First Circuit and District of Massachusetts Wade Into Flood Insurance Issues
The First Circuit has not had much occasion in the past to opine on issues under the National Flood Insurance Program (“NFIP”). Its recent decision in McGair v. American Bankers Ins. Co. of Florida, __ F.3d __ (2012), along with a recent U.S. District Court decision, Gottslandsini, LLC v. Fugate, et al., United States District Court for the District of Massachusetts, Civil Action Number 11-11907-RWZ (September 5, 2012), vividly demonstrate the challenges, both procedural and substantive, that flood insurance coverage litigation presents for policyholders.
Flood insurance under the NFIP is administered by the Federal Emergency Management Agency (“FEMA”). Although private insurers may issue policies, and adjust claims under those policies, the terms of the policies are prescribed by federal law, and FEMA reimburses private insurers for payments on claims.
When the McGairs purchased flood insurance from a private insurer, they disclosed that they had a finished basement and that the contents of their home were located in the basement and above. This information was included in the rating information section of the policy’s declarations page. After their home was flooded, the insurer declined to pay a substantial portion of the claim representing damage to the contents of the basement, citing a policy exclusion. In their suit against the private insurer, the McGairs argued that the reference in the declarations page to the basement contents created an ambiguity as to whether those contents were covered, requiring the policy to be interpreted in favor of coverage.
The Rhode Island District Court granted summary judgment for the insurer, explaining that coverage was governed by the terms of the federally prescribed policy and the McGairs were obligated to familiarize themselves with those terms. The First Circuit agreed, stating that even if there was an ambiguity, the general rule that ambiguities in insurance policies are interpreted in favor of coverage was trumped by the federal prescription of the policy terms. If the private insurer altered the terms of the policy by the language of the declarations page, the Court stated, it had no authority to do so, and the exclusion still applied.
The First Circuit went on to reject the policyholder’s argument that the terms of the policy should not be strictly applied because the insurer, not FEMA, should be liable. The asserted ambiguity in the declarations page did not constitute action by the private insurer significantly outside the scope of the NFIP that would render the private insurer liable for damages not subject to reimbursement by FEMA.
The First Circuit also touched on, but did not decide, a threshold jurisdictional issue. Both parties to the case agreed that the federal courts had exclusive jurisdiction over the case under 42 U.S.C. § 4072, authorizing an action against FEMA when it disallows a claim under an NFIP policy, and the insurer asked the Court to take jurisdiction of the case on this basis. The First Circuit explained that, in order to accept this argument, it would have to hold that the statute created jurisdiction not only over claims against FEMA, but also over claims against its fiscal agent, the private insurer. Noting that there was a circuit split on this issue, the Court declined to reach it, holding instead that federal question jurisdiction existed under 28 U.S.C. § 1331 since the interpretation of insurance policies issued under the NFIP was a matter of federal law.
The day after the McGair decision issued, Gottslandsini addressed another aspect of § 4072, ruling that the statute did not constitute a waiver of sovereign immunity where FEMA had some involvement in the adjustment process and upheld the private insurer’s coverage declination, but did not itself disallow coverage. The District Court dismissed the policyholder’s claim against FEMA.
In short, when a policyholder is unhappy with a flood insurance coverage determination by a private insurer, it may sue the insurer, but not FEMA, even where FEMA had input into the decision. The suit against the insurer may be brought in federal court, and it is possible that it must be brought there. Federal substantive law will apply. Traditional principles of insurance policy interpretation favoring coverage will not.
Posted In: Property Coverage