Posted on: 6/7/2007

PRIMA Issues Position Statement on FEMA Deductible and Insurance Requirement

As an advocate for public risk managers, PRIMA makes every effort to keep its member up-to-date on news and legislation effecting risk management in the public sector. This is one of your most valuable benefits of PRIMA membership.


As you may be aware, the Federal Emergency Management Agency (FEMA) recently released a fact sheet regarding deductible reimbursement and minimum insurance requirements. Be assured that your Association is carefully monitoring developments surrounding these requirements.


On Monday, September 10, 2007, PRIMA released the following statement in response to FEMA's reimbursement and deductible requirements:


Virtually all of PRIMA's members have exposures to natural catastrophes of varying degrees and many deal with the specter and risk of floods. It is with these facts in mind that we feel compelled to respond to recent news from FEMA regarding deductible reimbursement and minimum insurance requirements. 


This document, FEMA's Disaster Assistance Fact Sheet DAP9580.3, contains two items that cause concern. Both items are found in the Frequently Asked Questions (FAQ) section of the document. The first is Item 4, which answers questions concerning the reimbursement of deductibles. It states "FEMA deducts total insurance proceeds received or anticipated from the total eligible cost of the project. The remaining amount is reimbursed, which usually includes deductibles, non-recoverable costs, or uninsurable losses. However, a deductible is not eligible for the same facility in a subsequent disaster of the same type." In our judgment, this implies that if FEMA has previously reimbursed an entity for a deductible following a disaster (hurricane, earthquake, etc.), it would not repeat this process if the same type of disaster hits the entity again. Though FEMA has recently rescinded this statement, the agency has not clarified its ultimate position.  We urge FEMA to be sensitive to the fact that many public entities have limited options when it comes to deductible levels, and typically elect those amounts and types of deductibles available based on their financial capacity, risk tolerance, and more often than not, what the insurance marketplace dictates to them as respects to the amounts and types of deductibles available.   For example, in many catastrophe prone areas of the country, insurance underwriters mandate percentage deductibles of 5% or 10% based on insured amounts per location for specified perils.   A public entity has little choice but to accept these deductible terms if they intend to maintain insurance limits that are reasonable and adequate above these forced retention levels.  It is important that the public entity members of PRIMA are able to continue to receive adequate funding from the public assistance programs of FEMA to help them recover financially from these often large forced retentions.  Without adequate public assistance funding, some public entities may not be able to recover fully, and the programs and services they provide the local economies will suffer as a result.  


The second concern is Item 13 in the FAQs which states, "Regardless of the National Flood Insurance Program (NFIP) maximum policy amount (currently $500,000 for building coverage), insurance is required at least up to the amount of eligible damage.  Commercial flood insurance policies are readily available for this excess coverage." Unlike the section in Item 4 that deals with deductibles, the flood insurance portion was not rescinded and remains in place. This has the potential effect of creating severe financial challenges for public entities that could affect many of our members in adverse ways.  Experienced risk managers have had difficulty locating excess flood coverage in catastrophe-prone areas. For many sections of the nation, there is no capacity, and whatever capacity there is comes at an exorbitant price. 


PRIMA acknowledges that the federal government has legitimate concerns in not wanting to be the "insurer of first resort" when disaster strikes. When possible, it is preferable for the marketplace to address insurance coverage needs. PRIMA supports FEMA in the development of realistic insurance requirements.  PRIMA encourages FEMA to do the following:


  • Broadcast  future fact sheets and bulletins consistent with the original intent and language of the Stafford Act that  clearly communicate to  grantees or subgrantees  that they will be required to maintain  insurance for facilities damaged by disasters other than floods  and by flood, but only when it is reasonably available, adequate, and necessary, and not require greater types and extent of insurance than are certified as reasonable by the appropriate State insurance commissioner responsible for regulation of such insurance. 
  • Rescind the current position  on excess flood insurance purchase requirements immediately, and to maintain a flood insurance requirement as a condition of receiving Federal assistance that requires a grantee or subgrantee to obtain and maintain flood insurance in the amount of the eligible disaster assistance, or the maximum amounts available under the National Flood Insurance Program;  but only when it is reasonably available, adequate, and necessary, and not require greater types and extent of flood insurance than are certified as reasonable by the appropriate State insurance commissioner responsible for regulation of such insurance.
  • Continue to invite more input from public risk managers, insurance brokers, underwriters and other risk management professionals before setting policy and broadcasting fact sheets that could have unintended negative consequences for public entities.


PRIMA will continue to monitor and disseminate information regarding this situation and encourages its membership to do the same.


For a synopsis of PRIMA's response to FEMA, click here.

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