Opinion
CIVIL ACTION NO: 02-2021; SECTION "R" (2)
December 19, 2002
ORDER AND REASONS
Before the Court is plaintiffs' motion to remand. Because the Court finds that plaintiffs allege state law claims pertaining to policy procurement and do not allege claims that arise under the National Flood Insurance Act, the Court finds that it lacks jurisdiction over the lawsuit. Accordingly, the Court grants plaintiffs' motion to remand.
I. Background
Plaintiffs purchased homeowners/fire/liability insurance from defendant USAA General Indemnity Company covering structural loss/damage to their home in the amount of $233,000 and contents of their home in the amount of $174,750. Plaintiffs also purchased a flood insurance policy from defendant. This policy had structural loss/damage limits of $116,400 and contents coverage of $37,500. In June 2001, a flood caused damage in excess of the flood policy limits — building damage was estimated to be $228,000 and contents damage was estimated to be $224,506.
Plaintiffs filed this lawsuit in state court asserting that defendant USAA, as administrator and agent for both the fire liability policy and the flood policy, is liable to plaintiffs for failing either to close or bring to plaintiffs' attention the gap between the insured values under the fire/liability policy and the values under the flood policy. Defendant removed the lawsuit to this Court, and plaintiffs filed a motion to remand.
II. Discussion
A. Removal Doctrine
The Court must have statutory authority to adjudicate every claim presented to it. See Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377, 114 S.Ct. 1673 (1994); Nolan v. Boeing Co., 919 F.2d 1058, 1064 (5th Cir. 1990) ("[T]he federal courts are authorized to hear only those cases that Congress by statute authorizes them to hear."). The Court must therefore either establish that it has congressional authorization to retain plaintiff's lawsuit or remand the case for lack of subject matter jurisdiction. See 28 U.S.C. § 1447(a). As this case does not meet the requirements of diversity jurisdiction, removal is justified only if the suit presents a federal question. A cause of action arises under federal question jurisdiction only if the plaintiffs' well-pleaded complaint raises an issue of federal law. See Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63, 107 S.Ct. 1542, 1546 (1987). A defendant may not remove a case on the basis of an anticipated federal defense. Aaron v. National Union Fire Ins. Co., 876 F.2d 1157, 1161 (5th Cir. 1989). At the same time, when federal law so completely preempts a field of state law, a complaint is recharacterized as stating a federal cause of action. Id. (citing Avco Corp. v. Aero Lodge No. 735, 390 U.S. 557, 88 S.Ct. 1235 (1968)).
B. The National Flood Insurance Program
Defendant predicates federal question jurisdiction on the National Flood Insurance Act (NFIA). See 42 U.S.C. § 4001-129. Congress created the National Flood Insurance Program in 1968 to make it easier for individuals who live in flood-prone areas to obtain flood insurance. The federal government subsidizes the program and the Federal Emergency Management Agency (FEMA) administers it. The flood insurance policies issued under the NFIA are called Standard Flood Insurance Policies (SFIPs). FEMA promulgated regulations that enable the agency to use private insurers as intermediaries in providing flood insurance. 42 U.S.C. § 4071; 44 C.F.R. § 61.13(f). These insurance companies are called Write-Your-Own insurance companies (WYOs). WYOs issue SFIPs in their own names, but they may not may not alter, vary, or waive the terms of the SFIPs. Id.; 44 C.F.R. § 62.23(c). WYOs keep the premiums that they collect on SFIPs in segregated accounts from which claims and refunds on SFIPs are paid. If there are insufficient funds in the account, the WYO pays claims by drawing on FEMA letters of credit. 44 C.F.R. § 62, App. A. In addition, WYOs keep a portion of the premiums collected as reimbursement for operating expenses. Id. Last, WYOs receive commissions on payments of claims. In this manner the federal government encourages private insurers to provide flood insurance by bearing the ultimate responsibility for the payment of claims, allowing the WYO to receive a percentage of the premium to cover operating expenses, and paying a commission to the WYO on claims that the WYO pays out to insureds. Because the government is ultimately on the line for the policies, the government controls the terms of the SFIPs.
C. Preemption of State Law Claims
Although the NFIA does not expressly preempt state law claims, courts have held that NFIA preempts state law claims pertaining to claims handling. The preemption issue stems from the following provision of the NFIA:
Adjustment and payment of claims; judicial review; limitations; jurisdiction
[T]he Director shall be authorized to adjust and make payment of any claims for proved and approved losses covered by flood insurance, and upon the disallowance by the Director of any such claim, or upon the refusal of the claimant to accept the amount allowed upon any such claim, the claimant, within one year after the date of mailing of notice of disallowance or partial disallowance by the Director, may institute an action against the Director on such claim in the United States district court for the district in which the insured property or the major part thereof shall have been situated, and original exclusive jurisdiction is hereby conferred upon such court to hear and determine such action without regard to the amount in controversy.42 U.S.C. § 4072 (emphasis added). Upon examination of the statute, "most courts have consistently found that NFIA preempts state law claims that are based on the handling of SFIP claims." Gibson v. American Bankers Insurance Company, 289 F.3d 943, 949 (6th Cir. 2001); see also Van Holt v. Liberty Mutual Fire Insurance Company, 163 F.3d 161 (3d Cir. 1998); Spence v. Omaha Indemnity Insurance Company, 996 F.2d 793, 796 (5th Cir. 1993); Houck v. State Farm Fire and Casualty Company, 194 F. Supp.2d 452 (D.S.C. 2002); Neill v. State Farm Fire and Casualty Company, 159 F. Supp.2d 770 (E.D.Pa. 2000); Messa v. Omaha Property Casualty Insurance Company, 122 F. Supp.2d 513 (D.N.J. 2000). Further, in the context of a lawsuit concerning claims handling, the Third Circuit held that § 4072 provides federal courts with subject matter jurisdiction for an insured's suits against a WYO because a suit against the WYO "is the functional equivalent of a suit against FEMA." Van Holt, 163 F.3d at 166. In support of its finding, the Third Circuit noted that (1) a WYO company is a "fiscal agent" of the United States, 42 U.S.C. § 4071(a)(1); (2) regulations promulgated by FEMA require WYOs to defend claims but assure that FEMA reimburses defense costs, 44 C.F.R. § 62.23(i)(6); and (3) claims brought under SFIPs are ultimately paid by FEMA. Van Holt, 163 F.3d at 167.
In addition, 42 U.S.C. § 4053 grants federal district courts with original exclusive jurisdiction over lawsuits for denial of claims brought against insurance companies that have joined together in a pool as provided in that part of the Act.
In Spence, the Fifth Circuit addressed the issue of whether federal law governs not only an insured's claims pertaining to claims handling but also his state law tort claims arising out of policy procurement. Spence, 996 F.2d at 796. The plaintiffs in Spence purchased flood insurance from a WYO and then sustained property losses in a flood. Relying on a policy exclusion pertaining to finished basements, the WYO denied payment on their claim. The plaintiffs filed a lawsuit alleging breach of the insurance contract for denial of their claim and also alleging fraud arising out of representations made by the WYO in the process of procuring the policy. The Fifth Circuit noted that the NFIA's one-year statute of limitations applied to plaintiffs' contract claims, but it also held that the state law prescriptive period applied to the tortious misrepresentation claims. Id. In support of its holding, the Fifth Circuit noted that § 4072 "addresses itself solely to actions arising from partial or complete disallowance of flood insurance policy claims." Id. In addition, although WYOs are "fiscal agents" of FEMA, 42 U.S.C. § 4071(a)(1), the regulations specifically provide that "WYO companies shall not be agents of the Federal Government." 44 C.F.R. § 62.23(g). Indeed, WYOs possess substantial autonomy in SFIP marketing and claims adjustment. 44 C.F.R. § 62.23(e). Last, and perhaps most importantly, the Fifth Circuit determined that the regulations "plainly do not contemplate reimbursement for judgments on tort claims such as those asserted by the [plaintiffs]." Spence, 996 F.2d at 796 n. 17; see 44 C.F.R. § 62, App. A, Art. III, § D(2).
Citing to Spence, other courts distinguish between lawsuits related to claims handling and lawsuits "related to the procurement of the policy." See Gibson, 289 F.3d at 949 (noting distinction but finding that because the plaintiffs' claims pertain to claims handling it is unnecessary to decide preemption issue as to procurement claims); see also Houck, 194 F. Supp.2d at 461; Messa, 122 F. Supp.2d at 521; Neill, 159 F. Supp.2d at 776; Bleecker v. Standard Fire Insurance Company, 130 F. Supp.2d 726, 733 (E.D.N.C. 2000). Whereas the former are preempted by NFIA, the latter remain state law claims. This is primarily because § 4072 pertains only to claims handling. It is also because the federal government does not reimburse WYOs for liability arising from policy procurement. 44 C.F.R. § 62, App. A, Art. IV. Indeed, some courts focus primarily on whether federal funds are ultimately on the line. See Neuser v. Hocker, 140 F. Supp.2d 787, 800 (W.D.Mi. 1999) (concluding that tort claims are preempted under the Act to the extent that public funds are at risk); Southpointe Villas Homeowners Association, Inc. v. Scottish Insurance Agency, Inc., 213 F. Supp.2d 586, 593 (D.S.C. 2002) (holding that a lawsuit pertaining to refunds is governed by federal common law because federal funds are at risk).
The Court finds the reasoning behind the claims handling/policy procurement distinction to be persuasive. Since the federal government is on the line for claims payment, the federal interest in this area is strong. This explains why the federal government sets the terms of the insurance policies. But § 4072 makes no mention of claims arising out of policy procurement. Nor does the government dictate the manner in which WYOs procure customers for their policies. Rather, FEMA regulations give WYOs broad discretion to market the insurance policies "pursuant to their customary business practices." 44 C.F.R. § 62.23(a). Furthermore, the Court notes that a provision of the regulations sets forth a process by which the federal government can deny reimbursement for WYO litigation costs that fall outside the scope of the NFIA. 44 C.F.R. Pt. 62, App. A, Part (D)(4). This provision indicates not only that WYOs may be involved in litigation that falls outside of the scope of the Act, but also that the federal government is not responsible for picking up the tab on such litigation. Given that § 4072 provides a grant of original exclusive jurisdiction over lawsuits pertaining only to claims payment and that the federal government is on the line only for claims payment, claims arising out of policy procurement fall outside of the scope of the Act. The Court must therefore determine whether plaintiffs' lawsuit pertains to claims handling or whether plaintiffs bring claims pertaining to policy procurement.
In Powers v. Autin-Gettys-Cohen Insurance Agency, Inc., 2000 WL 1593401 (E.D.La. 2000), the court addressed this very issue on facts similar to those before the Court. In that case, the plaintiffs discovered that friends and neighbors were paying half as much in flood insurance premiums as they were. They brought state law claims alleging that the WYO misinformed them and failed to apprise them of their coverage options. After citing the claims handling/policy procurement distinction and noting that the WYO was unable to demonstrate that any federal funds would be utilized to pay the judgment or indemnify the defendants, the Court concluded that the plaintiffs asserted state law tort claims pertaining to policy procurement that are not preempted by the NFIA. The Powers court granted the plaintiff's motion to remand. Powers, 2000 WL 1593401 at *3-4.
The plaintiffs in this lawsuit raise claims that are similar in nature to the claims in Powers, and this Court reaches the same result. Here, plaintiffs do not allege that defendant refused to pay a claim or that defendant partially paid a claim. Rather, plaintiffs allege that defendant, as its homeowners/fire/liability insurer, should have noticed that their flood insurance was too low and should have informed them of this. In addition, plaintiffs allege that defendant mailed out "misleading notifications regarding policy coverage options which would have continued to result in a gap in coverage." (Petition § VII.) These allegations have nothing to do with payment under an SFIP. 44 C.F.R. § 62, App. A, Art. III. The claims have everything to do with the manner in which defendant procured customers for the policy. Id. The federal interest in such a claim is "attenuated." Spence, 996 F.2d at 796.
Perhaps sensing that plaintiffs' claims pertain to procurement, defendant does not even argue that they pertain to claims handling. Instead, defendant cites to cases that do not address the distinction. See McCormick v. Travelers Insurance Company, 103 Cal.Rptr.2d 258 (2001). In light of the Fifth Circuit's decision in Spence and upon review of the case law, the Court finds that the distinction makes sense. Spence, 996 F.2d at 796. The Court concludes that plaintiffs allege state law claims that pertain to policy procurement and that do not arise under the NFIA. This Court is therefore without federal question jurisdiction over this lawsuit.
III. Conclusion
For the foregoing reasons, the Court grants plaintiffs' motion to remand.