Interview: How fire chiefs can recoup response costs
Recovery of incident response costs has long been part of traditional homeowner's and auto insurance policies, but often forgotten as a way to fund fire departments
Covenant Solutions is one of several companies that provide cost recovery for the fire and emergency services response through insurance and other non-tax based revenue reimbursement sources. Cox and I discussed how fire chiefs can tap into this revenue source.
Fire Chief: What is cost recovery?
Cox: If your department responds to motor vehicle accidents or fires, structure fires, or hazardous materials incidents, there may be insurance funds available to reimburse your department for these services.
These provisions were built into policies way back in the days when they originally funded fire departments through these provisions. However, fire departments and other emergency services agencies quit applying for these funds. The insurance companies became used to not having requests for these monies and so the entire concept was forgotten by most because it was seen as an antique process.
Fire response cost recovery practice began in the late 1700s when Benjamin Franklin organized one of the earliest fire insurance endeavors in Philadelphia and reimbursed local fire companies for their response to his insured's fire emergencies. The concept has evolved over the years to include recovery for many other types of responses that have become necessary such as hazmat events, motor vehicle incidents, plane and train crashes, gas-line events and so on.
FC: So what's changed?
Cox: Nothing has changed except that fire departments need money to provide services and third-party administrator (TPA) companies like mine help fire departments in applying for and collecting those insurance reimbursements.
When the requests began to grow, they were met with resistance at first from the insurance industry, but the fact remains they never stopped collecting customer premiums that included these provisions. They just stopped paying them out when fire departments stopped asking for them.
What I'm finding today is that many insurance carriers have come to recognize the benefits and are reimbursing these funds to departments that request them using appropriate methods.
FC: How does it work?
Cox: When your department responds to an incident, you furnish your TPA with the standard information from your run report. This information can usually be submitted via email, fax or on their website. Your TPA then works on your behalf to process a claim with the appropriate insurance companies.
Your TPA commonly receives a percentage of the total amount collected for your department as their professional fee. If no collections are made on a report, no professional fees are collected.
FC: Is cost recovery legal?
Cox: Fire service incident response cost recovery is legal in every state in some form. There are variations and limits that can come into play based on federal and state laws, local ordinances, and ultimately the insurance policy itself.
Each state can have different guidelines regarding the issue of cost recovery, and in most states there are not yet any specific laws in place to address cost recovery. In this case an issue is generally decided on the local level (home rule).
FC: Does being a non-profit organization mean that you can't charge fees?
Cox: No, not at all. Typically, non-profit entities like volunteer fire departments do charge some type of fee for services due to the necessity of covering ever-rising operational costs. A non-profit means that any profits are used to provide services and are not distributed to the employees or directors for personal gain or use.
A non-profit will typically have an assigned treasurer or officer to keep records of all revenue, and funding in general and the distribution of such. The non-profit will need to file for tax-exempt status with the IRS, and a Federal EIN (or TIN) number is assigned, so they can be held accountable for any funds collected from fees. A tax-exempt entity will typically file an IRS Form 990 annually for receipts confirmation and accountability.
FC: How many departments go after individuals for payment if insurance declines or doesn't pay the full amount? And, what does that do to a department's image in the community?
Cox: For our clients, if insurance declines to pay, or only pays a portion, then individuals aren't billed directly. There are some fire departments that will bill uninsured, at-fault individuals. The reason and thought pattern behind this concept is to be fair to responsible insured parties, so they aren't penalized simply for being insured. They have followed the law and are covered by applicable insurance, so they are afforded consideration and not penalized if their provider can only remit a portion.
The general opinion is, a policy holder doesn't have control over what their insurance adjuster pays or doesn't pay, and have done what was legally required of them to the full extent of their abilities securing insurance coverage. We know many policy holders who have switched insurance carriers, once they became aware that their carrier was not complying with reimbursement requests from their fire departments. We have had absolutely no reports of negative impact on any of our clients.
FC: Does cost recovery have any impact on homeowner's insurance rates or the fire department’s ISO rating?
Cox: As I said earlier, these costs have been included in the policies written by insurance companies for hundreds of years. Just because fire departments stopped submitting requests for reimbursement didn't mean policy holders saw a reduction in their premiums over the years. To date, we have not been made aware of any type of insurance hikes in a community due to the recovering of costs in that area.
FC: What's the percentage these services take and how does that compare with staff doing the same work?
Cox: The average rate these days is 25 percent of the collected totals. The cost recovery service is basically taking all the risk, by handling all of the costs related to recovery, even if an incident turns out to not be recoverable.
I haven't done any comparison for hiring and paying an employee to do the same exact process, however we did have several clients who attempted to recover these costs themselves and actually created a couple of positions for that purpose. They ended up coming back to us because they weren't as successful, so their costs ended up to be much higher.
I think because there is such a specific skill set needed for this particular type of recovery billing, (it's nothing like EMS billing medical insurance companies) that there is nowhere to get this type of training outside of the industry itself.
FC: How much money will cost recovery generate for a department?
Cox: Each department's reimbursements vary depending on factors such as their state fire marshal's recommended fee schedules (if any), the number and make-up of incidents, as well as the type of motor vehicle and homeowner insurance policy and coverage is available. Your cost recovery provider can typically compare your stats to departments with similar stats in your state, to give you an average of what you could expect to receive on a monthly basis.
FC: How much does a TPA bill the insurance company?
Cox: Most TPAs use a recommended fee schedule that they have found works well in most cases or use the state-mandated rates if any exist. Check to make sure the TPAs you look into are basing their fee schedule on the national standard as used by most major TPAs.
Your TPA acts as your department's agent in recovering the costs the department incurs while providing services. If a department has a fee schedule of their own they want to use, most providers will work with the department if possible and make recommendations for adaptations where needed.
However, a good provider should make serious recommendations if a schedule being suggested is either in direct contradiction with a state-mandated schedule or is simply not going to be effective in recovering costs from insurance carriers, which would cause collections to be minimal.
FC: How are the billing rates and fee schedule determined?
Billing for fire department and rescue squad incident response cost recovery should represent actual response costs. The costs are typically based on the actual response time (the time the apparatus leaves the station until it is response ready or ready to go back in service).
The rates should follow the national standard for fire department billing, which is based on recommendations per information gathered during a FEMA commissioned study, as well as other relevant industry research. Fully calculated rates, using preset charges/values for each component involved, can include variables such as cost for vehicles and equipment, repairs and maintenance, useful life, contractors and billing and collections.
For vehicles or apparatus, an average formula used by fire departments is the rate of $1 per $1,000 of estimated value of vehicle per hour (the charge for a $275,000 pumper or rescue unit would be $275 per hour). Other mitigation factors that are included for itemization are consumable materials (foam, oil dry, pads) utilized at the incident and any special procedures performed (extrication, landing zone, high angle rescue).
FC: Do Insurance providers understand and pay this type of billing?
Cox: If the billing for the actual mitigation costs incurred during incident response adheres to preferred methods utilized and approved of within the insurance industry, reimbursements move smoothly through the claims system. Insurance providers should receive a detailed itemization of response costs along with any necessary documentation, allowing them to expedite a request for reimbursement with ease.
The quicker the insurance claims processor is able to justify each expense and match it to the corresponding exposure at the beginning of the review process, the better the result with less red tape and quicker payments.
FC: How should a fire department implement a cost recovery program?
Cox: When there isn't a federal or state law addressing an issue, local communities and municipalities may pass local laws or ordinances that do so. Cost recovery is commonly addressed on the local level. If a fire department is not located within a municipality or fire district, they may opt to establish a fire department billing resolution, which formally states their intention and beginning date for recovery of response costs.
Implementing an ordinance or resolution is usually a recommended first step to take, to affirm your intentions to recover your response costs. Because state and federal laws can be subject to change, locate a provider who is familiar with your state's laws, and stay informed yourself so you can be sure that all new laws are adhered to quickly and appropriately.
Working with your state legislation toward implementing supportive laws is also a proactive method to help keep community fire departments well-funded and response ready. These provisions were written into insurance policies with the exact intention of reimbursing emergency and first responders for their response costs.
While many other countries across the world have used these insurance funds as a standard to fund fire departments and rescue squads, the U.S. has only just begun to readdress this practice on a large scale over last 10 years.