FEMA: Any part of a claim or estimate not fully
supported by documented proof cannot be presented for payment— statements
without supporting documentation are insufficient to justify payment of NFIP
funds.
On November 20, 2014, FEMA issued some additional
clarifications to facilitate the handling of flood claims for settlement
purposes. It is very important for the
policyholders to provide receipts and other backup to support their expenses
when they performed repairs prior to the claim being approved by FEMA. FEMA will require actual receipts, paid
bills, paid invoices, cancelled checks and the like to support payment.
Here is the memo.
U.S. Department of Homeland Security 500 C St. SW Washington, D.C. 20472
W-14058
November 20, 2014
MEMORANDUM FOR: Write
Your Own (WYO) Company Principal Coordinators and the
National Flood Insurance Program (NFIP) Servicing Agent
SUBJECT: Clarification on: 1) Application of the Dwelling Form
Loss Settlement Clause; 2) Use of Flood Insurance Claims Proceeds; and 3)
FEMA’s Underwriting and Claims Operation Review Tool (U-CORT) November 20, 2014
This Bulletin addresses
the application of the Loss Settlement Clause of the Standard Flood Insurance
Policy (SFIP) Dwelling Form, 44 C.F.R. Part 61, App. A(1), § VII(V).
Specifically, it explains the application of the Loss Settlement Clause to the
settlement of claims when there is direct physical loss by or from flood to the
policyholder’s insured property.
The Loss Settlement Clause sets forth three methods of settling
insured losses: Replacement Cost Loss Settlement, Special Loss Settlement, and
the Actual Cash Value Loss Settlement. This Bulletin addresses the application
of the Replacement Cost Loss Settlement and Actual Cash Value Loss Settlement
provisions.
Replacement Cost Loss Settlement
For dwellings that qualify for the Replacement Cost Loss
Settlement, the NFIP will pay to repair or replace the damaged dwelling, after
applying the deductible but without deducting the value of its physical
depreciation, in an amount equal to either:
(1) The limit of liability for building coverage as shown on
the policyholder’s Declaration Page;
(2) The replacement cost of that part of the dwelling that was
damaged, with materials of like kind and quality, and for like use; or
(3) The necessary amount actually spent to repair or replace
the damaged part of the dwelling for like use.
Applying this provision, the NFIP will pay the least of those
three amounts.
Questions related to the Replacement Cost Loss Settlement
provision often relate to eligibility for additional payment after repairs and
initial payment has been made based on an estimate of replacement cost, and a
policyholder seeks additional payment based on the actual cost of repairs. The
policyholder is eligible for payment based on actual costs, and the NFIP
insurer will need documentation of the actual costs in order to make the
additional payment. FEMA will require actual receipts, paid bills, paid
invoices, cancelled checks and the like to support payment. If repairs have
been completed, it is the policyholder’s responsibility to prove that the claim
amounts paid plus the value of the deductible(s) and any applicable physical
depreciation were spent to repair or replace covered flood damage.
Actual Cash Value Loss Settlement
Buildings that are not eligible for the Replacement Cost Loss
Settlement provision are treated under the Actual Cash Value Loss Settlement
provision, which provides compensation based on “[t]he cost to replace an
insured item of property at the time of loss, less the value of its physical
depreciation” and less the policy deductible.
Significantly, the Actual Cash Value Loss Settlement provision
does not provide for a separate and distinct method to calculate the amount of
the loss—it only provides a different approach to compensate for the loss. This
principle appears to have caused confusion and requires clarification. If the
damage has not been repaired, the amount of the loss is determined by the
adjustment based on principles set forth in the Standard Flood Insurance
Policy, other guidance, and on the supported and verifiable estimate prepared
by the adjuster and, when available, receipts, and other data showing the
estimated cost of repair to further support the adjuster’s estimate. If repairs
have been completed, it is the policyholder’s responsibility to prove that the
amounts paid on the claim plus the value of the deductible(s) and any
applicable physical depreciation[1]
were spent to repair or replace covered flood damage. This only can be done by
presenting receipts, paid bills, paid invoices, and canceled checks. The amount
of loss cannot be determined on an estimate that is not fully supported by the
proof discussed above. Any part of a
claim or estimate not fully supported by documented proof cannot be presented
for payment— statements without supporting documentation are insufficient to
justify payment of NFIP funds.
The NFIP insurer may hire CPAs or other
financial experts to calculate the amount actually spent plus the value of the
deductible(s) and applicable depreciation. Only once the value of the loss has
been determined, either with receipts documenting repairs and/or a contractor’s
estimate of new damage that has not yet been repaired but has been verified,
can the NFIP insurer calculate the replacement cost or actual cash value loss
additional payment, as appropriate. The starting point for either methodology
of calculating the settlement amount is the same—the replacement cost of flood
damaged insured property with no deduction for the deductible and applicable
depreciation. Under the Replacement Cost Loss Settlement provision, no
deduction for the value of physical depreciation1 is applied to the amount of
loss, although the deductible is applied. Under the Actual Cash Value Loss
Settlement provision, the amount of loss is reduced by both the value of
physical depreciation and the applicable deductible(s). This process is
consistent with the SFIP’s “Our Options After a Loss” clause, 44 C.F.R. Part
61, App. A(1), § VII(K) and (V).
A second issue also needs clarification. Where repairs have
been made before a request for additional payment is submitted, the NFIP
Insurer must determine that funds previously provided were spent to make
repairs and that the supplemental request does not duplicate the prior payment.
Once payment is made to the policyholder, the NFIP has no control over the use
of the funds. The policyholder may use the funds to repair the covered loss,
repair losses that are not covered by the SFIP, or for any other use. Also, the
deductible and any applicable depreciation are the responsibility of the
policyholder and cannot be reimbursed as a part of any additional payment(s).
Accordingly, a policyholder’s lack of funds to complete repairs does not per se
show an underpayment.
To be eligible for additional NFIP payment, the
policyholder must document that funds previously paid were used to repair or
replace covered damage and must show with specificity that additional funds to
repair covered damage are required. The NFIP insurer should carefully review
the evidence of actual loss, together with paid receipts, paid invoices,
canceled checks, and other evidence of payment for repairs, to ensure that the
insured is not seeking duplicate payments, payment for uncovered losses, or the
values of applicable deprecation and the deductible(s) in a request for
additional payment.
A third issue that requires clarification is the appropriate
use and representation of FEMA’s Underwriting and Claims Operation Review Tool
(U-CORT) and the meaning of recent revisions to the U-CORT template. U-CORT is
a computer-based program designed to document information for operational
reviews that is also used for the granting of a waiver of the SFIP’s time
requirement for policyholders to send the Proof of Loss to their NFIP insurer. The NFIP Insurer documents the basis for a
request for a waiver through the use of U-CORT, thus facilitating the
expeditious resolution of claims. The revisions to the FEMA U-CORT template
merely asks and reminds NFIP insurers of factors they already evaluate during
the claim process and prior to making the waiver request.
Any questions or comments should be directed to Russell M.
Tinsley, AIC. Mr. Tinsley’s email address is Russell.Tinsley@fema.dhs.gov.
Once again we ask for your cooperation.
cc: Vendors, Government Technical Representatives, IBHS
[1] SFIP Dwelling Form, Section VII, V.4 list the types of
property that are always settled at Actual Cash Value regardless of the
applicable Loss Settlement provision. Notably, the list includes appliances,
carpets, and carpet pads, outdoor awnings, outdoor antennas or aerials, and
other outdoor equipment.
