23 minute read 17 Dec 2019
Ruins from neighborhood fire

How to avoid a second disaster

Authors

Allen Melton

EY Americas Insurance & Federal Claims Services Leader

Helping clients recover financially after disasters. Extensive experience with commercial insurance claims and federal disaster grants.

Bradley (BJ) Nichols

EY Americas Insurance & Federal Claims Services Partner

Helping clients recover financially after disasters through commercial insurance claims and federal disaster grants as a partner in the Insurance & Federal Claims Services practice.

23 minute read 17 Dec 2019
Related topics Assurance Risk

This article highlights certain areas associated with financial recovery through FEMA funding that have been impacted by disaster and responsive FEMA activity.

The past several years have been marked by record-breaking catastrophic disasters for the Federal Emergency Management Agency (FEMA). In fact, 124 disasters were declared in 2018, and 137 disasters were declared in 2017. The disasters included Hurricane Harvey, Hurricane Irma, Hurricane Maria, Hurricane Michael, Hurricane Florence, the earthquake in Alaska, and the 2017 and 2018 California wildfires. As a result, FEMA has obligated more than $18b in disaster recovery assistance for 2017 and 2018 declared events.

Disasters have changed; their timing, frequency and destructive forces are increasing at an unprecedented rate. As such, FEMA’s disaster recovery process continues to evolve, resulting in legislative changes and disaster program changes. Keeping up with new disaster recovery legislation, policy, guidance and requirements can often be challenging for Recipients and Subrecipients.

In response to increased funding made available by FEMA, the role of the Department of Homeland Security’s Office of Inspector General (DHS OIG) has been heightened, through real-time monitoring and capacity reviews with an eye toward deobligation of grant funding.

The Inspector General (IG) will continue to meticulously scrutinize grant funding to confirm FEMA compliance and to prevent possible waste, fraud and abuse. Therefore, it is imperative that FEMA grant Recipients and Subrecipients understand their obligations associated with FEMA disaster grant funding, remain current with respect to relevant guidance and increase the efficiency and effectiveness of their compliance efforts.

This article highlights certain areas associated with financial recovery through FEMA funding that have been impacted by disaster and responsive FEMA activity.

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Chapter 1

Five new areas of focus

This chapter highlights the five new areas of focus for you.

1. DHS OIG’s proactive audit approach

DHS OIG continued a proactive approach to conducting audits where the DHS OIG would assess Subrecipients’ capacity to account for and spend federal funds responsibly before the funds are spent. With this approach, the IG has started conducting audits much earlier into the disaster recovery process. In addition to the IG’s proactive approach, FEMA is also proactively scrutinizing eligibility of costs prior to obligation of funding. As a result, Recipients and Subrecipients will need to be audit ready from day one in the financial recovery process.

2. Disaster Recovery Reform Act of 2018 (DRRA)

In response to the significant impact of natural disasters in 2017, on October 5, 2018, President Donald J. Trump, signed HR 302, which contains the DRAA. The DRRA modifies several FEMA programs and provides greater flexibility to assist state and local disaster mitigation, preparedness and recovery. As part of the new Act, FEMA can no longer recoup any aid provided more than three years after its release.

3. Public Assistance Program and Policy Guide (PAPPG) — version 3.1

In April 2018, FEMA issued the PAPPG version 3.1. PAPPG superseded the majority of all prior Public Assistance guidance, and PAPPG version 3.1 is in effect for incidents declared on or after August 23, 2017.

Version 3.0 incorporated many revisions regarding houses of worship and religious institutions. Whereas, Version 3.1 made additional revisions to align with the changes made by the Bipartisan Budget Act, including changes regarding “essential social services” and “essential social-type services,” houses of worship and other private nonprofit educational facilities.

Included in previous versions of the guidance are changes to debris removal operations. The PAPPG eliminated the responsibility of FEMA and state government to monitor debris removal. Instead, the Subrecipient is solely responsible for monitoring debris removal operations and will need to identify issues or concerns during operations.

4. Public Assistance Management Costs Interim Policy (Interim Policy)

On October 5, 2018, as part of the DRRA, FEMA issued the Interim Policy, which redefined management costs. The Interim Policy defines management costs as “indirect costs, direct administrative costs and other administrative expenses associated with a specific project.”

Under the Interim Policy, a Recipient is allowed no more than 12% of the total award. A maximum of 7% can be used by a Recipient and a maximum of 5% used by a Subrecipient. Costs are funded at 100% federal cost share. The Interim Policy details eligibility and several deadlines to claim the costs. Under the Interim Policy, FEMA bases management costs on the total award amount, which is the actual eligible PA project cost, including the non-federal share, after insurance and any other reductions.

5. Public Assistance Alternative Procedures for Direct Administrative Costs (PAAP DAC)

For events declared between August 1, 2017 and October 4, 2018, FEMA’s PAAP DAC could apply if the Recipient and Subrecipient do not opt into the interim policy. Recipient and Subrecipient participation is optional in this program; however, if a Recipient elects to opt out of the pilot program, Subrecipients cannot participate. The pilot program includes accounting for all DAC on one single project worksheet (PW) at a fixed rate of 5% (4% standard with a 1% 90-day closeout incentive) of the total eligible project costs based on PWs that have been signed and submitted to FEMA within two years of the declaration (with the exception of DAC costs for Permanent Work Pilot projects). When a fixed estimate is developed under the Permanent Work Pilot, FEMA will calculate and lock in the related DAC amount based on the agreed-upon Permanent Work fixed estimate.

Test your disaster financial recovery quotient to check if you can avert a second disaster.

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Chapter 2

Financial recovery

Failure to pay attention to the relevant guidelines can lead to grant deobligation.

Financial recovery

Most organizations have plans in place to manage crises and restore operations in the event of a disaster. Maximizing financial recovery is often an afterthought even though it is equally, if not more, complex than physical recovery. Significant knowledge of the federal disaster grant management process is essential for an organization to successfully navigate from disaster recovery through grant closeout. Creating awareness within your organization and training your staff to understand these requirements are critical for a successful recovery.

Even after all the work is completed and costs are accounted for, Recipients and Subrecipients must be prepared for a potential audit by the US DHS OIG. The OIG audits awarded grants annually and recommends deobligations based on its findings.

Office of Inspector General audits

In September 2018, the OIG issued the report, Summary and Key Findings of Fiscal Year 2017 FEMA Disaster Grant and Program Audits (OIG Capping Report). This report summarized the awarded amount that the OIG classified as either questionable costs (recommended to be disallowed) or funds that could be put to better use. An alarming observation from this report is the total amount identified under these two categories is $2.164b. A breakdown of the $2.164b can be seen below:

Office of Inspector General audits

The most frequent funds put to better use findings were for lack of Subrecipient policies, procedures and business practices for compliance with federal procurement regulations, interest earned on federal funds and unused funding.

The most frequent questioned costs were ineligible work and costs as a result of noncompliant contracting practices and lack of supporting documentation.

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Chapter 3

Avoiding grant deobligation

This chapter tells you the responsibilities of Recipients and Subrecipients.

The OIG Capping Report stresses the following:

  • FEMA “has not sufficiently held grant Recipients financially accountable for improperly spending disaster relief funds.”
  • Recipients play an important role in monitoring their Public Assistance program grant and providing technical assistance to Subrecipients.

A proactive approach is critical to a healthy recovery and will help you avert a second disaster.

Proactive approach

Recipient and Subrecipient responsibilities

Responsibility for the proper usage of FEMA funding doesn’t only rest with Subrecipients. Regulations mandate that Recipients, which in most cases are states, also play an active role in managing grant funds. Recipients are responsible for the disbursement of grant funds to Subrecipients and are fully accountable for the usage of funds by Subrecipients.

The OIG Capping Report specifically stresses the important role Recipients must play in monitoring grants. Given that FEMA provides grant funds to Recipients to administer and oversee disaster funds, the OIG expects that better grant administration will enable Recipients to identify unused, unneeded and ineligible funds in a more expedited manner.

Recipient and Subrecipient responsibilities

The Recipient is responsible for monitoring the completion of grant-funded projects to verify that Subrecipients complete the work within regulatory time frames and in accordance with the approved scope of work and grant conditions, adhere to environmental requirements, and appropriately recoup duplicative benefits. Recipients must also document changes in grant conditions and report them to FEMA.

  • Support project identification activities
  • Conduct site visits as appropriate
  • Confirm that Subrecipients are aware of all eligibility requirements
  • Verify that Subrecipients comply with:
    • Public Assistance Program insurance requirements
    • OMB Circular A–133
    • Other federal, state and local requirements
  • Confirm that Subrecipients document and submit the following to FEMA for review:
    • Requests for supplemental funds
    • Closeout requests
    • Quarterly progress reports
  • Notify Subrecipients of all grant-related actions in a timely manner
  • Pay Subrecipients for eligible work in a timely fashion
  • For large projects, reconcile actual costs and provide summary documentation to FEMA
  • Evaluate and process time extension requests, improved project requests and alternate project requests from Subrecipients and send them to FEMA
  • Prepare and submit annual State Administrative Plan for Public Assistance
  • Submit FEMA form 20–10, Financial Status Report or SF–269 Financial Status Report and comprehensive quarterly progress reports to FEMA
  • Respond to OMB Circular A–133 audit findings

During fiscal year 2017, OIG reports included more than 70 recommendations associated with grants management and administration covering procurement and contracting practices, general grants management, project costs, accounting, and insurance recovery.

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Chapter 4

Procurement guidelines

The 2 CFR Part 200 is the primary source of guidance for procurements associated with FEMA funding.

Administrative grant requirements for FEMA, including those focused on procurements, were streamlined in December 2013. The 2 CFR Part 200 streamlined contents from eight existing OMB circulars into one consolidated set of guidance. The 2 CFR Part 200 now serves as the primary source of guidance for procurements associated with FEMA funding and applies to all disaster events occurring after December 2014.

OIG-19-06, November 28, 2018

DHS OIG audited $32.4m of FEMA Public Assistance grant funding awarded to an Indian reservation tribe in connection with a June 2010 flood that caused severe damage to its health clinic. It recommended that FEMA recover $22.3m of this funding as the tribe did not comply with federal procurement regulations or its own procurement procedures when it awarded six prime contracts.

Noncompliance with applicable regulations

Noncompliant procurement practices are often the target of OIG audits. The DHS’s findings referenced in the report centered on five key concerns:

  • Full and open competition was not conducted in awarding the contracts, a key provision of federal procurement regulations.
  • FEMA had no assurance that the costs paid or to be paid through the contracts were reasonable.
  • The tribe did not maintain sufficient records to support the history of its procurements.
  • The tribe did not include most of the federal contract provisions in any of its prime contracts.
  • The tribe did not maintain a contract administration system that conforms to federal procurement standards.

Tribal officials indicated they had additional documentation to clarify some of the procurement findings, which were provided to the OIG. The OIG reviewed the records and determined they had no effect on its findings.

FEMA may take any number of enforcement remedies in the case of a noncompliant procurement or other areas of noncompliance under a Stafford Act grant, including:

  • Temporarily withholding cash payments
  • Disallowing all or part of the cost of the activity or action not in compliance
  • Wholly or partly suspending or terminating the federal award
  • Initiating suspension or debarment proceedings
  • Withholding further awards for the program
  • Taking other remedies that may be legally available
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Chapter 5

Guidance summary

Maneuvering the landscape of procurement guidance can be a complex and challenging task.

You will require a detailed review and understanding of grant and procurement regulations to be able to maneuver the landscape of procurement guidance. Applicants should ask questions about requirements that are not clear, rather than assuming the federal agency will interpret the regulation a certain way.

Some of the key components are below:

The cheat sheet

  • There are different procurement guidelines for state and federal entities and non-federal entities. To better ensure compliance, entities must follow the most stringent guidelines applicable.
  • All procurements must provide fair and open competition and not require excessive or unnecessary bonding or other unnecessary qualifications that limit competition.
  • Noncompetitive procurement processes may be used if the goods being procured are only available from a single source.
  • Recipients and Subrecipients must perform a price or cost analysis in connection with every procurement action above the simplified acquisition threshold ($150,000), including contract modifications.
  • Cost-plus-percentage-of-cost or cost-plus-percentage-of-construction-cost contracts are not permitted.
  • Recipients and Subrecipients must take all steps to employ small and minority businesses, women’s business enterprises and labor surplus area firms when possible.

Recipients and Subrecipients should also be prepared to execute a variety of ongoing tasks during the procurement phase of recovery, such as:

  • Monitoring compliance of each procurement in an efficient manner
  • Obtaining an understanding of the documentation requirements and properly maintaining the relevant files
  • Determining the best way to complete internal cost estimates for goods and services that may never have been procured before by the entity
  • Verifying and documenting that no duplication of work has been procured
  • Differentiating between exigent and non-exigent circumstances
  • Determining the best contract/pricing structure for each procurement

Advance consideration of these factors will be key to an entity’s ability to retain federal funding through the closeout and audit process.

Next steps
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Chapter 6

Project worksheet scope and costing

Any costs associated with federal grants must be “necessary and reasonable.”

Project worksheet scope and costing

Recent OIG findings
OIG-17-93 (July 5, 2017)

OIG determined that $3.9m of $13.2m FEMA Public Assistance granted to a Subrecipient was ineligible for the following reasons:

  • Duplicate insurance and non-insurance benefits
  • Ineligible force account labor
  • Ineligible contract costs
  • Excessive equipment costs

According to federal cost principles, any costs associated with federal grants must be “necessary and reasonable.” They must be required because of the related major disaster event.

Furthermore, according to FEMA’s Public Assistance Program and Policy Guide, all source documentation supporting the project costs must be maintained. The Applicant must maintain all documentation for each project with its project worksheet (PW) as a permanent record to facilitate closeout and audits.

All financial and program documentation must be maintained for three years after the date of the Recipient’s final Financial Status Report (FSR). These records are subject to audit by FEMA, the US DHS OIG, state auditors and the US Government Accountability Office.

Scope of work

Projects and associated scopes of work are approved by FEMA and are incorporated into PWs. Subrecipients should work with FEMA resources to help confirm that the actual work Subrecipients have performed or will be performing is adequately covered by the scope of work in each PW. Thereafter, Subrecipients must adhere to the scope of work or they will be at risk of deobligation. If necessary, the Applicant may request a change to the scope of work once a project has been obligated; however, changes need to be approved by FEMA.

Accounting on a project-by-project basis

Costs must be submitted to FEMA based on PWs and individual site sheets. See Appendix B for a representative list of work that can be reimbursed by FEMA.

Subrecipients should maintain accounting records in such a manner that costs are captured and reported by their respective category and project. Many accounting systems are not set up in a way that corresponds directly to information required by FEMA PWs and for particular disasters or individual scopes of work. As such, separate processes and procedures must be established to properly account for costs associated with FEMA grants.

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Chapter 7

Unreasonable pricing

This chapter tells you what makes pricing reasonable.

Unreasonable pricing

OIG-15-141-D (September 9, 2015)

The OIG audited projects with net awards totaling $14.57m associated with a grant to a township and recommended that over $1.4m be disallowed in connection with unreasonable debris removal costs.

In the report referenced above, the amounts reviewed and deemed unreasonable by the OIG in connection with the grant were related to the differences between hourly rates the Subrecipient paid its contractors and the hourly rates the Recipient negotiated for statewide debris removal activities and made available to all municipalities within the state. The OIG determined the rates the Subrecipient used appeared unreasonable and higher than the hourly rates other municipalities paid for similar hourly debris removal work in the state.

Additionally, the Subrecipient could not provide evidence that a cost or price analysis was performed to determine the reasonableness of the rates for debris removal. The OIG stated that the Subrecipient should have negotiated a unit price for work contractors performed after the first 70 hours of the disaster, as required by FEMA guidelines.

Costs must be reasonable

FEMA considers only those costs that are reasonable as eligible for reimbursement.

2 CFR 200.404 states that a cost is reasonable if “in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. The question of reasonableness is particularly important when the non-federal entity is predominantly federally-funded.”

Several factors must be considered in determining whether or not a cost is reasonable. Some examples include:

  • Were the costs necessary for the proper and efficient performance of the award?
  • What were comparable market prices?
  • Did the Recipient or Subrecipient deviate significantly from its existing policies and practices?

Furthermore, FEMA may deny eligibility for costs that it finds are in excess of what is stipulated by existing contracts, employment agreements, union agreements and other established limits. For certain types of expenses, FEMA has established rates according to which it will provide reimbursements.

Cost reviews

For all costs that an Applicant is considering for reimbursement, the costs should be reviewed to confirm that they are not in excess of FEMA reimbursable amounts. We strongly recommend that Applicants maintain appropriate documentation to demonstrate the reasonability of costs.

Examples of red flags to be addressed during cost review:

Examples of red flags
OIG-18-08 (October 30, 2017)

OIG recommended that FEMA should disallow $142.7m in debris removal costs incurred by a California Subrecipient as well as not fund the remaining $82.7m in cost overruns as the agency did not adequately document costs.

Documentation requirements

FEMA guidance mandates that financial records and supporting documentation be maintained in connection with awarded grants. The standard for supporting documentation is very high in that complete information must be maintained with respect to incurred costs. According to FEMA’s Public Assistance Applicant Handbook, the documentation required should describe “who, what, when, where, why and how much” for each item of cost. Forms are maintained on FEMA’s website, which are intended to assist Applicants in understanding what level of records need to be maintained.

Documents required

  • Procurement policies and guidance
  • Contracts
  • Union and other employment agreements
  • Purchase orders
  • Vendor invoices
  • Rental and lease agreements
  • Records of materials from inventory
  • Change orders
  • Expense receipts
  • Contract work records
  • Time sheets
  • Fringe benefit calculations
  • Force account equipment usage information
  • Proof of payment
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Chapter 8

Management costs

This chapter highlights the major changes made to the Public Assistance program.

Management costs

OIG-19-05 (November 16, 2018)

OIG recommended FEMA should disallow $1.8m in direct administrative costs due to a Subrecipient’s improper oversight over its time and materials contractor, resulting in inconsistencies in billing of personnel, unsupported activities and billing of indirect costs.

The significance of management costs

As evident from the information in previous chapters, the administrative burden associated with managing a federal grant is cumbersome. FEMA has provisions in place to assist Recipients and Subrecipients with handling the complex process of financial recovery. Management costs are one of the mechanisms whereby expenses incurred in connection with administrative tasks can be recovered. Expenses directly incurred by Recipients, Subrecipients and third-party contractors can qualify.

On October 5, 2018, the President signed the Disaster Recovery Reform Act of 2018 (DRRA) into law as part of the Federal Aviation Administration Reauthorization Act of 2018. Section 1215 of the DRRA changed Section 324 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, as Amended (Stafford Act). As a result of the amendment to Section 324, Title 44 Code of Federal Regulations (CFR) Part 207 is no longer effective.

As per the interim policy, third-party contractors can be hired to perform grant management functions, and the associated costs can be recovered under management costs. This provision is noteworthy, as Recipients and Subrecipients often do not have the resources to focus on both financial and physical recovery as well as normal business operations. Furthermore, external parties can provide the benefit of extensive knowledge and experience with the FEMA grant process, which may not exist among internal resources.

The same procurement regulations apply to hiring a contractor to assist with grant management as with hiring other vendors to assist with recovery from damages.

Accounting for management costs properly

For Recipients, management costs are documented on a separate Category Z PW prior to project obligations with the eligible costs being 7% of the Recipient’s minimum statewide PA per capita impact indicator. If the Recipient estimates that its expenditures for the first 180 days of the declaration will exceed this amount, FEMA may obligate the estimated expenditure amount provided the Recipient provides a summary of anticipated expenditures and the amount does not exceed 7% of the estimated total award amount for the disaster.

If a Subrecipient requests a Category Z PW, FEMA will formulate a Category Z PW for 5% of the total award amount obligated for a Subrecipient at the time of its request. FEMA may process amendments up to once a quarter for 5% of the total award amount obligated for the Subrecipient at the time of its amendment request.

If all final actual management costs are known at the time the Subrecipient requests a Category Z PW, the Subrecipient should submit its claim for all eligible costs incurred, and FEMA will obligate the Category Z PW based on the actual eligible costs up to the 5% maximum. If additional project costs are obligated or deobligated, FEMA will adjust the 5% maximum and the actual eligible costs as appropriate.

Management costs checklist

In addition to the documentation noted in the PAPPG, the following documentation is required to substantiate the eligibility of management activities and associated costs. FEMA will publish a reasonable cost policy specific to management cost.

  • An explanation of work performed with a representative sample of daily logs/ activity reports. The activity must be related to eligible projects. Therefore, management costs associated with an appeal that is ultimately denied are not eligible. If an eligibility determination is appealed and the appeal is ultimately granted, that project is eligible for inclusion in the calculation of the Category Z PW and management activities associated with the eligible project costs are eligible for reimbursement.
  • Documentation to substantiate the necessity of any claimed office supplies, equipment or space.
  • For meetings or site inspections, the activity description needs to include the number and purpose of the meetings or site inspections.
  • Travel costs need to include the purpose of travel and a copy of the travel policy.
  • Training needs to include the location, date(s) and title of the course. The training must be related to PA and occur within the period of performance of the Category Z PW.
  • Recipients and Subrecipients need to certify that the management activities and associated costs claimed are eligible, consistent with the Interim Policy, and not related to ineligible projects. See PAPPG Appendix D for a Certification of Management Cost Eligibility document.
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Chapter 9

Governmental funding does not replace insurance

FEMA’s insurance requirements have become a focus area for the OIG.

44 CFR 206.253(b)(1)

Assistance under Section 406 of the Stafford Act will be approved only on the condition that the Recipient obtain and maintain such types and amounts of insurance as are reasonable and necessary to protect against future loss to such property from the types of hazard which caused the major disaster.

The 2017 Special Report: Lessons Learned from Previous Audit Reports on Insurance under the Public Assistance Program includes findings specific to insurance. The report summarizes 40 recommendations in questioned costs amounting to more than $320m. Section 312 of the Stafford Act states that an entity cannot receive federal funds for any loss for which it has received financial assistance for the same purpose from any other source, including insurance.

This special report was conducted to address insurance recovery challenges FEMA, Recipients and Subrecipients may face from Hurricanes Harvey, Irma and Maria and the October 2017 California wildfires. The OIG reviewed 37 reports from fiscal years 2013 to 2017, and identified $182.4m in duplicate benefits, $133.1m in insufficient insurance and $6.6m in misapplied or misallocated insurance proceeds. The OIG found that FEMA’s insurance reviews were inadequate in verifying that approved project costs included insurance reductions, FEMA’s insurance specialists routinely waived the requirements to obtain and maintain insurance for future disasters, and FEMA did not always complete the required insurance reviews to determine estimated insured losses.

One of the key steps FEMA took in 2015 to improve grant management was the issuance of the Public Assistance Policy on Insurance, which interprets statutes and regulations related to insurance requirements under FEMA’s Public Assistance Program.

Primary considerations outlined in the Stafford Act

  • Subrecipients must obtain insurance on damaged insurable facilities. Furthermore, they must maintain insurance on those facilities in order to qualify for PA funding for future disasters.
  • The purpose of FEMA funding is to supplement financial assistance from other sources, including insurance. Therefore, the total grant amount must be offset by the amount recovered through insurance.
  • In SFHAs, FEMA will reduce the amount of eligible Public Assistance funding for flood losses.

Summary

Most organizations have plans in place to manage crises and restore operations in the event of a disaster. Maximizing financial recovery is often an afterthought even though it is equally, if not more, complex than physical recovery. Significant knowledge of the federal disaster grant management process is essential for an organization to successfully navigate from disaster recovery through grant closeout. Based on OIG audit reports from 2017 to 2019, FEMA grant Recipients and Subrecipients continue to face the same challenges. This article has outlined five new areas of focus.

About this article

Authors

Allen Melton

EY Americas Insurance & Federal Claims Services Leader

Helping clients recover financially after disasters. Extensive experience with commercial insurance claims and federal disaster grants.

Bradley (BJ) Nichols

EY Americas Insurance & Federal Claims Services Partner

Helping clients recover financially after disasters through commercial insurance claims and federal disaster grants as a partner in the Insurance & Federal Claims Services practice.

Related topics Assurance Risk