Opinion
Civil Action No. 06-1677, Section "J" (1).
June 22, 2006
DEFENDANTS' POST-HEARING MEMORANDUM IN OPPOSITION TO PLAINTIFFS' MOTION TO REMAND
Defendants State Farm Fire and Casualty Company ("State Farm") and Christopher J. Nolan ("Nolan") (collectively, "Defendants") respectfully submit this post-hearing memorandum in opposition to plaintiffs' motion to remand. The Defendants will not repeat here all of the arguments and authorities presented in their opposition, but instead will address two recent Eastern District rulings in Landry v. State Farm Fire Cas. Co., 2:06-cv-181, and Koppel v. Eustis Insurance, Inc., 2:05-cv-06865, that were referred to during the June 14, 2006 hearing on plaintiffs' motion to remand. The Koppel decision was not entered until May 19, 2006 and was not reported prior to the filing of State Farm's opposition memorandum. Thus, neither party cited the Koppel decision in their briefing and the Defendants did not have sufficient opportunity at the June 14 hearing to address the cases. The Defendants believe this supplemental briefing on the recent remand orders in Landry and Koppel will help the Court resolve the jurisdictional issues presented in this case.
Landry and Koppel both involved allegations against an insurance agent for the agent's alleged breach of a purported duty to provide flood contents coverage and in both cases, the courts ruled that federal jurisdiction did not exist over the plaintiffs' claims. However, Landry and Koppel are distinguishable from the allegations and issues presented herein to this Court. Landry is dissimilar on several counts. First, it did not include a claim that alleged that the insurance company was liable to the plaintiff because the insurance company and the insurance agent failed to advise about or make available excess flood insurance. In addition, the court did not address the argument that federal funds were potentially at stake because it is FEMA (not the court nor plaintiffs) who determines whether alleged conduct is "significantly" outside the scope of the Arrangement. Further still, the court seemed to focus on whether claims alleging a failure to procure insurance were preempted and did not discuss whether the claims raise significant issues of federal law which can support federal question jurisdiction. There, as here, the plaintiffs' claims necessarily involve a determination of what SFIP contents coverage could have been purchased by plaintiffs and the extent to which their alleged losses would have been covered under any such policies, which is exclusively a question of federal law. Koppel similarly is distinguishable on several grounds. First, the court's jurisdictional decision was limited to an analysis of whether the NFIA completely preempted plaintiffs' negligence claims. Second, plaintiffs did not allege that an agent has a standing duty to advise about and/or provide excess flood coverage; rather, they alleged that the agent affirmatively undertook to procure excess flood coverage but failed to do so. Lastly, the defendant did not argue, and the court did not address whether the plaintiffs' claim regarding failure to procure excess flood coverage involved a federal question. Moreover, the Koppel court did not decide whether the claim handling/policy procurement distinction is a viable distinction.
Both courts acknowledged that the issue of whether federal question jurisdiction exists over claims that an agent failed to procure flood contents coverage under an insured's SFIP has not been addressed by the Fifth Circuit. Due to the unsettled law on the issue, the Koppel court refused to award attorney fees.
I. ARGUMENT AND AUTHORITIES
The plaintiffs in both Landry and Koppel asserted allegations against their respective insurance agent for the agent's alleged breach of a purported duty to provide flood contents coverage. Both courts characterized the plaintiffs' claims as arising from the procurement of flood insurance policies and concluded that federal subject matter jurisdiction did not exist over such claims. A review of the factual allegations and the analyses of the issues presented in those cases demonstrates that both cases are distinguishable and should not be relied upon by this Court in determining whether federal question jurisdiction exists here.
A. Landry, et al. v. State Farm Fire Casualty Co., et al., No. 2:06-cv-181
In Landry, plaintiffs alleged that they purchased a homeowners policy and a flood insurance policy from State Farm through State Farm agent Bordlee in 2000. No. 06-00181, Docket Entry 1, Exh. A (Petition), ¶ 7. In 2003, plaintiffs changed their State Farm agent and began seeing State Farm agent Lagarde. Id. at ¶¶ 8,9. Plaintiffs alleged that they asked Lagarde to review their coverages to ensure that they had the best coverage available and further alleged that Lagarde agreed to do so. Id. at ¶ 9. Plaintiffs alleged that they believed they had flood contents coverage, until they learned to the contrary after they submitted a claim after Hurricane Katrina. Id. at ¶¶ 10-13. Plaintiffs sought recovery of the full amount of the contents of their home premised upon Lagarde's and State Farm's alleged negligent failure to provide flood contents coverage. Id. at Wherefore ¶.
The court characterized the plaintiffs' claims as arising from the procurement of flood insurance policies and went on to conclude that it had no federal question jurisdiction over such claims. See No. 06-0181, Docket Entry 18 (Order and Reasons), pp. 3-9. The Landry ruling should not be followed because it is distinguishable from the facts and issues present before this Court and because the decision erred on or failed to address significant legal issues that support jurisdiction. First, Landry did not involve allegations regarding excess flood coverage. Here, plaintiffs seek to hold State Farm liable based on an alleged duty to advise about and/or provide excess flood insurance coverage in connection with the sale and/or administration of plaintiffs' SFIP. Significantly, the allegations here do not aver that the plaintiffs inquired about excess flood coverage or that Nolan or State Farm undertook to advise about or sell excess flood coverage. These allegations necessarily raise additional federal issues that were not present in Landry.
Imposing the duties asserted by plaintiffs would have the effect of placing additional conditions on WYO companies arising out of their participation in the NFIP. However, FEMA regulates the terms on which WYO companies participate in the NFIP ( 44 C.F.R. §§ 62.23, 62.24), including the sale and administration of SFIPs, and federal funds are at issue in litigation against WYO companies arising out of such activities. See 44 C.F.R. Pt. 62, App. A, art. III.D.1-2; see also 44 C.F.R. § 62.23(i)(6). Accordingly, any duties or conditions could only be imposed as a matter of federal law. Further, no coverage would be available under an excess policy unless coverage under the primary policy ( i.e., the SFIP) had been exhausted. Accordingly, determining whether plaintiffs would have been entitled to any recovery under an excess flood insurance policy necessarily requires determining what they may recover under their SFIP, a matter governed exclusively by federal law.
Further still, although plaintiffs allege few specifics about the excess flood insurance policies they allegedly should have been offered or informed about, the terms of excess flood insurance policies commonly rely on or incorporate the terms of the underlying coverage, in this case the SFIP. See, e.g., Thomas v. Standard Fire Ins. Co., 414 F. Supp. 2d 567, 569-70, 573 (E.D. Va. 2006) (considering excess flood policy which incorporated most terms of SFIP). Determining what recovery plaintiffs could have obtained under an excess flood insurance policy thus would involve construing and applying the terms of the SFIP, which is exclusively a matter of federal law.
Second, the Landry court did not address the argument that federal funds are potentially at stake in this litigation because it is FEMA (not the court nor plaintiffs) who determines whether alleged conduct is "significantly" outside the scope of the Arrangement. That determination is to be based on all information available to FEMA as to the actual conduct of the WYO, not just the plaintiffs' allegations. 44 C.F.R. Pt. 62, App. A, art. II.D.3.a. See Defendants' Opposition Memorandum at pp. 9-10 for a full explanation of the process by which FEMA determines whether all or part of the litigation is significantly outside the scope of the Arrangement.
The Arrangement provides for the use of federal funds to pay costs incurred by WYO companies "as a result of litigation that arises under the scope of this Arrangement and the Authorities set forth herein." 44 C.F.R. Pt. 62, App. A, art. III.D.1-2; see also 44 C.F.R. Pt. 62.23(i)(6). The Arrangement provides that loss payments (including litigation costs) " shall be made . . . from Federal funds," 44 C.F.R. Pt. 62, App. A, art. III.D.1 (emphasis added), and reimbursement will only be denied if FEMA makes certain determinations upon the conclusion of certain specifically enumerated procedures. 44 C.F.R. Pt. 62, App. A, art. III.D.3. The FEMA Office of the General Counsel ("OGC") conducts a review to determine whether "the litigation is grounded in actions by the Company significantly outside the scope of th[e] Arrangement, and/or involves issues of agent negligence. . . ." 44 C.F.R. Pt. 62, App. A, art. III.D.3.a (emphasis added). If the OGC so finds, then it is required to "make a recommendation to the Administrator regarding whether all or part of the litigation is significantly outside the scope of the Arrangement." Id. (emphasis added). The Administrator then must make a final determination, and WYO companies then have notice and appeal rights. 44 C.F.R. Pt. 62, App. A, arts. III.D.3.b., III.D.3.d. Accordingly, the ultimate determination as to the implications of a given case for the federal purse is squarely vested in FEMA and courts should give controlling deference to such agency interpretations of their own regulations. See Martin v. Occupational Safety Health Review Comm'n, 499 U.S. 144, 151 (1991) ("[it is] presume[d] that the power authoritatively to interpret its own regulations is a component of the agency's delegated lawmaking powers"). Further, the plain language of the Arrangement does not prohibit reimbursement in cases involving agent negligence, but only makes the presence of such negligence a triggering factor for the OGC's duty to make a recommendation. The OGC's ultimate recommendation and the Administrator's decision relate solely to whether the litigation is " significantly outside the scope of the Arrangement."
Third, the Landry court did not address the fact that plaintiffs' claims necessarily involve a determination of what SFIP contents coverage could have been purchased by plaintiffs and the extent to which their alleged losses would have been covered under any such policies. Federal law governs the availability, scope, and conditions of flood insurance coverage available through SFIPs. See 42 U.S.C. §§ 4011(a), 4013(a), 4013(b)(2), (b)(3); 44 C.F.R. §§ 61.4, 61.6, 61.11, 61.13(c), 61.14. Moreover, the SFIP itself (including all of its conditions, limitations, and exclusions) is "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. Part 61, App. A(1), art. IX, see also Wright v. Allstate Ins. Co., 415 F.3d 384, 390 (5th Cir. 2005). Indeed, the SFIP contains many exclusions, qualifications, and conditions to coverage for personal property. Plaintiffs' claim for the alleged failure to procure flood contents coverage necessarily requires the Court to determine what items are covered by the SFIP and the measure of the possible recovery under the SFIP. Since the NFIP has assigned exclusive jurisdiction over coverage claims arising under the SFIP, without regard to the amount in controversy, it is apparent that the claims here present federal questions that require national uniformity, the adjudication of which is assigned to the federal courts. These factors support federal question jurisdiction under Grable Sons Metal Products, Inc. v. Darue Engineering Manufacturing, 125 S.Ct. 2363 (2005). See Opp. Memo at pp. 13-14 for a thorough discussion. B. Koppel v. Eustis Insurance, Inc., No. 2:05-cv-06865
Among the many exclusions, qualifications, and conditions to coverage under the SFIP are provisions requiring that, in order to be covered, personal property in a building that is not fully enclosed must be "secured to prevent flotation out of the building," 44 C.F.R. Pt. 61, App. A(1), art. III.B.1; limiting coverage for items of appliances, but only "if installed in their functioning locations and, if necessary for operation, connected to a power source," id. art. III.B.3; providing special per-item limits applicable to certain types of personal property (e.g., artwork, jewelry, sports cards, and "personal property used in any business"), id. art. III.B.6; and excluding from coverage losses caused directly or indirectly by water, moisture, mildew, or mold damage resulting primarily from any condition either "substantially confined to [the insured's] dwelling" or "within [the insured's] control," id. art. V.D.4.
In a similar case, Dr. Scott Sullivan, et al. v. State Farm Fire and Cas. Ins. Co., et al., 2:06-cv-00004, United States District Court, Eastern District of Louisiana, the Honorable Judge Stanwood Duval denied a motion to remand in a putative class action on which the plaintiffs alleged that State Farm and State Farm agent breached a duty to advise the plaintiffs and putative class members about excess flood insurance and failed to provide access to excess flood insurance. Docket Entry 41. Judge Duval maintained jurisdiction under the Class Action Fairness Act and did not have a need to address the other federal question arguments. Id. at p. 15. Judge Duval subsequently granted the defendants' Rule 12 motions that the complaint failed to state a claim because there was no allegation that the defendants undertook a duty to advise about excess flood coverage or to make it available. Docket Entry 42 (April 6, 2006 Order); Docket Entry 44. Notably, in an effort to state a claim, the plaintiffs amended the complaint to aver that statements on State Farm's web site encouraging people to consider purchasing flood insurance constituted evidence of an undertaking to advise about excess flood coverage as well. Docket Entry 45 (Amended Complaint) at ¶¶ 1(VII)(3), 2(XIII)(g). Moreover, 44 C.F.R. § 62.23(h)(1) directs WYO insurance carriers to encourage persons to purchase the standard flood insurance policy from WYO companies. Clearly, the policies of the National Flood Insurance Act and the National Flood Insurance Program are inextricably interwoven in these types of claims.
In Koppel, plaintiffs filed suit in Louisiana state court against their insurance agent, Eustis Insurance, Inc. ("Eustis"), alleging that Eustis (1) negligently failed to procure contents coverage for their new home in a timely manner, and (2) negligently failed to procure excess flood coverage (referred to as "supplemental flood insurance") for their new home. No. 05-06865, Docket Entry 1, Exh. 1 (Pet.), at ¶¶ 10-14. Plaintiffs alleged that Eustis had been their insurance agent for approximately 20 years and during that time had advised plaintiffs on all of their insurance needs, including homeowners and flood insurance. Id. at ¶ 2. Eustis had obtained homeowners and flood insurance, including contents coverage and excess flood coverage for the plaintiffs' Rue Royale home. Id. at ¶¶ 3-4. In January 2005, plaintiffs began construction of a new home on Wavertree Court. Id. at ¶ 5. Plaintiffs alleged that they instructed Eustis to ensure that the new home would be properly insured with homeowners, flood insurance, and flood contents coverage. Id. Plaintiffs further alleged that before moving their contents into the new home on August 27, 2005, Eustis advised them that the requested coverage was in place and there would be no lapse in coverage. Id. at ¶ 7.
On August 29, 2005, Hurricane Katrina struck and caused substantial flood damage to the plaintiffs' new home, including the contents of the home. Plaintiffs alleged that they first learned after the hurricane that the contents of their new home were not insured for flood damage as of August 29, 2005 and that Eustis also had not procured excess flood coverage for the new home. Id. at ¶¶ 9-10.
Eustis removed the lawsuit asserting only that the federal court had federal question jurisdiction because plaintiffs' claims that Eustis negligently failed to procure contents coverage was preempted by the NFIA. Docket Entry 1. Eustis did not argue that the plaintiffs' claims required resolution of a substantial federal question. Nor did it argue that plaintiffs' claim regarding failure to procure excess flood coverage involved a federal question. Employing a complete preemption analysis, the Koppel court determined that plaintiffs' flood contents coverage procurement claims were not completely preempted by the NFIA, and thus federal jurisdiction did not exist. Docket Entry 25, pp 7-15. The court's holding and analysis, however, are not instructive to a determination of jurisdiction in this case for a number of reasons.
1. The Koppel Court's Jurisdictional Decision Was Limited To An Analysis Of Whether The NFIA Completely Preempted Plaintiffs' Negligence Claims.
First, because Eustis argued only that the federal court had jurisdiction because the plaintiffs' claims were preempted by the NFIA, the Koppel court's determination of whether federal question jurisdiction existed was limited to a complete preemption analysis. However, the Koppel court's decision regarding federal question jurisdiction based on a complete preemption analysis does not fully resolve the issues here because preemption, complete or otherwise, is not required for federal jurisdiction. Grable requires only that plaintiffs' claims require a resolution of a substantial federal question. Indeed, as acknowledged by plaintiffs in the case at hand, the Defendants do not argue that complete preemption applies here. While the Defendants explained in their Opposition (Opp. Memo at pp. 6-11) how plaintiffs' view of preemption is flawed in numerous respects, ultimately, the jurisdictional issue is not whether plaintiffs' claims are preempted, but rather whether they raise a substantial federal issue. 2. The Sullivan Plaintiffs' Claims That The Defendants Are Liable For An Alleged Breach Of A Purported Duty To Advise About And/Or Provide Excess Flood Coverage Raise Federal Issues Not Presented or Addressed In Koppel.
Second, Koppel did not involve allegations that an agent has a standing duty to advise about and/or provide excess flood coverage. Rather, the plaintiffs averred that the agent expressly agreed to procure excess flood coverage and then failed to do so. No. 05-06865, Docket Entry 1, Exh. 1 (Pet.), at ¶¶ 5-7, 10, 13-14. Thus, the defendant did not argue, and the court did not address, whether the Koppel claim regarding failure to procure excess flood coverage involved a federal question. In contrast, the Sullivan Petition alleges a breach of duty to sell excess flood insurance but does not allege that they actually asked about excess flood coverage or that State Farm or Nolan ever agreed to advise about or sell excess flood coverage. As demonstrated in the Defendants' Opposition to Motion to Remand, any such duties could only arise as a matter of federal law. Moreover, any attempt to impose varying duties from state to state would conflict with the objectives of the National Flood Insurance Program. Under either analysis, the claims present significant federal questions that support federal jurisdiction. See Opp. Memo at pp. 14-17.
3. The Koppel Court Did Not Decide Whether The Claim Handling/Policy Procurement Distinction Is A Viable Distinction.
Finally, Eustis argued that the plaintiffs' policy procurement claim was preempted by the NFIA because the claims handling/policy procurement distinction was no longer a viable distinction because the Fifth Circuit's decision in Wright repudiated that distinction and recognized that the NFIP preempts any state law claim that implicates the terms of the NFIP. In reaching its decision, the Koppel court noted that "[t]he extent to which the NFIA preempts state law tort claims that do not arise from claims handling is an unsettled issue in federal courts." The court went on to note that a number of cases, including Landry, distinguish between state law claims relating to claims handling and those relating to so-called "`policy procurement'" and hold that the NFIA does not preempt policy procurement claims. However the court expressly noted that it need not decide the issue of whether of the claims handling/policy procurement distinction remains viable in light of Wright. C. In The Event The Court Determines Jurisdiction Is A Close Issue Requiring Fifth Circuit Guidance, The Motion To Remand Should Be Denied And The Order Certified For Interlocutory Appeal.
For the reasons explained in the Notice of Removal, Defendants' Opposition to Plaintiffs' Motion to Remand, and herein, federal jurisdiction exists over this matter. Accordingly, State Farm and Nolan urge the Court to deny the motion to remand. However, as the judges in Landry and Koppel both acknowledged, the Fifth Circuit Court of Appeal has not addressed whether there is or can be federal question jurisdiction on claims that involve an alleged failure of an agent or a Write Your Own Insurance Company to procure federal flood insurance coverage. Neither of those cases even confronted, let alone addressed, whether claims that are premised upon an alleged duty to advise about or sell excess flood insurance provides even greater support for the exercise of federal jurisdiction. Clearly, the issue is significant, the cases impacted by the issue are numerous, and perhaps the only way to obtain guidance from the Fifth Circuit is via an immediate interlocutory appeal pursuant to 28 U.S.C. § 1292(b). Defendants believe that the motion to remand should be denied out of hand. However, in the event the Court finds the jurisdictional issue a close issue requiring Fifth Circuit guidance, Defendants respectfully ask the Court to deny the motion to remand and certify the order for immediate interlocutory appeal.
II. CONCLUSION
For the reasons explained herein, Landry and Koppel are distinguishable from this case and thus do not support remand here. Plaintiffs' motion to remand and request for actual expenses and attorney's fees should be denied.