“This could have a devastating effect,” said PRIMA President Sarah Perry, risk manager for the City of Columbia in Mo. She added, “This does have a much bigger impact on public risk managers than the private sector.”

PRIMA said late yesterday in a statement that there were “significant concerns” about the impact FEMA's interpretation of the Stafford Act (as described in the 2007 fact sheet) would have on its members.

The Alexandria, Va.-based PRIMA said that all of its membership–comprised of more than 2,000 entities in over 1,800 jurisdictions–”have exposures to natural catastrophes of varying degrees, and many members deal with the specter and risk of floods.”

The statement said that FEMA's reissued document contains two items causing concern–both found in the Frequently Asked Questions (FAQ) section.

The first, Item 4, answers questions concerning the reimbursement of deductibles, PRIMA said. It states: “In the first disaster, FEMA deducts the total insurance proceeds received or anticipated from the total eligible cost of the project. The remaining amount is reimbursed, which usually includes deductibles, nonrecoverable costs, or uninsurable losses.

“However, a deductible, up to and including the amount of eligible damages incurred in a previous disaster, is not eligible for the same facility in a subsequent disaster of the same type. The portion of a deductible in excess of the previous disaster damages is eligible.”

PRIMA said the statement implies that if an entity has previously been reimbursed by FEMA for a deductible following a disaster, FEMA would not repeat this process if the same type of disaster were to hit the entity again, unless the deductible exceeds the entire prior loss. In that case only the portion of the deductible exceeding the entire prior loss would be reimbursed.

“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,” PRIMA said.

For example, in many catastrophe-prone areas of the country, insurance underwriters mandate percentage deductibles of 5 percent or 10 percent, based on insured amounts per location for specified perils, PRIMA pointed out.

“A public entity has little choice but to accept these deductible terms if it intends to maintain insurance limits that are reasonable and adequate above these forced retention levels,” the organization said.

The second concern, Item 13 in the FAQs, states: “Regardless of the National Flood Insurance Program (NFIP) maximum policy amount (currently $500,000), insurance is required at least up to the amount of eligible damage. Commercial flood insurance policies are readily available for this excess coverage.”

This interpretation, PRIMA said, could potentially create “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 acknowledged the federal government has legitimate concerns in not wanting to be the “insurer of first resort” when disaster strikes and said it supports FEMA in developing realistic insurance requirements.

The association recommended that FEMA:

o Broadcast future fact sheets and bulletins consistent with the original intent and language of the Stafford Act–clearly communicating 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.

o Immediately rescind the current position on excess flood insurance purchase requirements–and maintain a flood insurance requirement as a condition of receiving federal assistance requiring 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.

o Invite input from public risk managers, insurance brokers, underwriters and other risk management professionals before setting policy and broadcasting fact sheets.

PRIMA said it will continue to monitor the situation and encouraged its membership to do so also. PRIMA extended an offer to work with FEMA officials on an acceptable revision of the Fact Sheet and on future Fact Sheets before they are issued.