In the wake of Hurricane Matthew and its associated flooding
(particularly in North Carolina and South Carolina), a recent case of first impression in the Sixth
Circuit may be cited by both damaged businesses and
insurers and insurance brokers in the Carolinas. Harris v.
Nationwide Mutual Fire Insurance Company, __ F.3d __, 2016 WL
4174381 (6th Cir. Aug. 8, 2016).
Writing for a unanimous panel, Judge Ralph B. Guy, Jr. held that
the National Flood Insurance Act (established in the wake of
flooding in Florida and Louisiana after Hurricane Betsy in 1965)
did not preempt claims based on state law for negligence in the
procurement of an insurance policy for a home situated in a
flood-prone area. Although this case was decided on principles of
federal abstention, it has major ramifications for those practicing
insurance law. While it is not binding on any courts in the area
affected by Hurricane Matthew, policyholder counsel will likely
cite to it as persuasive authority in support of negligence claims
against insurance brokers and other professionals involved in the
purchase of homes or insurance.
The case arose when a married couple suffered a flood loss during a
2010 flood of the Cumberland River. They brought a claim against
their mortgage bank (Regions), a flood-zone certifier, their
insurance company (Nationwide) and their insurance broker (David
Vandenbergh). On appeal, the issue was whether the homeowers'
state law claims for negligence during the procurement of their
Standard Flood Insurance Policy were preempted by Congress when it
passed the National Flood Insurance Act (NFIA) The panel
unanimouslyheld that while the NFIA preempted coverage claims
against the insurer, it did not preempt negligence claims regarding
procurement of the policy.
The case was remanded to the district court for further proceedings
and, presumably, for trial.
The Court explained that:
"The NFIA indisputably preempts
state-law causes of action based on "the handling and
disposition of SFIP claims." Gibson [v. American Bankers
Ins. Co.], 289 F.3d at 949. . . . . The Fifth Circuit has
distinguished claims-handling causes of action from
policy-procurement causes of action, and held that the NFIA does
not preempt state-law claims "to the extent that they
implicate [insurers'] acts or omissions regarding issuance of
the policy because those claims are procurement-based, not
claims-handling-based." Spong v. Fid. Nat'l Prop. and
Cas. Ins. Co., 787 F.3d 296, 306 (5th Cir. 2015). In
determining whether a plaintiff's cause of action arises from
claim handling or policy procurement, the Fifth Circuit looks to
whether the plaintiff was "already covered" by a SFIP, or
instead was a "potential future policyholder."
Id. We agree with the Fifth Circuit's approach
and hold that the NFIA does not preempt policy-procurement claims
such as plaintiffs'."
In adopting the same distinction as the Fifth Circuit, the Court
"Damages stemming from
policy-procurement claims, unlike those arising from
policy-coverage claims, are not "flood policy claim
payments." 44 C.F.R. § 62 App. A, Art. I. . . . .
Policy-procurement damages, therefore, pose no danger to the
federal interests prompting preemption in the claims-handling
context, i.e., "reduc[ing] fiscal pressure on federal flood
relief efforts." C.E.R. 1988, Inc., 386 F.3d at
Addressing questions of federal abstention:
principles do not compel barring state-law policy-procurement
claims. It is possible to comply with both state tort laws and FEMA
regulations, and state laws regarding misrepresentation and breach
of fiduciary duty in the policy-procurement process do not
"stand[ ] as an obstacle to the accomplishment and execution
of the full purposes and objectives of Congress" in enacting
the NFIA. Id. at 269Id. at 269 (quoting Green v. Fund Asset
Mgmt., L.P., 245 F.3d 214, 222 (3d Cir. 2001))."
As Hurricane Matthew's floodwaters recede from the
Carolinas, Harris and Spong are likely to be
cited as the parties duel over whether claims for negligent
procurement in the purchase of insurance can proceed to trial.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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It feels like a black swan event: last month, in GEICO Gen. Ins. Co. v. Harvey, No. 4D15-2724 (Fla. Ct. App. Jan. 4, 2017), a Florida appellate panel unanimously overturned a jury verdict, on the ground that the plaintiff's bad faith claim was insufficient as a matter of law.
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