Treatment of Insurance Proceeds and the Stafford Act’s Public Assistance Grant Program

Treatment of Insurance Proceeds and the Stafford Act’s Public Assistance Grant Program

Brent Huber and Susan Charles   By Brent W. Huber and Susan Charles, Partners, Ice Miller LLP

In their article appearing in the November/December 2011 issue of Coverage, "Treatment of Insurance Proceeds and the Stafford Act's Public Assistance Grant Program," Brent W. Huber and Susan Charles of Ice Miller LLP, observe that in instances of widespread disaster a community may find available insurance insufficient, so that the federal government may be needed to act as a kind of insurer of last resort. The Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. § 5121, et seq., authorizes assistance to state and local governments and certain private nonprofit organizations in such instances. The article describes how FEMA implements the Act's Public Assistance ("PA") Grant Program in terms of what disaster recovery work is eligible for funding, what costs are eligible for reimbursement and what losses and costs the Act expressly excludes from recovery.

The article examines the interplay of policyholders' insurance recoveries and their ability to obtain PA funding. One of the more important questions in evaluating the impact of insurance on PA funding is whether the available coverage would constitute a "duplication of benefits" which the Stafford Act and implementing regulations prohibit. The article focuses on two corollary issues:

(1)   Where a policyholder settles with its insurer for less than the policy limits, can PA funding be used to make up for the difference?

(2)   Where a policy covers both PA eligible and PA ineligible costs, how should the policy limits be allocated and what losses should be covered by PA funding?

The article examines the language of the Stafford Act and Congressional intent in promulgating the Act, but finds that the Act and applicable regulations are not dispositive of these issues. Moreover, the article surveys FEMA's positions and actions on these matters and finds them to be inconsistent. Furthermore, there is little case law addressing these issues. But the article discusses one decision on point, the Ninth Circuit's ruling in Hawaii v. FEMA, 294 F.3d 1152, that adopted a "commercially reasonable" standard for evaluating a policyholder's actions with respect to available coverage. The article contends that the commercially reasonable standard for approaching coverage questions is appropriate given Congress' intent in enacting the Stafford Act. The article concludes that to the extent a PA recipient does not seek reimbursement of expenses already paid by or to be paid by insurance, the Stafford Act should allow recipients to determine how best to allocate insurance proceeds using commercially reasonable standards.

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