISK.........................  Minimum of 80% Replacement Cost    Minimum of 80% RCV, or 110% of the total
                                    Value (RCV).                       building value at the applicant's highest-
                                                                       valued single location.
EARTHQUAKE.......................  35% of total building value of     35% of the total insurable building values
                                    $1M or less;.                      of $1M or less;
                                   25% of the next $9M of building    10% of the next $9M building value;
                                    value;.
                                   20% of the building value over     5% of the building value over $10M, with a
                                    $10M, with a maximum coverage      maximum coverage limit of $125M.
                                    limit of $125 M.
FLOOD............................  Maximum offered by NFIP per        Total limit equal to or greater than the
                                    building.                          combined total limits obtained under
                                                                       separate NFIP policies.
WIND.............................  Minimum of 80% of its insurable    Not less than 80% of the total insurable
                                    value up to $125M.                 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
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                                    Individual building by building
     Categories of insurance                     policy                             Blanket policy
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ALL-RISK.........................  0.1% of the building's insurable   0.1% of the building's insurable value
                                    value with a maximum of $100,000   with a maximum of $100,000 per occurrence
                                    per occurrence.                    for all buildings involved.
EARTHQUAKE.......................  Maximum of 7.5% of the insurable   Maximum of 7.5% of the insurable value of
                                    value of the building.             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.

[[Page 8930]]

 
WIND.............................  Maximum 5% of the insurable value  Maximum 5% of the total insurable value of
                                    of the building with a maximum     the building(s) involved with a maximum
                                    value of $100,000 per              value of $100,000 per occurrence for all
                                    occurrence.                        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 Secs. 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

[[Page 8931]]

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.
[FR Doc. 00-4246 Filed 2-22-00; 8:45 am]
BILLING CODE 6718-02-P