GAO

United States General Accounting Office

Report to Congressional Committees

July 2001 FEDERAL 

EMERGENCY 

MANAGEMENT 

AGENCY

Weaknesses Exist in 

the Cerro Grande Fire 

Assistance Claim 

Validation Process

GAO-01-848
Page 1 GAO-01-848 Cerro Grande Claim Payments

July 13, 2001

The Honorable Barbara A. Mikulski

Chairman

The Honorable Christopher Bond

Ranking Minority Member

Subcommittee on VA, HUD and Independent Agencies

Committee on Appropriations

United States Senate

The Honorable James T. Walsh

Chairman

The Honorable Alan B. Mollohan

Ranking Minority Member

Subcommittee on VA, HUD and Independent Agencies

Committee on Appropriations

House of Representatives

On July 13, 2000, the President signed into law the Cerro Grande Fire

Assistance Act (CGFAA).1

 The CGFAA established the Office of Cerro

Grande Fire Claims (OCGFC) and directed the Federal Emergency

Management Agency (FEMA) to expeditiously investigate victims’ claims

and to determine and compensate the victims of the Cerro Grande fire in

northern New Mexico for injuries resulting from the fire. The CGFAA also

mandated that we annually audit all claim payments made under the

CGFAA, including reviewing all subrogation claims2 for which insurance

companies have been paid or are seeking reimbursement as subrogees.

As agreed with your offices, our report, the first required under the

CGFAA, discusses whether OCGFC established a systematic process to

ensure the validity and reasonableness of claim payments in accordance

with the CGFAA. Our report also discusses one additional matter we

believe may be of importance to the Congress as it oversees FEMA’s

response to the Cerro Grande fire—whether the funding currently

appropriated will be sufficient to pay all approved claims.

 1

 Public Law 106-246, Div. C, Title I, 114 Stat. 511, 583 (2000).

2

 A subrogation claim is the right of one who has paid an obligation that another should

have paid to be indemnified by the other. In this case, insurance companies and possibly

others paid claims that the federal government is responsible for paying.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-848 Cerro Grande Claim Payments

As indicated above, the CGFAA also requires that we review all

subrogation claims for which insurance companies have been paid or are

seeking payment as subrogees. We could not review any subrogated claim

payments as part of our initial year audit because according to OCGFC

officials as of June 2001, no subrogated claim payments had been made.

The CGFAA specifies that nonsubrogee claims, to the maximum extent

practicable, are to be paid before subrogee claims. OCGFC in its first 9

months of operations has complied with this aspect of the act. OCGFC

officials did tell us, however, that as of June 2001, approximately 2,500

subrogation claims totaling approximately $70 million had been submitted

and are awaiting processing. OCGFC officials, based on estimates

provided by the insurance industry, indicated that as much as $160 million

in subrogated claims may be paid. OCGFC is developing the applicable

policies and procedures for processing these claims and estimates it may

start processing subrogated claims in August 2001 and make the first

payments in early 2002. We will audit these payments as part of our

subsequent year audits.

OCGFC has established and generally followed a systematic process for

the payment of fire victims’ injury claims in accordance with the CGFAA.

However, we found certain key procedures used by the claims reviewers

hired under contract by OCGFC were not formally documented and

actions taken by the claim reviewers to verify claimant-provided

information and determine claim reimbursements were typically not

documented. As a result, OCGFC officials responsible for approving claim

payments did not have a basis for determining the steps or actions the

claims reviewers had taken to determine the validity or reasonableness of

most claim payments and therefore, did not have the key information upon

which to base their payment approval determinations. FEMA’s Office of

Inspector General has raised similar issues as a result of the claim

payment reviews it has conducted.

Our review also disclosed that additional funds might be needed to pay

fire claims. As of September 30, 2000, FEMA reported, based on an

actuarial review of the damages, an estimated liability of $437 million for

outstanding claims. This estimate was not complete because damages for

various categories of claims, some of which could be significant, were not

estimable at the time. When this actuarial estimate was prepared, the final

rules and certain key policies and procedures for addressing how certain

claim types would be compensated had not yet been finalized. Some of

these policies and procedures were being developed during the time of our

review. In addition, the volume of claims submitted has been much greater

Results in Brief
Page 3 GAO-01-848 Cerro Grande Claim Payments

than originally anticipated. As of June 20, 2001, OCGFC officials told us

that approximately 14,000 claims had been submitted—approximately 10

times the volume initially expected. Accordingly, it is possible that the

$455 million appropriated to pay claims may be insufficient.

We are making recommendations in this report to strengthen OCGFC

claims review and payment processes. In commenting on a draft of the

report, FEMA stated that it was pleased that we recognized that a

systematic process for paying fire victim’s claims in accordance with the

CGFAA was established and followed, but said that it did not believe that

we had a balanced viewpoint of all of its efforts to develop and implement

the program since inception 9 months ago. It listed several areas where it

thought we were overly critical, particularly related to the adequacy of

policies and procedures and the level of documentation for supporting

claims. We made certain revisions to our report in response to FEMA’s

comments in order to clarify our positions in these areas. At the same

time, our overall position remains the same—the documentation

deficiencies we identified significantly diminish the effectiveness of the

claims review and approval process. OCGFC officials did not have

reasonable assurances that its claim review contractors performed

adequate procedures during their claims review and that the payment

process was consistently applied.

On May 4, 2000, the National Park Service initiated a prescribed burn on

federal land at Bandelier National Monument, New Mexico, in an effort to

reduce the threat of wildfires in the area. The plan was to burn up to 900

acres. On May 5, 2000, the prescribed burn exceeded the capabilities of the

National Park Service, spread to other federal and nonfederal land, and

was characterized as a wildfire. By May 7, 2000, the fire had grown in size

and caused evacuations in and around Los Alamos, New Mexico. On May

13, 2000, the President issued a major disaster declaration, and subsequent

to it, the Secretary of the Interior and the National Park Service assumed

responsibility for the fire and the subsequent loss of federal, state, local,

tribal, and private property. The fire, known as the Cerro Grande Fire,

burned approximately 48,000 acres in four counties and two Indian

pueblos, destroyed over 200 residential structures, and forced the

evacuation of more than 18,000 residents.

On July 13, 2000, the President signed the CGFAA into law. Under the

CGFAA, each claimant is entitled to be compensated by the United States

government for certain injuries and damages that resulted from the Cerro

Grande fire. The Congress appropriated $455 million to the FEMA for the

Background
Page 4 GAO-01-848 Cerro Grande Claim Payments

payment of such claims and $45 million for the administration of the Cerro

Grande program. The act requires that GAO conduct annual audits on the

payment of all claims made and annually report the results of the audits to

the Congress by July 13, beginning in fiscal year 2001. The act also requires

that our report include a review of all subrogation claims for which

insurance companies have been paid or are seeking payment as subrogees

under this act. FEMA is also required to annually submit a report to

Congress that provides information about claims submitted under the act.

This report is to include the amounts claimed, a description of the nature

of the claims, and a status or disposition of the claims, including the

amounts paid. FEMA’s first report is to be issued by August 28, 2001, based

on the issuance of the program rules as discussed below.

The CGFAA required FEMA to promulgate and publish implementing

regulations for the Cerro Grande program within 45 days of enactment of

the law. On August 28, 2000, FEMA published the Disaster Assistance:

Cerro Grande Fire Assistance; Interim Final Rule in the Federal Register

(Interim Final Rules).3

 FEMA followed the Interim Rule with a set of

implementing policies and procedures on November 13, 2000. FEMA

updated these policies and procedures in January and March 2001. After

reviewing public comments on the interim rule, FEMA finalized and

published The Disaster Assistance: Cerro Grande Fire Assistance; Final

Rule (Final Rule) on March 21, 2001.4

In performing our review, we considered the Standards for Internal

Control in the Federal Government.

5

 To gain an understanding of the

claim review and payment process established by the OCGFC, we

interviewed FEMA and OCGFC officials, General Adjusters Bureau (GAB)

Robins officials,6 and staff from FEMA’s Office of Inspector General. We

also reviewed the requirements of the CGFAA, the interim and final

regulations published in the Federal Register, OCGFC’s policies and

procedures manual, an actuarial report, FEMA’s fiscal year 2000 audited

 3

 44 CFR Chapter I and Part 295 (65 FR 52260).

4

 44 CFR Part 295 (66 FR 15948).

5 GAO/AIMD-00-21.3.1, November 1999.

6

 OCGFC awarded a contract to GAB (General Adjusters Bureau) Robins, an independent

claims adjusting firm to review and process all claims submitted by those who were injured

or suffered damages as a result of the Cerro Grande fire.

Scope and

Methodology
Page 5 GAO-01-848 Cerro Grande Claim Payments

financial statements and the current year Cerro Grande trial balance and

other documentation concerning the Cerro Grande program. We also

obtained, reviewed, and considered the results of numerous desk reviews

completed by FEMA’s Office of Inspector General. Finally, we selected

three separate random probability samples from the population of claim

payments to determine whether policies and procedures in place were

being followed and to ensure that they provided adequate internal controls

over appropriated federal funds. We did not assess the reasonableness of

individual payments made.

Our first sample of 59 partial claim payments was drawn from a population

of 1,195 partial claim payments made through November 24, 2000, that was

processed under the August 28, 2000, Interim Rules. The second random

probability sample consisted of 59 items drawn from a population of 488

partial payments made between November 25 and December 28, 2000.

These payments were processed using the policies and procedures

adopted by the OCGFC on November 13, 2000. For these two samples, we

reviewed the claim files to determine if all the required forms and key

signatures required to process a partial payment had been obtained. Our

third sample consisted of 63 final claim payments selected using a

stratified sampling approach from a population of 255 final payments

made through March 23, 2001. Fifty-eight of these 63 items were randomly

selected from the population of claim payments in which the amount paid

was less than $40,000. The remaining five items comprised all claim

payments greater than or equal to $40,000. For these 63 items, we

reviewed the claim files not only to see if all the required forms and

signatures existed but to also look for evidence that victims’ claims had

been investigated to determine their validity and that the payment

amounts were adequately supported and reasonable.7

As mentioned previously, we were not able to audit subrogated claim

payments because, as of June 2001, no subrogated claims had been

processed or paid. We did, however, inquire and obtain information about

the number and dollar amount of subrogated claims submitted to the

OCGFC through June 2001. We also inquired about the status of the

policies and procedures being drafted by the OCGFC to process these

claims.

 7

 In order to get assistance to fire survivors as soon as possible, the CGFAA allows for

claimants to receive partial payments before the start of the rebuilding process. Partial

payments may be based upon actual receipts or estimates. Final payments are made only

after the entire claims review process, as discussed below, is completed.
Page 6 GAO-01-848 Cerro Grande Claim Payments

Our work was conducted in Sante Fe, New Mexico, and Washington, D.C.,

from December 2000 through June 2001 in accordance with generally

accepted government auditing standards. We requested agency comments

on a draft of this report from the Director of FEMA. FEMA provided

certain technical comments orally, which we have incorporated as

appropriate. FEMA’s Assistant Director of the Readiness, Response and

Recovery Directorate also provided written comments in response to our

draft on behalf of FEMA and OCGFC, which are reproduced in appendix I.

We evaluated the written comments in the “Agency Comments and Our

Evaluation” section of this report.

The OCGFC has established and generally followed a systematic process

for the payment of claims resulting from the Cerro Grande fire. However,

this process, as illustrated in figure 1 and described below, needs to be

strengthened. We found that certain key procedures used by the claims

reviewers were not formally documented and actions taken by the claim

reviewers to verify claimant-provided information and determine claim

reimbursements were typically not documented. We also noted that

OCGFC is in the process of developing policies and procedures for how

certain claims to be paid in the coming months will be processed and paid.

The Standards for Internal Control in the Federal Government specifies

that internal control and all transactions and other significant events need

to be clearly documented and be readily available for examination. Control

activities should be documented in management directives, administrative

policies, or operating manuals which are properly maintained.

OCGFC Has

Established a

Systematic Claims

Payment Process but

Implementation

Weaknesses Exist
Page 7 GAO-01-848 Cerro Grande Claim Payments

Figure 1: Claims Payment Process

*OCGFC=Office of Cerro Grande Fire Claims

Source: OCGFC Claims Processing Information Handbook.

The claims payment process is initiated when an injured party submits a

Notice of Loss (NOL) form to the OCGFC. The NOL describes in general

terms the types of injury and/or damages a claimant has incurred as a

result of the fire. After the NOL is received, claim reviewers contact the

claimant to discuss their claim, explain the claims process, and determine

the best means to substantiate the loss or damages. The claims reviewer

then begins the process of verifying the victim’s claim. This includes tasks

such as

• confirming the cause and origin of the loss,

• reviewing supporting documentation provided by the claimant,

• confirming and assessing damages,

• determining the accuracy of the claimed amount,

• estimating or researching the values of damaged property,

• securing affidavits,

• contacting third parties to confirm or verify claimant information, and

OCGFC Claim Payment

Process

Claimant submits

notice of loss to

OCGFC*

Acknowledgement

by OCGFC

Claims Reviewer

meets with claimant

Claims reviewer

 verifies loss; prepares a claim

payment recommendation

package

Claims supervisor

reviews and

approves package

 Approval

 for payment

 form is sent to

 authorizing

 official

Authorizing

official

approves

payment

Partial

payment is

made

Proof of

loss signed

by claimant

is submitted

to OCGFC

Claims reviewer

prepares a

claim payment

recommendation

package

Claims supervisor

reviews and

approves package

Approval

for payment form is

sent to authorizing

official

Authorizing Official

approves payment

and sends a Letter of

Final Determination &

Release and Certification

Form to claimant

 Claimant signs and

 returns Release and

 Certification Form to

 OCGFC

Final Payment

is made

Schedule

of Payments

is created

Comptroller

reviews

sample of

payment

requests

Schedule

of payments

is created

Comptroller

reviews

sample of

payment

requests
Page 8 GAO-01-848 Cerro Grande Claim Payments

• documenting the claims review process.

Once these activities are complete, the claims reviewer prepares a claim

payment recommendation package which specifies that a claimant’s

injuries or damages occurred as a result of the Cerro Grande fire and that

claimed amounts are eligible for compensation under the CGFAA. A

claims supervisor reviews and approves this package. This review, among

other things, is intended to ensure that a proper investigation of the claim

occurred and that the proper documentation exists.

Following the approval of the claim payment recommendation package, an

Approval for Payment form is completed and sent to an OCGFC

Authorizing Official for review and approval. Requested payment amounts

are then added to a Schedule of Payments that is forwarded to the

Comptroller. The Comptroller reviews a sample of requested payments

and then approves the Schedule of Payments before sending it on to

FEMA’s Disaster Finance Center in Virginia for additional processing and

final approval for Treasury to disburse the funds.

In addition to this process, which is used for both partial payments (when

warranted) and final payments, prior to processing a final payment, the

claims reviewer prepares a Proof of Loss form. This form summarizes all

amounts recommended for payment, including those amounts previously

paid through a partial payment. The Proof of Loss must be signed by the

claimant subject to the provisions of 18 U.S.C. §1001, which establishes

criminal penalties for false statements. Once a signed Proof of Loss is

received, an OCGFC Authorized Official sends a Letter of Final

Determination to tell to the claimant the total amount of compensation

being offered under the CGFAA. Accompanying this letter is a Release and

Certification form which, if the claimant accepts the OCGFC

compensation determination, is signed thereby releasing the federal

government from any additional claims arising from the Cerro Grande

fire.8

 Upon receipt of the signed Release and Certification form, OCGFC

will process and mail a claimant’s final payment.

We found that OCGFC has generally followed its process for accepting,

processing and paying damage claims in terms of obtaining all the key

 8

 Section 295.34 of the final rule published in the Federal Register provides for the

reopening of claims, not withstanding the submission of a Release and Certification Form,

under certain circumstances.
Page 9 GAO-01-848 Cerro Grande Claim Payments

forms and signatures described above and maintaining this documentation

in the claim files. For instance, the claim files included properly signed

Notice of Loss forms, Claim Payment Recommendation Pages, and

Authorizations for Payment; and in the case of final payments, also

included Proof of Loss and Release and Certification forms. In addition,

the claim files included various documents that supported the amount

paid. However, as discussed below, certain key aspects of the claims

process were not sufficiently documented and other key control activities

were not being performed thereby leaving the Cerro Grande claims

program vulnerable to potential improper payments.

Based on our test work and discussions with OCGFC officials, we

determined that certain payment determinations were based on policies

and procedures that were not formally documented. OCGFC officials told

us that certain policies have only been documented in e-mails or in notes

from staff meetings. This can result in inconsistent determinations of

claim amounts and raised questions regarding the basis for certain claim

determinations. For example, we identified inconsistencies in the

calculation of lost wages for certain individuals. In one case, the

reimbursed amount was determined based on the claimant’s gross wages

whereas in another case, the claimant was reimbursed based upon net

wages. OCGFC officials stated that as part of renegotiating its contract

with its claims adjusting firm, it will require that all policies and

procedures be identified, formally documented, and updated monthly.

In addition to the lack of formally documented procedures, there generally

was insufficient documentation in the claim files to enable us to determine

what steps, if any, the claims reviewers hired under contract by OCGFC

had taken to verify certain key data provided by the claimants or to

determine the reasonableness of amounts claimed. This was the case for

43 of the 63 final claim payments we tested. When projected to the

universe of final payments made as of March 23, 2001, we can conclude

with 95 percent confidence that between 57 and 78 percent of the final

payments had similar documentation deficiencies. For the other 20 cases

where we determined the documentation was sufficient, the payments

usually involved victims’ claims for reimbursement of insurance

Lack of Documentation

Weakens Claims Process

and Precludes Validation

of Claims
Page 10 GAO-01-848 Cerro Grande Claim Payments

deductibles and/or flood insurance premiums.9 In these cases, the claim

payments were evidenced by documentation provided by the insurer.

The following examples illustrate the types of documentation deficiencies

we observed during our review of the case files. In numerous cases we

examined, the fire forced victims to evacuate their homes. OCGFC

compensated these victims for the “loss of use” of their homes based upon

a square footage methodology. In these cases, we found in the claim files

the calculations to determine the amount of compensation. What we did

not typically find was evidence to substantiate the square footage of the

home used in the calculations. We did not see evidence that the claims

adjusters had visited the property to obtain measurements or that they had

obtained or considered other documentation, such as property records or

insurance policies, that would substantiate the square footage.

For cases where personal property losses occurred, we commonly found

lists or spreadsheets prepared by the claimants listing the property

destroyed by the fire as well as the claimants’ estimates of the costs of

replacing these items. What was commonly lacking, however, was

documentation of the steps the claims reviewers took to verify that the

victims owned the items claimed to have been lost in the fire or to assess

the reasonableness of the replacement costs. Most often, the amount paid

for personal property was simply the total listed on the spreadsheet with

no evidence that any of the items or amounts were reviewed or

substantiated.

Officials we spoke with from FEMA’s Flood Insurance Administration told

us that its claims reviewers would routinely take steps to verify and

document that the information provided by the claimant was valid and that

the costs were reasonable before recommending a payment. Such steps

may include confirmation of purchases with a vendor or store, viewing

photographs taken prior to the fire, or performing reasonableness tests,

such as determining if items claimed are typical household items. While

OCGFC’s policy manual and its contract with GAB Robins do require an

investigation of the claim, there was frequently no evidence that such an

investigation was performed. Only in a limited number of circumstances

were we able to tell based on documentation in the claims file that a

claims reviewer had investigated particular items to establish that a

 9

 The CGFAA and the final program rules provide for the payment of flood insurance

premiums where there is an increased risk of flooding as a result of the fire.
Page 11 GAO-01-848 Cerro Grande Claim Payments

claimant did in fact own an item or that the amount requested to replace

the item was reasonable. For example, in one case, the claims reviewer’s

notes showed that he questioned and ultimately reduced the amount

claimed for an autographed poster from $1000 to $5.50 after researching

the poster’s value on the internet.

In another example of documentation deficiencies, a claims reviewer

recommended that certain medical expenses, although evidenced by third

party receipts and a physician’s letter, not be paid because the reviewer

determined that the claimant had a pre-existing condition. Based on our

discussions with OGCFC officials, we were told that this recommendation

was forwarded to an OCGFC authorizing official who reversed the claims

reviewer’s decision because the OCGFC policies provide for such a

payment under certain circumstances. However, the claim file contained

no explanation as to why the initial recommendation of the claim reviewer

was reversed. Key decisions such as this should be clearly documented in

the claim files to facilitate the supervisory review process and establish an

adequate audit trail as required by the Standards for Internal Control in

the Federal Government.

OCGFC officials advised us that the GAB Robins claims reviewers use an

automated claims information system (ACIS) to document their

interactions with the claimants and to document certain aspects of their

claim investigation work. Such an automated system could help mitigate

some of the documentation deficiencies we have discussed in this report.

We requested that OCGFC provide us with the available ACIS information

for specific cases in our sample. We reviewed the ACIS reports and found

that the reports documented GAB Robins’ contacts with the fire victims

but provided little or no information about what steps had been taken to

verify the validity or reasonableness of the claim payments for these

particular cases. In addition, the OIG reviews of OCGFC claim payments,

like our work, raised a number of questions regarding the adequacy of

documentation contained in the case files and also questioned whether in

certain circumstances OCGFC had established written policies on how to

handle certain claims. An OIG official told us that he has not found ACIS

to be helpful in resolving the documentation issues he has identified.

Without sufficient documentation, claims supervisors and authorizing

officials can not properly review the work of the claims reviewers, and the

risk of improper payments is increased. In addition, as stated above, the

lack of documentation in the claim files precluded us from determining

what steps the claims reviewers had taken to determine the validity and

reasonableness of most of the claim payments we tested.
Page 12 GAO-01-848 Cerro Grande Claim Payments

As of June 2001, OCGFC was in the process of developing certain key

policies and procedures for the payment of various claim types.

Established policies and procedures that are both documented and

communicated throughout an organization are a key component of an

effective system of internal control. As previously discussed, OCGFC is

still developing policies and procedures for paying subrogated claims. In

addition, OCGFC has deferred formulation of policies on how to

compensate property owners for unrealized declines in their property

values until the Los Alamos real estate market is further analyzed. Under

the CGFAA, fire victims have until August 28, 2002, to file Notices of Loss

for injuries resulting from the fire. OCGFC officials acknowledged that

finalizing all necessary policies and procedures is important and stated

that they have and will continue to approach policy development in a

prioritized manner. For instance, since the CGFAA specified subrogated

claim payments were not to occur until after the payment of other claims,

OCGFC placed a lower priority on the development of these policies and

procedures. OCGFC officials stressed that no claims have been paid

without first having put policies and procedures in place and that so far all

claims have been paid within 180 days after the receipt of a Notice of Loss

as specified in the CGFAA.

As previously discussed, the CGFAA appropriated $455 million to

compensate victims for losses resulting from the Cerro Grande fire. In its

fiscal year 2000 audited financial statements, FEMA recognized an

estimated claim liability of $437 million. This amount represents the

known probable and estimable losses that were unpaid as of September

30, 2000, and is based on the August 28, 2000, Interim Final Rules

published in the Federal Register. In addition, FEMA reported that there is

a reasonable possibility that additional liabilities may have been incurred.

However, these amounts could not yet be estimated because the potential

claims were unknown or had not been defined under the CGFAA “Interim

Final Rules.” FEMA’s estimated claim liability is based largely on a

December 5, 2000, independent actuary’s report. This report has not been

updated to reflect the policy changes contained in the final program rules

published in March 2001 or to reflect new policies implemented since

December. FEMA officials told us that because this report is costly to

prepare, they only intend to update the study annually for financial

statement purposes.

Based on our analysis of this actuarial report, we believe there is a

possibility that additional funding may be required to satisfy the claims

Certain Key Policies and

Procedures Are Under

Development

Additional Claim

Funding May Be

Required
Page 13 GAO-01-848 Cerro Grande Claim Payments

likely to arise as a result of the fire. The actuary’s study did not provide

estimates for certain categories of losses that could be significant. For

example, no estimates of loss were included for business losses outside of

the immediate fire area10 or for damaged or lost sacred Pueblo (tribal)

lands. At least one Pueblo has filed a Notice of Loss where there is a

potential claim for damages to unique cultural and religious sites as well as

environmental damages to the Pueblo grounds. The Notice of Loss also

mentions potential claims for loss of range productivity and agricultural

lands, cultural plants, big game, and archeological and cultural sites.

In addition, to date, no estimates for devaluation of residential and

commercial real estate and Pueblo lands as a result of the fire have been

made. OCGFC contracted with an independent public accounting firm to

analyze the residential real estate in the County of Los Alamos. The

purpose of this analysis was to assess whether the value of residential

property that was not physically damaged by the fire declined as a result

of the fire, and if so, which communities and types of housing were most

effected. The results of this study were released on March 28, 2001, and

concluded that single-family residences in Los Alamos County sold

between May 10, 2000, and January 31, 2001, experienced an average

diminution in value in the range of 3 to 11 percent.11 In addition, the study

concluded that other types of housing, including quads, duplexes, condos,

and townhouses in the eastern area of the City of Los Alamos, also appear

to have lost value. As of March 28, 2001, there have been approximately 25

claims for realized and unrealized property value diminution12 filed by Los

Alamos residents. On April 2, 2001, OCGFC issued policy guidance on how

it intends to compensate claimants who have realized losses. The policy

states that unrealized loss claims will not be addressed until an additional

follow-up analysis of the residential real estate market in Los Alamos is

completed during the second quarter of 2002. Until this study is completed

and policies are developed that address compensation for unrealized

losses, uncertainties about the potential cost will continue to exist.

 10 The fire region is defined as Los Alamos, Rio Arriba and Santa Fe Counties, as well as,

the Santa Clara, San Ildefonso, Pojoaque, Picuris, Nambe, and San Juan Pueblos.

11 PricewaterhouseCooper’s Economic Study of the Los Alamos Post-Fire Residential Real

Estate Market (Final Report).

12 Realized losses are recognized only after a home is sold. Unrealized losses reflect

possible declines that will not be realized until home is sold.
Page 14 GAO-01-848 Cerro Grande Claim Payments

Also, in the CGFAA Final Rules published in the Federal Register on

March 21, 2001, FEMA increased the amount of allowable compensation

for miscellaneous and incidental expenses incurred in the claims process.

These payments are made after FEMA has obtained a properly executed

Release and Certification form from the claimant. Under the interim rule

that was in effect when the original actuarial report was issued, claimants

(most individuals and businesses) were reimbursed for 1 percent of their

insured and uninsured losses (excluding flood insurance premiums) with a

minimum payment of $100 and a maximum payment of $3,000. Under the

final rule, claimants now receive a payment equal to 5 percent of their

insured and uninsured losses subject to a $100 minimum and a $15,000

maximum payment. This policy change will increase the total amount paid

under the CGFAA and increases the likelihood that additional funding may

be needed.

Finally, OCGFC officials stated that the volume of claims received has

been greater than originally anticipated. As of June 20, 2001, OCGFC

officials told us that approximately 14,000 claims had been submitted.

Initial estimates we were able to obtain only anticipated 1,200 to 1,500

claims being submitted. Therefore, the volume of claims submitted

through mid-June of this year is approximately 10 times more than the

initial estimates. This further calls into question the adequacy of the

$455 million appropriated to pay victims’ claims.

While the federal government has accepted responsibility for the Cerro

Grande fire and enacted legislation to expeditiously compensate those

injured by the fire, it is incumbent on FEMA as the administering agency

to establish an effective system of internal control to safeguard the funds

appropriated for the Cerro Grande program. The CGFAA lays a framework

to establish such accountability by requiring FEMA to determine that

victims’ injuries and losses occurred as a result of the fire and to

determine the amount of allowed compensation. In addition, the act

requires that we conduct annual audits of all claim payments. FEMA has

established a process to review all claims submitted. However, this

process as currently implemented does not provide adequate assurance

that only valid claims were paid or that the amounts paid were reasonable

because there is insufficient documentation of the steps taken to

determine the validity and reasonableness of the claim amounts. This lack

of documentation precluded us from determining what steps or actions

the claim reviewers took to determine the validity and reasonableness of

the claims we attempted to review but more importantly, may limit or

prevent FEMA officials responsible for approving the payments from

Conclusion
Page 15 GAO-01-848 Cerro Grande Claim Payments

obtaining assurance that the payments are proper. In addition, certain

OCGFC policies and procedures for paying claims have either not yet been

developed or have not been formally and centrally documented.

Beyond identifying deficiencies in FEMA’s claims process, our work raised

questions about whether the $455 million appropriation to pay victims’

claims will be sufficient. The current estimate of the government’s liability

($437 million) does not include estimates for all claim types and was

determined prior to the implementation of the final rules for compensating

fire victims. FEMA has not re-estimated the government’s liability in light

of significant changes that have occurred since December 2000.

In order to strengthen the claim review and approval process, we

recommend that the Director of FEMA direct the OCGFC to take the

following actions:

• Require claims reviewers to document all steps and procedures they

perform to determine the validity of a claim and the amount recommended

for payment.

• Review and consolidate all existing informal guidance and incorporate this

guidance into a set of formally documented policies and procedures that

are regularly updated and distributed to all staff responsible for the claims

review and award determination process.

• Establish standardized policies and procedures to address claims for

which no policy currently exists as expediently as possible.

• Based on the information currently available, re-estimate the remaining

claims to determine if there is sufficient funding available to fulfill the

objectives of the CGFAA. In the future, update the estimate as necessary

to reflect new claims information or changes in key policies and

procedures.

FEMA, in a letter from its Assistant Director of the Readiness, Response

and Recovery Directorate, stated that FEMA and the Office of Cerro

Grande Fire Claims (OCGFC) were pleased that this report recognized that

a systematic process for paying fire victim’s injury claims in accordance

with the Cerro Grande Fire Assistance Act (CGFAA) was established and

generally followed. However, FEMA expressed its concern that our report

did not provide a sufficiently balanced view of its efforts to develop and

implement the program since its inception 9 months ago and provided

comments on areas of the report where FEMA and OCGFC took issue with

our findings and comments on its progress. FEMA did not specifically

Recommendations for

Executive Action

Agency Comments

and Our Evaluation
Page 16 GAO-01-848 Cerro Grande Claim Payments

comment on our recommendations. FEMA’s comments are reproduced in

appendix I and discussed in more detail below.

FEMA expressed the need for further clarification on several of our

comments and findings on the (1) level of documentation contained in

claim files and (2) policies and procedures/methodologies used for

calculating losses. FEMA stated that it believes guidance and procedures

necessary to support claims determination are present and are in use. Our

evaluation of FEMA’s comments follows. We amplified the discussion on

several topics in our report in response to these comments.

With regard to our finding that OCGFC’s current policies do not cover all

needed procedures and do not require sufficient evidentiary documents,

FEMA stated that consistent with the resources provided, OCGFC has

responded timely and energetically to emerging policy and procedure

needs for a first-time program. FEMA also stated that claim reviewers have

responded to their direction to improve the claim file documentation.

While we recognize the unique nature of this program, the necessity for

documentation that proper policies and procedures have been carried out

still exists. The documentation contained in the claim files during the

period of our audit, did not provide us with a basis for determining what

steps, if any, the claims reviewers had taken to determine the validity and

reasonableness of most claim payments we attempted to audit. Further

and more importantly, because of the condition of the files, FEMA officials

cannot effectively carry out their responsibilities for assessing the

contractor’s work to determine the validity and reasonableness of the

amounts claimed. As a result, inconsistent claims determinations can

occur and there is no assurance that the amounts paid are proper.

FEMA further stated that the key separation of duties and multiple layers

of review in its process (reviewer, supervisor, and authorizing official)

constitute substantial documentary evidence of the validation of an

individual claim. The main point of our report is that sufficient

documentary support is either not obtained or not written down to

evidence the specific procedures performed by the contracted claims

reviewers. Therefore, the effectiveness of the supervisory review process,

even though it consists of multiple layers of review, is diminished and does

not provide reasonable assurances that the claim payment determinations

were proper. Better documentation is needed so that OCGFC officials are

able to properly oversee the work of the contractors and to make a fully

informed decision concerning approval of a claimed amount for payment.
Page 17 GAO-01-848 Cerro Grande Claim Payments

FEMA stated that the legislative history of the CGFAA provides that “the

regulation should not be overly burdensome for the claimants and should

provide an understandable and straightforward path to settlement.” In this

regard, our recommendations in no way put any additional burden on the

victims of the fire, but rather are directed toward obtaining reasonable

assurance that the procedures performed by OCGFC and its contractors

during the claim review and payment process are properly documented

and provide a reasonable basis for payment decisions under the

circumstances.

Regarding our example of insufficient documentation of square footage,

FEMA stated that GAB Robins claims reviewers followed industry

standards and that OCGFC required complete documentation of steps

taken by claim reviewers during verification of square footage and

personal property losses. While we were told that the claim reviewers

performed various procedures to determine the validity of the claimed

amounts, we typically found that there was no evidence of these steps in

the case files. Therefore, there is no basis for any after-the-fact

determinations on whether enough work was done to access the

reasonableness of the claims for square footage or other types of losses.

In commenting on our observation regarding the development of key

policies and procedures, FEMA stated that OCGFC policies that were in

effect during our review were detailed and extensive, and were intended

to help first those whose homes had been lost or damaged by fire, those

who suffered interruption of their businesses, and those who were

evacuated in response to the fire. They further stated that other policies

were developed when the need arose and only after consulting with

several other U.S. government agencies to ensure consistency with other

policies and positions taken in lawsuits. We revised our report to make it

clear that we do not take issue with FEMA’s development of policies in a

prioritized manner. However, we continue to believe that FEMA should

work expediently to develop and finalize all remaining policies so that

victims know what losses are eligible for compensation and how their

compensation will be determined well in advance of the August 28, 2002,

deadline for filing Notices of Loss.

We are sending copies of this report to the congressional committees and

subcommittees responsible for FEMA related issues; the Director of the

Federal Emergency Management Agency; Director of the Office of Cerro

Grande Fire Claims; and the Inspector General of the Federal Emergency

Management Agency. Copies will also be made available to others upon

request.
Page 18 GAO-01-848 Cerro Grande Claim Payments

If you have questions about this report, please contact me at (202) 512-

9508 or Steven Haughton, Assistant Director, at (202) 512-5999. Other key

contributors to this assignment were Julia Duquette, Phillip McIntyre, and

Christine Fant.

Linda M. Calbom

Director, Financial Management and Assurance
Appendix I: Comments From the Federal

Emergency Management Agency

Page 19 GAO-01-848 Cerro Grande Claim Payments

Appendix I: Comments From the Federal

Emergency Management Agency
Appendix I: Comments From the Federal

Emergency Management Agency

Page 20 GAO-01-848 Cerro Grande Claim Payments
Appendix I: Comments From the Federal

Emergency Management Agency

Page 21 GAO-01-848 Cerro Grande Claim Payments
Appendix I: Comments From the Federal

Emergency Management Agency

Page 22 GAO-01-848 Cerro Grande Claim Payments
Appendix I: Comments From the Federal

Emergency Management Agency

Page 23 GAO-01-848 Cerro Grande Claim Payments (190002)

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