By Robert Redfearn, Jr.
March 17, 2009
Whether you are an attorney, an insurance agent, adjuster or broker, or an individual insured, when dealing with claims under flood insurance policies, you may be surprised to discover that many things you think you know are wrong, and, particularly for insureds, many things you think you don’t know, you are deemed
to know. This is a paradox of flood insurance coverage.
In this litigious day and age, lawsuits alleging breach of the insurance policies, bad faith, unfair claims handling, unfair settlement practices or negligence by an insurance agent are so common that they are not considered particularly unique or as requiring specialized knowledge by most attorneys practicing in the area
of insurance defense. But, until recently, the amount of litigation involving claims under flood insurance policies was fairly insignificant, particularly compared to litigation involving general liability and non-flood related property insurance.
However, the widespread flooding recently experienced in the United States beginning with Hurricane Katrina in 2005 through Hurricane Ike in 2008 led to a relative explosion of litigation in which recovery under flood insurance policies or the alleged negligence of insurance agents in procuring or failing to procure
flood insurance was a central issue. As a result, attorneys, insurers, insureds and the courts have confronted issues unique and peculiar to flood insurance claims which had not been fully addressed in the past or which were not widely understood.
Two of the more significant issues addressed in the flood insurance related litigation are whether all claims related to recovery under flood insurance policies – including claims against insurance agents – are preempted by federal law or whether they are otherwise subject to limitations imposed by federal law. The
number of opinions issued since 2005 addressing these two issues illustrates the uncertainty in the answer to these questions. While the judicial decisions have since begun to reach a consensus, the application of that consensus to individual cases still requires some fleshing out.
Government as Primary Insurer
What makes a flood insurance policy unique from homeowners or commercial property insurance policies is that flood insurance is underwritten by the federal government. In 1968, Congress enacted the National Flood Insurance Act (NFIA) as a means to provide affordable flood insurance to the general public
because premiums charged by private insurers had risen dramatically following significant flood losses from hurricanes and other catastrophes. As a result of the NFIA, the U.S. government became the primary insurer against damage from flooding.
The U.S. flood insurance program is administered by the Federal Emergency Management Association (FEMA). As administrator of the program, FEMA promulgated the Standard Flood Insurance Policy (SFIP) through regulations published in the Code of Federal Regulations. FEMA regulations also set the
terms of the SFIP, its rate structure and premium costs.
The SFIPs are issued to the public either directly by FEMA or through private insurers operating as “Write Your Own” (WYO) companies. WYO companies issue the SFIPs in their own names and handle the adjustment, settlement, payment and defense of all claims arising under the flood insurance policies, but the
policies remain underwritten by the U.S. government and claims are paid out of the U.S. Treasury.
Preemption of Flood Insurance Claims
Following Hurricanes Katrina and Rita, many of the thousands of lawsuits filed by insureds included claims asserting various state law causes of action for bad faith claims handling and adjustment of flood insurance claims, and also claims for misrepresentation or negligence by insurance agents in connection with the
procurement or failure to procure flood insurance. Accordingly, a predicate issue which the courts had to decide was whether these state law claims were preempted by federal law.
Because Louisiana, Mississippi and Texas incurred some of the most significant flooding due to hurricanes in the past few years, the Federal Fifth Circuit Court of Appeals and the Federal District Courts within that circuit have issued a number of opinions addressing the issue of federal preemption. In the 1993 case of
Spence v. Omaha Indemnity Insurance Co., the Fifth Circuit held that federal common law governed claims under flood insurance policies, but state law provided the statute of limitations for misrepresentation claims brought against the WYO companies that issued SFIPs. [Spence v. Omaha Indemnity Ins. Co.,
996 F.2d 793, 796 (5th Cir. 1993)]
Subsequent courts interpreted Spence as holding that the SFIP and FEMA regulations did not preempt state law tort claims against WYO companies.However, effective Dec. 31, 2000, FEMA amended the SFIP to provide that “all disputes arising from the handling of any claim under the [flood insurance] policy are governed exclusively by the flood insurance regulations issued by FEMA, the National Flood Insurance Act of 1968 as amended (42 U.S.C. 4001, et seq.) and Federal Common Law.” [44 C.F.R. Pt. 61, App. A(1) art. 9 (2001)]
Subsequently, the Fifth Circuit issued an opinion clarifying that Spence did not hold that none of the available state law claims against WYO companies were preempted by federal law, but only that extracontractual state law claims against WYO companies were not preempted. But, for cases filed after the Dec. 31, 2000, effective date of FEMA’s amendment to the SFIP, the Fifth Circuit held that all state law tort claims, including extracontractual claims, arising out of
claims handling by a WYO company under a flood insurance policy were preempted by federal law. [Richmond Printing, L.L.C. v. Director Federal Emergency Management Agency, 72 Fed. App. X. 92 (5th Cir. 2003); Gallup v. Omaha Property & Casualty Ins. Co., 434 F.3d 341 (5th Fir. 2005).]
Since these pronouncements by the Fifth Circuit, courts have drawn a distinction between state law causes of action arising from claims handling of flood insurance and those arising out of procurement of flood insurance coverage, holding that the latter are preempted but the former are not.
One court has noted that “procurement” cases, which are not preempted, “include claims that the insurance agent failed to procure coverage having been asked to do so, or where the agent failed to increase the coverage over time, where the agent failed to recommend flood coverage, and where the coverage
had lapsed and the agent had failed to inform the plaintiff of the loss of coverage.” [Valerie v. Fidelity & Deposit Co. of Maryland, 2007 WL 2446100, n. 4
(W.D. La. 2007)]
What the Right Hand Giveth, the Left Hand Taketh Away
