Expert Commentary

Nonprofits: A Guide to Recovering from Catastrophic Losses

A tornado, hurricane, or flood hits your town, wreaking havoc, tearing apart residences and businesses alike, and causing significant damage to your hospital, college, or other nonprofit organization. You have insurance coverage for property damage and business interruption, but you expect a significant shortfall, because of either high deductibles or low limits. Now what?


Time Element
March 2011

Insurance is the centerpiece for most corporations' risk management programs. But nonprofit organizations should be mindful of the potential for Federal Emergency Management Agency (FEMA) recovery as well. FEMA can play an important role for a nonprofit after a disaster. FEMA is the component of the Department of Homeland Security that administers and oversees the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the "Stafford Act"). Through the Public Assistance (PA) Program, FEMA provides supplemental aid to states, communities, and certain private nonprofit (PNP) organizations to help them recover from disasters.

FEMA has provided millions of dollars of funding to numerous nonprofit organizations after disasters around the country. This includes hurricanes (e.g., Andrew, Frances, Jeanne, Charlie, Ivan, Katrina, Gustav, and Ike), floods (e.g., Tennessee, Iowa, Minnesota, and upstate New York), and numerous tornados. Obtaining FEMA funding can be onerous, as FEMA requires that all amounts be documented under specific rules. These include:

  • Capture all costs by specific FEMA category.
  • Document costs incurred to replace damaged contents and other assets.
  • Accumulate costs under specific "Project Worksheets" as required by FEMA.
  • Document bids obtained for specific work.
  • Show that contractor profit, overhead, and other fees are within FEMA guidelines.
  • Capture "Force Account Labor" in order to recover internal labor incurred.
  • Capture labor incurred (including internal and external) to prepare the FEMA claim.
  • Identify fringe benefits on labor that may be recoverable under FEMA.
  • Capture qualified administrative costs.
  • Determine the proper offset of insurance recovery against FEMA.
  • Consider Alternate Projects when repairs are not to be made to return the property to the condition it was before the incident.

Summary of the FEMA Process

When a catastrophic event occurs, the governor of the state may request that the president declare, under the authority of the Stafford Act, that an emergency or major disaster exists in the state. When such a declaration is made, the state becomes qualified to receive funds from FEMA and can provide grants through FEMA to qualified PNP organizations.

The program provides assistance for debris removal, emergency protective measures, and permanent restoration of infrastructure. The federal share of these expenses is typically 75 percent or more of eligible costs. The program also encourages protection from future damage by providing assistance for "hazard mitigation" measures during the recovery process.

To qualify for FEMA support, a PNP organization must provide certain types of services, follow special procedures, and meet certain qualifications,1 including:

  • Qualify as a tax-exempt nonprofit under Sections 501(c), (d), or (e) of the Internal Revenue Code.
  • Provide education, medical, custodial care, emergency, utility, certain irrigation facilities, or other essential governmental services. Essential governmental services are defined as:

Museums

Performing arts facilities

Community arts centers

Zoos

Community centers

Libraries

Homeless shelters

Rehabilitation facilities

Senior citizen centers

Shelter workshops

Health and safety services of a governmental nature

    If qualified, a PNP organization may apply directly to FEMA for a public assistance grant to cover permanent repairs and restoration if it provides "critical services." Critical services are defined as "those providing power, water, sewer, wastewater treatment, communications, education, and emergency medical, fire protection, and emergency services."2 All other PNP organizations that are considered to provide "noncritical" services must first apply to the Small Business Administration (SBA) for a low-interest loan.

    If the SBA loan is declined, the nonprofit may then apply for the FEMA public assistance grant for the full amount of qualified costs of the permanent repairs and restoration. If the SBA loan is approved but covers only a portion of the total qualified costs of permanent repairs and restoration, the PNP organization may then apply for a FEMA grant for the uncovered portion.

    FEMA covers only the property portion of a loss and does not cover business interruption. It does, however, have specific guidelines to potentially provide "emergency assistance" (remediation) following a disaster. Further, the portion of insurance attributable to property damage, which is often subject to an allocation, will be deducted from the FEMA eligible costs.

    Hazard Mitigation

    FEMA helps to identify and fund "hazard mitigation" measures to help PNP organizations make their facilities safer in order to avoid or minimize damage should another incident occur. However, the applicant should be mindful of certain requirements and FEMA guidelines. Funds are available under Sections 404 and 406 of the Stafford Act.

    Section 406 funds apply to facilities that have been damaged and are typically easier to obtain, but the applicant must show that the work to be performed meets certain "cost-benefit" tests relative to the damage actually incurred from the specific disaster. Section 404 is broader and allows an applicant to identify ways to make its facilities safer. The applicant need not show that the work meets the "cost-benefit" requirement. However, funds may be more difficult to obtain because FEMA provides 404 funding based on a percentage of the total federal disaster costs incurred in that state. The state administers Section 404; FEMA administers Section 406.

    Conclusion

    If a PNP facility qualifies for assistance from FEMA, it is critical to get the right team in place as soon as possible following the loss. The FEMA guidelines are quite specific, and the claim process is extensive, typically requiring a great deal of time, expertise, attention to detail, and overall management of the process. It is wise to involve the organization's insurance broker, attorney, and particularly a qualified insurance claims accountant—a certified public accountant (CPA) with experience in FEMA claims. (Some fees incurred for these costs may be reimbursable under "administrative costs" allowances under the Stafford Act.) Let those who have traveled this road before help lead the way.

    With proper planning, consultation, professional support, and an ongoing evaluation of risks and coverage, a nonprofit organization stands a good chance of recovering from a catastrophic loss. A solid strategy and plan can help minimize chaos, mitigate the loss itself, and expedite the overall recovery process.


    1FEMA Public Assistance Guide—FEMA 322, June 2007, Chapter 2. Eligibility, PNP Organizations.

    2FEMA Public Assistance Guide—FEMA 322, June 2007, Chapter 2. Eligibility, Application Requirements for PNPs—Permanent Work.


    Michael C. Speer, CPA, is an Expert Commentator for the IRMI.com business interruption series, which provides articles on practical and topical ideas on how a risk manager or insurance professional can better understand the business interruption claims process and the challenges faced with such claims. Mr. Speer has over 30 years of experience in public accounting and consulting firms and has extensive experience with business interruption and FEMA claims. He is with the Chicago office of Grant Thorton LLP, where he provides property insurance, business interruption and FEMA claim support services to policyholders. He also provides general forensic accounting and litigation support services. For contact information, see Mr. Speer's full biography on IRMI.com. He can be reached at


    Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

    Like This Article?

    IRMI Update

    Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

    Learn More