Federal Emergency Management Agency: Weaknesses Exist in the
Cerro Grande Fire Assistance Claim Validation Process (13-JUL-01,
GAO-01-848).
While the federal government has accepted responsibility for the
Cerro Grande fire and enacted the Cerro Grande Fire Assistance
Act (CGFAA) to expeditiously compensate those injured by the
fire, it is incumbent on the Federal Emergency Management Agency
(FEMA) as the administering agency to establish an effective
system of internal control to safeguard the funds appropriated
for the Cerro Grande program. The CGFAA lays a framework to
establish such accountability by requiring FEMA to determine that
victims' injuries and losses occurred as result of the fire and
to determine the amount of allowed compensation. FEMA has
established a process to review all claims submitted. However,
this process as currently implemented does not provide adequate
assurance that only valid claims were paid or that the amounts
paid were reasonable because there is insufficient documentation
of the steps taken to determine the validity and reasonableness
of the claim amounts. In addition, policies and procedures for
paying claims have either not yet been developed or have not been
formally and centrally documented.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-848
ACCNO: A01390
TITLE: Federal Emergency Management Agency: Weaknesses Exist in
the Cerro Grande Fire Assistance Claim Validation Process
DATE: 07/13/2001
SUBJECT: Claims processing
Claims settlement
Internal controls
Property damage claims
Property damages
Property losses
Bandelier National Monument (NM)
Cerro Grande (NM)
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Testimony. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-01-848
GAO United States General Accounting Office
Report to Congressional Committees
July 2001 FEDERAL EMERGENCY MANAGEMENT AGENCY
Weaknesses Exist in the Cerro Grande Fire Assistance Claim Validation
Process
GAO- 01- 848
Page 1 GAO- 01- 848 Cerro Grande Claim Payments
July 13, 2001 The Honorable Barbara A. Mikulski Chairman The Honorable
Christopher Bond Ranking Minority Member Subcommittee on VA, HUD and
Independent Agencies Committee on Appropriations United States Senate
The Honorable James T. Walsh Chairman The Honorable Alan B. Mollohan Ranking
Minority Member Subcommittee on VA, HUD and Independent Agencies Committee
on Appropriations House of Representatives
On July 13, 2000, the President signed into law the Cerro Grande Fire
Assistance Act (CGFAA). 1 The CGFAA established the Office of Cerro Grande
Fire Claims (OCGFC) and directed the Federal Emergency Management Agency
(FEMA) to expeditiously investigate victims? claims and to determine and
compensate the victims of the Cerro Grande fire in northern New Mexico for
injuries resulting from the fire. The CGFAA also mandated that we annually
audit all claim payments made under the CGFAA, including reviewing all
subrogation claims 2 for which insurance companies have been paid or are
seeking reimbursement as subrogees.
As agreed with your offices, our report, the first required under the CGFAA,
discusses whether OCGFC established a systematic process to ensure the
validity and reasonableness of claim payments in accordance with the CGFAA.
Our report also discusses one additional matter we believe may be of
importance to the Congress as it oversees FEMA?s response to the Cerro
Grande fire- whether the funding currently appropriated will be sufficient
to pay all approved claims.
1 Public Law 106- 246, Div. C, Title I, 114 Stat. 511, 583 (2000). 2 A
subrogation claim is the right of one who has paid an obligation that
another should have paid to be indemnified by the other. In this case,
insurance companies and possibly others paid claims that the federal
government is responsible for paying.
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 01- 848 Cerro Grande Claim Payments
As indicated above, the CGFAA also requires that we review all subrogation
claims for which insurance companies have been paid or are seeking payment
as subrogees. We could not review any subrogated claim payments as part of
our initial year audit because according to OCGFC officials as of June 2001,
no subrogated claim payments had been made. The CGFAA specifies that
nonsubrogee claims, to the maximum extent practicable, are to be paid before
subrogee claims. OCGFC in its first 9 months of operations has complied with
this aspect of the act. OCGFC officials did tell us, however, that as of
June 2001, approximately 2,500 subrogation claims totaling approximately $70
million had been submitted and are awaiting processing. OCGFC officials,
based on estimates provided by the insurance industry, indicated that as
much as $160 million in subrogated claims may be paid. OCGFC is developing
the applicable policies and procedures for processing these claims and
estimates it may start processing subrogated claims in August 2001 and make
the first payments in early 2002. We will audit these payments as part of
our subsequent year audits.
OCGFC has established and generally followed a systematic process for the
payment of fire victims? injury claims in accordance with the CGFAA.
However, we found certain key procedures used by the claims reviewers hired
under contract by OCGFC were not formally documented and actions taken by
the claim reviewers to verify claimant- provided information and determine
claim reimbursements were typically not documented. As a result, OCGFC
officials responsible for approving claim payments did not have a basis for
determining the steps or actions the claims reviewers had taken to determine
the validity or reasonableness of most claim payments and therefore, did not
have the key information upon which to base their payment approval
determinations. FEMA?s Office of Inspector General has raised similar issues
as a result of the claim payment reviews it has conducted.
Our review also disclosed that additional funds might be needed to pay fire
claims. As of September 30, 2000, FEMA reported, based on an actuarial
review of the damages, an estimated liability of $437 million for
outstanding claims. This estimate was not complete because damages for
various categories of claims, some of which could be significant, were not
estimable at the time. When this actuarial estimate was prepared, the final
rules and certain key policies and procedures for addressing how certain
claim types would be compensated had not yet been finalized. Some of these
policies and procedures were being developed during the time of our review.
In addition, the volume of claims submitted has been much greater Results in
Brief
Page 3 GAO- 01- 848 Cerro Grande Claim Payments
than originally anticipated. As of June 20, 2001, OCGFC officials told us
that approximately 14,000 claims had been submitted- approximately 10 times
the volume initially expected. Accordingly, it is possible that the $455
million appropriated to pay claims may be insufficient.
We are making recommendations in this report to strengthen OCGFC claims
review and payment processes. In commenting on a draft of the report, FEMA
stated that it was pleased that we recognized that a systematic process for
paying fire victim?s claims in accordance with the CGFAA was established and
followed, but said that it did not believe that we had a balanced viewpoint
of all of its efforts to develop and implement the program since inception 9
months ago. It listed several areas where it thought we were overly
critical, particularly related to the adequacy of policies and procedures
and the level of documentation for supporting claims. We made certain
revisions to our report in response to FEMA?s comments in order to clarify
our positions in these areas. At the same time, our overall position remains
the same- the documentation deficiencies we identified significantly
diminish the effectiveness of the claims review and approval process. OCGFC
officials did not have reasonable assurances that its claim review
contractors performed adequate procedures during their claims review and
that the payment process was consistently applied.
On May 4, 2000, the National Park Service initiated a prescribed burn on
federal land at Bandelier National Monument, New Mexico, in an effort to
reduce the threat of wildfires in the area. The plan was to burn up to 900
acres. On May 5, 2000, the prescribed burn exceeded the capabilities of the
National Park Service, spread to other federal and nonfederal land, and was
characterized as a wildfire. By May 7, 2000, the fire had grown in size and
caused evacuations in and around Los Alamos, New Mexico. On May 13, 2000,
the President issued a major disaster declaration, and subsequent to it, the
Secretary of the Interior and the National Park Service assumed
responsibility for the fire and the subsequent loss of federal, state,
local, tribal, and private property. The fire, known as the Cerro Grande
Fire, burned approximately 48,000 acres in four counties and two Indian
pueblos, destroyed over 200 residential structures, and forced the
evacuation of more than 18,000 residents.
On July 13, 2000, the President signed the CGFAA into law. Under the CGFAA,
each claimant is entitled to be compensated by the United States government
for certain injuries and damages that resulted from the Cerro Grande fire.
The Congress appropriated $455 million to the FEMA for the Background
Page 4 GAO- 01- 848 Cerro Grande Claim Payments
payment of such claims and $45 million for the administration of the Cerro
Grande program. The act requires that GAO conduct annual audits on the
payment of all claims made and annually report the results of the audits to
the Congress by July 13, beginning in fiscal year 2001. The act also
requires that our report include a review of all subrogation claims for
which insurance companies have been paid or are seeking payment as subrogees
under this act. FEMA is also required to annually submit a report to
Congress that provides information about claims submitted under the act.
This report is to include the amounts claimed, a description of the nature
of the claims, and a status or disposition of the claims, including the
amounts paid. FEMA?s first report is to be issued by August 28, 2001, based
on the issuance of the program rules as discussed below.
The CGFAA required FEMA to promulgate and publish implementing regulations
for the Cerro Grande program within 45 days of enactment of the law. On
August 28, 2000, FEMA published the Disaster Assistance: Cerro Grande Fire
Assistance; Interim Final Rule in the Federal Register
(Interim Final Rules). 3 FEMA followed the Interim Rule with a set of
implementing policies and procedures on November 13, 2000. FEMA updated
these policies and procedures in January and March 2001. After reviewing
public comments on the interim rule, FEMA finalized and published The
Disaster Assistance: Cerro Grande Fire Assistance; Final Rule (Final Rule)
on March 21, 2001. 4
In performing our review, we considered the Standards for Internal Control
in the Federal Government. 5 To gain an understanding of the claim review
and payment process established by the OCGFC, we interviewed FEMA and OCGFC
officials, General Adjusters Bureau (GAB) Robins officials, 6 and staff from
FEMA?s Office of Inspector General. We also reviewed the requirements of the
CGFAA, the interim and final regulations published in the Federal Register,
OCGFC?s policies and procedures manual, an actuarial report, FEMA?s fiscal
year 2000 audited
3 44 CFR Chapter I and Part 295 (65 FR 52260). 4 44 CFR Part 295 (66 FR
15948). 5 GAO/ AIMD- 00- 21. 3. 1, November 1999. 6 OCGFC awarded a contract
to GAB (General Adjusters Bureau) Robins, an independent claims adjusting
firm to review and process all claims submitted by those who were injured or
suffered damages as a result of the Cerro Grande fire. Scope and
Methodology
Page 5 GAO- 01- 848 Cerro Grande Claim Payments
financial statements and the current year Cerro Grande trial balance and
other documentation concerning the Cerro Grande program. We also obtained,
reviewed, and considered the results of numerous desk reviews completed by
FEMA?s Office of Inspector General. Finally, we selected three separate
random probability samples from the population of claim payments to
determine whether policies and procedures in place were being followed and
to ensure that they provided adequate internal controls over appropriated
federal funds. We did not assess the reasonableness of individual payments
made.
Our first sample of 59 partial claim payments was drawn from a population of
1,195 partial claim payments made through November 24, 2000, that was
processed under the August 28, 2000, Interim Rules. The second random
probability sample consisted of 59 items drawn from a population of 488
partial payments made between November 25 and December 28, 2000. These
payments were processed using the policies and procedures adopted by the
OCGFC on November 13, 2000. For these two samples, we reviewed the claim
files to determine if all the required forms and key signatures required to
process a partial payment had been obtained. Our third sample consisted of
63 final claim payments selected using a stratified sampling approach from a
population of 255 final payments made through March 23, 2001. Fifty- eight
of these 63 items were randomly selected from the population of claim
payments in which the amount paid was less than $40,000. The remaining five
items comprised all claim payments greater than or equal to $40,000. For
these 63 items, we reviewed the claim files not only to see if all the
required forms and signatures existed but to also look for evidence that
victims? claims had been investigated to determine their validity and that
the payment amounts were adequately supported and reasonable. 7
As mentioned previously, we were not able to audit subrogated claim payments
because, as of June 2001, no subrogated claims had been processed or paid.
We did, however, inquire and obtain information about the number and dollar
amount of subrogated claims submitted to the OCGFC through June 2001. We
also inquired about the status of the policies and procedures being drafted
by the OCGFC to process these claims.
7 In order to get assistance to fire survivors as soon as possible, the
CGFAA allows for claimants to receive partial payments before the start of
the rebuilding process. Partial payments may be based upon actual receipts
or estimates. Final payments are made only after the entire claims review
process, as discussed below, is completed.
Page 6 GAO- 01- 848 Cerro Grande Claim Payments
Our work was conducted in Sante Fe, New Mexico, and Washington, D. C., from
December 2000 through June 2001 in accordance with generally accepted
government auditing standards. We requested agency comments on a draft of
this report from the Director of FEMA. FEMA provided certain technical
comments orally, which we have incorporated as appropriate. FEMA?s Assistant
Director of the Readiness, Response and Recovery Directorate also provided
written comments in response to our draft on behalf of FEMA and OCGFC, which
are reproduced in appendix I. We evaluated the written comments in the
?Agency Comments and Our Evaluation? section of this report.
The OCGFC has established and generally followed a systematic process for
the payment of claims resulting from the Cerro Grande fire. However, this
process, as illustrated in figure 1 and described below, needs to be
strengthened. We found that certain key procedures used by the claims
reviewers were not formally documented and actions taken by the claim
reviewers to verify claimant- provided information and determine claim
reimbursements were typically not documented. We also noted that OCGFC is in
the process of developing policies and procedures for how certain claims to
be paid in the coming months will be processed and paid.
The Standards for Internal Control in the Federal Government specifies that
internal control and all transactions and other significant events need to
be clearly documented and be readily available for examination. Control
activities should be documented in management directives, administrative
policies, or operating manuals which are properly maintained. OCGFC Has
Established a Systematic Claims Payment Process but Implementation
Weaknesses Exist
Page 7 GAO- 01- 848 Cerro Grande Claim Payments
Figure 1: Claims Payment Process
*OCGFC= Office of Cerro Grande Fire Claims Source: OCGFC Claims Processing
Information Handbook.
The claims payment process is initiated when an injured party submits a
Notice of Loss (NOL) form to the OCGFC. The NOL describes in general terms
the types of injury and/ or damages a claimant has incurred as a result of
the fire. After the NOL is received, claim reviewers contact the claimant to
discuss their claim, explain the claims process, and determine the best
means to substantiate the loss or damages. The claims reviewer then begins
the process of verifying the victim?s claim. This includes tasks such as
confirming the cause and origin of the loss,
reviewing supporting documentation provided by the claimant,
confirming and assessing damages,
determining the accuracy of the claimed amount,
estimating or researching the values of damaged property,
securing affidavits,
contacting third parties to confirm or verify claimant information, and
OCGFC Claim Payment
Process
Claimant submits notice of loss to OCGFC*
Acknowledgement by OCGFC Claims Reviewer
meets with claimant Claims reviewer
verifies loss; prepares a claim payment recommendation package
Claims supervisor reviews and approves package
Approval for payment form is sent to authorizing official
Authorizing official approves payment
Partial payment is made
Proof of loss signed by claimant is submitted to OCGFC
Claims reviewer prepares a claim payment recommendation package
Claims supervisor reviews and approves package
Approval for payment form is sent to authorizing official
Authorizing Official approves payment and sends a Letter of Final
Determination & Release and Certification Form to claimant
Claimant signs and returns Release and Certification Form to OCGFC
Final Payment is made Schedule
of Payments is created
Comptroller reviews sample of payment requests
Schedule of payments is created
Comptroller reviews sample of payment requests
Page 8 GAO- 01- 848 Cerro Grande Claim Payments
documenting the claims review process. Once these activities are complete,
the claims reviewer prepares a claim payment recommendation package which
specifies that a claimant?s injuries or damages occurred as a result of the
Cerro Grande fire and that claimed amounts are eligible for compensation
under the CGFAA. A claims supervisor reviews and approves this package. This
review, among other things, is intended to ensure that a proper
investigation of the claim occurred and that the proper documentation
exists.
Following the approval of the claim payment recommendation package, an
Approval for Payment form is completed and sent to an OCGFC Authorizing
Official for review and approval. Requested payment amounts are then added
to a Schedule of Payments that is forwarded to the Comptroller. The
Comptroller reviews a sample of requested payments and then approves the
Schedule of Payments before sending it on to FEMA?s Disaster Finance Center
in Virginia for additional processing and final approval for Treasury to
disburse the funds.
In addition to this process, which is used for both partial payments (when
warranted) and final payments, prior to processing a final payment, the
claims reviewer prepares a Proof of Loss form. This form summarizes all
amounts recommended for payment, including those amounts previously paid
through a partial payment. The Proof of Loss must be signed by the claimant
subject to the provisions of 18 U. S. C. sect.1001, which establishes criminal
penalties for false statements. Once a signed Proof of Loss is received, an
OCGFC Authorized Official sends a Letter of Final Determination to tell to
the claimant the total amount of compensation being offered under the CGFAA.
Accompanying this letter is a Release and Certification form which, if the
claimant accepts the OCGFC compensation determination, is signed thereby
releasing the federal government from any additional claims arising from the
Cerro Grande fire. 8 Upon receipt of the signed Release and Certification
form, OCGFC will process and mail a claimant?s final payment.
We found that OCGFC has generally followed its process for accepting,
processing and paying damage claims in terms of obtaining all the key
8 Section 295.34 of the final rule published in the Federal Register
provides for the reopening of claims, not withstanding the submission of a
Release and Certification Form, under certain circumstances.
Page 9 GAO- 01- 848 Cerro Grande Claim Payments
forms and signatures described above and maintaining this documentation in
the claim files. For instance, the claim files included properly signed
Notice of Loss forms, Claim Payment Recommendation Pages, and Authorizations
for Payment; and in the case of final payments, also included Proof of Loss
and Release and Certification forms. In addition, the claim files included
various documents that supported the amount paid. However, as discussed
below, certain key aspects of the claims process were not sufficiently
documented and other key control activities were not being performed thereby
leaving the Cerro Grande claims program vulnerable to potential improper
payments.
Based on our test work and discussions with OCGFC officials, we determined
that certain payment determinations were based on policies and procedures
that were not formally documented. OCGFC officials told us that certain
policies have only been documented in e- mails or in notes from staff
meetings. This can result in inconsistent determinations of claim amounts
and raised questions regarding the basis for certain claim determinations.
For example, we identified inconsistencies in the calculation of lost wages
for certain individuals. In one case, the reimbursed amount was determined
based on the claimant?s gross wages whereas in another case, the claimant
was reimbursed based upon net wages. OCGFC officials stated that as part of
renegotiating its contract with its claims adjusting firm, it will require
that all policies and procedures be identified, formally documented, and
updated monthly.
In addition to the lack of formally documented procedures, there generally
was insufficient documentation in the claim files to enable us to determine
what steps, if any, the claims reviewers hired under contract by OCGFC had
taken to verify certain key data provided by the claimants or to determine
the reasonableness of amounts claimed. This was the case for 43 of the 63
final claim payments we tested. When projected to the universe of final
payments made as of March 23, 2001, we can conclude with 95 percent
confidence that between 57 and 78 percent of the final payments had similar
documentation deficiencies. For the other 20 cases where we determined the
documentation was sufficient, the payments usually involved victims? claims
for reimbursement of insurance Lack of Documentation
Weakens Claims Process and Precludes Validation of Claims
Page 10 GAO- 01- 848 Cerro Grande Claim Payments
deductibles and/ or flood insurance premiums. 9 In these cases, the claim
payments were evidenced by documentation provided by the insurer.
The following examples illustrate the types of documentation deficiencies we
observed during our review of the case files. In numerous cases we examined,
the fire forced victims to evacuate their homes. OCGFC compensated these
victims for the ?loss of use? of their homes based upon a square footage
methodology. In these cases, we found in the claim files the calculations to
determine the amount of compensation. What we did not typically find was
evidence to substantiate the square footage of the home used in the
calculations. We did not see evidence that the claims adjusters had visited
the property to obtain measurements or that they had obtained or considered
other documentation, such as property records or insurance policies, that
would substantiate the square footage.
For cases where personal property losses occurred, we commonly found lists
or spreadsheets prepared by the claimants listing the property destroyed by
the fire as well as the claimants? estimates of the costs of replacing these
items. What was commonly lacking, however, was documentation of the steps
the claims reviewers took to verify that the victims owned the items claimed
to have been lost in the fire or to assess the reasonableness of the
replacement costs. Most often, the amount paid for personal property was
simply the total listed on the spreadsheet with no evidence that any of the
items or amounts were reviewed or substantiated.
Officials we spoke with from FEMA?s Flood Insurance Administration told us
that its claims reviewers would routinely take steps to verify and document
that the information provided by the claimant was valid and that the costs
were reasonable before recommending a payment. Such steps may include
confirmation of purchases with a vendor or store, viewing photographs taken
prior to the fire, or performing reasonableness tests, such as determining
if items claimed are typical household items. While OCGFC?s policy manual
and its contract with GAB Robins do require an investigation of the claim,
there was frequently no evidence that such an investigation was performed.
Only in a limited number of circumstances were we able to tell based on
documentation in the claims file that a claims reviewer had investigated
particular items to establish that a
9 The CGFAA and the final program rules provide for the payment of flood
insurance premiums where there is an increased risk of flooding as a result
of the fire.
Page 11 GAO- 01- 848 Cerro Grande Claim Payments
claimant did in fact own an item or that the amount requested to replace the
item was reasonable. For example, in one case, the claims reviewer?s notes
showed that he questioned and ultimately reduced the amount claimed for an
autographed poster from $1000 to $5.50 after researching the poster?s value
on the internet.
In another example of documentation deficiencies, a claims reviewer
recommended that certain medical expenses, although evidenced by third party
receipts and a physician?s letter, not be paid because the reviewer
determined that the claimant had a pre- existing condition. Based on our
discussions with OGCFC officials, we were told that this recommendation was
forwarded to an OCGFC authorizing official who reversed the claims
reviewer?s decision because the OCGFC policies provide for such a payment
under certain circumstances. However, the claim file contained no
explanation as to why the initial recommendation of the claim reviewer was
reversed. Key decisions such as this should be clearly documented in the
claim files to facilitate the supervisory review process and establish an
adequate audit trail as required by the Standards for Internal Control in
the Federal Government.
OCGFC officials advised us that the GAB Robins claims reviewers use an
automated claims information system (ACIS) to document their interactions
with the claimants and to document certain aspects of their claim
investigation work. Such an automated system could help mitigate some of the
documentation deficiencies we have discussed in this report. We requested
that OCGFC provide us with the available ACIS information for specific cases
in our sample. We reviewed the ACIS reports and found that the reports
documented GAB Robins? contacts with the fire victims but provided little or
no information about what steps had been taken to verify the validity or
reasonableness of the claim payments for these particular cases. In
addition, the OIG reviews of OCGFC claim payments, like our work, raised a
number of questions regarding the adequacy of documentation contained in the
case files and also questioned whether in certain circumstances OCGFC had
established written policies on how to handle certain claims. An OIG
official told us that he has not found ACIS to be helpful in resolving the
documentation issues he has identified.
Without sufficient documentation, claims supervisors and authorizing
officials can not properly review the work of the claims reviewers, and the
risk of improper payments is increased. In addition, as stated above, the
lack of documentation in the claim files precluded us from determining what
steps the claims reviewers had taken to determine the validity and
reasonableness of most of the claim payments we tested.
Page 12 GAO- 01- 848 Cerro Grande Claim Payments
As of June 2001, OCGFC was in the process of developing certain key policies
and procedures for the payment of various claim types. Established policies
and procedures that are both documented and communicated throughout an
organization are a key component of an effective system of internal control.
As previously discussed, OCGFC is still developing policies and procedures
for paying subrogated claims. In addition, OCGFC has deferred formulation of
policies on how to compensate property owners for unrealized declines in
their property values until the Los Alamos real estate market is further
analyzed. Under the CGFAA, fire victims have until August 28, 2002, to file
Notices of Loss for injuries resulting from the fire. OCGFC officials
acknowledged that finalizing all necessary policies and procedures is
important and stated that they have and will continue to approach policy
development in a prioritized manner. For instance, since the CGFAA specified
subrogated claim payments were not to occur until after the payment of other
claims, OCGFC placed a lower priority on the development of these policies
and procedures. OCGFC officials stressed that no claims have been paid
without first having put policies and procedures in place and that so far
all claims have been paid within 180 days after the receipt of a Notice of
Loss as specified in the CGFAA.
As previously discussed, the CGFAA appropriated $455 million to compensate
victims for losses resulting from the Cerro Grande fire. In its fiscal year
2000 audited financial statements, FEMA recognized an estimated claim
liability of $437 million. This amount represents the known probable and
estimable losses that were unpaid as of September 30, 2000, and is based on
the August 28, 2000, Interim Final Rules published in the Federal Register.
In addition, FEMA reported that there is a reasonable possibility that
additional liabilities may have been incurred. However, these amounts could
not yet be estimated because the potential claims were unknown or had not
been defined under the CGFAA ?Interim
Final Rules.? FEMA?s estimated claim liability is based largely on a
December 5, 2000, independent actuary?s report. This report has not been
updated to reflect the policy changes contained in the final program rules
published in March 2001 or to reflect new policies implemented since
December. FEMA officials told us that because this report is costly to
prepare, they only intend to update the study annually for financial
statement purposes.
Based on our analysis of this actuarial report, we believe there is a
possibility that additional funding may be required to satisfy the claims
Certain Key Policies and
Procedures Are Under Development
Additional Claim Funding May Be Required
Page 13 GAO- 01- 848 Cerro Grande Claim Payments
likely to arise as a result of the fire. The actuary?s study did not provide
estimates for certain categories of losses that could be significant. For
example, no estimates of loss were included for business losses outside of
the immediate fire area 10 or for damaged or lost sacred Pueblo (tribal)
lands. At least one Pueblo has filed a Notice of Loss where there is a
potential claim for damages to unique cultural and religious sites as well
as environmental damages to the Pueblo grounds. The Notice of Loss also
mentions potential claims for loss of range productivity and agricultural
lands, cultural plants, big game, and archeological and cultural sites.
In addition, to date, no estimates for devaluation of residential and
commercial real estate and Pueblo lands as a result of the fire have been
made. OCGFC contracted with an independent public accounting firm to analyze
the residential real estate in the County of Los Alamos. The purpose of this
analysis was to assess whether the value of residential property that was
not physically damaged by the fire declined as a result of the fire, and if
so, which communities and types of housing were most effected. The results
of this study were released on March 28, 2001, and concluded that single-
family residences in Los Alamos County sold between May 10, 2000, and
January 31, 2001, experienced an average diminution in value in the range of
3 to 11 percent. 11 In addition, the study concluded that other types of
housing, including quads, duplexes, condos, and townhouses in the eastern
area of the City of Los Alamos, also appear to have lost value. As of March
28, 2001, there have been approximately 25 claims for realized and
unrealized property value diminution 12 filed by Los Alamos residents. On
April 2, 2001, OCGFC issued policy guidance on how it intends to compensate
claimants who have realized losses. The policy states that unrealized loss
claims will not be addressed until an additional follow- up analysis of the
residential real estate market in Los Alamos is completed during the second
quarter of 2002. Until this study is completed and policies are developed
that address compensation for unrealized losses, uncertainties about the
potential cost will continue to exist.
10 The fire region is defined as Los Alamos, Rio Arriba and Santa Fe
Counties, as well as, the Santa Clara, San Ildefonso, Pojoaque, Picuris,
Nambe, and San Juan Pueblos. 11 PricewaterhouseCooper?s Economic Study of
the Los Alamos Post- Fire Residential Real Estate Market (Final Report). 12
Realized losses are recognized only after a home is sold. Unrealized losses
reflect possible declines that will not be realized until home is sold.
Page 14 GAO- 01- 848 Cerro Grande Claim Payments
Also, in the CGFAA Final Rules published in the Federal Register on March
21, 2001, FEMA increased the amount of allowable compensation for
miscellaneous and incidental expenses incurred in the claims process. These
payments are made after FEMA has obtained a properly executed Release and
Certification form from the claimant. Under the interim rule that was in
effect when the original actuarial report was issued, claimants (most
individuals and businesses) were reimbursed for 1 percent of their insured
and uninsured losses (excluding flood insurance premiums) with a minimum
payment of $100 and a maximum payment of $3,000. Under the final rule,
claimants now receive a payment equal to 5 percent of their insured and
uninsured losses subject to a $100 minimum and a $15, 000 maximum payment.
This policy change will increase the total amount paid under the CGFAA and
increases the likelihood that additional funding may be needed.
Finally, OCGFC officials stated that the volume of claims received has been
greater than originally anticipated. As of June 20, 2001, OCGFC officials
told us that approximately 14,000 claims had been submitted. Initial
estimates we were able to obtain only anticipated 1,200 to 1, 500 claims
being submitted. Therefore, the volume of claims submitted through mid- June
of this year is approximately 10 times more than the initial estimates. This
further calls into question the adequacy of the $455 million appropriated to
pay victims? claims.
While the federal government has accepted responsibility for the Cerro
Grande fire and enacted legislation to expeditiously compensate those
injured by the fire, it is incumbent on FEMA as the administering agency to
establish an effective system of internal control to safeguard the funds
appropriated for the Cerro Grande program. The CGFAA lays a framework to
establish such accountability by requiring FEMA to determine that victims?
injuries and losses occurred as a result of the fire and to determine the
amount of allowed compensation. In addition, the act requires that we
conduct annual audits of all claim payments. FEMA has established a process
to review all claims submitted. However, this process as currently
implemented does not provide adequate assurance that only valid claims were
paid or that the amounts paid were reasonable because there is insufficient
documentation of the steps taken to determine the validity and
reasonableness of the claim amounts. This lack of documentation precluded us
from determining what steps or actions the claim reviewers took to determine
the validity and reasonableness of the claims we attempted to review but
more importantly, may limit or prevent FEMA officials responsible for
approving the payments from Conclusion
Page 15 GAO- 01- 848 Cerro Grande Claim Payments
obtaining assurance that the payments are proper. In addition, certain OCGFC
policies and procedures for paying claims have either not yet been developed
or have not been formally and centrally documented.
Beyond identifying deficiencies in FEMA?s claims process, our work raised
questions about whether the $455 million appropriation to pay victims?
claims will be sufficient. The current estimate of the government?s
liability ($ 437 million) does not include estimates for all claim types and
was determined prior to the implementation of the final rules for
compensating fire victims. FEMA has not re- estimated the government?s
liability in light of significant changes that have occurred since December
2000.
In order to strengthen the claim review and approval process, we recommend
that the Director of FEMA direct the OCGFC to take the following actions:
Require claims reviewers to document all steps and procedures they perform
to determine the validity of a claim and the amount recommended for payment.
Review and consolidate all existing informal guidance and incorporate this
guidance into a set of formally documented policies and procedures that are
regularly updated and distributed to all staff responsible for the claims
review and award determination process.
Establish standardized policies and procedures to address claims for which
no policy currently exists as expediently as possible.
Based on the information currently available, re- estimate the remaining
claims to determine if there is sufficient funding available to fulfill the
objectives of the CGFAA. In the future, update the estimate as necessary to
reflect new claims information or changes in key policies and procedures.
FEMA, in a letter from its Assistant Director of the Readiness, Response and
Recovery Directorate, stated that FEMA and the Office of Cerro Grande Fire
Claims (OCGFC) were pleased that this report recognized that a systematic
process for paying fire victim?s injury claims in accordance with the Cerro
Grande Fire Assistance Act (CGFAA) was established and generally followed.
However, FEMA expressed its concern that our report did not provide a
sufficiently balanced view of its efforts to develop and implement the
program since its inception 9 months ago and provided comments on areas of
the report where FEMA and OCGFC took issue with our findings and comments on
its progress. FEMA did not specifically Recommendations for
Executive Action Agency Comments and Our Evaluation
Page 16 GAO- 01- 848 Cerro Grande Claim Payments
comment on our recommendations. FEMA?s comments are reproduced in appendix I
and discussed in more detail below.
FEMA expressed the need for further clarification on several of our comments
and findings on the (1) level of documentation contained in claim files and
(2) policies and procedures/ methodologies used for calculating losses. FEMA
stated that it believes guidance and procedures necessary to support claims
determination are present and are in use. Our evaluation of FEMA?s comments
follows. We amplified the discussion on several topics in our report in
response to these comments.
With regard to our finding that OCGFC?s current policies do not cover all
needed procedures and do not require sufficient evidentiary documents, FEMA
stated that consistent with the resources provided, OCGFC has responded
timely and energetically to emerging policy and procedure needs for a first-
time program. FEMA also stated that claim reviewers have responded to their
direction to improve the claim file documentation. While we recognize the
unique nature of this program, the necessity for documentation that proper
policies and procedures have been carried out still exists. The
documentation contained in the claim files during the period of our audit,
did not provide us with a basis for determining what steps, if any, the
claims reviewers had taken to determine the validity and reasonableness of
most claim payments we attempted to audit. Further and more importantly,
because of the condition of the files, FEMA officials cannot effectively
carry out their responsibilities for assessing the contractor?s work to
determine the validity and reasonableness of the amounts claimed. As a
result, inconsistent claims determinations can occur and there is no
assurance that the amounts paid are proper.
FEMA further stated that the key separation of duties and multiple layers of
review in its process (reviewer, supervisor, and authorizing official)
constitute substantial documentary evidence of the validation of an
individual claim. The main point of our report is that sufficient
documentary support is either not obtained or not written down to evidence
the specific procedures performed by the contracted claims reviewers.
Therefore, the effectiveness of the supervisory review process, even though
it consists of multiple layers of review, is diminished and does not provide
reasonable assurances that the claim payment determinations were proper.
Better documentation is needed so that OCGFC officials are able to properly
oversee the work of the contractors and to make a fully informed decision
concerning approval of a claimed amount for payment.
Page 17 GAO- 01- 848 Cerro Grande Claim Payments
FEMA stated that the legislative history of the CGFAA provides that ?the
regulation should not be overly burdensome for the claimants and should
provide an understandable and straightforward path to settlement.? In this
regard, our recommendations in no way put any additional burden on the
victims of the fire, but rather are directed toward obtaining reasonable
assurance that the procedures performed by OCGFC and its contractors during
the claim review and payment process are properly documented and provide a
reasonable basis for payment decisions under the circumstances.
Regarding our example of insufficient documentation of square footage, FEMA
stated that GAB Robins claims reviewers followed industry standards and that
OCGFC required complete documentation of steps taken by claim reviewers
during verification of square footage and personal property losses. While we
were told that the claim reviewers performed various procedures to determine
the validity of the claimed amounts, we typically found that there was no
evidence of these steps in the case files. Therefore, there is no basis for
any after- the- fact determinations on whether enough work was done to
access the reasonableness of the claims for square footage or other types of
losses.
In commenting on our observation regarding the development of key policies
and procedures, FEMA stated that OCGFC policies that were in effect during
our review were detailed and extensive, and were intended to help first
those whose homes had been lost or damaged by fire, those who suffered
interruption of their businesses, and those who were evacuated in response
to the fire. They further stated that other policies were developed when the
need arose and only after consulting with several other U. S. government
agencies to ensure consistency with other policies and positions taken in
lawsuits. We revised our report to make it clear that we do not take issue
with FEMA?s development of policies in a prioritized manner. However, we
continue to believe that FEMA should work expediently to develop and
finalize all remaining policies so that victims know what losses are
eligible for compensation and how their compensation will be determined well
in advance of the August 28, 2002, deadline for filing Notices of Loss.
We are sending copies of this report to the congressional committees and
subcommittees responsible for FEMA related issues; the Director of the
Federal Emergency Management Agency; Director of the Office of Cerro Grande
Fire Claims; and the Inspector General of the Federal Emergency Management
Agency. Copies will also be made available to others upon request.
Page 18 GAO- 01- 848 Cerro Grande Claim Payments
If you have questions about this report, please contact me at (202) 5129508
or Steven Haughton, Assistant Director, at (202) 512- 5999. Other key
contributors to this assignment were Julia Duquette, Phillip McIntyre, and
Christine Fant.
Linda M. Calbom Director, Financial Management and Assurance
Appendix I: Comments From the Federal Emergency Management Agency
Page 19 GAO- 01- 848 Cerro Grande Claim Payments
Appendix I: Comments From the Federal Emergency Management Agency
Appendix I: Comments From the Federal Emergency Management Agency
Page 20 GAO- 01- 848 Cerro Grande Claim Payments
Appendix I: Comments From the Federal Emergency Management Agency
Page 21 GAO- 01- 848 Cerro Grande Claim Payments
Appendix I: Comments From the Federal Emergency Management Agency
Page 22 GAO- 01- 848 Cerro Grande Claim Payments
Appendix I: Comments From the Federal Emergency Management Agency
Page 23 GAO- 01- 848 Cerro Grande Claim Payments (190002)
The first copy of each GAO report is free. Additional copies of reports are
$2 each. A check or money order should be made out to the Superintendent of
Documents. VISA and MasterCard credit cards are also accepted.
Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.
Orders by mail:
U. S. General Accounting Office P. O. Box 37050 Washington, DC 20013
Orders by visiting:
Room 1100 700 4 th St., NW (corner of 4 th and G Sts. NW) Washington, DC
20013
Orders by phone:
(202) 512- 6000 fax: (202) 512- 6061 TDD (202) 512- 2537
Each day, GAO issues a list of newly available reports and testimony. To
receive facsimile copies of the daily list or any list from the past 30
days, please call (202) 512- 6000 using a touchtone phone. A recorded menu
will provide information on how to obtain these lists.
Orders by Internet
For information on how to access GAO reports on the Internet, send an email
message with ?info? in the body to:
Info@ www. gao. gov or visit GAO?s World Wide Web home page at: http:// www.
gao. gov
Contact one:
Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm
E- mail: fraudnet@ gao. gov
1- 800- 424- 5454 (automated answering system) Ordering Information
To Report Fraud, Waste, and Abuse in Federal Programs
*** End of document. ***