Stanford Public Law and Legal Theory Working Paper Series

Stanford Public Law and Legal Theory Working Paper Series

Stanford Public Law and Legal Theory Working Paper Series

I. INTRODUCTION A. The Role of Tort: Responsible Party

The Role of Tort: Responsible Party

On the evening of February 20, 2003, a rock band, Great White, staged a concert in an overcrowded nightclub, The Station, in West Warwick, Rhode Island, using pyrotechnics (also described as stage fireworks) as part of their act that ignited foam insulation on the walls of the club. The ensuing fire turned the club into a raging inferno and led to 100 deaths and more than 200 injuries, many of which were very serious burn cases. Early estimates of the total prospective claims in tort ranged in the area of one billion dollars.1

Prospective tort defendants were not hard to identify. The foam insulation appeared to be highly flammable, which suggested the possibility of suits against the owners of the nightclub, as well as the company that supplied the foam, and its manufacturer.2 The foam had been in place for nearly three years, and yet the municipal fire inspector had certified the club as recently as two months before the fire – strongly suggesting viable claims against the municipality. The band itself, of course, and its manager, were certain defendants. And in the search for deep pockets, Clear Channel, the largest operator of radio stations in the country, which had promoted the concert on its local affiliate and whose disc jockey introduced the band, was named in early filings.3 So too, were sponsors of the event, such as Anheuser-Busch Co., one of the largest breweries in the United States, and Shell Oil Co.4

One could anticipate the plaintiffs relying on a number of tort theories: In the claims against the band members and their manager, negligence in setting off incendiary devices in an enclosed structure with no forethought about the flammable nature of the surroundings

1 See Christopher Rowland & Jonathan Salzman, Tragedy in Rhode Island

2 Apparently, the supplier’s salesman was a neighbor of the owners. The salesman allegedly suggested the product when informed about noise complaints from other neighbors. Jonathan Saltzman, Purchase of Foam at Club Is Traced, BOSTON GLOBE, Mar. 6, 2003, at B5.

3 See Jonathan Saltzman, R.I. Fire Victims’ Lawyers Eye Firm Suits Expected To Name Radio Station ‘s

Owner, BOSTON GLOBE, Mar. 8, 2003, at B 1.

4 See Passa v. Derderian, 308 F.Supp. 2d 43 (2004) (upholding the jurisdiction of the federal district court in Rhode Island to consolidate claims brought in other courts with the claims pending before it). The court’s decision in Passa was made under a newly passed Congressional Statute entitled the Multiparty, Multiforum Trial Jurisdiction Act of 2002, 28 U.S.C. § 1369 (2004).

safety as well, which could trigger punitive as well as compensatory damages under the United States tort system.

It is one thing, however, to identify defendants and establish viable tort theories, and another to recover damages in tort. In the West Warwick case, the prospect of insolvency casts a pall on tort litigation. The owners, band members, and those in the supply chain of the foam insulation materials all are likely to be marginally solvent defendants with limited insurance coverage.5 The town’s liability, even if established, is limited by state statute to $100,000 per plaintiff.6 It seems unlikely that even by recourse to joinder of defendants, anywhere near the out-of-pocket loss will be recoverable against these most “immediate” defendants – let alone claims for intangible loss (consider, once again, the many serious burn cases, along with the prospect of 100 wrongful death claims, and trauma claims of those who managed to escape serious physical injury in the fire).7

Moreover, in the absence of settlement, a protracted litigation process will almost certainly ensue, during which the plaintiffs will be left to their own resources. Indeed, eighteen months after the fire, most of the cases had just recently been filed, and the claims were still simply at the jurisdictional stage.8 Nor is there any real certainty that the defendants whose connection with the case is more attenuated, such as sponsors of the event like Anheuser-Busch and Shell Oil, will ultimately be found responsible. These major corporate defendants are joined principally because recourse to their substantial assets, if attainable, would assure full compensation in tort to the plaintiffs.

The Rhode Island nightclub fire serves as a useful introductory scenario for thinking about financial compensation in catastrophic loss cases in the United States, in situations where human responsibility for the disaster can arguably be established. As the following sections of this report will indicate, social welfare legislation in the U.S. that would provide recovery for financial harm associated with catastrophic loss is relatively underdeveloped when compared to European social welfare systems. Private health, auto, homeowner’s, and commercial property insurance coverage go part of the

5 The insurance coverage might, in fact, be unavailable against those defendants whose criminal liability is established. The owners of the nightclub and the manager of the rock group have been indicted. See Elizabeth Mehren, 3 Indicted in R.I. Club Blaze

6 Rowland & Saltzman, supra note 1.

7 The federal district court in Passa, supra note 4, at 46, reports that 412 people were inside the nightclub and, “[o]nly seventy-seven people are reported to have escaped the building without physical harm, yet, even for these lucky few who escaped bodily injury, the disaster continues to haunt their memories and affect their lives.”

8 Nearly 250 claims in addition to the five plaintiffs in Passa, supra note 4, were filed for deaths and injuries in mid-summer 2004. See RHODE ISLAND: Survivors, Families Sue Over Nightclub Inferno, L. A. Times, July 23, 2004, at A24.

way towards filling the gap, but only part of the way.9 For all of these reasons, when a potentially responsible third party can be identified, it is virtually always the case that recovery in tort is pursued.10

Moreover, the prominent role played by tort in the U.S. is not simply a function of its serving as a gap-filler under a system where large gaps exist in meeting the out-of¬pocket losses, let alone the intangible costs, associated with unanticipated accidental harm. Just as significantly, the U.S. tort system is notably generous both in its body of substantive tort principles and remedial rules of damages – and this circumstance creates strong incentives to litigate in tort, even when insurance coverage is present.

In particular, the expansive damages categories in tort create a substantial incentive to litigate whenever an arguably responsible defendant can be identified. The central precept underlying damage recovery in U.S. tort law is to restore an injury victim as closely as possible to an approximation of his/her pre-injury status. In addition to recognizing a right of recovery for all medical expenses, this underlying tenet of damage recovery entitles a victim, or a victim’s survivors in a wrongful death action, to claim future wage loss (along with actual past wage loss) calculated to take account of the full expectation damages of the victim. Similarly, an individualized assessment of intangible loss – pain and suffering – is a standard heading of compensatory damages.11 Hence, even in circumstances where private insurance coverage and/or a no-fault legislative compensation system provides benefits – circumstances to be discussed in detail in later sections of this report – tort provides damage awards (in particular, individualized, case-by-case assessment of wage loss and noneconomic harm) that would not be recoverable under even the most generous insurance system. And, as another incentive to seek tort recovery, where a colorable case can be made out that the defendant’s conduct was egregious in nature, punitive damages may be available.12

9 In any event, recovery of private insurance benefits is generally ignored under the collateral source rule if an injury victim recovers in tort (i.e. “double-recovery” is allowed, although at times subject to subrogation rights of the insurer). Thus, private insurance coverage does not necessarily diminish the incentive to sue in tort.

10 This is not to suggest that catastrophic loss cases are necessarily litigated to a jury verdict and through an exhaustive appeals process. To the contrary, most catastrophic loss cases – like most tort cases generally – are settled at some point prior to final judgment. In Deborah R. Hensler and Mark A. Peterson, Understanding Mass Personal Injury Litigation: A Socio-legal Analysis, 59 Brook. L. Rev. 961 (1993), the authors offer brief case descriptions of the major personal injury mass disasters of the preceding decade and find that virtually every aggregation of cases was settled prior to final disposition in court.

11 In a serious injury case, a derivative claim may also be entered by a spouse, or in some states a wider category of close relatives, for loss of companionship – technically referred to as “loss of consortium.”

12 While punitive damages are capped in some states and subject to due process limitations under recent U.S. Supreme Court rulings, see especially, State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003), juries retain very broad discretion to set an award that reflects considerations tailored to the particular case.

It is important to note, as well, that it has become common in recent mass tort litigation to find “secondary” categories of defendants, with far more attenuated relationships to mass tort claimants, named as defendants when the “primary” harm¬imposers are either insolvent or impecunious.13 This phenomenon corresponds to a broad judicial conception of the duty obligation in tort law that has emerged in the past thirty years.14 In a like vein, courts have developed expansive approaches to causation, such as market share liability in a discrete category of joint responsibility situations, which reflect a commitment to distribute broadly the harm associated with toxic products, rather than allowing the loss to fall on injury victims.15

In sum, tort functions as a default financial recovery system in cases of catastrophic harm (and indeed in accident cases more generally) that is routinely invoked where a colorable claim can be made that a responsible party exists, irrespective of whether private and/or public insurance systems are available.16

B. Natural Disasters

But what of situations, so-called natural disasters, where no human agency can be charged with responsibility for catastrophic harm? In these cases there is no recourse to tort in most instances, and victims of catastrophic loss ordinarily must rely exclusively on private insurance coverage, or, when available, on public insurance systems.17 The latter can be parsed into two separate categories: social welfare schemes (discussed in section II of this report), such as government disability and unemployment insurance legislation, which are available to all claimants meeting general eligibility requirements – without reference to the source of the harm that has occurred. And, legislative no¬fault or insurance schemes that have been established with designated types of catastrophic loss in mind. This second category of social welfare legislation will be

13 A particularly salient recent example is the asbestos litigation. See Deborah Hensler, As Time Goes By: Asbestos Litigation After Amchem and Ortiz, 80 TEX. L.REV. 1899 (2002).

14 An especially influential case, which opened the floodgates of asbestos litigation, was Borel v. Fibreboard Paper Products Corp., 493 F.2d 1076 (5th Cir. 1973), cert. denied, 419 U.S. 869 (1974).

15 See the leading case involving DES litigation, Sindell v. Abbott Labs., 607 P.2d 924 (Cal. 1980), cert. denied 449 U.S. 912 (1980).

16 One qualification is necessary. Some legislative no-fault schemes require the claimant either to opt out of tort in order to claim benefits, or preclude resort to tort altogether by eligible claimants.

17 Even in natural disaster situations, one qualification is necessary, reflecting the broad sweep of U.S. tort law. At times, in these cases – an earthquake, for example – if injury claimants can establish that greater foresight (perhaps on the part of a building construction contractor) might have anticipated the consequences that came to fruition through an “act of God,” there may be resort, once again, to tort litigation. Thus, it is more accurate, as a general proposition, to think of tort in the context of U.S. catastrophe compensation as a complementary system of redress, rather than a default system, offering the prospect of damage recovery that takes full account of the injury victim’s loss when its liability standards are satisfied.

discussed, along with a description of private insurance coverage, in section IV – after examining the government agency whose work is devoted exclusively to disaster relief (in section III, on the Federal Emergency Management Agency).

Section V of the report will serve as a reprise on the somewhat patchwork design of the U.S. system by isolating for special consideration three case studies of particularly salient disaster events that illustrate the range of approaches discussed earlier: First, the terrorist acts of September 11, and, in particular, the legislative no¬fault compensation scheme that was enacted to compensate the personal injury victims

In a concluding section VI of the report, we will return to a more general overview of the system, offering a brief final commentary on fairness and efficacy considerations.


A. The U. S. Social Security System: Background

The social security system in the U.S. was originally created in response to the widespread social hardships of the Great Depression. In the early 1930s, the number of unemployed workers skyrocketed. The nation’s elderly was one cohort group facing serious danger. As family incomes and savings dropped, care of the elderly became a heavy burden on families and charity groups were unable to meet the demands for aid. President Franklin Delano Roosevelt submitted a social security program proposal to Congress in 1935.18

The original Social Security Act of 1935 emerged from Congress as a two-part social insurance program that included provisions for federal old-age insurance and for federal grants to state-run unemployment compensation programs.19 The old-age insurance component created retirement benefits that were available to primary workers at the age of 65. From the outset, some argued for the inclusion of disability funding, as well. Many viewed disabled workers as a

18 Economic Security Bill, H.R. 4120, 74th Cong. (1935).

19 At the time, legal scholars were uncertain whether Congress had the authority under the U.S. Constitution to enact such sweeping social welfare legislation. In 1937, the U.S. Supreme Court responded in the affirmative. See Helvering v. Davis, 301 U.S. 619 (1937) (finding Social Security Act to be a valid exercise of Congress’ constitutional authority and rejecting claim that the Act violated the Tenth Amendment)

group greatly in need of federal support but left without care under the Social Security system. Finally, in 1954, Congress responded, introducing the first disability benefits program.

B. Disability Provisions: Eligibility Standards

The initial scope of disability benefits was limited. Disability was defined conservatively as the “inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” Benefits were only available for insured workers between the ages of 50 and 65.

Over time, however, Congress amended and expanded the disability provisions. It added coverage for dependents of disabled workers and disabled children of retired or deceased workers. The minimum age requirement was removed and the definition of “disability” was loosened to include impairments “expected to last for a continuous period of not less than 12 months.” With these and other changes, the size of the program grew significantly as did the amount of funds being doled out annually.20

In its current form, the Social Security Administration manages two federal disability benefits programs: the Social Security disability insurance program (SSDI) (Title II of the Social Security Act) and the supplemental security income program (SSI) (Title XVI of the Act). While neither program was specifically designed as a catastrophe-mitigation scheme, disabilities caused by a catastrophic event are covered, provided they meet the general requirements of the Act.

Title II has several requirements that applicants must meet. First, SSDI benefits are only available for “insured” workers (and their dependents under certain conditions). To be “insured” for purposes of the Act, an individual must have contributed to the Social Security trust fund through the Social Security tax deducted from their employment earnings. Second, the individual must have accumulated a certain number of “work credits” at the point of filing for disability.21

Most critically, the applicant’s impairment must meet the definition of “disability” set forth in the Act. A disability for Social Security purposes is “the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”22 In essence, then, SSDI benefits are

20 By 1960, the number of awards issued by the SSA to disabled beneficiaries and nondisabled dependants reached 388,861. In 1975, that number rose to 1,305,345. SOCIAL SECURITY ADMIN., ANNUAL STATISTICAL REPORT ON THE SOCIAL SECURITY DISABILITY INSURANCE PROGRAM tbl. 30 (2002), available at

21 Work credits are based on total yearly wages (or total income for self-employed workers). A worker can earn up to four work credits per year. Generally, SSDI requires a worker to have accumulated forty work credits, ten of which must be earned in the ten years immediately prior to the claimed disability.

22 Social Security Act, 42 U.S.C. § 416(i)(1)(A) (2004).

limited to prospective permanent and total disability. The program is circumscribed insofar as it does not pay benefits for partial or short-term disabilities. At the same time, its scope is broad in that it defines disability in terms of capability of performing work functions and not general life activities.

The limits of the SSDI program may be seen as a reflection of its intended role in relation to other forms of economic support. Given the program’s limits, a worker must rely on state workers’ compensation programs, personal insurance and personal savings to weather short-term disability episodes.23

The second general disability program, Supplemental Security Income, differs in some ways from SSDI benefits. The purpose of the SSI program is to ensure that the basic needs of the aged, blind and disabled individuals in the poorer segment of the nation’s society are provided for. To be eligible for SSI benefits, an individual must be over 65 years of age, blind, or disabled. In addition, the eligibility requirements set a maximum annual income and total resource level. 24 Essentially, an applicant’s monthly income must not be greater than the federal benefit rate25 and the value of the individual’s personal property cannot exceed the amount dictated by the SSA.26

C. Benefit Levels, Treatment of Collateral Sources, and Funding

Benefit levels under SSDI and SSI differ. SSDI benefit rates are based on the claimant’s lifetime average earnings covered by Social Security. No form of social security is intended as a full replacement for earned wages. The benefits tend to fall below 50% of the claimant’s average yearly salary. Claimants with higher salaries are generally eligible for a lower percentage of their wage in benefits than claimants with lower average yearly salaries.

23 In addition to meeting the definition of “disability,” a worker must also show that his or her impairment is “severe.” The Social Security Administration maintains a list of medical conditions that per se qualify as “severe.” If an applicant’s impairment is not listed, the Administrator assesses whether it is of equal severity to a listed impairment. If it is deemed not to be of equal severity, the Administrator determines if the condition nonetheless interferes with the applicant’s ability to do the work previously undertaken or to adjust to other work. To determine if an applicant can adjust to new work, the claimant’s age, education, work experience, and transferable skills are considered.

24 Eligibility requirements for Supplemental Security Income benefits are set forth in Social Security Act, 42 U.S.C. § 1382(a) (2004).

25 The federal benefit rate as of January 2003 is $552 for an individual and $829 for a couple. See SOC. SECURITY ADMIN., SOCIAL SECURITY HANDBOOK § 2113.1 (2003). These amounts can be supplemented by State programs. 42 U.S.C. § 1382(e). States can enter into an agreement with the SSA to have SSA administer the State supplemental program and distribute those benefits along with the federal benefits. If such an agreement is entered into, SSA charges the state a fee for every supplementary payment issued. See SOC. SECURITY ADMIN. § 2016.1.

26 As of 2003, the limits $2,000 for an individual and $3,000 for a couple. SOC. SECURITY ADMIN., supra note 25, § 2113.2.

Under the SSI program, a national maximum payment rate is established every year. For 2004, the highest federal SSI monthly payment was set at $564 for an individual and $846 for a couple. 27 The amount that an individual claimant will receive is generally based on the person’s income for the two months prior to each monthly payment. States are free to supplement the national SSI funds and may apply their own rules for establishing the rates of the supplements. Payments are generally made on a monthly basis, though provisions exist for requesting a lump sum payment.

The treatment of collateral sources raises an important question, because disabled workers claiming benefits under the SSDI program generally do have other sources of benefits available: Private health insurance, private pension plans, and state workers’ compensation programs are some leading examples. When the government calculates SSDI benefits for which a person is eligible, it does not consider any money that person has collected from private insurance. In other words, disability benefits from private sources such as private pensions and insurance do not reduce SSDI benefits.28 At the same time, disability benefits from public sources may reduce SSDI benefits. Workers’ compensation, civil service disability benefits, military benefits, and state temporary benefits are all examples of public sources of compensation. The combined amount of benefits from public sources cannot exceed 80% of the claimant’s pre-disability income. If the combined benefits do exceed that amount, the excess is subtracted from the SSDI contribution.29

Finally, with respect to funding, SSDI and SSI are financed by different sources, lending some insight into their differing objectives. The SSDI program is funded by wage-based tax payments made by workers, employers, and self-employed persons. By contrast, the SSI program is financed through general tax revenues.

D. Administration

Applying for SSDI benefits is generally a nonadversarial, administrative process with responsibilities allocated between federal and state officials. Applications are submitted to the Social Security District Office, which is responsible for assisting applicants in filling out the necessary paperwork and gathering evidence needed to determine entitlement.30 Once the District Office has completed its tasks, it forwards the application to a state disability determination unit. This state-level administration of the federal program is accomplished through a formal agreement between the state and federal governments.31


28 However, when a private insurer calculates the amount that it will pay out, it may consider SSDI income and adjust its payout accordingly. NAT’L ORG. OF SOC. SECURITY CLAIMANTS’ REPRESENTATIVES, SOCIAL SECURITY PRACTICE GUIDE § 7.03 (2003).

29 Veterans Administration benefits and SSI payments are not included in the calculation of combined benefits.


31 Id. § 10.10.

The state office determines whether the applicant qualifies as “disabled” under the Act.32 Once a formal determination is reached, a written notice is sent to the applicant.33 If a claim is approved, disability benefits are dispersed on a monthly basis from the federal funds. Benefits under the SSDI program typically cannot begin until five months after the onset of the claimed disability. By contrast, under the SSI program, benefits can begin as early as the date that the applicant filed the claim. A “presumptive disability” advance can be made in certain cases to sustain the applicant for up to six months while the formal application review process takes place. There is no requirement that the monies be refunded if the application is ultimately denied.

If a claim is denied, the applicant can file an appeal. The first step in the appeals process is a request for reconsideration of the initial determination. If such a request is made, the primary examining office will re-examine the administrative record and the applicant is permitted to submit new evidence to support her eligibility. The applicant can appeal this second determination by requesting a hearing before an Administrative Law Judge (ALJ) of the federal Office of Hearings and Appeals. The next step is to request a review of the ALJ’s decision by the Office of Hearings’ Appeals Council. Finally, a dissatisfied applicant can enter the federal court system by filing a civil action against the Social Security Administrator in federal district court. The district court can affirm, modify, or reverse an SSA decision and can remand the application back to SSA for reconsideration or it can enter a final judgment on the case with remand.34

E. Health Care Benefits

Medicare is a federal health insurance program that was created in 1965 to ensure

that retired and disabled Americans have access to basic health care.35 Medicare is available to individuals who are 65 or older and individuals of any age that suffer from certain disabilities.36

32 The determination is made by a team composed of a trained disability analyst and a medical consultant. The team makes its disability determination based on application forms, medical evidence, and other data. To be eligible for compensation under either the SSDI or SSI program, a claimant must have a “medically determinable impairment.” The impairment must be established through medical evidence. A claimant’s own statement of symptoms is insufficient to secure benefits. To prove a disability, the applicant must provide medical records of symptoms, diagnoses, and/or laboratory findings substantiating her claim. If an applicant fails to submit sufficient medical evidence herself, the disability examiner may request an additional examination be conducted by a state consulting physician. The reviewing team makes an independent determination of disability based on the medical records and other evidence filed and does not take the evaluations of consulting physicians to be dispositive. SOC. SECURITY ADMIN., supra note 25, § 604.3.

33 20 C.F.R. § 404.1562 (2003).

34 See SOC. SECURITY ADMIN., supra note 25, § 2000 – 2019.

35 Social Security Amendments of 1965, 42 U.S.C. § 1395 et seq. (2004).

36 Medicare’s disability provision is tied to SSDI. Medicare is available to individuals under the age of 65 who have met the requirements of the SSDI benefits program for a period of at least 24 consecutive months. See 42 U.S.C. §§ 1395(c), 1395(o) (2004).

Medicare coverage can be obtained in two ways, directly from the government (Original Medicare Plan) or from participating private insurance companies (Medicare Advantage Plan).37

The Original Medicare Plan has two parts. Part A (Hospital Insurance) covers a portion of short-term, inpatient care in hospitals and critical access facilities. Most working Americans pay for Part A coverage through a Medicare tax deducted from their paychecks during the term of their employment. If an individual is 65 or older, or disabled, but did not pay the Medicare

tax while employed, she may be able to purchase Part A coverage from the government. Part B (Medical Insurance) helps to cover outpatient medical care, such as doctor’s visits, outpatient hospital care, some types of physical therapy, and some medical supplies.

Part B requires a monthly premium payment. In 2004, the monthly cost was $66.60. For both Parts A and B, the insured must pay a deductible amount before federal funds are available. If medical costs exceed that deductible, then Medicare and the insured share the remaining costs according to the program cost schedule.

F. Concluding Observations

By definition, the general governmental disability provisions in the U. S. were not enacted with special reference to providing compensation for catastrophic loss. As a consequence, the gaps in coverage, which are apparent even when the benefit schemes are assessed under ordinary circumstances of accidental harm, stand out when a mass disaster occurs.

More specifically, federal social welfare legislation provides only a limited safety net for injury victims along at least three critical dimensions. First, there is no governmental scheme of national health insurance in the U.S. The coverage afforded under the principal federal scheme, Medicare, is largely limited to the elderly. Second, there is only limited coverage of wage loss in the case of disabling injury: the federal SSDI scheme provides benefits only in the case of permanent total disability. While state disability schemes and unemployment compensation insurance offer supplemental assistance, they are limited in scope, and in any event, provide only limited wage replacement. Finally, property loss is not covered at all under governmental programs of general applicability. Here, the gap is filled in part by disaster relief programs discussed in sections III and IV, just as gaps in personal injury out-of-pocket loss are covered, if at all, through private insurance coverage, also discussed in section IV.


A. Introduction

37 Private insurers that offer Medicare Advantage Plans can provide a wider range of coverage options than is available through the Original Medicare Plan (e.g. expanded prescription drug coverage) and can charge monthly premium rates for the added benefits.

The Federal Emergency Management Agency (FEMA) was created in 1979 as an attempt to unify the diverse federal disaster relief programs then in existence. FEMA, once an independent agency, is now part of the recently created Department of Homeland Security. The Agency is responsible for administering federal disaster relief funds, as well as managing the government’s myriad preparedness and prevention programs. FEMA’s jurisdiction covers the gamut of emergencies – both natural and man-made. Since its inception, FEMA has provided assistance in the aftermath of earthquakes, hurricanes, tornadoes, the hazardous waste contamination of Love Canal, the accident at Three Mile Island nuclear power plant, the Cuban refugee crisis, and the terrorist attacks on September 11, 2001.38

Two types of assistance are administered by FEMA: individual and public. Individual assistance provides monies to individuals, families, and businesses in the form of low-interest loans, housing grants, tax refunds, unemployment benefits, and even free legal counseling. FEMA’s Public Assistance Grant Program provides funding to state and local governments and certain types of private nonprofit organizations to help in the rebuilding of communities harmed by a disaster event. In addition to serving as a source of funding, FEMA also coordinates post-disaster relief efforts, including support from other agencies of the federal government.

As discussed in greater detail below, state and local governments bear the initial responsibility for relief and recovery after catastrophes that take place in their region. The federal funds administered by FEMA are meant to support the efforts of state and local governments when relief requirements overwhelm their capabilities.

B. FEMA: Coordination with State and Local Entities

1. The Role of Local Government

Disaster assistance in the United States begins at the local level. Thousands of emergencies occur nationwide every year and most of them are handled by local governments. Local elected officials (e.g. mayors, city councils, boards of commissioners) have primary responsibility for protecting their citizens. Upon learning of a potentially imminent emergency, local officials have a duty to warn their citizens and take whatever steps are warranted to minimize damage. Evacuation orders are most often issued at the local level.

If a disaster does occur, aid and protection are provided by local medical crews, rescue workers, fire fighters, and police. Private and public utility crews work to restore downed power, transportation, and communication systems. Private and nonprofit aid

38 More recently, FEMA has been actively engaged in providing disaster relief in the wake of a cluster of four hurricanes, beginning with Hurricane Charley, which caused enormous damage in the state of Florida in August-September 2004. For discussion, see Abby Goodnough, In Florida, Oficials are Hoping for One Final Storm Recovery, New York Times, Sept. 29, 2004, at A 21.

organizations, such as the Red Cross, Salvation Army, and churches, offer food, housing and clothing to victims in coordination with the local government. Voluntary agencies lend assistance regardless of whether an official “state of emergency” has been declared by any level of government. They typically coordinate their efforts and work with government officials to determine the community’s needs.

In the aftermath of a disaster, local governments must coordinate and provide both short-term and long-term recovery. Short-term recovery includes the restoration of essential community services, ensuring houses are habitable to allow families to return home from temporary housing, and repair of major roads, water distribution services, and communication lines. Long-term recovery involves the extensive repair and rebuilding necessary to put the community as close to its pre-disaster conditions as possible. In addition, long-term recovery often includes implementing strategies to minimize the damage of similar events in the future.

Often, local communities enter mutual aid agreements with surrounding localities. These agreements allow local governments to rely on their neighbors for financial and service assistance in the case of an emergency. Such agreements may be inadequate, however, where a disaster hits an entire region. The greater the magnitude of a disaster, the more likely that state government will be involved.

2. The Role of State Government

If local resources are overwhelmed, the state government may be called upon to declare a state of emergency in the affected area. The local officials submit a request to the state governor (the chief executive official of the state), providing specific information about the emergency, its effects (deaths, injuries, level of property damage, etc.), and the type of aid needed from the state. Such requests are reviewed by the state emergency management office and a recommendation is issued to the governor.

All states have emergency and disaster response laws that set forth the state government’s responsibilities in the event of an emergency and the governor’s duties and powers, including the power to declare a state of emergency and decide when to end that declaration.39 Nearly every state has some form of emergency management office.40 Such agencies have the responsibility to prepare for emergencies and coordinate the activation and allocation of state resources as needed to help localities respond to and recover from disasters.

State-level personnel can engage in monitoring and information gathering even before a declaration of emergency by the governor. When an emergency is declared at the state level, it releases state funds, personnel and equipment for use in aiding local

39 See e.g. Cal. Code Regs. tit. 19, § 2400 et seq. (2002).

40 See Homepage of California’s Governor’s Office of Emergency Service, available at ?OpenForm.

governments’ response efforts. Additionally, state personnel may be called on to provide technical assistance and resources that would not ordinarily be available to local officials. Just as local governments can enter into mutual aid agreements, many states are part of the Emergency Management Assistance Compact or similar cooperative arrangements that allow participating states to draw on a common pool of personnel, equipment, and supplies in emergency situations. These agreements allow states to expand their own resource base without needing to ask for federal assistance.41

The state may provide a variety of services depending on the determined need of the affected community. The Department of Public Safety may deploy engineers and heavy equipment to conduct damage assessments of bridges and other infrastructure and assist in reconstruction plans that will create greater resistance in future disasters. Safety personnel may assist with evacuation efforts, crowd control, search, and rescue. Public health units may also be used to monitor water and food supplies and manage efforts to control communicable diseases.

State social service agencies can be called upon to manage shelters and provide counseling services to individuals and families to help people cope with the trauma of a disaster. The governor may call the State National Guard into service in an affected area to provide civil control and supplemental law enforcement services. Public health agencies, the state department of agriculture, and natural resource agencies may also have a role to play depending on the type of disaster and relief efforts needed by the local community.

C. FEMA: Core Responsibilities

1. Historical Overview

If the resource capacities of both the state and local governments are exceeded by a disaster event, the federal government is the next in line to provide aid. Prior to 1950, the federal government had no unified disaster relief law in place. Congress had to pass a new law every time it sought to release federal funds for disaster assistance. In 1950,

Congress passed the Federal Disaster Relief Act42 which created a mechanism for federal emergency relief. The Act set forth the principle that federal aid is to be a supplement to state and local resources, not a primary source of relief. It conditioned federal disaster aid on a presidential declaration of a “major disaster” and required state and local governments to commit a “reasonable amount of funds” before federal monies could be distributed.43

41 See e.g. Mich. Emergency Mgmt. Assistance Compact (2002), available at

42 Pub. L. No. 81-875 (1950).

43 Id.

In 1979, President Carter consolidated federal emergency management and mitigation responsibilities into a single agency: the Federal Emergency Management Agency. The decision was motivated by a plea from state governors who found navigating their way through the disparate federal programs extremely difficult, especially during crisis times. It was also an attempt to increase efficiency and efficacy. The Robert T. Stafford Disaster Relief and Emergency Assistance Act,44 which was passed in 1988, is the statute that currently gives the government the authority to dispense federal funds for response and recovery assistance.

The Federal Response Plan (FRP), coordinated by FEMA, provides guidance to federal emergency response efforts.45 The FRP is a signed agreement between more than 20 departments and agencies of the federal government that describes how federal resources will be used to meet state and local response and recovery needs. It provides federal supplemental assistance in 12 critical areas. These “emergency support functions” are: 1) transportation

2. Obtaining Federal Assistance

As suggested above, federal funding for disaster relief is not automatically available when an emergency event occurs. The state governor must request a presidential declaration of major disaster and must support that request with a demonstration that the situation has surpassed state and local economic capabilities. The process is initiated by a Preliminary Damage Assessment (PDA), which is an analysis of the damage that has occurred as a result of an incident. The PDA is assembled through a coordinated effort between state and local officials and FEMA regional officials. The PDA allows the federal decision-makers to assess the impact and magnitude of damage, the needs of individuals and businesses, and the capabilities of state and local emergency management funds. It also provides information on which to base estimates of the types and extent of federal assistance needed.

44 42 U.S.C. § 5121 et. seq. (1988).


http: //

Once the PDA is compiled, the governor reviews the document and supporting evidence (photographs, surveys, etc.) and determines whether federal assistance is needed. Before the governor can submit a formal request for a presidential disaster declaration, the state must have implemented its own Emergency Operations Plan. If that action has been taken, the governor can submit a declaration request to the President, which includes specific information about the type and amount of state and local resources slotted for disaster-related efforts. Additionally, the request must guarantee that the Stafford Act’s cost-sharing provisions will be met.

The FEMA Regional Director then evaluates the request and makes a recommendation to the national FEMA director, who, in turn, makes a recommendation to the President. In analyzing the request, FEMA officials consider a number of factors, including the amount and type of damage, the impact on citizens, businesses, and government entities, non-federal resources available to the community including insurance coverage, federal assistance available without a formal disaster declaration, threats to life and safety, and whether the state has suffered other recent disaster events.

Once the President decides to declare a major disaster, he appoints a Federal Coordinating Officer. The federal and state coordinating officers46 work together to establish a disaster field office,47 and an agreement is signed by FEMA and state officials. This FEMA-State Agreement sets the time parameters, types of assistance and eligible regions, cost-share arrangements, and other terms.

3. The Federal Response

In general, disaster relief under FEMA is available for both immediate needs for emergency support, discussed above, and longer-term restorative assistance to victims. On the latter score, FEMA provides loans and grants for property damage directly caused by a disaster event. Importantly, the intent of FEMA is to return a damaged region to a functional state. It is not to return the area to its pre-disaster condition. In this regard, it is strikingly more modest in design than tort law, discussed earlier.

Federal response comes in various forms. The following sub-sections give a more detailed discussion of the types of federal personnel and financial assistance available to victims of disaster.

a. Federal personnel available

When a major disaster occurs, federal personnel teams are coordinated by the FEMA Regional Director of the affected region and dispatched. Different types of

46 The State Coordinating Officer (SCO) is the point of contact for the state and local officials and is the person charged with overseeing and coordinating the state and local response/recovery efforts.

47 The Disaster Field Office is the on-site coordination center for disaster relief personnel. It is not a public reception center. Other spaces are designated for public outreach activities.

personnel teams can be created. The Emergency Response Team is a federal interagency group that is activated only after a presidential declaration. It operates from a Disaster Field Office and coordinates the overall federal response and recovery efforts and assistance. It coordinates with state and local governments to ensure that the federal employees maintain their role as supplemental to, rather than supplanting, local efforts. In addition, an Emergency Support Team functions at FEMA headquarters to coordinate local efforts and serves as a point source for information.

In the case of predictable disasters, such as hurricanes and floods, when advance warning allows officials to make early estimates of the magnitude of impending damage, an advance team of federal personnel may be dispatched to an area even before a disaster is officially declared. This Advance Emergency Response Team will establish emergency communications systems in an area and work with state and local officials to help coordinate early response efforts and identify what assistance may be needed.

Once a major disaster occurs, the FEMA Regional Director of the affected region will coordinate the Regional Support Team and possibly an Emergency Support Team and the Emergency Response Team.

b. Types of federal assistance provided for individuals and businesses

Immediate needs funding is a unique category of federal funding. The Public Assistance Program allows a completed Preliminary Damage Assessment, mentioned above, to trigger federal funding for emergency work in the most in-need areas even before a presidential declaration has been issued. Up to 50% of the total federal share estimated in the PDA can be used for emergency work. This provision is meant to allow funding to be available for the most basic necessities in the heart of the crisis so that administrative delays do not contribute to the human suffering in an emergency of disaster proportions.

Under the regular scheme, as distinguished from immediate needs funding, federal assistance is available for individuals and businesses. This assistance comes in many forms. The primary concern in the aftermath of a disaster is ensuring that victims’ most basic needs are met. To that end, various efforts are made to provide food, temporary shelter, and longer-term restorative funds for housing and commercial redevelopment. In the accompanying footnote we offer a partial description of some of the principal forms of grants and loans, designed to provide a sense of the strategies used to get disaster victims off to a fresh start.48

48 The U.S. Department of Agriculture (USDA) houses the Food and Nutrition Service, a federal agency that oversees the federal Disaster Food Stamp and Food Commodities Programs. The food stamp program provides food coupons to eligible individuals and families. Once USDA gives federal approval, the program is administered by state and/or local social service agencies and stamps are distributed through an application process. The food commodities program involves federal distribution of surplus commodities to applicants. The applicant pool typically consists of state or voluntary assistance organizations (e.g. the Red Cross) or individual households.

c. Types of federal assistance provided for communities

Community assistance takes two predominant forms: hazard mitigation assistance and public assistance.

The purpose of hazard mitigation assistance is to reduce or eliminate an area’s vulnerability to similar disasters in the future. As with many other features of FEMA, the purpose of this type of assistance is to bolster local self-sufficiency, reduce the need for federal relief funds, and avoid damage to property and loss of life wherever possible. Hazard mitigation49 assistance is limited insofar as it becomes available only in cases where personal or public assistance has also been declared available. However, it is broad insofar as use of its funds is not limited to the areas included in the disaster declaration. Rather, it can be used throughout the state.

Public assistance initiatives seek to help restore damaged communities to a functional state. Upon a declaration of disaster by the President, FEMA becomes authorized to provide supplemental monetary assistance to the recovery efforts of the state and local governments and nonprofit organizations that provide services of a “governmental nature” (e.g. medical and emergency facilities, utilities, custodial care and education facilities). Monies are available only for use in carrying out certain types of work. Emergency work includes things like removal of debris, search and rescue and other activities aimed at saving lives and protecting public and private property from damage. Permanent work is that which is needed to restore an affected community to

The Disaster Housing Program makes federal funds available for home restoration. The funding is only intended to restore homes to a “safe, sanitary, and functional condition.” Funds from this program can also be used for rent payments if the applicants show that they lived in a house damaged by the disaster event. Finally, this program also provides assistance for rent or mortgage payments to homeowners or renters who can show that they suffered financial hardship related to the disaster.

The Individuals and Household Program has a Housing Assistance component. Housing Assistance makes federal funds available to homeowners and renters for rental assistance, repair and replacement expenses, and costs of building a permanent home

In addition to addressing victims’ most immediate needs, FEMA also coordinates more long-term recovery assistance for individuals and businesses. Such aid comes in the form of loans, unemployment compensation, tax aid, legal and mental health services, and other aid. Individuals may qualify for federal loans to help finance property repairs. Even absent a presidential disaster declaration, the Small Business Administration has the authority to make available low interest loans. The monies can be used for repair or replacement of homes and personal property. Small businesses may be eligible for a few different types of loans from the SBA. Physical loss loans provide money for repairing property damage including inventory. Economic injury loans can give small businesses and small agricultural cooperatives working capital to get them through the aftermath of the disaster.

49 Hazard mitigation is a significant component of the federal emergency management program. “Hazard mitigation” is defined as “any action taken to reduce or eliminate the long-term risk to human life and property from natural hazards.” 44 C.F.R. § 206.41 (2004). Grants issued under the Hazard Mitigation Grant Program can cover up to 75% of the costs of an eligible mitigation project. Once a project is approved by the program, the state becomes responsible for implementing the program and for providing the remaining 25% of needed funding (in cooperation with local sources).

its pre-disaster state. Rebuilding of transportation infrastructure and utilities are included in this category.50

D. Funding of FEMA and Coordination with Collateral Sources

The funds distributed by FEMA under the Stafford Act are from general revenues of the U.S. government. This is consistent, of course, with the conception of FEMA as an agency that responds primarily to natural disasters for which there is no assignable source that might be deterred in the future by earmarked financial responsibility.51

As far as coordination of FEMA benefits with collateral sources is concerned, federal assistance provided through the Stafford Act is available only for those needs that cannot be met through private insurance coverage.52 The Stafford Act provides, “with respect to any property to be replaced, restored, repaired, or constructed with such assistance, such types and extent of insurance will be obtained and maintained as may be reasonably available, adequate, and necessary, to protect against future loss to such property.” In determining what insurance is reasonably available, FEMA relies on the assessments of the State insurance commissioner.

E. Concluding Observations

FEMA’s declared mission is to aid state and local governments in preparing for, mitigating the impacts of, responding to, and recovering from disaster events. FEMA faces a number of challenges in program operations and criticisms about its performance as an agency. As we have discussed above, FEMA was originally created as an attempt by the federal government to consolidate its disparate emergency response efforts. The goal was to facilitate the dispersal of federal aid to state and local disaster sites and provide strong, unified federal leadership during disaster events. Management

50 FED. EMERGENCY MGMT. AGENCY, A CITIZEN’S GUIDE TO DISASTER ASSISTANCE 3-24 (2003). Public Assistance grants contain a cost-share requirement that mandates that some portion of the total grant be non-federal and that that portion be split between the state and the applicant. Additionally, insurance proceeds may be deducted from the total grant amount.

Other assistance programs also exist that are activated by a presidential declaration of disaster. Examples include Farm Service Agency loans for rural water system restorations and U.S. Department of Health and Human Services and Food and Drug Administration programs for sanitation system improvements. In addition, federal agencies can be ordered by the President to lend their expertise, personnel, and equipment in response to disasters. The Army Corps of Engineers has specialized flood response experience

51 Note, however, that FEMA funding does attempt to reduce the likelihood of similar catastrophic events in the future, even though there are no assignable risk-generating sources to deter.

52 42 U.S.C. § 5154 (2004).

and coordination are important elements of an effective federal emergency response program and form the focus of most criticism that has been levied against FEMA.53

The aspects of FEMA’s operations that are most persistently identified as areas of needed improvement are adequacy of staff and efficacy of resource distribution. FEMA’s budgetary resources have increased notably over time. At its creation in 1979, FEMA distributed approximately $1 billion from its disaster relief fund. In 2001, that number reached nearly $3.5 billion.54 Between 1998 and 2002, the Agency’s budgetary resources grew from $8 billion to $12 billion.55 Yet in that same span, staff resources grew by only 400 FTEs.56

In the aftermath of an event, FEMA officials are responsible for assessing whether the damage reaches a “disaster level” and whether to recommend that the President issue a disaster declaration. Further, the staff bears the burden of determining what projects qualify for federal relief funding, often an enormously important decision for those seeking aid. In 1999, FEMA proposed a credentialing program for evaluating the skills and knowledge of its staff as a means of improving program implementation and building greater public confidence in the agency. As of 2003, the program was not yet implemented.57

A second key area of criticism focuses on the evaluation criteria used by FEMA in assessing disaster events. Under the Stafford Act, federal assistance only becomes available when the President determines that emergency conditions have exceeded state and local government capabilities. Of course, the President’s decision rests heavily on the recommendation and information provided by FEMA. Thus, the underlying criteria that FEMA employs in assessing the damage done by an event and the state/local financial capabilities are extremely important. FEMA has published regulations establishing the formal criteria that it uses for these assessments. The criteria include a number of qualitative factors, including the local impact of the event and the recent occurrence of other disasters in the state. The U.S. General Accounting Office has


54 Id. at 18.


56 Id. FTE designates “full-time equivalency” and is generally used to represent a single full time employee.

57 Id at 11-12. The General Accounting Office conducted a study of FEMA’s performance in 2001 and found that FEMA’s training budget had decreased between 1999 and 2001 by more than $1 million. U.S.

GEN. ACCT. OFFICE, DISASTER ASSISTANCE: IMPROVEMENT NEEDED IN DISASTER DECLARATION CRITERIA AND ELIGIBILITY ASSURANCE PROCEDURES 18 (GAO-01-837 2001). Further, it found that training in FEMA’s disaster field offices was oftentimes either untimely, or not offered at all. Id. at 18-19.

repeatedly recommended that FEMA develop more objective standards so as to better capture a state’s true financial capacity. It suggests a focus on the state’s total taxable resources or another comparable assessment of statewide funding capabilities. Evaluating FEMA’s current operations, the GAO has concluded that federal funds are being dispersed to some states that do not have a legitimate need, while leaving other states’ needs unmet.58

Finally, the Agency’s oversight of dispersed funds has been criticized for being weak. FEMA lacks an effective grants management system, a problem that allows grantees’ noncompliance with regulations, outright fraud, and monetary waste to go undetected.59 It also lacks mechanisms for recovering improper assistance payments even in cases where they are revealed.60

In addition to these ongoing institutional challenges, FEMA faces new hurdles in the wake of the September 11 terrorist acts. FEMA’s fiscal response to September 11 surpassed the assistance monies it had distributed up to that point, both in absolute terms and in terms of percentage of need.61 If such increased assistance levels are

58 U.S. GEN. ACCT. OFFICE, supra note 55, at 8.


60 FEMA’s Inspector General uncovered an $8.5 million improper grant payment and brought it to the attention of FEMA management in February 2001. By September 2001, FEMA had still not recovered the funds. U.S. GEN. ACCT. OFFICE, supra note 55, at 14.

61 Under the Stafford Act, an area hit by disaster can petition for FEMA to provide 75 to 100% of the region’s eligible recovery and response costs. Generally, FEMA limits its aid to the 75% level. By statute, the remaining portion of any allocation less than 100% must be matched by state and local officials

students who lost school time after the terrorist attacks). The major uses for this funding were as follows:

• $1.7 billion for debris removal operations and insurance.

• $2.8 billion to repair and upgrade the transportation infrastructure of

Lower Manhattan.

• $0.6 billion to the New York City Police and Fire Departments for such

purposes as emergency efforts and replacing destroyed vehicles.

• $0.3 billion to miscellaneous city agencies for a wide range of activities

(e.g., instructional time for students and building cleaning).

• $0.7 billion for non-New York City agencies for many purposes (e.g.

office relocations and repair of damaged buildings).

• $1.2 billion available on June 30, 2003, for public assistance-related

reimbursements to New York City and state (work to be decided).

viewed as a precedent, the Agency’s future costs could rise significantly. Of greater potential importance is the Bush Administration’s formation of the Department of Homeland Security. FEMA, once an independent agency, is now subsumed under this new federal department. The Department of Homeland Security’s primary objective is, obviously, maintaining domestic security. There is a notable risk that FEMA’s natural disaster programs will receive inadequate attention and budgetary support in this new environment.62

Since FEMA’s inception, the U.S. has experienced some of the most deadly and costly emergency events in its history. Hurricane Andrew, the Northridge Earthquake, and the terrorist attacks of September 11, 2001 rank as major catastrophic events, not only within the U. S., but also worldwide. FEMA doled out enormous sums of federal assistance to the victims of these disasters, providing food, shelter, and other basic needs to people whose lives had been devastated. In the complex landscape of victim compensation, FEMA clearly plays a prominent role. In an agency imbued with such responsibility and tasked with functioning in the chaos of emergencies, improvements to management and efficacy will always be possible.


There are a variety of types of private insurance coverage that may come into play as a consequence of a catastrophic event. In the case of mass personal injuries, life, health, and private disability insurance coverage may be applicable. With regard to property damage, homeowners’ insurance and commercial casualty insurance would be the policy coverages most likely to be triggered. As in the case of public welfare programs (see section II), these insurance provisions have broader applicability than mass disaster events. But they do provide baseline private coverage when such events occur.

In general, insurance policies are written so as to protect the insured against a specified loss regardless of the cause of that loss. For example, the standard homeowners’ insurance policy provides coverage for damage to a home by fire, with little regard to the cause of the fire itself. But insurance policies fall into the realm of private contracts and insurers generally have the authority to determine the scope of the coverage that they are willing to offer. Nonetheless, typically, “disasters” have not been excluded from private insurance coverage – and no such general exclusion exists today. The standard residential homeowners’ policy offered by private insurance carriers is an “all risk” policy, under which only those events that are specified are

U.S. Gen. Acct. Office, Disaster Assistance: Information on FEMA’s Post 9/11 Public Assistance to the New York City Area (GAO-03-926 2003).

62 Id. at 16.

excluded from coverage – and specification remains unusual, although as we will see, floods and earthquakes now get special exclusionary treatment.63

As is true of nearly every aspect of the American landscape, the events of September 11 impacted the U.S. insurance industry. Before September 11, most insurance actuaries deemed it feasible for acts of terrorism to fall within standard personal coverage. Since the September 11 attacks and the ensuing “War on Terrorism,” the threat of terrorism has become much harder to calculate and too significant a risk to simply fold into general coverage. Although not the subject of a general exclusion, federal legislation has changed the landscape of coverage for acts of terrorism. Similarly, more localized catastrophes, such as the Northridge earthquake in California, have triggered reluctance on the part of private insurers to continue coverage of certain risks.64 Both the federal and state governments within the U.S. have demonstrated their willingness to step in and supplement and/or regulate private insurance to ensure needed guarantees for public catastrophe compensation.

This section will focus on the types of private insurance most often affected by disaster events and provide a general survey of the industry’s involvement in different types of events that have occurred in the U.S. A disaster such as the Rhode Island nightclub fire, discussed in the introductory section, where tort liability plays a major role, is likely to activate private liability insurance coverage to injured third parties under a standard commercial policy, as well as casualty loss coverage for fire-related damage to the insured’s property under the standard protection with regard to first-party losses. The section below will focus on the gaps in private insurance coverage and the government’s response in those categories of protection that now get special treatment in the case of catastrophic loss.

It is possible to discern three distinct models that have emerged. First, governmental regulation provides a structure within which private insurers remain the principal guarantors against risk. The Price-Anderson Act, addressing potential commercial nuclear energy releases, discussed immediately below, offers an example of this approach. Second, government provides coverage above a baseline of risk that remains under the coverage of private insurers. The Federal Terrorism Risk Program, discussed in the succeeding sub-section, offers an illustration of this approach. And third, a governmental entity actually steps in and assumes the risks of a

63 There are also “named risk” policies that are marketed, but banks will generally not accept them for lending purposes. It should be noted, however, that with respect to personal property coverage – as distinguished from real property coverage – specification of items covered is a common practice. The realm of commercial property coverage practices differs and is harder to capture in any general way

64 A “catastrophe” is defined within the property insurance industry in terms of the value of claims an event is expected to generate. Under the definition established by the insurance industry, a natural or man-made disaster becomes a catastrophe when the resultant claims are expected to reach $25 million. The definition has changed in

recent years. In 1997, the threshold for expected claims was set at $5 million. INS. INFO. INST., CATASTROPHES: INSURANCE ISSUES (July 2004)

potentially hazardous event. Earthquake and flood insurance, discussed in following sub¬sections, take this approach. While these are certainly not the only variants that might be adopted, they do constitute the major pathways that are being pursued at present in the U.S. in catastrophe scenarios.

B. Types of Insurance Coverage Triggered by Disaster Events

1. Nuclear Reactor Accidents: Price-Anderson Act

Congress passed the Price-Anderson Act65 in 1957 with the express purpose of encouraging private development of nuclear energy in the United States. Though still long before the tragedy of Chernobyl or the scare at Three Mile Island, the threat of ruinous tort litigation was a barrier to private involvement in the nuclear energy industry. The Act created a mixed system of compulsory private insurance coverage and emergency compensation funding designed to lessen the financial impact of post-accident litigation on holders of nuclear power plant licenses, in order to create incentives to operate reactors. In addition, it placed a cap on the total amount of liability that each reactor operator faced in the event of a nuclear accident. In essence, the Act sets the ground rules for private contribution and responsibility, but that is the limit of government intervention.

Participation in the program created by the Price-Anderson Act is mandatory for all nuclear reactor operators. The statute requires operators to obtain the maximum amount of private insurance coverage available. In 2003, that was $300 million per reactor per accident.66 In addition to each reactor’s primary insurance policy, the Act provides for the creation of a secondary insurance fund. This secondary fund is created in the event of an accident at any U.S. reactor that causes damages greater than the affected reactor’s primary insurance coverage. Each U. S. reactor operator is compelled to contribute to the fund. Contributions are based on the damage caused by the accident. Damages in excess of the affected operator’s $300 million of private insurance are prorated among the pool of U. S. operators up to a set cap. By 2003 figures, each licensed operator can be responsible for contributory payments up to $95.8 million. In 2003, there were 104 licensed operators within the U. S., so had an accident occurred in that year, the Act would have required a disaster relief fund with a ceiling of $8.6 billion dollars.

In the event that an accident exceeds the maximum amount available in the secondary fund, the Act requires Congress to assess the accident, but does not require the federal government to expend any funds to cover the excess liability. Thus, the burden of the fund’s limits could fall on the accident victims if the government chooses not to intervene. Other federal funding, e.g. FEMA-administered disaster relief funds described in the previous section, may be available.

65 42 U.S.C. 2210 (1988 & Supp. 1992).


(Sept. 2003), available at

Under Price-Anderson, victims of nuclear accidents are free to pursue tort claims for property damage and personal injuries against the reactor operators or any other potentially responsible party in accordance with state tort law. The only limitation imposed by the Act on recovery in such suits is in the form of the total monetary cap on insurance funding, referred to above. In the event of an “extraordinary nuclear occurrence,”67 the Act requires all claims to be consolidated in federal court. The Act creates strict liability in tort for licensees involved in nuclear incidents and abrogates the defense of contributory negligence.68 Each individual claimant still bears the burden of establishing causation and particularized proof of economic loss and intangible harm.69

2. Federal Terrorism Risk Insurance Act

The Terrorism Risk Insurance Act of 2002 (TRIA) exemplifies the federal government assuming the role of excess liability insurer, in effect providing a cap on the losses for which the private insurance industry will be responsible in the event of a major act of terrorism.

In terms of insurance losses, the terrorist attacks on the World Trade Center and Pentagon on September 11, 2001, rank as the most costly catastrophe in U.S. history.70 This is without reference to the personal injury claims compensated under the Victim Compensation Fund, totaling nearly $7 billion, discussed in a separate section of this report.71 By the middle of October 2003, private insurance companies had received 35,094 claims related to the September 11 attacks on the World Trade Center alone, representing a total of $19.07 billion, including massive numbers of personal property and business interruption claims (the latter including claims for lost income and expenses related to restarting or reinvigorating affected businesses).72 Workers compensation claims paid by the industry came to 5,660. These aggregate costs far exceeded past terrorism-related damage claims in the U.S.73

In the aftermath of the attacks, even before massive numbers of claims began to be filed, the U.S. Congress was faced with widespread concern about the solvency of the American insurance industry. On November 26, 2002, President George W. Bush signed into law the

67 “Extraordinary nuclear occurrence” is defined as “any event causing a discharge or dispersal of source, special nuclear, or byproduct material … in amounts offsite, or causing radiation levels offsite.” 42 U.S.C. § 2014(j) (2004).

68 Id. § 2210(n)(1).

69 See 10 C.F.R. § 140.81 (2004).


71 See section V(A), case study of September 11 Victim Compensation Fund.

72 INS. INFO. INST., supra note 64.

73 The Los Angeles riots of 1992 were the second most expensive for private insurers with a total of $775 million. Id.

Terrorism Risk Insurance Act of 2002.74 TRIA was created to ensure the continuing availability of insurance for terrorism risk. Its goals encompassed both protecting the American public, by ensuring continued insurance coverage, and protecting the insurance industry as it rebuilt after the losses caused by September 11. The Act created a mechanism by which the federal government and private insurance providers would share the burden of property and casualty losses resulting from any future terrorist attacks.

Essentially, all commercial insurers doing business within the U.S. are required to participate in the program. Under the Act’s provisions, insurers are required to make available coverage for insured losses resulting from acts of terrorism in all of their commercial property and casualty insurance policies. The coverage cannot differ materially from the terms, amounts, and other limitations of policies written to cover losses arising from non-terrorist causes.75 In addition to the continued availability of coverage, insurers must inform policyholders of the premium charged for coverage and the federal share of compensation provided for under the Act.76

In return for such actions on the part of insurers, the federal government assumes a percentage of an insurer’s losses from compensating claims arising from terrorist acts. Each insurer is responsible for a deductible amount.77 But once that threshold is reached, federal funds are used to reimburse the insurer 90% of the insured losses in excess of the deductible.78 Importantly, the Act imposes a $100 billion annual industry-aggregate limit on federal reimbursements.79

The program’s reimbursement provision is triggered only by the occurrence of an “act of terrorism.” To qualify, an event must meet a three-part definition, in addition to a threshold dollar amount of $5 million. The act must: 1) be “a violent act or an act that is dangerous to human life, property or infrastructure

74 31 C.F.R. § 50.1 et. seq. (2004).

75 The Act does not specify the premium rates that insurers are to charge.

76 31 C.F.R. § 50.10 (2004).

77 The deductible amount increases each year of the program. In the first year of the program, an insured’s deductible equals it direct earned premiums from the previous year multiplied by 7%. That amount is increased to 10% and 15%, respectively, for years two and three of the program. Id. § 50.5(g).

78 Id. § 50.50.

79 Id. § 50.50(d).

80 Id. § 50.5(b).

insured (including the federal contribution), and risk management administration, remains in the hands of the private insurer.

In addition to providing for reimbursement, the Act also contains provisions for managing litigation arising out of certified acts of terrorism. Once an act of terrorism is certified, the Act creates an exclusive federal cause of action and remedy for property damage, personal injury, or death arising out of or relating to the terrorist act. The federal cause of action preempts certain state law claims and provides for the consolidation of all civil claims. Additionally, the Act provides that punitive damages awarded in actions for property damage, personal injury, or death are not to be counted as “insured losses” and are not paid under the Program. Finally, the United States is provided the right of subrogation with respect to any payment made by the United States under the Program.81

The provisions of the Act make it clear that Congress did not intend the program to be a primary source of compensation. Compensation provided for by other federal programs cannot be duplicated by funds from the Program. For example, disaster relief provided under FEMA or benefit awards under the September 11th Victim Compensation Fund must be deducted from the total amount otherwise payable under TRIA.82 Moreover, the TRIA Program is a stopgap measure. The Act expires in 2005 and the deductible amount attributed to the insurers increases annually until that point to reduce the total amount of losses subject to federal reimbursement.

3. California Earthquake Authority

The 1994 Northridge Earthquake in California caused more than $15 billion in insured losses.83 After that event, many private insurers in the state attempted to terminate their earthquake coverage offerings. The state was challenged to find a solution that would keep its citizenry protected from future earthquake-related losses while also protecting the state’s insurance industry. In 1996, California revamped its insurance laws related to earthquake coverage and created the California Earthquake Authority (CEA).84

81 Id. § 50.84.

82 Social Security Disability Insurance benefits are not deducted, however. Id. § 50.51.

83 Ins. Info. Network of Cal., Financial Aftershocks: 10 Years Later, Northridge Earthquake Prompts Physical, Fiscal Preparedness, Jan. 2004, available at http: //

84 Cal. Ins. Code § 10089.6 (2004).

Insurance providers that sell “residential property insurance”85 in the state of California are permitted to exclude earthquake-related losses from their standard policy coverage, but are required by law to offer their customers earthquake insurance in some form.86 An insurer must notify its customer that the primary residential property insurance policy issued by the insurer does not contain a provision for earthquake damage and must make an offer of an independent policy (or an addition to the primary policy) for such coverage. The insurer can meet its obligations in several ways. It can offer to underwrite the earthquake coverage itself or it can arrange for coverage by another affiliated (or unaffiliated) insurance provider.87 Most residential property insurers – those comprising about 80% of the market, including the largest homeowners’ insurers in the state – have chosen to opt out of providing coverage themselves, and instead simply administer policy coverage for the CEA, which assumes primary risk-bearing responsibility.

Homeowners and renters are not required by law to carry earthquake insurance. Thus, once the requisite offer of coverage is made by the insurance provider, the insured is free to accept or reject the offer.88 If the insured does decide to purchase earthquake insurance, the insurance provider must provide coverage that complies with the applicable CEA regulations.89 In its administrative capacity (for the CEA), an insurance provider is not required to abandon its usual underwriting standards in issuing earthquake insurance. Rather, it can use these standards to determine whether or not it is willing to provide an earthquake policy for each particular customer. However, if the insurer determines that a home does not meet its underwriting standards and decides not to issue earthquake insurance, the provider also becomes foreclosed from providing a primary residential property insurance policy for the home.90 Nor can an insurance provider cancel a residential property insurance policy on the grounds that the

85 “Policy of residential property insurance” is defined as “a policy insuring individually owned residential structures of not more than four dwelling units, individually owned condominium units, or individually owned mobile homes, and their contents, located in this state and used exclusively for residential purposes or a tenant’s policy insuring personal contents of a residential unit located in this state. ‘Policy of residential property insurance,’ as defined, shall not include insurance for real property or its contents used for any commercial, industrial or business purpose, except a structure of not more than four dwelling units rented for individual residential purposes. A policy that does not include any of the perils insured against in a standard fire policy shall not be included in the definition of ‘policy of residential property insurance. ‘” Id. § 10087(a).

86 Id. § 10081.

87 See id. §§ 10081, 10084 (2004)

88 If the insured does not accept the offer of coverage, the insurance provider is required to renew the offer every other year. Renewal must be “in connection with any continuation, renewal, or amendment of the policy, in connection with any reinstatement of the policy following any lapse, or with respect to any other policy that extends, changes, supersedes, or replaces the policy of residential property insurance.” See SIDBURY ET AL, supra note 87, § 36.15.

89 Cal. Ins. Code § 10089 (2004) establishes the minimum coverage required.

90 Williams v. State Farm Fire & Cas. Co., 216 Cal. App. 3d 1540, 1543 (1989).

customer accepted the offer for earthquake insurance.91 But the critical point is that the CEA assumes the risk within the stated policy limits if an earthquake should occur – as mentioned, the private insurer plays an exclusively administrative role.

The Authority is a privately financed entity that provides earthquake insurance to California residents. It is composed of insurance companies licensed to do business in California and is governed by a three-member board of state officials including the Governor, the State Treasurer and the State Insurance Commissioner.92 The Board has the authority to conduct certain oversight and financial duties,93 but the issuance and management of earthquake policies is done by the private member companies. The Authority is charged with setting a rate for earthquake insurance94 and writing a residential earthquake insurance policy that is in compliance with the insurance laws discussed above and approved by the Board. Insurance policies are available for homeowners, renters, mobile home owners and condominium owners. Coverage generally extends to costs of repair or replacement of property damaged by earthquake activity.

The Authority is funded by participating insurers, along with bond sales, reinsurance, and the premiums charged for policies sold.95 Initial operating capital was provided through mandatory contributions by the participating insurers.96 If the Board determines, at any time, that claims will exceed the working capital of the Authority and that no additional sources of funding (e.g. assessments, reinsurance, private capital market monies) will be available to the Authority to pay claims, the Board can present a plan for pro rata or installment payments of claims for approval by the Insurance Commissioner. The Board is obligated to ensure the Authority has sufficient capital to maintain operation.97 The State itself has no liability to pay claims in excess of the Authority’s capability.98

91 Cal. Ins. Code § 10086.5 (2004).

92 Id. § 10089.7.

93 Id. § 10089.7(c).

94 Id. § 10089.40. “Rates established by the authority shall be actuarially sound so as to not be excessive, inadequate, or unfairly discriminatory. Rates shall be established based on the best available scientific information for assessing the risk of earthquake frequency, severity, and loss . . . .”

95 Id. §§ 10089.5(b), (f), (m), 10089.10, 10089.15, 10089.23, 10089.29, 10089.30.

96 “Initial operating capital shall be contributed by insurance companies admitted to write residential property insurance in the state. Each insurer that elects to participate in the authority shall contribute as its share of operating capital an amount equal to one billion dollars ($ 1,000,000,000) multiplied by the percentage representing that insurer’s residential earthquake insurance market share as of January 1, 1994, as determined by the board. A minimum of seven hundred million dollars ($ 700,000,000) in commitments shall be required before the authority may become operational.” Id. § 10089.15(a).

97 Id. § 10089.35.

98 Id. § 10089.35(e).

Thus, by establishing a ceiling on the mandated contributions from private insurers, and pooling these risks, the CEA represents a model under which the state has relieved the private insurers of the uncertainty and potentially catastrophic losses associated with a major earthquake. Similar options are available for insurers of commercial property. In practice, however, major commercial insurance brokers have created pools of private insurers to offer coverage on large commercial properties.

4. National Flood Insurance Program

The National Flood Insurance Program (NFIP), administered by FEMA, is an example of the federal government assuming the role of primary insurer. NFIP can be regarded as a variant on the just-discussed California Earthquake Authority: Like the state of California, under the latter program, the federal government has stepped in and assumed the risk of financial loss associated with a disastrous flood under the flood insurance scheme.

NFIP was established by the National Flood Insurance Act of 1968.99 The program was a response, in part, to private insurers’ reluctance to sell flood coverage.100 This reluctance was principally due to the character of flood risk. Because the chance of flooding is geographically limited, the pool of flood insurance purchasers consists only of those living in floodplain areas. Adverse selection is a significant barrier to private insurance companies providing flood insurance, since only those people with the less desirable risks and higher expected losses choose to insure. Relatedly, the small pool of interested buyers, makes it very difficult for the insurance providers to spread the risk in a satisfactory fashion.101 As a consequence, the dearth of private insurance placed a heavy burden on federal relief funds when flooding occurred.

Congress created NFIP to serve two main purposes. First, the Program was intended, over time, to make flood insurance available wherever needed through the cooperative efforts of the federal government and the private insurance industry.102 Second, Congress sought to encourage disaster mitigation by giving state and local governments incentives to constrict development on flood-prone lands.103

The National Flood Insurance Program is voluntary. Communities located in areas identified by FEMA as posing a special flood hazard are eligible to participate in the Program.

99 42 U.S.C. § 4001 et. seq. (2004).

100 See id. (stating as one of the purposes for the Act’s passage, “The Congress also finds that (1) many factors have made it uneconomic for the private insurance industry alone to make flood insurance available to those in need of such protection in reasonable terms and conditions

101 See Saul Jay Singer, Flooding the Fifth Amendment: The National Flood Insurance Program and the “Takings” Clause, 17 B.C. ENVTL. AFF. L. REV. 323, 332-33 (1990).

102 42 U.S.C. § 4001(d).

103 Id. § 4001(e).

In order to participate, a community must implement land management ordinances and use practices that are in compliance with federal guidelines.104 The land management practices are designed to limit development in regions threatened by potential flooding and to reduce future damage caused by flooding.105 Importantly, eligibility for national flood insurance is limited to residents of participating communities.

In theory, eligible residents can choose whether or not to purchase flood insurance. However, the Flood Disaster Protection Act of 1973 mandated flood insurance coverage for certain properties. The Act prohibits regulated lending institutions from making, increasing, extending or renewing any loan secured by improved real estate located in areas identified as having special flood hazards and to which flood insurance has been made available under NFIP unless the property is covered by flood insurance for the length of the loan.106 Additionally, federal agencies are prohibited from providing financial assistance for acquisition or construction in such areas.107 Perhaps most noteworthy for the purposes of this report, federal agencies are also barred from providing flood-related disaster assistance loans or grants to property located within identified hazard areas unless the community is participating in the Program.108

FEMA works in conjunction with private insurance companies to administer the program. NFIP policies are sold through state-licensed insurance agents and through private insurance companies. In 1983, FEMA started the “Write Your Own” program that allows private insurance companies to sell and service NFIP flood insurance.109 WYO companies issue flood insurance policies in their own name and keep the premiums collected in a segregated account. The company is responsible for paying claims under the policy but can collect FEMA letters of credit for any claim amount that exceeds its available premium funds. WYO companies issue and service the insurance policies, but they are required to charge the premium rate set by FEMA and enforce the rates, coverage limitations and eligibility requirements of NFIP.110 Premium rates are risk-based and reflect the flood hazards of the particular community. In 2002, FEMA determined that 95% of all NFIP policies were written through the WYO Program.111

104 Communities must meet FEMA’s criteria for zoning, subdivision, hazard mitigation plans, building requirements, flood control projects, warning systems and emergency preparedness planning. 44 C.F.R. § § 60.2 – 60.7 (2004).

105 42 U.S.C. §4102.

106 Id. § 4012a.

107 Id. § 4106.

108 Id. § 4106.

109 44 C.F.R § 61.13(f).

110 Id. § 61.13.


(2002), available at

It should be noted that the design of the NFIP program differs from a traditional reinsurance scheme. Under a reinsurance system, the private insurers would act as independent providers to the public, issuing flood insurance policies and assuming the risk of a flood event that exceeds their actuarial calculations. Private insurers could hedge their risk by purchasing reinsurance from a third party (e.g. the federal government). Under a reinsurance scheme the private insurer maintains two distinct contractual relationships, one with the insured and one with the reinsurer. The insured and reinsurer are not in privity. The private insurer retains the risk that a flood event will result in losses that exceed the premium that it charged the insured and the coverage that it secured from the reinsurer. By contrast, under the NFIP program, the private insurer is exposed to no financial risk at all. Rather, the private insurer acts as a sort of mouthpiece for the federal government. It administers the WYO policy, collects premiums, and settles all claims that can be covered by the premiums collected. However, if the losses stemming from a flood event exceed the premiums collected by the private insurer, the government steps in and compensates the insured party for all such excess covered losses.

The Standard Flood Insurance Policy specifies the terms established by NFIP. Those eligible to purchase national flood insurance policies include owners, renters, condominium associates, and builders in the process of construction. Insurance is available for residential, business, agricultural, state and local government properties and properties occupied by non¬profit organizations located in eligible areas. The Policy provides coverage for direct physical losses to structures and their contents112 caused by flood.113 The Program sets maximum amounts of coverage. For example, under the regular program, a single family dwelling is eligible for up to $250,000 in building coverage and up to $100,000 in personal property coverage.114 In 2002, the average amount of combined building and contents insurance coverage purchased under NFIP was $131,670.115

Since the Program was started in 1969, it has paid $11.9 billion in claims. In the absence of the Program, this cost would have been borne by the taxpayers through federal disaster assistance funding or by the victims individually. In addition, by requiring communities to comply with FEMA floodplain management standards as a condition of participation, FEMA estimates that the program saves $1 billion per year in avoided damages.116

C. Concluding Observations

Private insurance tends to provide the first layer of coverage for victims of catastrophic events in the U. S. Generally, the emergency benefit programs funded by the federal government are designed to supplement, not to replace private insurance. The National Flood Insurance

112 44 C.F.R. § 61.3.

113 See id. § 59.1 for definition of “flood” in the Act.

114 Id. § 61.6.

115 FED. EMERGENCY MGMT. AGENCY, supra note 111, at 25.

116 See id. at 28.

Program, however, is an example of the federal government alleviating the private sector entirely of insurance responsibility. As indicated, California has taken similar action with respect to earthquake risks. The Price-Anderson Act and the new Federal Terrorism Insurance Act illustrate more limited models of federal involvement in the industry. Such involvement is more generally characterized by the government’s attempt to further national policy goals by providing risk mitigation in the background of private industry.

Whatever the mode of intervention, the government has become a major player in the web of insurance coverage. In some instances, government intervention has been responsible for preventing the total withdrawal of private insurers from an area

Hurricane Andrew provides an illustration of the contrasting viewpoints. Before Andrew, Hurricane Hugo of 1989 ranked as the largest tropical storm event in terms of insured losses. The insurance industry used the $4 billion of insured losses from Hugo as a basis for assessing their future risks. Hurricane Andrew’s $17 billion insurance price tag invalidated the industry’s forecasting models, bankrupted a number of smaller insurers, and mandated a reassessment of hurricane risk. Most insurers sought to pull out of the business of covering hurricane-related losses because of the uncertainties associated with calculation of risk and attendant premiums charges. Likewise, reinsurers sought to reduce their exposure to an uncertain risk by limiting available coverage and raising both premium and deductible rates.117

Under normal market forces, the private insurance industry would most likely have responded to Hurricane Andrew by reducing or eliminating its hurricane coverage or significantly increasing premium rates in an attempt to hedge the uncertainty of risk it faced in offering coverage at all. The result for individual consumers would have been either a complete inability to obtain coverage, and so a forced assumption of the full risk of future catastrophe¬related loss, or soaring premiums. In the case of Hurricane Andrew, Florida’s government imposed regulations that forced private insurers to continue offering hurricane coverage and maintained a lower-than-actuarially-optimal premium rate.118 Proponents of government intervention laud this type of involvement, arguing that without it the public would be forced to assume too much expense and risk.119 In addition, proponents assert that the government is in a better position than private insurers to bear catastrophic risk because of its broad resource base

117 See CONGRESSIONAL BUDGET OFFICE, FEDERAL REINSURANCE FOR DISASTERS 12 (2002), available at One insurer’s reinsurance deductible for catastrophic loss coverage rose from $30 million to $100 million after Hurricane Andrew. Anne Gron and Andrew Winton, Risk Overhang and Market Behavior, 74 J. BUS. 4, 591-612 (Oct. 2001).

118 See CONGRESSIONAL BUDGET OFFICE, supra note 117, at 5-7.

119 Id. at 19-20.

and borrowing capabilities. The government is able to withstand uncertainty and loss that would bankrupt private providers.120

On the other side of the issue, many argue that government intervention in the catastrophe insurance market has substantial detrimental effects. First, by regulating availability of coverage and premium levels, the government distorts the insurance market. Under such a system, insurance price and availability no longer reflect the risk level of the activity being insured (e.g. living in hurricane-prone coastal regions) and so eliminate a potentially powerful economic deterrent to risky behavior. Thus, government intervention forces the public at large to subsidize the risky lifestyle of a segment of society.121

Another argument raised is that government intervention actually propagates the gap in private insurance coverage that it is created to fill. In most examples, the government initially acts in order to protect the public from a coverage failure within the private insurance industry. However, by using regulations to force insurance coverage and premium rates that are out of step with the actuarial assessments of the private insurers, the government creates a market in which private insurers are unable to compete, even if they wanted to reenter. Florida’s Residential Property and Casualty Joint Underwriting Association is an example. The program was created as a stop-gap measure to fill the void in hurricane-related damage coverage that plagued the state after Hurricane Andrew in 1992. In 1996, FRPCJUA was the second-largest insurer in Florida. The state was forced to create incentives, such as cash payments and special assessment exemptions to private insurers, in order to decrease its role in the market.122

Whichever arguments prevail, there is little doubt that the role of government intervention in the catastrophe insurance market will remain an important issue within the United States. Higher overall population, greater clustering in the coastal zones, predictions of more intense climatic events, and the heightened risk of terrorism all force catastrophe compensation to the forefront of the American dialogue.


We have selected for closer examination three distinct illustrations of approaches taken by the U.S. legal system to compensation for financial loss in particularly notable instances: 1) the personal injury and death toll stemming from the terrorist attacks on September 11, 2001

A. The September 11 Victim Compensation Fund

120 Id.

121 Id. at 20-21.

122 See id. at 36.

In the immediate aftermath of Sept. 11, a no-fault compensation plan was enacted that closely reflected the anxieties and emotions stirred up by the horrendous toll of deaths and injuries occurring on that fateful day.123 The September 11 Victim Compensation Fund (the Fund), signed into law just eleven days after the terrorist attacks, addressed only personal injury and fatality claims. Losses related to property damage, as well as business losses or interruptions, remained compensable only in tort, if at all. Moreover the Fund was part of a broader legislative scheme, the Air Transportation Safety and System Stabilization Act, offering a package of loans and subsidies to the airlines to avoid a potential collapse of the U.S. commercial air transport system.

1. The September 11 Victim Compensation Fund: Statutory Framework

Within limits, the Fund was meant to create baseline assurance that victims of physical injury and their survivors would receive benefits.124 More precisely, the Fund established eligibility for individuals “present at [any of the three crash sites] at the time, or in the immediate aftermath, of the terrorist-related aircraft crashes,”125 and who “suffered physical harm or death” as a result of the crashes.126 For this circumscribed class, the Fund provided benefits for both economic and non-economic losses on a no¬fault basis.

In spelling out those benefits, however, the Fund appeared to be far more generous than earlier-enacted no-fault systems in the U.S., virtually all of which follow the traditional model established in the early twentieth century for addressing the toll of industrial injuries: workers’ compensation schemes. Under workers’ compensation, eligible claimants recover medical expenses and a percentage of lost income (generally based on a schedule of awards in cases of permanent disabling conditions and in death benefit cases), subject to a statutory ceiling.127

123 By mid-June 2004, when the no-fault program was closed, 4,430 personal injury claims had been filed, of which compensation was made in 2,675 cases, and 2,973 death cases were deemed eligible for benefits. David W. Chen, After Weighing Cost of Lives, 9/11 Fund Completes Its Task, N.Y. TIMES, June 16, 2004, at A1.

124 The description of the Fund and regulations that follows draws in part on an earlier treatment, see Robert L. Rabin, The Quest for Fairness in Compensating Victims of September 11, 49 CLEV. ST. L. REV. 573 (1991).

125 Air Transportation Safety and System Stabilization Act, Pub. L. No. 107-42, 405(b)(2), 115 Stat. 230, 238 (2001) (codified as amended at 49 U.S.C. § 40101 (2004)).

126 Id. at § 405(c)(2)(A)(ii).

127 Death benefits are typically calculated as a fixed percentage of the decedent’s average weekly wage, which is capped at a level that varies from sate to state, but generally approximates the average weekly wage in the state. See U.S. DEPT. OF LABOR, STATE WORKERS’ COMPENSATION LAWS (2003), available at

WORKERS’ COMPENSATION COMPARISONS (2001), available at See generally 5 LEX K.

By contrast, under the Fund economic loss was defined to include not just medical expenses and loss of present earnings, but “loss of business or employment opportunities to the extent recovery for such loss is allowed under applicable state law”128 – presumably, a reference to individual, case-by-case tort principles. And non¬economic loss was broadly defined to include “losses for physical and emotional pain, suffering, inconvenience, physical impairment, mental anguish, disfigurement, loss of enjoyment of life, loss of society and companionship, loss of consortium (other than loss of domestic service), hedonic damages, injury to reputation, and all other nonpecuniary losses of any kind or nature.”129 Interestingly, no parallel to the economic loss definition that referenced “[as] allowed under applicable state law” was included in this latter definition of non-economic loss. Nonetheless, the pervasive influence of the tort perspective of doing individualized justice – disparaged by critics of the tort system, trumpeted by its advocates – was apparent on the face of both provisions.

But there was one substantial qualification to this apparent generosity of spirit. Under traditional tort principles, there is recovery in tort of out-of-pocket expenses even if they have been reimbursed by “collateral” sources such as health and disability insurance. Under the Fund, there is no recovery for these items. 130 Indeed, the restriction on “double recovery,” as tort critics would put it, was written in exceedingly broad terms to cover “all collateral sources, including life insurance, pension funds, death benefit programs, and payments by Federal, State, or local governments related to the terrorist-related aircraft crashes….”131

Thus, the Fund steered a somewhat uncertain course between collective principles that would emphasize timely compensation and filling the gaps of unmet need, on the one hand, and individualized recovery that would pull in the direction of the tort model, on the other. Before examining this tension in somewhat more detail,

LARSON, LARSON’S WORKERS’ COMPENSATION LAW § 93.01 (2000) (“The beginning point in calculating the amount of benefits is the ‘average weekly wage.’ This, when the fixed statutory percentage of roughly between one-half and two-thirds has been applied to it, becomes the unit of benefit by which practically all compensation . . . is measured, subject to maximum and minimum limits.”). In many states, including New York, the surviving spouse continues to receive the weekly benefit during the entire period of that they remain a widow/widower (until the individual remarries or dies). Some states, however, impose limits on the duration (e.g., 500 weeks in Michigan) or the total dollar amount (e.g. $160,000 in California) of the death benefits. Id. § 98.03[1]

128 Air Transportation Safety Act, supra note 125, § 402(5).

129 Id. § 402(7).

130 Nor is it possible to recover punitive damages under the Fund. See id. § 405(b)(5).

131 Id. § 402(4). In treating life insurance and pension funds as “primary,” the Fund departs from the parameters of other no-fault schemes.

however, consider the escape hatch provided in the Act: the prospect of lodging a tort claim instead of proceeding under the Fund.

One can only speculate about why a statutory tort cause of action for claimants was established in the Fund legislation

Whatever the case, Congress’s ambivalent embrace of tort is highlighted by the title of section 408, which created the federal cause of action: “Limitation on Air Carrier Liability.”134 If Congress was determined to leave tort as an option, it was equally determined to constrain tort along lines familiar to observers of late twentieth century U.S. tort reform. The Act established a ceiling on tort liability of the air carriers, providing that liability “shall not be in an amount greater than the limits of the liability coverage maintained by the air carrier.”135 In subsequent legislation, this protective cap on liability, linking it to the limits of insurance coverage, was carried over to aircraft manufacturers, property owners in the World Trade Center, airport owners, and governmental entities.136

132 Note, however, that the Special Master softened the offset provision in the Final Rule. See infra notes 145-46 and accompanying text.

133 See the statute’s provision identifying a claimant as an individual who has “suffered physical harm or death.” Air Transportation Safety Act, supra note 125, § 405(c)(2)(A)(ii). In addition, the Special Master’s decisions were made final, with no recourse to judicial review. Id. § 405(b)(3).

134 Id. § 408 (emphasis added).

135 Id. § 408(a). The amount of insurance coverage was reported to be $1.5 billion per plane. See Jim VandeHei and Milo Geyelin, Economic Impact: Bush Seeks to Limit Liability of Companies Sued as Result of Attacks, WALL ST. J., Oct. 25, 2001, A6.

136 See Title II—”Liability Limitation” of the subsequent compromise, Aviation and Transportation Security Act, Pub. L. No. 107-71, § 201(b)(2), 115 Stat. 597 (Nov. 19, 2001). It is noteworthy, however, that the same act refused to limit the liability of companies supplying airport security: “Nothing in this section shall in any way limit any liability of any person who is engaged in the business of providing air transportation security and who is not an airline or airport sponsor or director, officer, or employee of an airline or airport sponsor.” Id. This provision was in turn subsequently modified to limit the liability of some airport screening companies. See Homeland Security Act of 2002, Pub. L. No. 107-296, § 890, 116 Stat. 2135.

Ceilings aside, exclusive jurisdiction to hear “all actions brought for any claim (including any claim for loss of property, personal injury, or death) resulting from or relating to the terrorist-related aircraft crashes” was located in the federal district court for the Southern District of New York.137 But no federal common law was created

Thus, claimants eligible under the Fund were put to a choice – they had either to elect a claim for benefits under the Fund or to waive their rights and pursue a tort claim. 140 At the same time, for those falling outside the eligibility limits of the Fund – such as those claiming solely economic loss – tort, as circumscribed in the Act, remained available. Interestingly, the tort option provided in the Fund legislation is not found in the traditional workers’ compensation model, which precludes recourse to tort altogether (other later-enacted, no-fault schemes vary in this regard). Nonetheless, in its benefit provisions, as indicated, the Fund was far more generous than any other existing no-fault scheme in the U.S.

These singular aspects of the Fund were not lost on the Special Master, appointed under the Act, who faced the immediate task of developing a concrete program for determining benefit awards for victims of Sept. 11. His efforts offer an alternative vision of how one might design a no-fault model for future victims of terrorism, or catastrophic loss more broadly conceived.

2. The September 11 Victim Compensation Fund: Regulatory Guidelines

When the Special Master, Kenneth Feinberg, was appointed on November 26, 2001, his initial task was to promulgate regulations resolving the principal tensions in the Act and filling in some important blanks.141 He issued a set of draft regulations (“Interim Final Rule”) for commentary on December 21, 2001, and subsequently, on

Air Transportation Safety Act, supra note 125, § 408(b)(3). Id. § 408(b)(2).

Id. § 408(b)(1).

140 Id. § 405(c)(3)(B). In the Final Rule, the Special Master, appointed to promulgate rules and administer the Fund, included a provision offering claimants an opportunity to request a rough calculation of benefits under the Fund before deciding between options. Warily Circling the Sept. 11 Fund, N.Y. TIMES, June 5, 2002, at A26.

141 See Diana B. Henriques & David Barstow, A Nation Challenged: The Special Master

March 8, 2002, he issued final regulations (“Final Rule”), spelling out his interpretations of Fund provisions.142

Feinberg’s reading of the main provisions of the Fund reveals an interesting

effort to strike a balance between understanding the Act in traditional no-fault terms that would have emphasized meeting scheduled basic loss of victims, and interpreting the Act in an open-ended fashion that essentially would have offered tort-type, individualized compensation in a no-fault setting. His manner of resolving this tension is evident in the approach taken to the three key substantive benefit provisions already discussed: collateral source offset, economic loss, and non-economic loss.

a. Collateral Source Offset

As mentioned earlier, the Act explicitly called for the offset of life insurance and pension benefits. These provisions raised a firestorm of criticism from victims’ families (in particular, the well-endowed), concerned that they were likely to receive nothing in Fund benefits because of the foresight of the deceased, who it was argued, had earned or set aside funds for just such a contingency as occurred. 143 These protests were sharpened to a fine point by prospective claimants observing that unconstrained tort – the absence of a Fund – would be a superior option, since life insurance and pension benefits traditionally are not offset under the tort system. 144

The Special Master responded to these criticisms in the Final Rule, by interpreting the Act to allow reduction of the offset to the extent of victims’ self¬contributions. 145 More generally, Feinberg announced that it would be “very rare” for any eligible claimant to receive less than $250,000.146 It should be noted that neither of these interpretive moves is grounded in the language of the Act.

Rather, the Special Master’s actions reflected a fundamental philosophical difference buried in the esoteric legal language of collateral offset. On the one hand, a need-based approach to compensation would point to full offset of all collateral sources, as the Act appeared to require, since these outside benefits do contribute to meeting basic needs. On the other hand, under an individual claimant-focused, tort-type inquiry as to the “deserving” status of the victim, offsets arguably would be ignored entirely. In the end, the Special Master arrived at something of a compromise, liberalizing the

142 September 11th Victim Compensation Fund of 2001, 67 Fed. Reg. 11233 (Mar. 13, 2002) (to be codified at 28 C.F.R. pt. 104)(hereinafter Final Rule).

143 See Diana B. Henriques, A Nation Challenged: The Federal Fund

144 This assumes, of course, that liability would have been possible to establish in tort.

145 Final Rule, supra note 142, § 104.43.

146 Id. at 67 Fed. Reg. at 11234 (Statement by the Special Master).

statute from the victims’ perspective by reducing the offset through recognition of victims’ contributions and ignoring entirely outside private charity received by Fund¬eligible claimants, as well as establishing a quite substantial presumptive minimum recovery.

b. Economic Loss

As indicated, in addressing economic loss the Act appears to be at cross-purposes with the literal terms of the collateral source offset provision, in referring to recovery of “loss of business or employment opportunities” as defined in state tort law.147 On its face, this would seem to suggest an individualized inquiry in every case into the lifetime earnings prospects of each deceased victim, entirely at odds with the traditional no-fault approach of scheduled benefits. 148

In the Final Rule, the Special Master again crafted a compromise. Although there is no mention of scheduling in the statute, Feinberg established a grid applicable to the range of potential claimants – a “presumed economic loss” schedule – based on age, size of family, and recent past earnings, along with a presumptive cap applicable to the upper 2% of income earners.149 In devising this strategy, he provided for awards that recognized very considerable future earnings disparities, an announced range of $250,000 to $3-$4 million.150 But at the same time, he rejected an approach that would have recognized entirely open-ended, case-by-case speculation about future earnings prospects. 151

c. Non-economic Loss

Although there are exceptions, no-fault schemes typically do not provide for pain and suffering loss, apart from optional or supplemental recourse to tort.152 In fact, tort law itself, as encapsulated in wrongful death statutes, did not traditionally provide any pain and suffering loss for survivors – that is, loss of companionship.153 Indeed, many

147 Air Transportation Safety Act, supra note 125, § 402(5).

148 See discussion in text, supra note 128.

149 Final Rule, supra note 142, § 104.43. In the case claiming that Feinberg had ventured beyond the framework created by the statute, Schneider v. Feinberg, 345 F.3d 135 (2d Cir.2003), the Special Master’s presumptive cap was the subject of special attack, but to no avail.

150 The final rule indicates that awards less than $250,000 “will be very rare” and “awards in excess of $3 or $4 million will be rare.” Final Rule, supra note 143, at 67 Fed. Reg. at 11234 (Statement by the Special Master).

151 See Putting a Value on Lives, N.Y. TIMES, Jan. 24, 2002, at A26.

152 See, e.g., 1 LEX K. LARSON, LARSON’S WORKERS’ COMPENSATION LAW § 1.03 [4] (2000) (“There is no place in [workers’] compensation law for damages on account of pain or suffering, however dreadful they may be.”).

153 See, e.g., Liff v. Schildkrout, 404 N.E.2d 1288 (N.Y. 1980).

states still do not recognize non-pecuniary loss as compensable to survivors in tort, limiting recovery to economic loss.154 And some other states, such as California, refuse to recognize pain and suffering of the deceased victim prior to death as recoverable in

tort. 155

Nonetheless, the Special Master provided for scheduled non-economic benefit awards under the Fund, for each victim and every surviving eligible family member. In the Interim Final Rule, $250,000 was to be awarded for each victim

d. Resolving Tensions: A Hybrid Model

The implementation strategy that emerges from the Fund and its subsequent interpretation in the Final Rule can be seen as a hybrid model: one foot in no-fault precepts and the other in tort principles. Neither the Fund provisions nor the implementing regulations can be read, however, apart from the long shadow cast by three related considerations: 1) the constraints on the tort action provided as an optional remedy

Consider initially the constraints on the tort remedy enacted along with the Fund. As mentioned earlier, this statutory tort action, replacing common law tort rights (albeit adopting common law substantive tort principles), capped tort at insurance limits against virtually all potential defendants.158 As a practical matter, this was taken to mean that recovery under the tort option, if it were exercised, might be severely limited after all the outside property damage claims (which of necessity would be brought in tort) were aggregated with personal injury claims: $1.5 billion per air carrier, it was thought, would soon be exceeded.159 To the extent that this perception was accurate, it

154 See DAN B. DOBBS, THE LAW OF TORTS § 297 (2001).

155 See Williamson v. Plant Insulation Co., 28 Cal. Rptr. 2d 751 (Cal. Ct. App. 1994)

156 Final Rule, supra note 142, § 104.44.

157 Id.

158 See supra note 135. Subsequent legislation also capped the liability of the airport screeners, for the most part. See supra note 136.

159 See Lizette Alvarez & Stephen Labaton, A Nation Challenged: The Bailout

created pressure for a no-fault option sufficiently generous to avoid coercing claimants into substantially diminished recoveries in tort.

Related to this point, tort was by no means clearly an available option. The applicable common law rules required a considerable stretch to provide a remedy to victims in the buildings

Finally, the event itself cast a long shadow. Public sentiments would almost certainly have been offended by the prospect of coercing the surviving families into a long, drawn-out pursuit of recovery in tort, given the special sympathy for their plight.

In view of these factors, the Special Master’s strategy emerges and becomes apparent. He sought to closely enough approximate the range of tort compensation to make no-fault benefits under the Fund an offer that could not be refused by most

eligible parties.160 In this regard, he seems to have been highly successful: 97 percent of the 2,973 surviving families eligible for benefits applied, and only 70 opt-out lawsuits were filed against the airlines.161

Note, however, that the Special Master’s strategy reflects a very different set of motivations than one ordinarily finds underlying no-fault systems. Workers’ compensation, auto accident no-fault, black lung disease benefits for coal miners, and virtually every other system of no-fault in the U.S., unapologetically provide a form of social insurance against risk

B. Compensating Hurricane Damage: Hurricane Andrew

On August 24, 1992, Hurricane Andrew made landfall in the United States. This Category 4 hurricane struck just east of Homestead Air Force Base in Florida, passed through the southern Florida peninsula and moved onto south-central Louisiana. When it hit Florida, the storm had sustained wind speeds of approximately 145 mph, with gusts of at least 175 mph,162 and storm surges up to 16.9 feet.163


160 See Rabin, supra note 124 for more detailed discussion.

161 Compensation in death cases averaged about $2.1 million, ranging from $250,000 to $7.1 million. The range of payments in injury cases was from $500 to $8.7 million. See Chen, supra note 123.


updated 1993).


Natural events only become “disasters” because of the impact that they have on human settlements. And disaster events are typically ranked relative to one another based on the costs associated with the damage that they cause. When it struck, Hurricane Andrew became the costliest natural disaster in U.S. history, both in terms of the FEMA relief required164 and total estimates of property damaged. 165 Total property damage was estimated to be more than 25 billion dollars.166 Florida witnessed 28,066 of its homes destroyed and another 107,380 damaged.167 180,000 people were left homeless, 82,000 businesses were destroyed or damaged, 1.4 million residents were left without power and 32,000 acres of farmland were damaged.168 In addition, twenty-six deaths were found directly attributable to the hurricane’s impact and another 39 lives were lost as an indirect result of the storm.169

1. Role of Private Insurance

a. Hurricane-related losses compensated by insurance

Hurricane Andrew caused $17 billion in insured damage.170 Homeowner policy holders in Florida submitted 280,000 claims and recovered over $11 billion or 65% of total insured losses resulting from Andrew.171 The other types of insurance coverage triggered by the event included commercial multiperil ($3.767 billion), commercial fire ($1.062 billion) automobile/physical damage ($365 million) mobile-home owners ($204 million), and farm owners ($16 million).172


available at Hurricane Andrew has since been eclipsed by both the Northridge Earthquake of 1994 and Hurricane Georges of 1998.


166 See THE BIG ONE: HURRICANE ANDREW 12-13 (Roman Lyskowski & Steve Rice, eds., 1992)

167 GOVERNOR’S REV. COMM., supra note 163.

168 Id.

169 RAPPAPORT, supra note 162, at tbl. 3a.


(1993) available at (hereinafter IMPACT ON INSURANCE).(estimating $15.018 billion based on claims filed to date)

available at (estimating $19,595,600,000).

171 CONG. BUDGET OFF., supra note 117, at 10, tbl. 3.

172 Id. (all in 1999 dollars).

The size of the disaster caught many insurance companies unprepared, which affected the efficiency of claims processing. First, insurers were, themselves, victims of the disaster. Many of the insurers’ employees who lived in the south Florida area suffered property damage making it difficult for them to attend to their business duties and their own home crises.173 Additionally, the storm damaged office buildings, communications services, and data storage facilities of the insurance companies. This damage created hurdles for efficient operation of business.174

There was also simply a dearth of claims adjusters in relation to the magnitude of claims filed. Florida’s Department of Insurance streamlined its process of licensing claims adjusters in the days following the storm, enabling insurers to use emergency adjusters to deal with the volume of claims. Some insurers did not take advantage of this emergency provision and the shortage of adjusters introduced delays in the system. With so many policyholders left homeless or severely in need in the first few days after the storm, these delays resulted in many people having to wait for the temporary living expense funds they needed to pay for basic necessities like food, shelter, and clothing. 175

b. Uncompensated losses

While Hurricane Andrew may rank as one of the costliest disasters in the U.S. in terms of insured losses, there was still a gap between the amount of compensation meted out by insurance companies and the total expectations of the insured. The loophole created by “Ordinance or Law” provisions in many property insurance contracts explains some of the discrepancy.

“Ordinance or Law” provisions are designed to prevent homeowners from gaining a windfall as a consequence of a natural disaster and from putting the burden of compliance with updated building codes on insurers. Thus, while most property insurance policies will compensate a homeowner insofar as it is necessary to return their home to its pre-disaster state, many policies exclude from coverage those costs associated with upgrading the home to a better condition than it was in previously. Specifically, such “ordinance or law” provisions exclude the costs of bringing a home into compliance with building regulations that the home was not in compliance with before the natural disaster event. 176

173 FLA. DEPT. OF INS., supra note 170, at 4.

174 Id.

175 Id. at 14.

176 See Hugh L. Wood, Jr., The Insurance Fallout Following Hurricane Andrew: Whether Insurance Companies Are Legally Obligated to Pay for Building Code Upgrades Despite the “Ordinance or Law” Exclusion Contained in Most Homeowner Policies.” 48 U. Miami L. Rev. 949, 950 (1994) (quoting Your State Farm Homeowners Policy, Special Form 3, at 10 (Dec. 1990)).

At the same time, as discussed in detail in the earlier chapters addressing FEMA and the National Flood Insurance Program, much of the federal government’s disaster relief funding is conditioned upon community compliance with mitigation practices. For example, many communities are forced to pass new building codes with higher elevation requirements for homes located in flood plain areas to reduce the risk of flood damage. Additionally, these codes set forth requirements for construction materials and methods for the same purpose. If a new home in a flood plain area sustained damage and needed “substantial improvement,”178 it was then forced to comply with all of the codes’ flood mitigation provisions.179

As a consequence, homeowners were caught in a bind. FEMA disaster relief and NFIP availability for the community was dependent on the local government’s enforcement of proper mitigation practices, but home repairs that were dictated by the County’s building codes fell squarely within the “Ordinance or Law” exception to homeowner coverage.

At least 3,000 south Dade County homeowners were caught in this bind. They could not obtain building permits to rebuild their damaged or destroyed homes unless they raised the foundations of their houses above federal flood levels. Raising the foundation of a two thousand square foot house by several feet could cost more than $30,000 in 1992.180 Nor could they rebuild without complying with the upgraded requirements for building materials and methods. But because these rebuilding requirements were mandated by law, the costs were not covered by insurers.181

2. Impacts on the Insurance Industry

178 “Substantial improvement” is defined as: “any combination of repairs, reconstruction, alteration, or improvements to a structure, taking place during the life of a structure (a fifty-year period), in which the cumulative cost equals or exceeds fifty (50) percent of the market value of the structure. The market value of the structure shall be (1) the appraised value of the structure prior to the start of the initial repair or improvement, or (2) in the case of damage, the value of the structure prior to the damage occurring.” Dade County, Fla., Building Code 11C-2(ff) (1987).

179 Homes already built were grandfathered in.

180 See Don Fine Frock, Insurance Could Pay to Elevate Houses, Miami Herald, Nov. 18, 1992, at 1A.

181 The Miami Herald estimated that construction costs for Dade County residents resulting from Hurricane Andrew could costs as much as $90 million dollars due to the building code upgrades. Id.

In 1992, property insurers in Florida collected $1.5 billion in premiums. 182 They paid out about 10 times that amount to victims of Hurricane Andrew. The costs of the hurricane were greater than any company expected and forced members of the Florida insurance industry to recalculate their risks. In the aftermath of Hurricane Andrew, the landscape of Florida’s insurance industry changed dramatically. Before Andrew struck, nearly 300 insurers provided a variety of coverage options to Florida’s citizenry.183 As a result of the losses caused by Andrew, seven small insurers became insolvent, 34 insurers informed Florida’s Department of Insurance of their intent to withdraw from the market entirely, and 29 reduced their coverage options in the state.184 Reinsurers also contributed to the situation. Primary insurers are restricted in the coverage that they can offer by the reinsurance available to them and many reinsurers became reluctant to provide coverage after the events of Hurricane Andrew.185

The Florida Legislature responded to the state’s insurance crisis by creating the Residential Property and Casualty Joint Underwriting Association and the Florida Hurricane Catastrophe Fund, which are currently of major importance.

a. Residential Property and Casualty Joint Underwriting Association

In December 1992, during a special legislative session, the Legislature created the Florida Residential Property and Casualty Joint Underwriting Association (RPCJUA).186 The purpose of RPCJUA was to provide a state response to the post-Hurricane Andrew shortage of residential property insurers by serving as an insurer of “last resort” for the state’s residents. The program was meant to provide residential property insurance coverage for those residents unable to obtain coverage from a private

insurer. 187

The new law required all insurers authorized to write property and casualty insurance policies in Florida to participate in the Association. Members of the association were required to apportion among themselves the coverage of eligible policyholders unable to secure coverage on the voluntary market. This was done through the imposition of regular and emergency assessments.188 In other words, a risk

182 FLA. H.R. COMM. ON INS., FLORIDA’S PROPERTY INSURANCE CRISIS 1 (1994) (on file with Comm.)


184 Id.

185 Id. at 4.

186 Fla. Stat. 627.351(6) (1993).

187 DEPT. OF FIN. SERVICES, FLORIDA’S RESIDUAL INSURANCE MARKET, available at (last updated 4/12/04).

188 Fla. Stat. 627.351(6)(b)(3) (1997). The Association is administered by a Board, consisting of representatives of the insurance industry, consumer advocates, and the Department of Insurance. The

pool was established among property insurance companies, similar to the assigned risk pool in which auto liability insurers participate in many states, with the companies continuing to bear shared, primary risk responsibility through the new entity.

The RPCJUA was designed as a stopgap measure, but by 1998 it had become the second largest property insurer in the state based on the number of policies issued and value of property insured.189 By September 1996, it had issued 937,000 policies. This represented $98 billion in exposure and 17.7% of the state’s residential property insurance policies.190 Despite a number of incentives created by the state to reduce the number of policyholders seeking coverage from RPCJUA, including incentives to the private insurance market, by 2000 the number of policies had dropped only to 66,004 which still represented $10.4 billion in exposure. 191

b. Florida Hurricane Catastrophe Fund

The Florida Hurricane Catastrophe Fund is a state/private risk sharing program created by the Florida Legislature in 1993.192 Essentially, the Fund acts as a reinsurer of the state’s property insurance providers. Each insurer writing “covered policies” 193 in the state is required to enter into a reimbursement contract with the State Board of Administration (Board),194 the body that administers the Fund. Under the terms of the contract, the insurer must pay the Board an annual “reimbursement premium.”195 In exchange for the annual reimbursement premium, the Board agrees to reimburse the insurer 45%, 75%, or 90% of its losses from each covered event, depending on what agreement the insurer elects.196 The insurer’s premium is adjusted depending on the level of coverage it elects. Reimbursement is available to cover the insurer’s losses for

Board was authorized to write residential property policies and set premiums. The premium rates charged by the RPCJUA could not be lower than the average rates of the highest commercial carrier among the state’s twenty highest-volume carriers. See Jan Gorrie, Property Insurance in Florida: The 1997 Legislative Reform Package, 25 FLA. ST. U. L. REV. 351, 352 (1998).

189 Id. at 353.

190 DEPT. OF FIN. SERVICES, supra note 186.

191 Id .

192 Fla. Stat. § 215.555 (2004).

193 See Id. § 215.555(c) for definition of “covered policy.”

194 As of January 7, 2003, the Board’s trustees are the Governor, the Chief Financial Officer, and the Attorney General. The Board is guided by a nine-member advisory panel consisting of an actuary, a meteorologist, an engineer, a representative of insurers, a representative of insurance agents, a representative of reinsurers, and three consumers representing affected industries. Id. § 215.555(8).

195 Fla. Stat. § 215.555(5) defines “reimbursement premiums.”

196 Id. § 215.555(4)(b). Joint underwriting associations and risk apportionment plans must elect the 90% coverage option. Id. § 215.555(4)(b)(2).

“covered events,” which are defined as any single storm declared by the National Hurricane Center to be a hurricane that causes insured losses in the state of Florida.197

In establishing the Fund, the Florida legislature noted the state’s compelling interest in maintaining a viable private sector property insurance market but recognized that after the losses caused by Hurricane Andrew, private insurers felt the need to reduce their catastrophic exposures in order to maintain solvency.198 Thus, the Legislature determined that it was the state’s responsibility to protect the public from the private insurance industry’s inability (or unwillingness) to provide sufficient property insurance to state residents. So it created the Florida Hurricane Catastrophe Fund to “provide a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses.”199

Reimbursement from the Fund is not reduced by reinsurance paid to the insurer from another source, but if the aggregate of reimbursement from the Fund and other sources exceeds 100% of the insurer’s losses, the excess is to be returned to the Fund.200 Reimbursement from the Fund in any given year is not to exceed the actual claims¬paying capacity of the fund or $11 billion, whichever is lower.201

The Fund is financed through a combination of sources. The primary source of funding is the premium payments made by participating insurers.202 The Fund invests the premium revenues in short-term securities to increase it liquid assets.203 In addition to premiums, the Fund received periodic appropriations from the Florida Legislature.204 If a hurricane event occurs and the Board determines that the Fund has insufficient assets to meet its reimbursement contracts, the Fund is authorized to issue revenue bonds.205 Finally, if bond issuance still proves insufficient, the Board has the authority

197 Id. § 215.555(2)(b). Eligible losses are those in excess of the insurer’s retention plus adjustment expenses equaling 5% of total reimbursed losses. Id. § 215.555(4)(b). “Retention” is calculated according to the provisions established in § 215.555(2)(e).

198 Id. §215.555(1)(a) – (b).

199 Id. § 215.555 (1)(e) .

200 Id. § 215.555(4)(b)(3).

201 Id. § 215.555(4)(c)(1) (providing an exception to the $11 billion annual cap in years where the fund has an estimated claims-paying capacity in excess of $22 billion).

202 STATE BOARD OF ADMIN. OF FLA., FLORIDA HURRICANE CATASTROPHE FUND (2004), available at (last updated 3/23/04).

203 Id.

204 Id. As of December, 2003, the Legislature has appropriated a total of $99,052,090 to the Fund.

205 Fla. Stat. § 215.555(6) (2004).

to direct the Office of Insurance to levy an emergency assessment on all property and casualty insurers doing business in the state.206

As of December 31, 2003, the Fund disbursed $13,133,973 to participating property insurers in Florida. Hurricanes Erin and Opal, both in 1995, caused the greatest reimbursable damage under the Fund, prior to the current Hurricane Charley, discussed below.207

3. Role of FEMA

Hurricane Andrew is ranked third on FEMA’s list of costliest natural disasters.208 In total, FEMA distributed $1.4 billion in relief.209 The National Flood Insurance Program tallied $168 million in expenditures related to Hurricane Andrew. Total federal financial assistance was over $4 billion.210

FEMA was subjected to extreme scrutiny and widespread criticism after Hurricane Andrew. The disaster was one of the first major tests of the still relatively new agency and significant shortfalls in the agency’s newly unveiled Federal Response Plan were uncovered.211 At the time, federal funding under the Stafford Act was not released to a disaster area until a presidential disaster declaration had been made. In the case of Hurricane Andrew, this provision impacted Florida’s ability to undertake short-term preparation measures to mitigate the oncoming damage in the time before Andrew hit land. For example, federal resources, including military personnel and equipment, were not available to Florida medical facilities as they attempted to airlift hospital patients out of the Florida Keys in the day before the storm.212

206 Id. § 215.555(6)(a)(3) (emergency assessment provision does not apply to insurers providing workers compensation, accident, or health coverage).

207 STATE BOARD OF ADMIN. OF FLA., supra note 201.

208 FED. EMERGENCY MGMT. AGENCY, supra note 164.

209 Id. Under FEMA’s relief programs, it distributed $823 million in public assistance grants, $128 million of temporary housing, $23 million in mitigation grants, $177 million in individual and family grants, and $83 million in other expenses.

210 CONG. BUDGET OFF., supra note 117, at 16, tbl. 5. The Small Business Administration issued $177 million in loans to individuals and businesses and the Department of Agriculture spent over $1 billion in post-Andrew financial assistance. Other federal entities that contributed to the disaster relief included the Departments of Commerce, Defense, Education, Health and Human Services, Housing and Urban Development, and Transportation.

211 The Federal Response Plan has been updated since 1992. This discussion refers to the FRP in its 1992 form.

212 See Testimony of Frank Koutnik, Hearing Before the Subcommittee on Toxic Substances, Research and Development of the Committee on Environment and Public Works, United States Senate (1993).

FEMA staff was present in Dade County in the days leading up to the hurricane’s landfall, but none there had the authority or resources needed to initiate response operations or establish a commanding federal presence.213 In fact, three days passed after Andrew hit south Dade County before federal assistance began.214 FEMA was awaiting a presidential disaster declaration, the president was awaiting a formal request from the Florida governor, and the Florida governor felt the dramatic destruction within his state was an adequate plea for help.215

Even after it was mobilized, FEMA was criticized for its inefficiency in getting relief where it was most needed. One of the key shortcomings was a failure to adequately assess the needs of the community and the people. Under the general design of FEMA, local governments and states are tasked with taking the lead on response and recovery efforts. This system fell apart in the face of such large scale destruction. When Andrew hit, it decimated government offices as well as private homes, destroyed the region’s communication systems, and made response leadership by the local government an implausible expectation. The local and state governments were unable to make an accurate assessment of the damage done and the immediate needs of its citizenry, yet FEMA failed to step in and perform a needs assessment on its own. Rather, it waited for aid requests from the local level, introducing significant delays into the process of relieving need.216

Indeed, failure among the various government emergency managers and activated response teams to coordinate and establish a clear line of command was a fault noted by nearly every commentator on the event.217

4. Concluding Observations

The risk of hurricane events occurring in Florida is continuous. If anything, climate change studies indicate that the frequency and severity of such storms will increase in the future. And the potential damage that a storm of Andrew’s caliber could inflict today far exceeds the destruction that occurred in 1992. One study estimated that if Hurricane Andrew hit with the same force in the same location today, it would cause close to $70 billion in damage, nearly

213 FED. EMERGENCY MGMT. AGENCY, FEMA02: DEVELOP A MORE ANTICIPATORY AND CUSTOMER¬DRIVEN RESPONSE TO CATASTROPHIC DISASTERS (2002), available at http: //govinfo.library. unt. e du/npr/library/reports/FEMA2.html.

214 Eliot Kleinberg, State, U.S. Learn From Andrew Mistakes Dealing with Storm ‘s Aftermath Important Part of Preparedness, PALM BEACH POST, June 1, 2001, at 8A.

215 Id.

216 See Opening Statement of Senator Bob Graham, Hearing Before the Subcommittee on Toxic Substances, Research and Development of the Committee on Environment and Public Works, United States Senate (1993).


twice the 1992 figure.218 As coastal area populations continue to increase and infrastructure continues to grow denser, the potential impact of future hurricanes becomes more devastating.

The catastrophe-response infrastructure of both Florida and FEMA were heavily analyzed in the aftermath of the storm. Since 1992, FEMA has updated the Federal Response Plan twice, attempting to strengthen federal coordination, management, and leadership. Likewise, Florida’s insurance industry underwent a major overhaul, along the lines discussed above.

The 2004 summer hurricane season put both the national and the state relief reforms to an unprecedented test. Beginning with Hurricane Charley, the southeast coastal states suffered through four significant hurricanes

between August and October. As of late October, 2004, combined state and federal disaster aid for Florida alone reached more than $2 billion.219

218 Ken Kaye and Robin Benedick, What if Hurricane Andrew hit South Florida today?, SUN SENTINEL, Aug. 24, 2002, available at¬sandrew24aug24,0,1246678. story.

219 Fed. Emergency Mgmt Agency, Florida Disaster Aid Tops $2 Billion (Release No.- 1539-238, Oct. 27, 2004), available at

220 Citizens incorporates the Florida Residential Property and Casualty Joint Underwriting Association, discussed above, and the Florida Windstorm Underwriting Association, a similar state insurance entity offering coverage specifically for wind-related damage. The FRPCJUA and FWUA were combined to form Citizens in 2002. After the reformation, insured parties maintained the coverage that they had

obtained from the individual associations with little chance in policy terms, but they realized new benefits. For instance, in its new form, Citizens is eligible for federal tax exemptions that neither FRPCJUA nor FWUA could realize on their own. FLA. DEP’T OF INS., A HANDBOOK FOR CONSUMERS AND AGENTS ON THE COMBINATION OF THE FLORIDA RESIDENTIAL PROPERTY AND CASUALTY JOINT UNDERWRITING ASSOCIATION AND THE FLORIDA WINDSTORM UNDERWRITING ASSOCIATION RESULTING IN THE NEWLY FORMED: CITIZENS PROPERTY INSURANCE CORPORATION 5, 2002.

This cluster of hurricanes will provide a test for Florida’s insurance industry, as well as FEMA. Florida’s government will be challenged both in its role as a primary catastrophe insurer, through the state’s newly formed Citizens Property Insurance Corporation,220 and as a reinsurer, through the Florida Hurricane Catastrophe Fund. These programs were created by the state in direct response to the lessons learned from Hurricane Andrew. As the state cleans up from Hurricane Charley and its three successors, and Florida’s residents begin rebuilding their homes and their lives, onlookers will have the opportunity to assess whether Andrew’s lessons were well-heeded.

C. Catastrophic Loss in Tort: The Case of Commercial Airline Crashes

Commercial airline crashes are perhaps the prototypical instance of a catastrophic accident in which responsibility is assigned to human agency. When a commercial airliner crashes, there is typically mass loss of life and a number of potential defendants in the ensuing tort litigation. In the U.S., there is no legislative compensation scheme that specifically applies to airline crash victims. Hence, the tort system is the only available channel of recourse, other than private insurance coverage that the victims may have available and general welfare benefits.

We will begin with a brief discussion of the tort principles applicable in these cases, after which we will indicate the background social welfare and insurance systems that may contribute to overall compensation of victims and their survivors. Finally, we will summarize the findings of the major empirical study that was conducted of this litigation by the RAND Institute for Civil Justice.221 Although the study was conducted in the mid-1980s, it is the best available examination of the system in action, and remains largely accurate today, in our view.

1. Applicable Tort Principles

When a commercial passenger airplane crashes, the most likely defendant is the airline itself – with the further possibility, which will not be discussed here, of claims against more collateral defendants such as the airplane manufacturer (products liability) and the Federal Aviation Agency (for negligence on the part of air traffic controllers). The basic elements in a negligence case of duty, proximate cause, and damages are generally easily established. The contestable issues, as might be expected, are breach of duty and cause in fact – that is, whether there was any causal negligence on the part of the pilot, crew, or maintenance personnel, including failure to detect a defect. On the breach of duty issue, assuming that there is no direct evidence of what happened (since


222 On the tort principles applicable to airline litigation generally, see LEE S. KREINDLER, AVIATION ACCIDENT LAW (1994). A major factor in civil airline litigation is the investigation conducted by the Federal Aviation Administration, including information from the flight recorder tape. Often, however, this evidence is inconclusive.

there are generally no survivors among the passengers and crew), the surviving families, as plaintiffs, benefit particularly from the potential applicability of the doctrine of res ipsa loquitur (translated, causal negligence can be inferred from the accident itself).222 In many jurisdictions, plaintiffs would get the added benefit of the common carrier doctrine, which provides that commercial airlines owe passengers “the highest duty of due care.”

Once liability has been established, there are certain aspects of damage assessment that are specific to the airline context, but for the most part damages are governed by general rules of recovery in tort. Thus, in the majority of jurisdictions in the U.S., wrongful death statutes would award “pecuniary loss” to the survivors

The more specifically airline-related item of damages is for recovery by the decedent’s estate for pain and suffering during the brief period of remaining life from the moment when the victim became aware of impending death to the actual time of demise. Most state courts would allow recovery for this concededly imprecise figure.223 Indeed, there are cases standing for the proposition that fear-of-death recovery is warranted in cases where a reasonable person would expect impending death, even if the pilot then avoids the accident through emergency actions.224

It can be inferred from this brief summary that airline crash cases would be ripe for class action disposition under American procedural provisions, since all of the victims are similarly situated and there is a common scenario of conduct on the part of the defendant(s). But just because the tort rules are so straightforward and liability is so likely to ensue, most of the mass airline crash cases in the U.S. are settled en masse rather than litigated, as discussed below in the RAND summary.225 Thus, tort is the principal avenue of recovery in this prototypical category of catastrophic loss where blame can be assigned – as it would be in similar mass disaster events that bespeak

223 See, e.g., Shu-Tao Lin v. McDonnell Douglas Corp., 742 F.2d 45 (2d Cir. 1984).

224 See, e.g., Quill v. Trans World Airlines, Inc., 361 N.W. 2d 438 (Minn. App. 1985).

225 International airline crashes are subject to the rules embodied in the Warsaw Convention, but are beyond the scope of this discussion.

226 Recall the Rhode Island night club fire, discussed at the outset of the introductory chapter. See also, Hensler & Peterson, supra note 10, for description of major hotel disasters of recent vintage.

negligent conduct, such as a sudden structural collapse or fire in a place of public accommodation.226

2. Background Social Welfare and Insurance Systems

It is unusual for there to be survivors of a commercial airline disaster. As a consequence, the principal private insurance and social welfare programs that are called into play by an airline crash are those providing death benefits. In the case of privately held insurance, this would typically be life insurance, as well as death benefits associated with a workplace pension plan. Obviously, not all plane crash victims carry this coverage, but as the next section mentions, airplane crash victims are disproportionately from the higher end of the socioeconomic stratum, so the likelihood of such coverage is correspondingly greater than in the population at large.

As far as public social insurance coverage is concerned, the main source of compensation would be the survivor benefits under the Social Security program, when eligibility as a designated beneficiary can be established, as discussed in the earlier section on welfare programs. If in fact there were survivors of the crash, SSDI benefits for permanent disability could be recovered, and Medicare-eligible victims could recover health benefits. In addition, workers’ compensation would be available where the injuries were in the course of employment (say, on a business trip)

3. Empirical Analysis of the Compensation System

In 1985, the RAND Institute for Civil Justice (ICJ) completed a comprehensive study of cases arising from aviation accidents. ICJ looked at the records of every death case arising from a major aviation accident in the U.S. from 1970-1984.228 Its study described the characteristics of the decedents in these cases and the

227 At the same time, however, some of these insurance sources, such as workers’ compensation and private health insurers might exercise a right of subrogation against a responsible defendant like the airline. But this is far less likely in the cases of death-related coverage such as life insurance and pension benefits.

228 It defined “major” as accidents involving commercial aircraft with more than 60 passenger seats and more than five deaths. Twenty-five accidents fit ICJ’s study criteria and involved 2,228 total deaths.

229 This includes total outlays by all defendants, including economic and noneconomic loss and legal fees and expenses.

litigation stemming from these accidental deaths. It also provided data on compensation paid and litigation costs, and compared these figures with each other and with similar figures for other types of tort cases.

The compensation figures do not represent current award levels, since they are based on awards twenty and more years ago. However, when viewed comparatively and in context, the findings remain interesting and relevant today, in our estimation. The average compensation in the death cases studied was $363,000 (in 1986 dollars),229 aggregating to an average of $32 million per accident for the 25 accidents studied. No punitive damages were paid in any of these cases.

Actual compensation per victim varied widely: one-fourth of the claimants received less than $100,000

An earlier ICJ study had found that a defendant in the average tort case paid about $37,300 (again in 1986 dollars), $18,700 of which was net compensation to plaintiffs and the remainder constituting litigation expenditures. By contrast, a defendant in the average airline accident case paid about $412,233 of which $291,170 was net compensation to the plaintiffs. In this latter regard, it is revealing that these figures suggest that airline accident cases have a considerably lower ratio of transaction costs to total expenditures than general tort cases. Plaintiffs’ lawyers take lower contingency fees percentage-wise in airline cases, reflecting an overall datum about the litigation: that the cases are disposed of in a more routine fashion because disputes over liability are less prevalent.

But while most cases settle – 85 percent of the lawsuits settled before trial according to ICJ — on average, a claimant was more likely to take a claim to trial rather than enter into a settlement agreement as the value of economic loss suffered increased. More generally, claims involving larger losses were more likely to result in lawsuits, to go to trial, and to take longer to settle: A one percent increase in loss to survivors increased the probability of a suit by four percentage points, the probability of a trial by 1.7 percentage points, and the length of time to resolve a case by almost nine percentage points.

Finally, with respect to the parties and their attorneys, the profile of the average airline accident victim was different than the profile of the average American. On

average, the decedents in ICJ’s study were predominantly male and middle-aged (almost certainly, this would be less true today with a dramatic increase of women in the white-collar workforce). Two-thirds were employed with an annual income twice the national average. As far as attorneys were concerned, ICJ looked at the trends in legal representation for both sides. On the defense side, ICJ found that the direct insurer of the involved airline coordinated the defense and led negotiations with the plaintiff. On the plaintiff side, ICJ found that almost one-third of the 2,258 cases examined were handled by only 14 law firms – indicating the degree of specialization in this discrete area of mass tort litigation.


In cases of catastrophic loss involving human error in the U.S., tort remains the most prominent system for affording financial compensation to victims. Virtually without exception, injury victims suffering substantial loss assert tort claims even under circumstances where they have private insurance coverage and are entitled to baseline social welfare benefits. In part, this near-universal resort to tort is a function of the collateral source rule: Recovery in tort is not reduced for benefits received from private or public insurance sources (although in some circumstances the insurer may exercise a subrogation right against a third-party wrongdoer that would eliminate “double recovery”). An even more significant explanation for the resort to tort, however, is the continuing adherence in the U.S. to the common law principle of individualized recovery. An injury victim is entitled to compensation for loss of income (including future loss) measured by the prospects of his/her own individual earning power, and recovers pain and suffering loss (intangible loss) evaluated in terms of personal psychic harm – generally, as evaluated by a jury.230

There are at least two important qualifications, however, to the breadth of tort law in catastrophic loss cases. First, under some circumstances, the sheer prospect of imposing mass tort liability on a defendant for a single instance of wrongful conduct leads courts to impose a limited duty rule. A leading example is the New York City power outage in 1977, in which the city was thrown into complete darkness for 25 hours due to gross negligence on the part of Consolidated Edison, the power supplier. The New York Court of Appeals denied the personal injury claim of a city resident who was not in contractual privity with the power supplier, holding that a duty would be recognized only to those in privity.231 But a limitation of this sort on personal injury is

230 As indicated earlier, in wrongful death cases, the surviving beneficiaries similarly can establish their own and the decedent’s economic circumstances – and in a minority of states their intangible loss of companionship, as well – in the damages phase of a tort case. It is also critical to note that all of these damages assessments are made, in most cases, by a jury in the U.S. system.

231 Strauss v. Belle Realty Co., 482 N.E.2d 34 (N.Y. 1985).

fairly rare

A second, more commonly invoked limitation on recovery is the so-called “economic loss” rule, under which tort plaintiffs whose claims are based exclusively on economic loss such as lost profits, without attendant personal injury or property damage, are denied a right of recovery – based on a concern over the administrative feasibility of drawing lines that would prevent virtually unlimited recovery against a defendant.233 This latter limitation, it should be noted, is not invoked exclusively in catastrophic loss cases

Whatever the doctrinal limitations, tort is frequently criticized from the broader perspectives of economic efficiency, distribution of risk, and fairness. Certainly from a compensation vantage point, the latter two concerns loom large. Tort only provides compensation: 1) when the wrongdoing of a defendant can be established, and 2) when the defendant is solvent (again, recall the discussion in the introductory section of this report). These limitations, along with the no-duty rules just discussed, mean that it is often the case that victims suffering similar injuries are not treated in a like fashion – and indeed that the disparities are sometimes glaring (ranging from no recovery to millions of dollars for similar accidental injuries or deaths). Thus, both in terms of risk distribution and fairness, it can be argued that tort leaves much to be desired.

Moreover, these limitations spill over into a critique from an economic, deterrence-oriented perspective, as well: No-duty rules, as well as insolvency, that insulate risk generators from bearing the cost of accidents for which they are responsible, translate into inadequate incentives on risk generators to provide safety precautions. In addition, the high administrative cost of shifting losses in tort is

232 There is also one category of potential catastrophic loss in which special legislative provision for tort recovery and pooled insurance has been enacted, nuclear reactor mishaps under the Price-Anderson Act, discussed earlier in section IV.

233 See e.g. 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Center, Inc., 750 N.E.2d 1097 (N.Y. 2001).

234 It is generally thought that injury victims in tort receive roughly 50% of total expenditures by tort defendants. See J. KAKALIK & N. PACE, RAND INST. CIV. JUST., COSTS AND COMPENSATION PAID IN TORT LITIGATION (1985).

frequently invoked as an independent shortcoming of the system – undermining both its deterrence function and its efficacy from a risk-distribution and fairness perspective.234

As indicated in the section on insurance, the limitations of tort do not mean that those suffering personal injury loss as a consequence of catastrophic harm go entirely uncompensated.235 About 85% of the U.S. population is covered to some extent by private health insurance, and Medicare offers public health insurance coverage to those over 65 years of age. The resulting gap in medical coverage – while still fairly substantial – is not as wide as the shortfall in coverage for wage loss. Private disability insurance coverage in the U. S. is quite uncommon, and while state disability and unemployment insurance benefits provide short-term partial relief, they do not fill the gap in cases of longer-term or very serious injuries. On this latter score, the federal SSDI insurance program, as indicated earlier, does offer scheduled benefits – although considerably short of full economic restoration – to those experiencing permanent total disability. In sum, the public welfare schemes in the U.S. leave quite large gaps in coverage for the economic consequences of personal injury, and private insurance sources fill only part of the gap, primarily for those carrying generous health insurance.

With regard to residential and commercial property and casualty loss, private insurance is the avenue of recourse. In the case of residential property, it is likely to be held by homeowners

These non-tort private insurance sources of benefits would also be applicable in cases of catastrophic harm from natural disasters. Tort, in most instances, would not. But in the case of natural disasters, the federal and state governments have come to play a more proactive role in recent years. There is no single pattern, in part because the U.S. is a federal system in which much of the responsibility for public safety and welfare continues to reside in state governments – each of which takes an independent tack reflecting regional considerations – rather than in the national authority. In the case of disaster relief generally, however, the federal government has entered the field in a major way with the establishment of the Federal Emergency Management Agency, which as we have seen in section III, provides frontline coordination and restorative grants and loans to get the victims of a disaster back to a semblance of normality. In the cases of hurricanes, earthquakes, and floods, states that tend to be most heavily affected have devised insurance schemes, discussed in section IV, whereby they either provide

235 Indeed, a 1991 study conducted by RAND Institute for Civil Justice found that overall areas of personal injury, payments in tort comprised 11% of total benefits received by accident victims – although the percentage would almost certainly be higher for victims in catastrophic loss cases. D. HENSLER, ET AL., RAND INST. CIV. JUST., COMPENSATION FOR ACCIDENTAL INJURIES IN THE UNITED STATES (1991).

excess liability insurance or in some instances, such as the California Earthquake Authority, actually have taken over the role of primary risk-bearer.

For the most part, these publicly-initiated insurance schemes aimed at compensating for the personal injury toll of natural catastrophes – and even more frequently, for property damage and economic devastation – operate from a different set of assumptions than tort about the purposes of financial relief. Tort aims at individualized recovery that will as closely as possible restore victims to their life circumstances before the injury occurred. By contrast, the government schemes – whether they provide scheduled benefits for personal injury or grants and loans for property/economic loss – are more likely to operate from the perspective of restoring the victim to a baseline state of normalcy requisite to resumption of ordinary life.

In the case of relief from natural disasters, deterrence concerns are less of an issue than in the cases of human error and responsibility discussed above. But they are not entirely absent: As mentioned in section IV, a community can only qualify for federal flood insurance coverage if it offers a plan incorporating provisions that take account of future regional vulnerability to flood damage. In addition, states and local communities have enacted specific legislative programs requiring community and individual action to safeguard against potential damage from catastrophes such as earthquakes, floods, and fires. But these latter legislative safety-promoting schemes ordinarily operate independently of social welfare programs providing compensatory relief – not surprisingly, perhaps, in view of commonly shared norm that victims of natural disasters should be afforded relief by the state without blaming them for their plight (in the sense of imposing strings or sanctions on recovery).

In the final analysis, the U.S. has what might well be termed a patchwork system for providing financial compensation for catastrophic loss: partly tort, partly public social welfare benefit programs, and partly private insurance coverage (often mandated)