All posts tagged 'NFIP'

First Circuit Rules Constitution's Appropriations Clause Quashes Flood Policy Claim Lacking Proof-of-Loss

September 26, 2013 00:38
by J. Wylie Donald

You know it is not going well when the court cites the Constitution at you in a breach of contract case.  But so it went in DeCosta v. Allstate Insurance Co., where the First Circuit last Friday reversed the trial court and granted summary judgment to Allstate on a suit involving a Standard Flood Insurance Policy (SFIP) under the National Flood Insurance Program (NFIP).

The case was relatively simple on both its facts and on the law.  DeCosta suffered a flood loss in 2009 and tendered his claim to his flood insurer, Allstate, who wrote coverage under the Write-Your-Own program of the NFIP.

DeCosta submitted four sworn proofs of loss. Two were timely, submitted within 60 days of the loss.  Allstate paid those sums in full "within days." Id. at 5.  Two were untimely, but Allstate submitted a waiver request, which FEMA granted. Allstate paid those sums in full as well. DeCosta also submitted an unsigned, unsworn estimate by his appraiser, which tallied approximately $100,000 in additional building damage. Allstate refused to pay it. Suit followed in state court, which Allstate removed. 

First, over Allstate's objection the trial court ordered the parties to an appraisal. When the appraisal came back in the amount of $99,805.67 in favor of DeCosta, Allstate moved to strike the award and for summary judgment.  The court confirmed the award and denied Allstate's request for summary judgment. Throughout, Allstate had argued that DeCosta had failed to comply with the SFIP's requirement that payment under the policy could only be made upon a signed and sworn proof of loss, which had not been submitted.  The trial court found that Allstate had waived that argument by paying on the claim in the first place.  Id. at 10-11.  Allstate also asserted that the appraisal panel determined scope of coverage, rather than the value of the loss, again in violation of the SFIP's terms. The court rejected that argument as well.   Id. at 10. 

The First Circuit overturned the ruling fundamentally because "DeCosta's SFIP is not an ordinary insurance policy; rather, his SFIP's provisions are also embodied in FEMA's codified regulations ... and interpretation of DECosta's SFIP is a matter of federal law.”  Id. at 15.  The court was not considering federal common law, which might have brooked some flexibility. Instead, this was federal regulatory, statutory, and even constitutional law.

That made the Court’s decision simple.  It had “already held that federal law mandates strict compliance with the SFIP, including its proof-of-loss requirement.”  Id. Other circuits had ruled likewise.  See Mancini v. Redland Ins. Co., 248 F.3d 729, 734-35 (8th Cir. 2001); Evanoff v. Standard Fire Insurance Co., 534 F.3d 516, 520-21 (6th Cir. 2008).  Strict compliance was compelled for a number of reasons.

First, under the NFIP the insurance companies act as administrators of the federal program; they do not pay the claims, the government does.  Accordingly, the companies are “fiscal agents of the United States”.  DeCosta. at 15.  Since the Appropriations Clause of the Constitution “prohibits the judiciary from awarding claims against the United States that are not authorized by statute” and the authorizing statute “authorized payment of flood insurance funds to only those claimants that submit a timely sworn proof of loss,” a court could not “award an unauthorized money claim based on a theory of substantial compliance.”  Id. at 16-17. 

Second, sovereign immunity prohibited payment.  “The proof-of-loss provision serves as a ‘condition precedent to a waiver by the federal government of its sovereign immunity.’”  Id. at 17. 

Third, “the need for uniformity in federal law … supports strict construction of the SFIP.”  Id. at 18.  Uniformity promotes clarity both to the companies issuing the policies, and the jurisdictions construing them. 

Because DeCosta did not submit a signed and sworn proof of loss for the additional $100,000 he sought, he did not strictly comply with the requirements of the SFIP and his claim had to be denied.  Further, his argument that Allstate had waived the requirement also was rejected.  “Mere payment of claims properly submitted in a proof of loss does not waive objections to further sums not submitted as required by the SFIP’s proof-of-loss provision.”  Id. at 24.  The SFIP “explicitly precludes oral waiver or waiver by conduct.”  Id. at 25. 

Having found DeCosta not entitled to any payment of the claimed funds, the Court did not need to reach the issue concerning the appraisers' scope versus value determinations.

For practitioners, DeCosta v. Allstate is a valuable reminder that federal flood insurance policies are quite unlike the usual insurance contracts.  As the Court held, strict compliance is required even though under state insurance law "a lesser form of compliance might suffice."  Id. at 15.  As stated by the Third Circuit, “In the realm of private insurance, common law doctrines (such as `reasonable expectations,' `notice/prejudice,' and `substantial compliance') govern the evaluation of claims. By contrast, a [Write-Your-Own] insurer must strictly follow the claims processing standards set out by the federal Government."  C.E.R.1988, Inc. v. Aetna Cas. & Sur. Co., 386 F.3d 263, 270 (3d Cir. 2004).  Thus, when the policy language and even the policy handbook is federal law, one needs to take a second look at all the usual tenets. 

Flood Insurance

Top 6 at 12: Highlights of the Top Climate Change Stories in the Second Half of 2012

December 31, 2012 11:59
by J. Wylie Donald

2012 has drawn to a close.  We chronicle here six of the most significant stories on the climate change front in the last six months.  For those looking for hope that government is taking action to rein in greenhouse gas emissions, the focus is on California, where cap-and-trade stepped into reality with California's first emissions auction.  Nationally and internationally regulation is at a standstill or going backward.  In the courts, the climate change liability plaintiffs were pounded again as the Ninth Circuit confirmed the dismissal of Native Village of Kivalina v. ExxonMobil Corp.  Responding to climate change, however, is a different story.  Superstorm Sandy was a wakeup call on adaptation and the impacts of extreme weather; the National Flood Insurance Program managed to obtain statutory authority to include climate change in its considerations.

1.  Superstorm Sandy –  Climatologists are confident that the changing climate will lead to more frequent and more severe storms.  Sandy, following Hurricane Irene the previous year, delivered on both predictions.   A nine-foot storm surge at Battery Park.  Transformers exploding and putting Manhattan into darkness.  The Hoboken PATH station  submerged.  $50 billion in damage.  Superstorm Sandy set records and was completely consistent with the concerns of proponents of climate change mitigation and adaptation.  Did it have anything to do with climate change or was it simply a chance confluence of events?  The weather pattern was unusual.  There was a hurricane (albeit fading), coupled with a nor’easter, intersecting with an arctic high pressure front, under a full moon.  Individually, those are independent of climate change.  But there was also a record lack of sea ice, which has a measured and observed effect on global atmospheric circulation, which could result in severe weather coming together more severely.  So quite possibly Sandy is a result of climate change.  More important than the academic debate, however, is the impact on adaptation.  Regardless of one’s views on climate change, Sandy demonstrated that a major metropolitan area is vulnerable to extreme weather.  Steps will be taken to flood-proof subways, bury electric lines, raise seawalls, improve evacuation plans  and emergency response,  etc.  All of these are part of the steps needed to adapt to climate change.   Whether it is acknowledged as linked to climate change or not (but see Bloomberg Business Week cover following Sandy:   “It’s Global Warming, Stupid!”), adaptation is going to happen. 

2.  Presidential Election - Climate change was an important part of the campaign:  "The Obama-Biden cap-and-trade policy will require all pollution credits to be auctioned, and proceeds will go to investments in a clean energy future, habitat protections, and rebates and other transition relief for families."  The 2008 election campaign that is. It was a completely different position in 2012. Or maybe not different at all.  No one could tell because nobody was talking about it.  Even Sandy wasn't enough to propel climate change into the debate in the last week of campaigning.

3.  Native Village of Kivalina v. ExxonMobil - The last filed of the original quartet (American Electric Power, General Motors, Comer, and Kivalina) of climate change nuisance cases, Kivalina finally made it to a federal appellate court, where in September it met the same fate as its brethren:  dismissal affirmed.  Plaintiffs asked for rehearing.  The Ninth Circuit wasn't interested.  As of this writing, the only case left is Comer v. Murphy Oil USA, which is on appeal following its dismissal last March (for the second time) by the Southern District of Mississippi.  According to that court, plaintiffs lose for a wide variety of reasons:  standing, political question doctrine, res judicata, collateral estoppel, displacement, statute of limitations and proximate cause.   

4.  Cap-and-trade - California, alone among the fifty states, instituted its multi-industry full-fledged cap-and-trade program auctions in November.  All of its allowances for 2013 were sold at a price slightly above the mandated floor price of $10/ton.  Regulators and environmental groups hailed the auction as a success; some business groups were less enthusiastic.  The California Chamber of Commerce sued the California Air Resources Board to invalidate the auctions.  Meanwhile, the Regional Greenhouse Gas Initiative in the northeast continues with its allowances trading at the floor price, and with less than 2/3 of its allowances selling in its August and December auctions.  Some commentary concludes that it is time for RGGI to shut down as its CO2 emission goals have been met.    From where we sit, RGGI's success or failure can't be judged until its carbon trading is done in connection with  a robust economy.  The world economic malaise suppresses business, and with it, carbon dioxide emissions.  California may face the same issue.  

5.  National Flood Insurance Program Reform - Could a poisonously partisan Congress vote for this: 

(1) IN GENERAL- The Council shall consult with scientists and technical experts, other Federal agencies, States, and local communities to--(A) develop recommendations on how to--(i) ensure that flood insurance rate maps incorporate the best available climate science to assess flood risks; and (ii) ensure that the Federal Emergency Management Agency uses the best available methodology to consider the impact of--
(I) the rise in the sea level; ..."?  

Not the Congress we know.  Or so we thought.  Somehow, somewhere, someone put this into a draft, which made it into and out of a committee, ended up on the floor of both houses, survived two votes and came out as an enrolled bill for the president's signature.  The president signed it into law in July.  This was part of the miscellaneous section of the Moving Ahead for Progress in the 21st Century Act  (aka the Transportation and Student Loan Bill), which may explain how this occurred.  In any event, climate change considerations are statutorily mandated as part of the NFIP.  42 USC § 4101a(d)(1).  We can expect a report by July 6, 2013.  Id. § 4101a(d)(1)(B).  Who'd have thunk? 

6.  Global GHG Regulation - COP-18, the Conference of the Parties to the United Nations Framework Convention on Climate Change, wrapped up in Doha, Qatar in the middle of December widely panned as ineffective.   While it extended to 2020 the Kyoto Protocol addressing global greenhouse gas emissions, major nations (Canada, Russia, Japan and New Zealand) dropped out, and the United States continued to refuse to participate.  Thus, only about fifteen percent of global emissions are now covered by the protocol (the EU and other European nations, as well as Australia, continue to support the protocol).   Developing nations (whose emissions are not restricted by Kyoto) had hoped to obtain commitments for funding "climate finance" of $100 billion, but that did not occur either.  One can see parallels between the Kyoto Protocol and the Western Climate Initiative and RGGI.  In all three members have dropped out and the commitment to address greenhouse gas emissions waivers. 
 
The fiscal cliff was the focus at the end of 2012; climate change got short shrift.  2013 may establish that that was short-sighted.

Force Placed Insurance When the Flood Plain Fails to Consider Climate Change

May 8, 2012 22:22
by J. Wylie Donald

An interesting case crossed our desk last week from the Texas Court of Appeals. The amount at issue, $4,410.69, belies its significance. In Alvarado v. Lexington Insurance Company, Nos. 01-10-00740-CV, 01-10-01150-CV, slip op. (Tex. Ct. App. 1st Dist. Apr. 19, 2012) (attached), the court thoroughly examined (with extensive citations) the issue of whether a homeowner, subject to "force placed" insurance, has any rights in the policy obtained by his lender.  The majority concluded that the terms of the policy established that the homeowner was an intended beneficiary and could claim under the policy.  The dissent strongly disagreed (attached).

This issue is likely to have increasing prominence for lenders (and their insurers) as the correspondence between the mapped flood plain and reality becomes more and more in error.  See Underwater? What Climate Change Means for a Loan Portfolio Near the Flood Plain, Massachusetts Banker (2011).  The proposition is fairly simple. As a result of climate change, storms in many areas will become more frequent and more severe. The effect of this is to make the current 100-year flood plain an under-estimation of the actual area at risk for a 100-year flood. When the Federal Emergency Management Agency (FEMA) or the Army Corps of Engineers finally gets around to preparing accurate flood plain maps, scores of homeowners will find themselves waking up one morning subject to requirements for flood insurance.  See 42 U.S.C. § 4012a(e)(1)

Their lenders may do more than just wake up. Pursuant to federal National Flood Insurance Program (NFIP) requirements, they may send letters advising their borrowers of the requirement to obtain flood insurance. Id.  Some will comply. Some will not. For those choosing not to comply, the lenders will buy the insurance for them and bill their borrowers back.  See 42 U.S.C. § 4012a(e)(2).   Even where NFIP requirements do not apply, lenders may still have the right to place coverage for their borrowers as a result of breach of covenants agreed to by those borrowers.

This is force placed insurance.  It is defined by one internet source as:  "The insurance that a lien holder places on a property, to provide coverage in the event the borrower allows coverage to lapse. Forced place  [sic] insurance is intended to ensure that the property remains insured, protecting both the homeowner and the lien holder. The costs associated with forced place insurance are paid upfront by the lien holder, but added to the balance of the lien."   A borrower will covenant to insure the mortgaged property adequately.  When the borrower breaches (either by not purchasing required insurance, cancelling insurance or allowing insurance to lapse, or failing to procure the right type and amount of insurance), the lender may force place the required policy(ies).   All manners of property coverage may be purchased; liability coverage is typically restricted to only general liability.  A detailed discussion of the subject was prepared by the Mortgage Bankers Association in 2006. 

In Alvarado, the carrier issuing the force placed policy argued the subject policy was clear about

who was named as insured:  the lender (and not the borrower),

whose interest was protected:  the lender (and not the borrower), and

to whom loss was payable:  the lender (and not the borrower). 

The borrower disagreed and pointed to Endorsement 12,  "Special Broad Form Homeowners Coverage," which provided coverage to "You and residents of your household," defined the insured property as the "residence premises" (the "one family dwelling where you reside"), and provided coverage for living expenses and personal liability.  None of these could apply to a bank.

The majority concluded that the endorsement clearly established that the borrower was an intended beneficiary of the contract.  "All of these provisions of this endorsement are meaningful only if the "Insured" and "you" referenced in the Definitions and Property Coverages of Endorsement #12 mean the homeowner of an owner-occupied property reported by Flagstaff [the lender] to Lexington [the insurer] on Lexington's reporting forms as having force placed Homeowners Coverage and if the Homeowners Coverage part of the Policy is interpreted as directly insuring the homeowner against loss to property, both real and personal, as well as insuring him against personal liability and certain other personal losses, such as loss of use of the property and additional living expenses."  Alvarado at 35-36.  "We conclude ... that the additional coverage in Endorsement #12 for which the homeowner is forced to pay additional premiums "ha[s] no purpose whatever" and is meaningless unless the "Special Broad Form Homeowners Coverage" was intended by Lexington, the insurer of the property, and Flagstaff, the mortgagee, to directly benefit the mortgagors and homeowners of the properties specifically described ... on Lexington's reporting forms, including Alvarado." Id. at 41. Coverage practitioners will recognize the majority's decision as a simple application of one of the basic rules of coverage:  contra proferentem  -  the policy will be construed against the one who drafted it.

The dissent rejected all that:  "The borrower nonetheless is not a third-party beneficiary to [the force placed policy]: he is neither named as an additional insured nor expressly contemplated to be a beneficiary under it, as defined by its terms—most particularly, its liability limits. To rely on provisions that provide homeowner-types of coverage to conclude that the borrower is insured for these homeowner risks would provide more insurance coverage to the borrower than it does to the named-insured lender, whose coverage is limited to losses in which the lender has "a mortgage or ownership interest." But it is axiomatic that a third-party beneficiary cannot claim more rights under the contract than that of the first-party rights it relies on for enforcement." Alvarado (Bland, J., dissenting) at 11.

We take two lessons from Alvarado.  First, it teaches that force placed policies may provide more coverage than a lender or insurer will later argue they anticipated.  Policyholders in the unfortunate position of being subject to force placed coverage should not relinquish this possible source of coverage without closely examining the force placed policy for which they are being billed.

More importantly, however, is the need to recognize principles and considerations applicable in one situation, and to bring them to bear on new circumstances (such as those accompanying climate change).  Lending institutions may be in the crosshairs as flood risks develop in the coming years and bank real estate portfolios are threatened.  The numbers on which these portfolios were underwritten will no longer represent reality in that the risk of loss will be higher than anticipated. To protect themselves, banks may attempt to force place coverage. As Alvarado shows, however, the bank may come up short as the bank's borrower may have a claim on that protection. 

20120419 Alvarado v. Lexington Ins. Co., slip op. (Tex. App. Apr. 19, 2012).doc (98.00 kb)

20120419 DISSENT Alvarado v. Lexington Ins. Co., slip op. (Tex. App. Apr. 19, 2012).doc (47.00 kb)

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