- 

DEPARTMENT OF HOMELAND SECURITY 

Office of Inspector General 

A Review of the World Trade Center 

Captive Insurance Company 

OIG-08-21 June 2008
 

Office of Inspector General 

U.S. Department of Homeland Security 

Washington, DC 20528 

June 12, 2008 

Preface 

The Department of Homeland Security Office of Inspector General (OIG) was 

established by the Homeland Security Act of 2002 (Public Law 107-296) by amendment 

to the Inspector General Act of 1978. This is one of a series of audit, inspection, and 

special reports prepared as part of our oversight responsibilities to promote economy, 

efficiency, and effectiveness within the department. 

This report addresses concerns raised by Congressman Jerrold Nadler regarding the 

World Trade Center Captive Insurance Company’s handling of claims arising from debris 

removal work at the World Trade Center site following the September 11, 2001, terrorist 

attacks. It is based on interviews with employees and officials of relevant agencies and 

institutions, direct observations, and a review of applicable documents. 

The recommendations herein have been developed to the best knowledge available to our 

office, and have been discussed in draft with those responsible for implementation. It is 

our hope that this report will result in more effective, efficient, and economical 

operations. We express our appreciation to all of those who contributed to the 

preparation of this report. 

Richard L. Skinner 

Inspector General 
 

Table of Contents/Abbreviations 

Executive Summary.............................................................................................................1
 

Background..........................................................................................................................2 

Results of Review ................................................................................................................8 

The Captive’s Litigation of Claims Does Not Violate Public Law 108-7 or 

the Grant and Sub-Grant Agreements............................................................................8 

The Captive’s Expenditures Are Offset Through Investment Income and 

Guided by Internal Controls.........................................................................................15 

Claims Administration Procedures Support the Captive’s Current Activities.............19 

FEMA Oversight Activities Should Be Strengthened .................................................22 

Recommendations........................................................................................................28 

Management Comments and OIG Analysis ................................................................28 

Appendices 

Appendix A: Purpose, Scope, and Methodology........................................................33 

Appendix B: Management Comments to the Draft Report ........................................35 

Appendix C: Letter from Congressman Jerrold Nadler..............................................41 

Appendix D: World Trade Center Captive Insurance Company’s Claims

 Administration Process .........................................................................43 

Appendix E: World Trade Center Captive Insurance Company Expenditures 

as of March 2008 ..................................................................................46 

Appendix F: Site Locations for World Trade Center Recovery Operations...............47 

Appendix G: Major Contributors to this Report.........................................................48 

Appendix H: Report Distribution................................................................................49 

Abbreviations 

DHS Department of Homeland Security 

FEMA Federal Emergency Management Agency 

OIG Office of Inspector General 

OMB Office of Management and Budget 

VCF Victim Compensation Fund 

WTC World Trade Center 
OIG 

Department of Homeland Security 

Office of Inspector General 

Executive Summary 

After the September 11, 2001, terrorist attacks in New York City 

and collapse of the World Trade Center (WTC) towers, city 

agencies and private contractors began to remove debris from the 

site. Contractors normally purchase insurance for such projects, 

and are reimbursed by the Federal Emergency Management 

Agency (FEMA). However, the magnitude of the disaster, ensuing 

environmental concerns, and the potential for unknown liabilities 

left the city and its contractors with insufficient insurance, as 

insurance markets were averse to the inherent risks of providing 

coverage for workers at the site. 

Due to the risks assumed by the city and its contractors working 

without commercial insurance coverage, Public Law 108-7 directed 

FEMA to provide up to $1 billion to create an insurance company. 

New York City, with funding from FEMA, established the World 

Trade Center Captive Insurance Company in July 2004. The 

company was to insure the city and its contractors for claims arising 

from debris removal at the WTC and related sites. As of March 

2008, individuals alleging health problems from work at the WTC 

site had filed 9,397 suits against the city and its contractors. While 6 

claims totaling $320,936 were settled with insureds for plaintiffs 

with broken bones and cuts, no claims involving alleged cases of 

respiratory problems, gastrointestinal illness, or cancer have been 

settled, since such cases are the subject of litigation. 

Agreements between FEMA, New York State, New York City, and 

the World Trade Center Captive Insurance Company allow for 

payment of legal fees to defend insureds, which totaled 

$103,700,734 as of March 2008. These agreements also permit the 

company to invest the federal funds to offset operational costs. As 

of March 2008, the company’s assets totaled $1,011,230,283. 

The World Trade Center Captive Insurance Company also hired a 

private firm that specializes in third-party claims administration 

services. This firm has implemented procedures to receive and 

catalog claims, assess whether claims are covered under the 

insurance policy, and notify the defense counsel of lawsuits. We 

made five recommendations for FEMA to improve its oversight of 

the Captive’s procurement process and financial reporting. FEMA 

concurred with all recommendations. 

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Background 

Our review of the World Trade Center (WTC) Captive Insurance 

Company responds to concerns raised by Congressman Jerrold 

Nadler of “possible mishandling of claims brought by individuals 

who have suffered deleterious health effects as a result of their 

rescue and recovery work at the WTC site.” In his July 27, 2006, 

letter, Congressman Nadler questioned (1) why the Captive opted 

to litigate every claim that has been filed, (2) whether a process to 

handle such claims has been established, and (3) the amount of 

funds spent on legal fees to defend the city and other named 

insureds. 

Immediately following the September 11, 2001, terrorist attacks in 

New York City, municipal agencies and private sector contractors 

worked with other responders to rescue survivors and remove 

debris from the collapsed WTC towers. In response to the attacks, 

President Bush declared a national emergency, triggering a federal 

response that drew several agencies, including the Federal 

Emergency Management Agency (FEMA), into the rescue and 

recovery effort. FEMA, under disaster number DR-1391-NY, 

ultimately expended about $8.8 billion for rescue and recovery 

efforts in lower Manhattan. These funds covered rescue and debris 

removal operations, assistance grants to those affected by the 

tragedy, and compensation to municipal agencies for additional 

expenses related to the emergency response and recovery 

operations. 

Throughout the recovery effort, the uniqueness of the disaster 

remained apparent. Beyond the sheer scale of the attack and the 

collapse of the 110-story Twin Towers, rescue and recovery 

workers faced over a million tons of debris nearly 12 stories high, 

fires that smoldered for almost 3 months, and layers of asbestosladen dust, pulverized concrete, glass fibers, and other hazardous 

materials. Debris was transported from the WTC site by truck to 

various loading and unloading areas, transfer stations, and piers 

where additional sorting and recovery of human remains took 

place before final disposal.1 

1

 See Appendix E for a description of the “WTC site” locations. 

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Recovery Workers at the WTC Site in Lower Manhattan 

Source: FEMA Photo Library 

Municipal agencies and private contractors responded to the 

disaster immediately, without waiting to negotiate and sign 

contracts, search for adequate insurance coverage, or obtain 

indemnity for the work they would perform. AMEC Construction 

Management Inc., Bovis Lend Lease LMB, Inc., Tully 

Construction Co., Inc., and Turner Construction Company 

ultimately worked as the four prime contractors at the WTC site, in 

addition to dozens of subcontractors and consultants, collectively 

referred to as contractors. 

While insurance coverage is normally a prerequisite for debris 

removal and a reimbursable expense under FEMA’s public 

assistance program, neither New York City nor the contractors 

were able to purchase adequate insurance for their work at the 

WTC site. Commercial insurers were wary of issuing a 

comprehensive policy due to the uniqueness of the disaster and the 

potential for unknown liabilities resulting from exposure to 

hazardous materials at the site. Rescue and recovery efforts 

continued nonetheless. New York City was able to obtain 

$500 million in marine insurance from Lloyds of London and 

$79 million in general liability insurance from Liberty Mutual and 

London Market insurers for itself and its contractors. This 

coverage, however, was limited and insufficient. FEMA 

reimbursed New York City for the cost of that insurance coverage. 

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With the commercial insurance market unwilling to issue a 

comprehensive policy, New York City and the contractors initially 

sought federal immunity from potential liabilities associated with 

debris removal. This attempt was unsuccessful and the search for 

insurance coverage continued into 2002. New York City and its 

contractors continued to seek a federal solution, eventually gaining 

White House and congressional backing for a $1 billion allocation 

of federal funds to address the insurance gap. 

Throughout 2002, FEMA, officials from New York City and New 

York State, and contractor representatives held discussions on how 

best to secure the necessary coverage. Representatives from New 

York City and the contractors continued to meet with members of 

Congress and White House staff to discuss the issue. In December 

2002, New York City, acting in conjunction with the New York 

State Emergency Management Office and the contractors, 

submitted a final proposal to FEMA, formally requesting that the 

federal government fund the creation of a captive insurance 

company with a $1 billion premium. In general, captive insurance 

offers a means to acquire coverage for risks that might not 

otherwise be available, and to do so at a lower cost than through 

standard insurance companies. One or more entities may establish 

a captive insurance company, contributing premiums that can be 

invested and used to pay claims should the need arise. Under New 

York City’s proposal, however, the federal government’s grant 

would pay the entire premium for New York City and the WTC 

site contractors. 

Creation of the WTC Captive Insurance Company 

With White House and congressional support, FEMA participated 

in drafting legislation that authorized it to fund a captive insurance 

company. The legislation was reviewed and passed by Congress, 

signed by the President, and appeared in a Consolidated 

Appropriations Resolution in February 2003, which became Public 

Law 108-7. Specifically, Public Law 108-7 directed FEMA to use 

“up to $1,000,000,000 to establish a captive insurance company or 

other appropriate insurance mechanism for claims arising from 

debris removal, which may include claims made by city 

employees.” The $1 billion was allocated from the total 

$8.8 billion appropriation that covered FEMA’s reimbursements 

for the rescue and recovery efforts in New York City. 

A FEMA official said congressional representatives were 

concerned about protecting the city and its contractors, due to their 

inability to acquire sufficient liability insurance coverage in the 

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commercial market, and the potential for enormous liability was 

factored into the decision to provide insurance coverage. FEMA 

responded to Congress’ directive by coordinating closely with New 

York State, New York City, and the affected contractors to 

establish the World Trade Center Captive Insurance Company, 

Inc., hereafter referred to as the Captive. Agreements between 

FEMA and New York State, the state and the city, and the city and 

the Captive formalized this project and outlined many of the 

Captive’s obligations. The Captive was incorporated in July 2004, 

and all agreements were officially signed by December 2004. 

After expending $100,000 to hire insurance industry consultants to 

provide expertise on how captive insurance companies work, 

FEMA granted $999,900,000 to New York State. The state then 

transferred the funds through a sub-grant to the city, which 

transferred the funds to the Captive as a premium, and the 

insurance company commenced operations. 

As a captive insurance company, the Captive provides liability 

insurance to New York City and over 140 private contractors who 

participated in the recovery work in lower Manhattan and other 

areas used for debris removal. In addition to the agreements 

between FEMA, New York State, New York City, and the Captive, 

the insurance company is further governed by its own bylaws, 

certificate of incorporation, liability insurance policy, and 

applicable New York State insurance law. The insurance policy is 

issued to New York City and numerous private contractors, all 

confirmed as insureds. These documents were drafted through a 

collaborative process that involved FEMA, New York State, New 

York City, the contractors, and several private consulting firms. 

The Captive’s liability insurance policy is the only policy it will 

issue, because the company’s sole purpose is to provide insurance 

for New York City and its contractors that participated in debris 

removal from the WTC site. 

The Captive’s staff consists of four full-time employees, including 

a president, chief financial officer, general counsel, and an 

administrative assistant. A board of directors oversees the 

company’s operation. This five-member body is appointed by the 

mayor of New York City and includes a contractor representative. 

In addition, several board members form an audit committee that is 

responsible for financial oversight of the insurance company. In 

early 2007, the Captive created a three-member advisory 

committee to resolve claims disputes. 

The Captive contracts with private firms for much of its 

operational work. These companies provide services such as 

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claims administration and processing, document control, legal 

consultation and defense, financial and investment management, 

media relations, and administrative functions. 

The Captive and Ongoing Litigation 

As of March 2008, the Captive recorded 9,397 suits by individual 

plaintiffs against New York City and its contractors alleging they 

have been harmed through their work at the WTC site or by 

exposure to certain materials at or near the site. As of March 2008, 

the Captive had settled with insureds for six claims arising from 

WTC recovery work totaling $320,936. One settlement in 2006 

partially reimbursed a private insurer after its own decision to 

settle with a plaintiff who had suffered a broken bone. In May 

2007, Captive officers said the company similarly settled with an 

insured regarding five additional claims involving broken bones 

and cuts from workplace accidents that were supported by medical 

records. According to the Captive’s president, none of the settled 

claims were part of ongoing litigation in the federal courts. The 

Captive has not settled any claims involving alleged cases of 

respiratory problems, gastrointestinal illness, cancer, or fear of 

cancer, which continue to be the subject of litigation. 

The ongoing lawsuits cite a range of complaints, from respiratory 

problems to fear of cancer. Medical research and clinical work 

performed since the terrorist attacks suggest that work and 

exposure to materials at the site likely resulted in or exacerbated 

certain respiratory and other health problems. Medical researchers 

and practitioners working on September 11, 2001, health issues 

agree that the full scope of the health effects of the disaster will not 

be known for decades, particularly regarding certain kinds of 

cancer. 

As a basis for their suits, the plaintiffs allege that New York City 

and its contractors were negligent for not providing adequate 

safety measures, which resulted in these injuries or illnesses. Two 

New York City law firms that specialize in mass torts and personal 

injury cases have coordinated the plaintiffs’ lawsuits. In August 

2005, those firms filed a master complaint on behalf of named and 

unnamed individuals in the U.S. District Court for the Southern 

District of New York requesting trial by jury to resolve these 

allegations. 

The Captive, on behalf of New York City and the more than 140 

private contractors it insures, has consolidated and funded the 

defense against lawsuits. Though many lawsuits were initially 

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filed in state court, the Second Circuit Court of Appeals ruled in 

2005 that the Airline Transportation Safety and System 

Stabilization Act, passed by Congress after the September 11, 

2001, attacks, channeled all related litigation to the U.S. District 

Court for the Southern District of New York. 

Defense attorneys hired by the Captive to represent New York City 

and its contractors argued for broad immunity from liability for the 

work conducted at the WTC site. In October 2006, the district 

court judge ruled that the defendants might be benefited by 

“limited immunity” but that each case must be decided on an 

individual basis through a process of discovery and possibly by 

trial. The defendants appealed the district court’s ruling, again 

arguing for broad immunity. The Second Circuit Court of Appeals 

agreed to consider the defendants’ appeal of the lower court’s 

ruling and, in March 2007, issued a stay of trial and pretrial 

proceedings pending resolution of the immunity question. 

In March 2008, the appeals court ruled that under New York state 

law, defendants were not entitled to immunity from suit, but that 

they might be entitled to immunity from liability. Thus, the 

plaintiff construction workers, firefighters, police, and others are to 

be allowed to pursue their claims, and defendants can raise 

immunity as a defense to liability, to be determined under state 

law. The court further ruled that defendants might benefit from 

federal derivative immunity, depending on the defendants 

relationship with federal agencies involved in managing the WTC 

site. Significant fact-finding remains to resolve the complex 

questions whether the federal government was acting within the 

scope of its immunity for discretionary functions, the levels of 

control and direction federal agencies exercised over the New 

York defendants’ activities, and whether the defendants violated 

state statutes. The ruling returned the litigation to the district 

court, which has initiated discovery proceedings. The district court 

judge requested the submission of documentation to further 

develop claims against New York City and its contractors. 

According to Captive officials, if legal proceedings determine the 

validity of claims and liability is established, the Captive will pay 

those claims. If litigation advances to where affected parties are 

willing to negotiate, Captive officials will negotiate in good faith. 

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Results of Review 

The Captive’s Litigation of Claims Does not Violate Public 

Law 108-7 or the Grant and Subgrant Agreements 

Based on Public Law 108-7, accompanying House Conference Report 

108-10, and the grant agreements, we conclude that the Captive is 

operating pursuant to, and not in violation of, these mandates and other 

documents that guide the Captive’s actions, including the liability 

insurance policy. Public Law 108-7 directed FEMA to provide up to 

$1,000,000,000 to establish a captive insurance company or other 

appropriate insurance mechanism for claims arising from debris removal, 

which may include claims made by city employees. In House Conference 

Report 108-10, Congress stated that the insurance will provide the City of 

New York and its debris removal contractors with coverage for claims 

arising from debris removal performed after collapse of World Trade 

Center buildings on September 11, 2001, including claims brought by City 

of New York employees. 

Congressional Support for New York City’s Insurance 

Proposals 

New York City submitted a May 13, 2002, proposal to FEMA 

requesting “funding as needed to pay the premium, plus associated 

costs, for an insurance policy providing a minimum aggregate limit 

of liability amount equal to $1 billion of non-risk-transfer 

insurance, whether in the form of finite risk or captive insurance.” 

On June 20, 2002, FEMA approved the city’s proposal with 

stipulations that the city and state provide a detailed package 

describing the mechanism for implementing the insurance 

coverage and the manner in which the insurance carrier would be 

funded. FEMA also acknowledged that there would be a minimum 

of $1 billion in insurance. 

In December 2002, New York State submitted a final proposal to 

FEMA, including a detailed response to FEMA’s request, on how 

the required insurance coverage could be acquired. New York 

State, New York City, and the private contractors submitted a 

“joint insurance package that will protect all the entities involved 

in the debris removal project to accomplish the mission of the 

FEMA approval letter.” This proposal described the need for 

insurance coverage due to “substantial losses or extensive litigation 

costs to defend against such allegations.” The proposal also 

outlined the need for insurance due to “vast litigation and defense 

costs exposure for the Contractors and the City” generally 

associated with mass tort cases. The proposal concluded that, “The 

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City and contractors will have to incur considerable legal expense 

simply to manage and refute such claims.” 

At the time this document was created, many claims had already 

been filed against New York City and its contractors, and the 

timing and volume of future claims was uncertain. In accordance 

with the December 2002 proposal, “The Captive has been 

structured to preserve all available defenses and mitigants to 

lawsuits brought against the insured, including City immunities for 

emergency response, ... and whatever recourse City workers may 

have under the Victim Compensation Fund.” The Victims 

Compensation Fund (VCF) was created to compensate victims or 

their families for death or injuries resulting from the terrorist 

attacks. Acknowledging that lawsuits were inevitable, it provided 

that the “existence of a funded Captive will not change the 

litigation dynamics in any appreciable fashion.” 

The New York State and New York City proposals received 

endorsements from members of both the United States Senate and 

the United States House of Representatives, as documented in their 

letters to FEMA in May and December of 2002. In two separate 

but similarly worded letters sent to FEMA in May 2002, both New 

York State Senators and thirty New York State Representatives 

urged the agency to give a “prompt review and approval of the 

City’s proposal.” In these letters, members of Congress noted that 

“because of the extraordinary circumstances of the attacks, and the 

need to begin recovery efforts immediately, the contractors began 

work without securing insurance coverage. Despite the City’s best 

efforts, the private insurance market has provided only minimal 

liability coverage, and none for potential environmental damages.” 

These letters express appreciation for the Administration’s 

commitment to help “fill the insurance gap by providing the 

resources that will enable the City to secure $1 billion in insurance 

on its own behalf and for the contractors.” They also added, “The 

coverage envisioned in this proposal will ensure that sufficient 

resources will be available to satisfy legitimate claims by 

individuals affected by the recovery operations while safeguarding 

the fiscal health of the City and the contractors.” Both New York 

State Senators wrote to FEMA again in December 2002, noting 

that the response “was prepared by the City, in close cooperation 

with the Contractors, and is fully supported by the State.” The 

senators urged FEMA to give the submission “prompt and 

favorable review and to provide the requested $1 billion in 

funding,” and thanked FEMA for its commitment to meet the 

insurance needs of the City and the Contractors related to the 

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massive debris effort at the WTC site, noting that all the parties 

involved in the debris removal undertaking would be protected. 

Criteria for Captive Operations 

Following approval of New York City’s final proposals and the 

passage of Public Law 108-7 in February 2003, FEMA began to 

work with New York City, State, and the contractors to create the 

Captive. Three agreements clarify the provision of federal funds 

from (1) FEMA to New York State, (2) New York State to New 

York City, and (3) New York City to the Captive. The grant 

agreement between FEMA and New York State and the subgrant 

agreement between New York State and New York City anticipate 

and incorporate defense costs and responsibilities into their terms, 

which are further outlined in the Captive’s liability insurance 

policy. The terms of the New York City and Captive agreement 

are intended to ensure the Captive’s conformity with the grant and 

subgrant agreements. 

Third-party liability insurance offers specific protection for insured 

parties in the event of a lawsuit. When a lawsuit is filed, the 

insurer is obligated to defend its insured pursuant to the insurance 

policy issued. The Captive’s liability insurance policy, certificate 

of incorporation, and bylaws were incorporated by reference into 

the New York State and New York City grant agreements, and 

provided the foundation for the Captive’s obligation to defend its 

insureds. 

The Captive exercises its duty to defend by litigating lawsuits filed 

against New York City and its debris removal contractors. The 

Captive’s involvement in ongoing litigation is consistent with these 

documents, as well as with statements from federal, state and local 

officials on the intended operation of the Captive. 

FEMA - New York State Grant, New York State - New 

York City Subgrant, and New York City - Captive 

Agreements 

According to a FEMA official, FEMA took the lead in 

drafting the grant agreement. In addition, FEMA hired 

attorneys that specialized in captive insurance to provide 

advice on establishing a captive insurance company and to 

draft the terms of the grant agreement. 

In November 2004, FEMA and the grantee, New York 

State Emergency Management Office, entered into the 

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grant agreement for the Captive project. The State 

Emergency Management Office also entered into a 

subgrant agreement with New York City in November 

2004. That subgrant agreement was based on the terms and 

conditions of the FEMA and state grant agreement. 

In September 2004, New York City entered into an 

agreement with the Captive to provide insurance pursuant 

to the liability insurance policy. The agreement, signed in 

anticipation of the federal-state grant, was entered into to 

ensure compliance with the expected terms and conditions 

of the FEMA grant agreement and the State Emergency 

Management Office subgrant agreement. 

Liability Insurance Policy 

According to a Captive official, the Captive Liability 

Insurance Policy, Section 2.04(a), governs the business of 

the company, outlines the duty to defend, and establishes 

the scope of operations. Captive officials also explained 

that not taking action to defend its insureds would be a 

breach of its duty, and that the company is constrained by 

the terms of the grant agreement and the insurance policy. 

The Captive’s liability insurance policy, which became 

effective retroactively to September 2001, specifies the 

company’s right and duty to defend an insured against any 

suit seeking damages to which the policy applies, even if 

the suit is groundless, false, or fraudulent. The duty to 

defend includes providing and paying for legal counsel in 

the event lawsuits are filed against the insureds. The 

Captive assumes the defense of any covered pre-existing 

claim not resolved prior to the creation of the Captive, pays 

fees and expenses of the appointed defense counsel, and 

becomes responsible for any settlement, judgment, or other 

disposition of the claim. In the event of a settlement or 

final judgment in a suit, the Captive will pay the amount 

due when it has received evidence of its obligation to pay. 

Also included in the liability insurance policy is the 

Captive’s right and obligation to appoint and retain counsel 

for defending suits against its insureds. 

Should a lawsuit against an insured succeed, either through 

a jury decision or settlement, the Captive’s attention would 

focus on financial compensation. Pursuant to the coverage 

clause of the Captive’s liability insurance policy, the 

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company will pay any monies its insureds are legally 

obligated to pay provided the claims fall into at least one of 

the following categories: 

•	 General liability – liability arising from bodily 

injury or property damage; 

•	 Marine liability – liability arising from the use of 

barges in transit on the Hudson River or other 

waterways, to include piers, docks and adjacent 

facilities for loading and unloading, on which such 

barges operated in furtherance of debris removal; 

•	 Environmental liability – liability arising from the 

actual, alleged or threatened discharge, dispersal, 

seepage, migration, release or escape of pollutants 

into or upon the land, water, atmosphere, or any 

other natural resource damage; or 

•	 Professional liability – liability arising from any 

alleged act, error or omission, misstatement, 

misleading statement, neglect or breach of duty 

committed in the performance of professional 

services. 

Claims must have arisen from any occurrence of illness or 

injury that is one or a series of accidents, happenings, or 

events. Also, claims must arise from an exposure, or 

continuous or repeated exposures, to conditions that result 

in damages covered under the insurance policy that resulted 

from work during the exposure period. The exposure 

period began with the removal of debris starting September 

11, 2001, until August 30, 2002. All exposures to the same 

general conditions existing at or emanating from the WTC 

site are considered one occurrence. 

We received the following comments concerning the 

Captive’s duties and responsibilities under the liability 

insurance policy: 

•	 A New York City Office of Management and 

Budget official said the Captive was authorized 

through the federal legislative process, and was 

taking the expected legal action to defend its 

insureds against claims. The official further 

explained that the Captive was abiding by the terms 

of its agreement with the city and all reporting 

requirements. 

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•	 A New York City Law Department official said the 

liability insurance policy was for the benefit of the 

city and its contractors to protect their interests in 

the event of lawsuits, and the Captive has a 

contractual and legal obligation to defend the 

insureds. 

•	 New York State Insurance Department officials 

explained that the purpose of the Captive was to 

indemnify New York City and private contractors 

for liabilities incurred during the WTC clean-up. 

The officials also said the Captive is obligated 

under its insurance policy to provide a legal defense 

for its insureds. 

•	 A former board member and contractor 

representative who worked for one of the four 

primary contractors said he believed the Captive 

had a fiduciary responsibility to the insureds 

because the contractors did not cause the problem; 

they were trying to solve it. 

•	 A FEMA official said the Captive was created as an 

insurance company to protect the interests of New 

York City and its contractors by defending them 

against claims arising from clean-up efforts at the 

WTC site after the terrorist attacks. 

•	 Captive officials said the liability insurance policy 

governs the business of the company, outlines the 

duty to defend, and establishes its scope of 

operations. Captive officials explained that not 

taking action to defend its insureds would be a 

breach of its duty, and the company is constrained 

by the terms of the grant agreement and insurance 

policy. 

Certificate of Incorporation 

The Captive’s certificate of incorporation became effective 

in June 2004, and characterizes the company as a not-forprofit corporation formed to provide insurance for debris 

removal occurring on or after September 11, 2001. The 

insurance was solely for liabilities incurred by New York 

City and its affiliated companies. The insurance law for 

New York State, which regulates the Captive, defines 

affiliated companies as contractors, subcontractors, and 

consultants of New York City. 

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The Captive is authorized by the insurance law of New 

York State to transact business covering personal injury 

liability. The certificate of incorporation defines personal 

injury liability insurance, in part, as insurance against legal 

liability of the insured, and against loss, damage, or 

expense incident to a claim of such liability. The claims 

must arise from the death or injury of any person, or arise 

out of injury to the economic interest of any person, as the 

result of negligence in rendering expert, fiduciary, or 

professional service. It is further defined as insurance to 

protect an insured against liability for indemnification or 

contribution to a third party held responsible for injury to 

the insured’s employee arising out of and in the course of 

employment. 

Bylaws 

The Captive’s bylaws specify that the company shall 

receive grant funds pursuant to the grant agreement 

between FEMA and the New York State Emergency 

Management Office. The bylaws also indicate that the 

Captive shall not take any action that conflicts with the 

provisions of the grant agreement without prior written 

notice to FEMA, and shall conduct its affairs in compliance 

with the terms of the agreement. The bylaws also describe 

how the Captive issues a liability insurance policy to New 

York City as the named insured, and the contractors as 

additional named insureds, effective September 2001. 

The Captive’s Litigation of Claims 

The ongoing litigation regarding debris removal claims with which 

the Captive is involved, while delaying possible relief to those with 

health problems arising from debris removal work, conforms to the 

Captive’s mandate as an insurance company to defend an insured 

against any suit seeking any damages. Immunity is an available 

defense which New York City and contractors have urged the 

Captive to assert. In interposing immunity defenses, the Captive is 

not acting inconsistently with its charter, which conforms to Public 

Law 108-7. 

We recognize the increased concerns regarding the number of 

claims the Captive has settled when compared to the thousands of 

individuals who allege health problems as a result of their work at 

the WTC site. However, the process of determining the legitimacy 

of lawsuits filed against New York City and contractors has been 

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ongoing in both the Second Circuit Court of Appeals and U.S. 

District Court for the Southern District of New York. As of April 

2008, this process is proceeding through the discovery phase at the 

district court level. Importantly, in the context of tort litigation, 

which Public Law 108-7 was enacted to address, determining the 

legitimacy of the claims depends not only on the existence of an 

illness or injury linked to WTC debris removal work, but also on 

whether another party’s negligence caused such illness or injury. 

Many agree that the tort system may not be best suited to providing 

compensation to WTC victims. Officials from both the Captive 

and New York City have publicly advocated meeting the needs of 

individuals injured as a result of debris removal efforts through 

other means. Specifically, in February 2007, the mayor of New 

York City proposed reopening the September 11th VCF to help 

ailing workers receive relief without having to prove fault. He also 

recommended granting immunity to the city and contractors, which 

would further help redirect claims away from the courts. 

According to a February 13, 2007, statement by the Captive, its 

officials share the mayor’s view that a VCF would provide a better 

way to resolve the claims of those involved in the post-9/ll rescue, 

recovery and debris removal process than the tort system and the 

current costly and time-consuming litigation. Captive officials 

stated, “It is within the congressional prerogative to create a new, 

or reopen the old, Victim Compensation Fund, which would make 

funds available on an appropriate and equitable basis to those 

involved in the post-9/ll rescue, recover and debris removal 

process.” 

Unlike the VCF, which was created to compensate victims or their 

families for death or injuries resulting from the terrorist attacks, the 

Captive was created as an insurance company to insure and defend 

New York City and its contractors from claims arising from debris 

removal at the WTC site. As such, the Captive operates differently 

from the VCF by legislative design, and cannot automatically pay 

claims without adhering to its insurance policy. 

The Captive’s Expenditures Are Offset Through Investment 

Income and Guided by Internal Controls 

The grant agreements signed by FEMA, New York State, New York City 

and the Captive permit the insurance company to earn income by investing 

the $999,900,000 premium. As a result of its investment strategy, the 

Captive has increased the value of FEMA’s initial premium to 

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$1,011,230,283 as of March 2008. The Captive also developed a system 

of internal controls that, if followed, should improve its ability to comply 

with the grant agreements. 

Expenditures 

As shown in Chart 1, as of March 2008, the Captive’s expenditures 

totaled $132,497,099. This includes administrative costs - staff 

salaries and office expenses; compensation for professional 

services - banking and accounting activities; claims related 

expenses - legal fees and claims administration; and claims paid. 

Chart 2 illustrates that claims-related expenses, including costs of 

attorneys and other legal services, totaled $115,486,601 as of 

March 2008. 

Chart 1: The Captive’s Total Expenditures as of March 2008 

Source: WTC Captive Insurance Company 

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Chart 2: The Captive’s Claims Related Expenses as of March 

2008 

Source: WTC Captive Insurance Company 

As defense and plaintiffs’ attorneys continue to argue before the 

courts, the Captive will continue to incur legal expenses on behalf 

of New York City and its debris removal contractors. The 

Captive’s president said that the nature of tort liability involves 

proving damages through trial or negotiated settlements, a time 

consuming and costly process. 

While FEMA does not control the Captive’s expenditures, the 

grant agreements permit it to request cost-cutting measures. 

FEMA officials said they had not requested a reduction in the 

Captive’s spending because no discrepancies or violations of the 

grant agreements had occurred. 

Investments 

The agreement between New York City and the Captive required 

the development of a general investment strategy for FEMA grant 

funds to be used until the Captive hired an independent investment 

manager. After consulting with FEMA and receiving the funds in 

December 2004, the Captive invested in treasury bills and a money 

market fund. 

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The Captive hired BlackRock Financial Management, Inc., as its 

investment manager in March 2005, and the company began active 

management of the insurance company’s funds in April 2005. 

BlackRock Financial Management, Inc., developed an investment 

strategy designed, in part, to preserve the invested assets and to 

provide sufficient liquidity for payment of the costs and expenses 

of Captive’s operations. According to the Captive, the insurance 

company held $1,011,230,283 in assets as of March 2008. 

Internal Controls 

The grant agreements include requirements for the Captive to 

comply with Office of Management and Budget (OMB) Circulars 

A-1332

, A-1023 and A-874. 

OMB Circular A-133 establishes objectives for internal controls 

pertaining to compliance requirements for federal programs that 

ensure proper and lawful execution and recording of transactions, 

as well as safeguarding funds, property, and other assets against 

loss from unauthorized use or disposition. OMB Circular A-102 

requires nonfederal entities receiving grant awards to establish and 

maintain internal controls to ensure compliance with federal laws, 

regulations, and program compliance requirements. OMB Circular 

A-87 provides for a uniform approach for determining costs and to 

promote effective program delivery, efficiency, and better 

relationships between governmental units and the federal 

government. 

The Captive developed and documented internal controls to guide 

its day-to-day operations and fiscal responsibilities. These controls 

govern employment practices, legal and regulatory compliance, 

financial reporting, and information technology and data storage. 

We reviewed the Captive’s internal control manual and determined 

that it included adequate processes and procedures to comply with 

the applicable OMB circulars. 

In addition to our review, the Captive’s internal controls were 

reviewed by Johnson Lambert & Co., an independent accounting 

firm. In March 2005, the Captive hired Johnson Lambert & Co. to 

conduct annual audits of its financial reports. The company issued 

an audit report in April 2005 for 2004, a report in April 2006 for 

2005, and a third report for 2006 in March 2007. These audit 

2

 OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, June 26, 1997 

3

 OMB Circular A-102, Grants and Cooperative Agreements With State and Local Governments, 

October 7, 1994, further amended August 29, 1997

4

 OMB Circular A-87, Costs Principles for State, Local and Indian Tribal Governments, May 10, 2004 

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reports concluded that the Captive complied, in all material 

respects, with all requirements of OMB Circulars A-133, A-102 

and A-87. The reports further concluded that the Captive’s 

internal controls complied with the requirements of laws, 

regulations, contracts, and grants as required by OMB Circular 

A-133, and that there were no material weaknesses regarding the 

Captive’s internal controls over compliance and its operation. 

The agreements signed by FEMA, New York State, New York 

City, and the Captive provide that the insurance company is 

subject to additional oversight. The Captive’s financial and 

performance reports, for example, are submitted to the following 

entities: 

• FEMA 

• House Appropriations Committee 

• Senate Appropriations Committee 

• New York State Emergency Management Office 

• New York State Insurance Department 

• Office of the New York State Comptroller 

• New York City 

Based on discussions with federal, state, and city officials, the 

Captive continues to fulfill its reporting requirements by providing 

the required information. FEMA officials in the Recovery 

Division and Grants Management Branch confirmed receipt of the 

required quarterly and annual reports. Officials from the New 

York State Emergency Management Office and New York State 

Insurance Department further attested to the receipt and 

completeness of Captive’s reports. A New York City Office of 

Management and Budget official said he receives copies of the 

reports in his role as a member of the Captive’s board of directors. 

These officials said that, based on their review of these reports, the 

Captive was functioning according to its obligations in the grant 

agreements. 

Claims Administration Procedures Support the Captive’s Current 

Activities 

In January 2005, the Captive hired GAB Robins, a private firm that 

specializes in third-party claims administration services.5 At the Captive’s 

direction, GAB Robins developed and implemented procedures to catalog 

claims received from an insured named in a lawsuit, as well as coordinate 

5

 In the fall of 2007, the Captive transferred claims administration functions from GAB Robins to Navigant 

Consulting, Inc. GAB Robins continues to handle specific administrative tasks. 

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with the Captive’s coverage counsel to determine each claim’s coverage 

eligibility. This process allowed the Captive to determine whether claims 

were covered under its liability insurance policy, confirm the decision 

with its insureds, and notify the lead defense counsel of new lawsuits. As 

of March 2008, the Captive identified 9,397 plaintiffs who filed lawsuits 

or other pleadings against the Captive’s insureds. 

Once hired, GAB Robins developed procedures to receive legal 

documents from insureds and created electronic files using the information 

contained within each suit. Following receipt and documentation, 

complaints were sent to Captive’s coverage counsel, McDermott Will & 

Emery, for coverage analysis. When a coverage determination was made, 

the claims administrator coordinated with the Captive, the Captive’s 

insureds, and defense counsel to ensure that new lawsuits were accepted 

for defense. 

McDermott Will & Emery undertakes coverage analysis on behalf of the 

Captive by determining whether claims in each complaint fall under the 

Captive’s insurance policy or are excluded from coverage based on certain 

exceptions. Specifically, the exclusion section of the Captive’s liability 

insurance policy bars liabilities for punitive damages, workers’ 

compensation, disability, retirement benefits, fines, sanctions or penalties, 

and liability for intentional acts by an insured’s employee. Claims are also 

reviewed to determine if they fall within the geographic and temporal 

limits of the insurance policy. McDermott, Will & Emery also confers 

with the Captive for a final decision on coverage eligibility. 

GAB Robins managers told us that their process, from receipt of notice of 

a lawsuit to sending the notification of a decision, is completed within 45 

days. Diagram 1 outlines the general steps involved in the Captive’s 

claims administration activities as managed by GAB Robins. Appendix C 

provides a more comprehensive explanation of the Captive’s claims 

administration process. 

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Diagram 1: Claims Administration Process 

Source: The World Trade Center Captive Insurance Company and GAB Robins 

Ongoing Litigation on the Claims Administration Process 

New York City and its contractors initially argued before the 

district and appeals courts for broad immunity for their work at the 

WTC site based on state and federal laws. For this reason, the 

Captive’s president informed us in February 2007 that traditional 

third-party administrator activities, such as direct contact with the 

plaintiffs’ attorneys, claim investigation, and documenting 

damages, would be premature or inappropriate. GAB Robins’ staff 

provided a similar assessment, saying that the extent to which the 

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claims administration process is implemented and the tasks 

involved depend on the litigation. 

On March 26, 2008, the appeals court decided that state immunity 

laws may provide protection from liability rather than from 

lawsuit, and federal law may also provide protection from suit. The 

extent of these immunities will now be determined in district court, 

which has resumed discovery proceedings. 

As of April 2008, the Captive had not broadened its claims 

administration procedures beyond those already described due to 

ongoing litigation. The plaintiffs have begun to submit additional 

information to support their claims and the Captive’s lead defense 

counsel has begun to review this documentation. The Captive’s 

president said that the responsibility for contacting the plaintiffs’ 

attorneys and analyzing the documentation rests with the defense 

counsel. The Captive’s claims administrator remains responsible 

for intake and cataloging of claims and providing notification of 

new lawsuits. 

FEMA Oversight Activities Should Be Strengthened 

According to OMB Circular A-123, “Management’s Responsibility for 

Internal Control,” management is responsible for developing and 

maintaining effective internal control, and should design management 

structures that help ensure accountability of results. In addition, internal 

controls must be established that reasonably ensure that funds and other 

assets are safeguarded against waste, loss, unauthorized use, or 

misappropriation. As part of this process, agencies must take systematic 

and proactive measures to develop and implement appropriate, cost 

effective internal controls. 

Under the grant agreement between FEMA and New York State, FEMA 

maintains full authority to negotiate, administer, and execute all terms and 

conditions of the grant agreement. While nothing came to our attention 

that would lead us to conclude that the Captive’s operations have not been 

managed according to the grant agreement, we discovered specific areas 

related to financial reporting and procurement where FEMA’s internal 

controls should be strengthened. Establishing such internal controls would 

provide greater assurance that the purpose of the grant is achieved, and 

federal grant funds are properly expended. 

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Oversight of the Captive’s Financial and Performance 

Reporting 

According to Article VII of the FEMA and New York State grant 

agreement, which describes FEMA’s oversight role, the Captive 

must satisfy periodic reporting requirements that include 

submitting to FEMA: 

•	 A report of each calendar quarter of losses incurred, losses 

paid, changes in experience account balances, and changes 

in individual and aggregate case reserves; 

•	 Annual reports; 

•	 Quarterly and annual financial statements; and 

•	 Minutes for all meetings of Captive’s board of directors 

and advisory committee. 

The FEMA Grants Handbook, dated June 2002, establishes 

internal policies and procedures that govern FEMA’s assistance 

management process for both non-disaster and disaster programs. 

The policies and procedures are intended to ensure that grant funds 

are used for approved purposes. 

According to the Grants Handbook, monitoring FEMA’s disaster 

grants is the joint responsibility of a disaster grants management 

specialist in the Grants Management Branch and a program officer 

from the responsible program office. Monitoring activities should 

include, at a minimum, quarterly reviews of financial and 

performance reports that are to be documented and placed in the 

official grant file. However, for the Captive grant, procedures for 

the coordination of monitoring activities between the grants 

management specialist and program officer have not been 

established, and there is no process to ensure the adequacy of 

financial and performance reviews. In addition, a system to ensure 

that all monitoring actions are appropriately documented and filed 

has not been developed. 

A FEMA management official with extensive involvement in the 

creation of the Captive said the agency's oversight role was to 

review quarterly and annual reports submitted by the Captive. 

Another FEMA management official added that there is no 

precedent for establishing a billion-dollar insurance company after 

a terrorist attack. Consequently, there are no policies or 

procedures on exactly how to manage this project, as this situation 

is unique. 

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FEMA’s Grants Management Branch 

The Grants Management Branch is responsible for reviewing the 

grantees’ financial and performance reports to determine their 

progress, as well as compliance with grant agreements. According 

to a FEMA grants management official, the office receives the 

Captive’s financial reports from the FEMA program officer. A 

grants management specialist reviews the Captive’s expenses, 

investment returns, and outstanding obligations for reasonableness. 

However, a written assessment of the review results is not 

prepared. 

The Grants Handbook requires that the appointment of a grants 

management specialist and program officer consider a person’s 

experience, training, and grants or program knowledge. A FEMA 

grants manager explained that numerous pages of back-up 

financial information are attached to the Captive’s reports, such as 

balance sheets, financial status reports, and other documents that 

are not normally received. The official also said it was difficult to 

understand all of the financial information due to the level of 

detail. Moreover, FEMA does not perform a more thorough 

analysis of these documents because of staffing and time 

constraints. Therefore, this type of review results in the reports 

receiving “a really good glance.” 

A grants management official said that since the staff is shorthanded, it uses signed and dated post-it notes to document status 

information. Also, some official information is documented in a 

memo-to-record. Both types of information become a part of the 

official file. 

Communication between the grants management specialist and the 

program officer is informal. According to the grants management 

specialist, if discrepancies are found in a financial report, the 

program officer is contacted to resolve the problem before filing 

the report. However, no discrepancies have been found to date. 

Program Office 

Under the grant agreement between FEMA and New York State, 

the designated program office maintains responsibility for 

monitoring the technical performance of the Captive’s activities as 

described in the project narrative. The program officer responsible 

for the Captive grant said that after receiving their financial 

reports, he reviews expenses and investments for any significant 

increases in expenses or decreases in investment returns that would 

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raise concerns that may need to be further explored. He also pays 

special attention to legal expenses and said that there has never 

been a reason for FEMA to request the Captive to initiate costcutting measures because most legal services are at reasonable 

rates. 

The Captive grant is unique in that there is an initial performance 

period of 25 years from the effective date of the agreement, with 

provisions for extensions in 2-year increments. In addition, FEMA 

disbursed the entire award amount to the Captive at the beginning 

of the performance period, instead of through an allocation process 

that makes funds available for obligation. A grants management 

official said that, to their knowledge, this is the first time FEMA 

has transferred an entire award amount up front and for such an 

extended period of time. They also said that when the Captive 

award was granted, they knew the current staff would not be 

around for the close-out. Therefore, individuals replacing the 

present staff would have to become familiar with the grant by 

reviewing the files and making sure they know the major 

participants. 

While we recognize that federal regulations do not outline a 

specific process for an awarding agency to assess the performance 

of a grantee, FEMA needs to establish a process to ensure the 

adequacy and consistency of reviews conducted of the Captive’s 

financial and performance reports. Considering that many 

provisions of the Captive grant agreement are atypical in 

comparison to other FEMA grant awards, it is essential that a 

comprehensive financial and performance review process be 

established and documented. It is also important that the quality of 

this process provide assurance that grant funds are being properly 

expended. 

Oversight of the Captive’s Procurement Activities 

In order to fulfill its mandate of insuring the city and its contractors 

for claims arising from debris removal at the WTC site, the 

Captive has solicited and awarded professional service contracts. 

These contracts include custodian and banking services, 

investment management, third-party claims administration, 

auditing, media and public relations, actuarial services, legal 

services, and Captive management. 

The Captive’s expense summary document shows $126,064,897 in 

expenses for professional services from inception through March 

2008. Due to the level of attention the Captive’s contractual 

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service expenses have been subjected to from the media and other 

entities, we reviewed FEMA’s internal controls over the Captive’s 

solicitation and award procedures for professional service 

contracts. 

According to the grant agreement between FEMA and New York 

State, the general management of the corporate affairs of the 

Captive is vested in a board of directors. FEMA officials said they 

approved pre-grant expenses until the funds were transferred to the 

Captive in December 2004. Since that time, the Captive and its 

board of directors have been solely responsible for expenditures as 

all grant funds are under their control. 

The Captive’s board of directors approved professional service 

contracts with minimal intervention by FEMA. A FEMA 

management official said that Captive’s contracting requirements 

are not the sort that FEMA typically handles because the company 

is compelled to hire specialists within an insurance industry that is 

highly complex and technical. The official additionally said that 

FEMA is made aware of Captive’s contracts through verbal 

presentations, board meetings, and reports. However, given the 

unique characteristics of this grant and FEMA’s responsibility to 

ensure that federal grant funds are appropriately used, a more 

active role by FEMA in the procurement process is essential. 

The FEMA and New York State grant agreement requires the 

Captive to comply with FEMA regulation, 44 Code of Federal 

Regulation (CFR) Part 13, “Uniform Administrative Requirements 

for Grants and Cooperative Agreements to State and Local 

Governments.” However, the grant agreement exempts the 

Captive from 44 CFR Part 13.36, which covers the procurement of 

property and services. Instead, the Captive’s procurement 

activities are governed by the requirements set forth in Exhibit A 

of the New York City and Captive agreement. 

In general, Exhibit A outlines basic methods of procurement that 

parallel 44 CFR Part 13.36, but does not include all of the 

requirements. For example, under 44 CFR Part 13.36(g), an 

agency can request procurement information from the grantee or 

subgrantee under certain circumstances, such as when a 

procurement is expected to exceed specific thresholds and is 

awarded without competition, or is awarded to other than the 

lowest bidder under a sealed-bid procurement. In addition, 

44 CFR Part 13.36(f) requires that a cost or price analysis be 

performed in connection with every procurement action. In 

contrast, these provisions are not incorporated in Exhibit A. 

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According to a FEMA management official, Exhibit A was 

developed to provide greater clarity of the procurement 

requirements, and provisions not included in Exhibit A were those 

not usually relied on by FEMA when administering 44 CFR 

Part 13. In addition, the separate procurement requirements make 

sure that Captive could compete in a highly specialized 

environment when possible. 

A FEMA official said that, because FEMA does not typically deal 

with the types of contracting services the Captive requires, the 

agency would likely become involved “after the fact” regarding 

procurement issues. He said that service providers are costly, and 

FEMA does not become involved in the highly technical world of 

insurance. 

According to a Captive management official, the company selected 

service providers pursuant to its procurement procedures. 

Generally, service providers are selected for an initial term of 3 

years, and the agreements may authorize extensions beyond the 

initial term. The board of directors approves all selections and 

extensions. While there is not a specific limit on contract terms, 

the board has expressed a reluctance to extend an arrangement with 

a service provider beyond a term of 5 to 6 years without 

conducting a new request for proposal process. 

Our review of documents related to the solicitation and award of 

current service provider contracts showed that the Captive has 

complied with the provisions as outlined in Exhibit A of the 

Captive and New York City grant agreement. However, although 

not specifically outlined in regulation, FEMA’s participation in 

Captive’s solicitation, award, and renegotiation of professional 

service contracts needs to be increased because of the unique 

mission and provisions of this grant agreement, as well as other 

related factors that include: 

•	 The emphasis placed on systems of internal control for 

prudent business practices; 

•	 The increased scrutiny surrounding Captive’s grant 

expenditures; 

•	 The Captive’s exclusion from requirements of FEMA’s 

traditional procurement regulations; and 

•	 FEMA’s accountability for the proper expenditure of 

federal grant funds. 

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Recommendations 

We recommend that the Administrator, Federal Emergency 

Management Agency: 

Recommendation #1: Develop and implement a review process 

for Captive financial and performance reports that will provide 

assurance that funds are being used prudently and according to 

provisions of the grant agreements. This review process should be 

documented in order to allow for continuity and subsequent follow 

up of all analyses and conclusions. 

Recommendation #2: Establish a system of coordination between 

the responsible program office and the Grants Management Branch 

to improve and facilitate monitoring activities for Captive’s 

financial and performance reporting. 

Recommendation #3: Work in conjunction with the Captive and 

the Grants Management Branch to ensure that financial reports 

submitted include explanations to facilitate an understanding of the 

information reported. 

Recommendation #4: Ensure that sufficient personnel with the 

appropriate level of expertise are assigned to perform substantive 

reviews of all Captive financial and performance reports, and 

subsequent attachments. 

Recommendation #5: Develop and implement a review process 

to verify the appropriateness of the Captive’s solicitation, award, 

and renegotiation processes, and document the results. 

Management Comments and OIG Analysis 

We evaluated FEMA’s written comments and have made changes 

to the report where we deemed appropriate. Below is a summary 

of FEMA’s written response to the report’s recommendations, and 

our analysis of the response. A copy of FEMA’s response, in its 

entirety, is included as Appendix B. 

Recommendation #1: Develop and implement a review process 

for Captive financial and performance reports that will provide 

assurance that funds are being used prudently and according to 

provisions of the grant agreements. This review process should be 

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documented in order to allow for continuity and subsequent follow 

up of all analyses and conclusions. 

FEMA Response: FEMA agreed with our recommendation. In 

its response, FEMA noted that while the Disaster Assistance 

Directorate, Grant Programs Directorate, and Office of Chief 

Counsel all play a role in reviewing the Captive’s activities, its 

review process with respect to the Captive’s financial and 

performance reports is somewhat informal and unstructured. 

FEMA proposed establishing an internal committee comprised of 

staff from its Disaster Assistance Directorate, Grant Programs 

Directorate, and Office of Chief Counsel to meet to discuss and 

document their review of the Captive’s reports. FEMA also 

proposed to develop a standard operating procedure to memorialize 

an appropriate review process to address the unique nature of 

monitoring an insurance company that may operate for at least 25 

years. 

OIG Evaluation: We consider FEMA’s proposal responsive to 

the recommendation. The recommendation is resolved and open 

pending verification that (1) standard procedures have been 

developed for conducting in-depth reviews and assessments of 

Captive financial and performance reports, and (2) regular 

meetings are being held with FEMA’s staff from the Disaster 

Assistance Directorate, Grant Programs Directorate, and Office of 

Chief Counsel to discuss, assess, and document reviews of Captive 

reports. 

Recommendation #2: Establish a system of coordination between 

the responsible program office and the Grants Management Branch 

to improve and facilitate monitoring activities for Captive’s 

financial and performance reporting. 

FEMA Response: FEMA agreed with our recommendation and 

reiterated its intent to establish a committee with staff from the 

Disaster Assistance Directorate, Grant Programs Directorate, and 

Office of Chief Counsel to meet regularly and summarize in 

writing their coordination and review process. FEMA said that the 

committee will meet at least quarterly upon receipt of the Captive’s 

reports and will utilize a formal standard operating procedure to 

guide its activities. 

OIG Evaluation: We consider FEMA’s proposal responsive to 

the recommendation. The recommendation is resolved and open 

pending verification that the FEMA staff is meeting at least 

quarterly as proposed, and that standard operating procedures have 

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been developed as guidance for future program managers. This 

action should formalize regular contact between the program office 

and Grant Programs Directorate. 

Recommendation #3: Work in conjunction with the Captive and 

the Grants Management Branch to ensure that financial reports 

submitted include explanations to facilitate an understanding of the 

information reported. 

FEMA Response: FEMA agreed with our recommendation and 

said it has worked closely with the Captive over the last three years 

to ensure that the Captive provides all necessary financial reports 

in a manner that facilitates FEMA’s review. FEMA said the 

Captive has always been willing to accommodate FEMA in this 

regard. FEMA noted that these reports can be complex but, as part 

of the committee process described above, it proposed to re-engage 

on this issue internally and communicate any additional reporting 

needs to the Captive. 

OIG Evaluation: We consider FEMA’s comment responsive to 

the recommendation, which is resolved and open. This 

recommendation will remain resolved and open until FEMA 

provides the results of internal discussions, and documentation of 

communications with the Captive regarding additional reporting 

needs to enhance understanding of the Captive’s reports. In 

addition, any additional reporting needs should be incorporated in 

FEMA’s standard operating procedures for conducting reviews of 

the Captive’s financial and performance reports. 

Recommendation #4: Ensure that sufficient personnel with the 

appropriate level of expertise are assigned to perform substantive 

reviews of all Captive financial and performance reports, and 

subsequent attachments. 

FEMA Response: FEMA agreed with our recommendation. 

FEMA noted that the number of personnel assigned to monitor the 

Captive has been small, given that oversight of captive insurance 

companies is not ordinarily part of FEMA’s mission. FEMA 

recognized the need to create a greater depth of expertise given the 

number of years FEMA may have to monitor the Captive’s 

operations. FEMA proposed to further develop the depth of 

experience of its staff through the committee process described 

above for the key offices within the Disaster Assistance 

Directorate, Grant Programs Directorate and the Office of Chief 

Counsel. 

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OIG Evaluation: We consider FEMA’s proposal responsive to 

the recommendation. The recommendation remains resolved and 

open pending verification that FEMA has taken steps to ensure its 

committee includes personnel with sufficient knowledge and 

expertise to conduct in-depth assessments of the Captive’s 

financial and performance reports. 

Recommendation #5: Develop and implement a review process 

to verify the appropriateness of the Captive’s solicitation, award, 

and renegotiation processes, and document the results. 

FEMA Response: FEMA agreed in part, noting that the Captive 

is not a FEMA grantee or sub-grantee and that it is highly unusual 

for an agency to become involved in the procurement activities of 

an entity such as the Captive. FEMA said that the Captive is not 

subject to FEMA's regulations at 44 CFR Part 13 regarding grantee 

and sub-grantee procurement requirements. FEMA said that it 

tends not to involve itself in its grantees’ and sub-grantees’ 

procurement activities, who are expected to follow applicable 

regulatory and policy guidance on procurement. FEMA added that 

there is no regulatory requirement that it become so involved and, 

in most instances, it would be ill-advised to interject itself into an 

independent procurement process for which it may not have the 

necessary expertise. FEMA said that it does not have expertise in 

the area of procuring investment firms, coverage counsel, third 

party claims administrators, and other professional service 

providers necessary to manage an insurance company. 

FEMA said that during the creation of the Captive, it recognized 

that it was critical that such a large amount of Federal funds be 

well-managed and procurement processes ensure the Captive 

receive bids and undertake a formal bid review process. Therefore, 

specific procurement processes were included as a requirement of 

the documents creating the Captive and the Captive has complied 

with these requirements. 

FEMA added that it does review major procurements undertaken 

by the Captive. FEMA said that the Captive alerts it to each such 

procurement the Captive intends to undertake as noted in the 

agendas for the Board of Director meetings. FEMA said that it is 

invited to attend all Captive Board of Directors meetings, and is 

provided with the minutes of each meeting. The minutes convey 

the Captive's report to its board including a briefing by the Captive 

staff regarding the need for such procurements and are followed by 

the issuance of a Request for Proposal and an outreach, 

recruitment, and engagement strategy. FEMA noted that all 

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bidders are thoroughly reviewed by Captive staff and finalists are 

subject to oral interviews to determine the best qualified service 

providers. The whole process is shared with the Board of 

Directors, who approves each procurement and makes all final 

decisions. FEMA said that all of its reviews, to date, have 

demonstrated the Captive has undertaken its procurements in a 

sound, professional manner, consistent with the procurement 

requirements set forth in the grant and sub-grant agreements. 

To address the OIG's concerns with respect to increased 

involvement, FEMA proposed to review how it monitors the 

Captive's procurement activities and examine whether it can create 

more formality in the process to carefully document its review. 

FEMA also agreed to work with the Captive to determine if there 

are more steps in the Captive's procurement process where FEMA 

should be involved. 

OIG Evaluation: We consider FEMA’s comments responsive to 

our recommendation. The recommendation is resolved and open 

pending our receipt of FEMA’s internal reviews of (1) current 

monitoring activities and whether these activities should be more 

formal, and (2) interactions with the Captive regarding FEMA’s 

level of involvement in the procurement process. We will evaluate 

this information and determine whether it complies with the intent 

of this recommendation. 

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Appendix A 

Purpose, Scope, and Methodology 

We conducted this review of the WTC Captive Insurance 

Company’s operations and responsibilities in response to 

Congressman Jerrold Nadler’s concerns about the “possible 

mishandling of claims brought by individuals who have suffered 

deleterious health effects as a result of their rescue and recovery 

work at the WTC site.”6

 In his July 26, 2006 letter, Congressman 

Nadler posed two principal questions: 

1) Why has the WTCC (World Trade Center Captive) chosen 

to use a $1 billion federal fund to litigate all 8,000 claims 

instead of settling whenever possible and appropriate? 

2) Why have no procedures been established to receive, 

review and pay medical, hospital, surgical and disability 

benefits to injured persons, and funeral and death benefits 

to dependents, beneficiaries or personal representatives of 

persons who were killed? 

We considered the Congressman’s first question as a compliance 

issue, examining not only the reasoning that supports the Captive’s 

role in ongoing litigation, but also the extent to which that role is 

consistent with relevant laws and grant documents. Regarding the 

Congressman’s second question, we determined the extent to 

which a claims administration process has been developed and 

implemented, and ascertained what criteria exist to evaluate 

claims. We also reviewed the Captive’s expenditures, investments, 

and internal controls, and assessed FEMA’s monitoring efforts 

concerning the Captive’s adherence to the grant agreement, and the 

status of its holdings. 

We analyzed Public Law 108-7 and the accompanying House 

Conference Report 108-10, as well as other applicable federal, 

state, and local laws. We also reviewed the grant agreement 

between FEMA and New York State, the subgrant agreement 

between New York State and New York City, the agreement 

between New York City and the Captive, and the Captive’s 

operational documents. We reviewed submissions from New York 

City and New York State to FEMA regarding insurance for the city 

and private contractors who removed debris from the WTC site; 

correspondence from congressional, New York State, New York 

City, and FEMA officials concerning the establishment and 

funding of a captive; and applicable court documents concerning 

6

 Congressman Nadler’s letter appears in full in Appendix C. 

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Appendix A 

Purpose, Scope, and Methodology 

related litigation in the Second Circuit Court of Appeals and the 

U.S. District Court for the Southern District of New York. 

We also interviewed officials at FEMA’s headquarters in 

Washington, DC and from its Region 2 office in New York City. 

Our fieldwork in New York City included interviews with Captive 

officers, and current and former board members, as well as with 

staff from select service contractors. We interviewed 

representatives of New York State and New York City, including 

the New York State Insurance Department, the New York City 

Office of Management and Budget, and the New York City Law 

Department. In addition, we held teleconference interviews with 

the New York State Emergency Management Office and with 

plaintiffs’ attorneys. 

Our fieldwork began in January 2007, and concluded in June 2007. 

Our review was conducted under the authority of the Inspector 

General Act of 1978, as amended, and according to the Quality 

Standards for Inspections issued by the President’s Council on 

Integrity and Efficiency. 

We would like to offer our appreciation to officials from FEMA, 

the Captive, New York State, New York City, and the private firms 

and individuals with whom we spoke for their cooperation and 

courtesies extended to our staff during this review. 

A Review of the World Trade Center Captive Insurance Company
 

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Appendix B 

Management Comments to the Draft Report 

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Appendix B 

Management Comments to the Draft Report 

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Appendix B 

Management Comments to the Draft Report 

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Appendix B 

Management Comments to the Draft Report 

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Appendix B 

Management Comments to the Draft Report 

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Appendix B 

Management Comments to the Draft Report 

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Appendix C 

Letter from Congressman Jerrold Nadler 

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Appendix C 

Letter from Congressman Jerrold Nadler 

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Appendix D 

World Trade Center Captive Insurance Company’s Claims Administration Process 

Initially, an insured under the Captive’s policy receives a 

“summons with notice,” alerting it to a forthcoming lawsuit, or a 

notice of an actual lawsuit from a plaintiff’s attorney. The notice 

of a lawsuit is provided through a “check-off” complaint, which 

lists possible alleged injuries and defendants. Injuries and 

defendants’ names are checked off based on the plaintiff’s 

allegations. The plaintiffs often name multiple insureds as 

defendants in a single lawsuit. 

•	 The insured provides these notices to the Captive’s claims 

administrator, which reviews and classifies them as a 

summons with notice or “check-off” complaint. The 

claims administrator also separates complaints in a lawsuit 

into individual claims, which equals the number of named 

insureds or defendants. 

•	 The claims administrator enters summonses with notice and 

“check-off” complaints into its electronic database. As of 

March 2008, the Captive had recorded lawsuits from 9,397 

plaintiffs against nearly 90 insured WTC contractors and 

New York City. As of March 2008, the Captive also 

counted 413,337 claims, as individual plaintiffs are suing 

multiple insureds. 

•	 For each lawsuit received, the claims administrator enters 

the plaintiff, defendants, nature of complaint, and alleged 

cause of injury into its database. The claims administrator 

compares new submissions to existing entries to avoid 

duplication. Possible duplicates are evaluated through a 

series of checks, including comparisons of case numbers 

and birth and exposure dates, before being entered as new 

claims. 

•	 Attorneys at McDermott Will & Emery review each claim 

against the Captive’s liability insurance policy to determine 

coverage eligibility. For a claim to be accepted, it must: 

(1) Fall within the insuring agreement of the policy, 

(2) Allege that exposure to the cause of injury occurred 

during the policy’s exposure period, and 

(3) Arise out of WTC site debris removal work. 

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Appendix D 

World Trade Center Captive Insurance Company’s Claims Administration Process 

•	 A claim is then compared to the exclusion section of the 

policy, which bars liabilities for punitive damages, 

workers’ compensation, disability, retirement benefits, 

fines, sanctions or penalties, and intentional acts by an 

insured’s employee. In submitting the claim, the insured 

must have complied with “conditions precedent to 

coverage,” which requires a timely, nonprejudiced 

submission of claims to the Captive. 

•	 McDermott Will & Emery recommends acceptance, 

acceptance with reservation of rights, deferral, or denial. 

Acceptance of a claim for coverage brings the insured 

under the Captive’s umbrella for purposes of defending 

against the lawsuit. Claims may be accepted with 

reservation of rights, in which case a claim may or may not 

fall under the scope of coverage. In any event, it must be 

initially included in any legal defense under New York 

State law.7 

Deferrals result from lawsuits that do not have sufficient 

information to determine coverage eligibility. GAB Robins 

managers said that it does not send summonses with notice 

to McDermott Will & Emery. Instead, coverage decisions 

on these claims are automatically deferred. GAB Robins 

managers said that even some decisions on “check-off” 

complaints have been deferred due to insufficient 

information. 

Lastly, claims may be denied should information in a suit 

warrant such a decision. For example, claims may not fall 

within the insuring agreement of the policy or the injury 

may not have occurred at any of the WTC-related sites. 

Attorneys at McDermott Will & Emery said that the 

Captive’s coverage eligibility criteria are very broad and 

give insureds the benefit of the doubt. 

7

 The Captive grants the “acceptance with reservation of rights” determination when the origin of a 

claimant’s injury or illness cannot be immediately determined. If, for example, an individual worked the 

WTC site as well as a non-WTC-related site over a particular time period and subsequently became ill from 

work at either site, the cause of which is unknown, the Captive must by law accept the claim for coverage 

and defend the insured from suit. Further analysis, including any court-driven discovery, should reveal the 

origin of the injury and basis for the claim. 

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Appendix D 

World Trade Center Captive Insurance Company’s Claims Administration Process 

•	 The Captive’s general counsel reviews McDermott Will & 

Emery’s recommendations and authorizes acceptance, 

acceptance with reservation of rights, deferral, or denial. 

•	 McDermott Will & Emery posts the decision on an online 

database, E-Room. E-Room allows coverage counsel to 

pass information to the claims administrator on claims 

recently decided, as well as on any changes to existing 

entries that may have occurred. Staff members in GAB 

Robins’ WTC Unit receive daily email updates from ERoom on recent changes or additions to the database. 

These updates lead GAB Robins to send notification letters 

on a coverage decision to each insured, reporting the status 

of recently submitted claims. 

•	 If the claim is accepted, the claims administrator issues a 

defense retention letter to Patton Boggs, the lead defense 

firm hired by the Captive to represent its insureds in court. 

•	 Deferrals are held until more information is submitted to 

the Captive and the claims administrator. Any claims 

denied for coverage may be resubmitted with additional 

information. 

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Appendix E 

World Trade Center Captive Insurance Company Expenditures as of March 2008 

Table 1: The Captive’s Expenditures as of March 2008 

2004 2005 2006 2007 2008* Total** 

Administrative 

Costs $1,360,535 $1,499,648 $1,459,438 $1,386,969 $404,676 $6,111,266 

Professional Service 

Fees 575,123 2,349,527 2,710,588 4,208,881 734,177 10,578,296 

Claims-Related 

Expenses 

 Claims 

 Administration 

0 3,136,364 4,371,242 3,479,688 798,574 11,785,868

 Lead Defense 

Counsel 

0 14,690,177 17,772,812 26,367,039 (1,579,998)8 57,250,030

 Coverage 

Counsel 

0 2,188,878 1,430,810 1,576,637 99,780 5,296,105

 Pre-Existing 

 Claims Counsel 

0 2,149,291 1,957,267 2,076,056 14,870,8199 21,053,433

 Document

 Management 

0 741,617 6,879,574 12,214,681 265,294 20,101,166 

Total ClaimsRelated Expenses 0 22,906,327 32,411,705 45,714,101 14,454,469 115,486,601 

Claims Paid 0 0 45,000 275,936 0 320,936 

Total Expenses 

$1,935,658 $26,755,501 $36,626,731 $51,585,887 $15,593,322 132,497,099 

*January 2008 to 

March 2008 

**December 2004 to 

March 2008 

 

Source: WTC Captive Insurance Company 

8

 The Captive reached a settlement for prior defense costs with an underlying insurance company and the 

amount received is allocated across the Lead Defense, Pre-Existing Claims Counsel and Document 

Management lines, which caused a net credit to the Lead Defense Counsel line. 

9

 This amount reflects a payment to New York City’s Corporation Counsel for pre-existing claims counsel 

work during Fiscal Years 2003-2005. 

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Appendix F 

Site Locations for World Trade Center Recovery Operations 

In addition to the immediate World Trade Center site, commonly 

known as “Ground Zero” after the September 11, 2001, terrorist 

attacks, other sites in lower Manhattan, Brooklyn, and Staten 

Island were used throughout recovery operations for additional 

debris processing before final disposal. The Captive’s liability 

insurance policy allows for claims arising from work at each 

location, identifying all sites involved in the clean-up as the 

“World Trade Center Site.” 

Below, we present those sites identified in the Captive’s insurance 

policy that are considered the “World Trade Center Site.” We 

adopted this list when referring to multiple sites involved in the 

recovery effort. 

(a) The secured area in New York City bounded by Broadway 

on the east, Albany Street and Thames Street on the south, 

Chambers Street on the north and the Hudson River on the 

west; 

(b) The loading areas in New York City at the West Side 

Highway and Chambers Street, as well as Pier 92 and the 

Heliport at 59th Street and Hamilton Avenue; 

(c) The Brooklyn Marine Transfer Stations where trucks 

dropped off debris and debris was loaded onto barges; 

(d) Barges in transit on the Hudson River and other waterways, 

together with adjacent piers, on which such barges 

operated; 

(e) Trucks in transit between the World Trade Center and any 

location involved in the transportation of debris including 

such locations in Brooklyn and Staten Island; 

(f) Debris loading and unloading areas, including those in 

Brooklyn and Staten Island; and 

(g) Debris sorting/sifting areas at Staten Island. 

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Appendix G 

Major Contributors to this Report 

Deborah Outten-Mills, Chief Inspector, Department of Homeland 

Security, Office of Inspections 

Jacqueline Simms, Senior Inspector, Department of Homeland 

Security, Office of Inspections 

Andrew Schmidt, Inspector, Department of Homeland Security, 

Office of Inspections 

Richard Doery, Department of Homeland Security, Office of 

Counsel to the Inspector General 

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Appendix H 

Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

General Counsel 

Executive Secretary 

Director, GAO/OIG Liaison Office 

Assistant Secretary for Policy 

Assistant Secretary for Public Affairs 

Assistant Secretary for Legislative Affairs 

Administrator, FEMA 

Audit Liaison, FEMA 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as 

appropriate 

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Appendix H 

Report Distribution 

 

Additional Information and Copies 

To obtain additional copies of this report, call the Office of Inspector General 

(OIG) at (202) 254-4199, fax your request to (202) 254-4305, or visit the OIG web 

site at www.dhs.gov/oig. 

OIG Hotline 

To report alleged fraud, waste, abuse or mismanagement, or any other kind of 

criminal or noncriminal misconduct relative to department programs or 

operations: 

• Call our Hotline at 1-800-323-8603; 

• Fax the complaint directly to us at (202) 254-4292; 

• Email us at DHSOIGHOTLINE@dhs.gov; or 

•	 Write to us at: 

DHS Office of Inspector General/MAIL STOP 2600, Attention: 

Office of Investigations - Hotline, 245 Murray Drive, SW, Building 410, 

Washington, DC 20528. 

The OIG seeks to protect the identity of each writer and caller.