The National Flood Insurance Program: a "flood" of controversy.

AuthorRichards, R. Jason

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In recent years, the doctrine of preemption has taken on a life of its own, becoming one of the most widely used and controversial defenses in litigation. (1) Derived from the Supremacy Clause of the U. S. Constitution, preemption is the constitutional notion that federal law can supersede or "preempt" any inconsistent state law. (2) In practice, preemption serves to disallow state court causes of action when the federal government regulates the product or service provided. For this reason, preemption is a favorite defense for industry defendants. By the same token, plaintiffs seek to avoid a finding of preemption for the purpose of availing themselves of state court remedies--such as fraud, misrepresentation, and unfair and deceptive trade practices--that often provide for more robust recovery. (3)

While preemption decisions involving ERISA, (4) federal banks, (5) and medical device litigation (6) have captured the news headlines in recent years, the devastation left behind by the hurricanes along the Gulf Coast in 2004 and 2005 has spawned a renewed interest in the preemption controversy as it relates to flood policies. This debate stems from the federal regulation that provides for exclusive federal court jurisdiction on "all disputes arising from the handling of any claim" under the Standard Flood Insurance Program (SFIP). (7)

But what does "handling of any claim" mean in this context? Does it prohibit state courts from hearing cases relating to claims of negligence or misrepresentation arising from the procurement of a flood policy? For example, assume an insurance agent selling a flood insurance policy tells a customer that she cannot obtain flood insurance for her home because she rents rather than owns the property. If the agent is mistaken, and flood insurance can be sold to renters, is the agent's mistake actionable? Or, suppose a customer seeking flood insurance tells her agent at the time of purchase that she wants the maximum amount of coverage she can obtain for her dwelling. Despite the agent's assurances that she will provide the requested coverage, the agent fails to do so. Does the fact that the agent failed to procure the requested coverage--leaving the policyholder uninsured or underinsured at the time of loss--preclude an action against the agent for negligent procurement, misrepresentation, or similar action? Are these the type of claims intended by Congress to warrant exclusive federal court jurisdiction?

In March 2007, Judge Collier of the U. S. District Court for the Northern District of Florida shed some light on this debate, becoming the first federal court judge in the state to recognize a difference between "policy procurement" and "claims handling" issues as it relates to flood insurance. The case, Greenfield v. Hickey, et al., Case No. 3:05cv470 (N.D. Fla. March 19, 2007), (8) provides important guidance to courts and attorneys in Florida and elsewhere on the reach of federal preemption in cases involving the National Flood Insurance Program (NFIP).

A Brief History of Federal Flood Insurance

The National Flood Insurance Act (NFIA) was adopted in 1968 as a reaction to private insurers charging unreasonably large premiums for flood insurance. (9) This act established the NFIP and made flood insurance affordable to the general public. (10) From 1968 to 1977, the program operated primarily through a pool of private insurers under the supervision of, and with financial support from, the Department of Housing and Urban Development. In 1977, however, this relationship ended and the Federal Emergency Management Association (FEMA) became primarily responsible for its operation. (11)

Under the NFIA, flood insurance policies can be issued by FEMA directly or by private insurers called write your own (WYO) companies, who issue flood policies in their own names, collect premiums under segregated accounts, and pay claims. (12) In the event there are insufficient funds in the segregated accounts to pay potential outstanding claims, WYO companies must cease writing flood insurance altogether.

Policies issued under the NFIP are single-risk insurance policies that insure against all "direct physical loss by or from flood." This requires evidence of physical changes to the structure and/or personal contents, directly caused by flood. (13) The SFIP is promulgated as a regulation in the Federal Register and is annually published at 44 C.F.R. Pt. 61, App. A(1). Part 61 of Title 44 of the Code of Federal Regulations describes the limits of coverage available under the NFIP. (14) Insurance is available for structures and for contents, whether the customer is an owner or renter. (15)

Lawsuits arising under federal flood polices--whether issued by FEMA or WYO insurers--are different from typical insurance cases because such claims must be brought in federal court applying federal law within one year of denial of the claim, whereas most litigation arising out of homeowners' claims are brought in state court. (16) The jurisdiction and statute of limitations for claims made under flood policies are set out in 42 U.S.C. [section] 4072: "Upon the disallowance ... of any ... claim ... the claimant, within one year ... may institute an action ... on such claim in the United States district court ... and original exclusive jurisdiction is hereby conferred upon such court to hear and determine such action." (17)

The regulations further provide: "This policy and all disputes arising from the handling of any claim under the 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." (18)

Federal Preemption at a Glance

Under the Supremacy Clause, the "Constitution and the laws of the United States ... shall be the supreme law of the land ... anything in the constitutions or laws of any State to the contrary notwithstanding." (19) In other words, any federal law trumps any conflicting state law. In fields traditionally occupied by the states, such as insurance regulation, there is a strong presumption against federal preemption. (20) Thus, there must be "clear" evidence that Congress intended that preemption apply. (21)

Preemption can be either express or implied. In cases of express preemption, Congress explicitly defines the manner in which its enactments preempt state law and the only issue for courts is whether the challenged state law is one that the federal law is intended to preempt. (22)

Implied preemption, sometimes referred to as "field" preemption or "conflict" preemption, refers to situations in which state law "regulates conduct in a field that Congress intended the [f]ederal [g]overnment to occupy exclusively." (23) Implied preemption occurs 1) "where it is impossible for a private party to comply with both state and federal requirements," or 2) where state law would frustrate the objectives of Congress' federal legislation. (24)

Implied preemption implicates difficult questions, as courts must look beyond the express terms of the federal law to determine whether Congress has "occupied the field" in which the state is attempting to regulate. However, such intent can sometimes be inferred when federal law is pervasive or when federal interest dominates. (25) Even when it is relatively certain that Congress intended to occupy the field, state law is preempted only to the extent that it actually conflicts with federal interests. (26) This is consistent with the Supreme Court's view that "a court should not find preemption too readily in the absence of clear evidence of a conflict." (27)

The Facts of Greenfield v. Hickey, et al.

On September 16, 2004, Hurricane Ivan, a category 4 hurricane, caused substantial flood and wind damage to hundreds of homes and businesses along the Gulf Coast of the United States. The plaintiff in Greenfield sustained both wind and flood damage as a result of Ivan, and made a claim with her insurer (Nationwide Insurance Company of Florida) for the loss. However, Nationwide denied her flood contents claim on the basis that she did not have contents coverage. (28) The facts of the case revealed that, while Greenfield's insurance agent provided her with a wind and flood policy in 2003, the policy issued did not include flood insurance for the contents of her home. (29) Greenfield failed to notice the coverage...

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