November 25, 2015

The Fifth Circuit recently applied federal common law to prevent a double recovery under a FEMA-backed flood policy.  In Lowery v. Fidelity Nat’l Property & Cas. Ins. Co., --- F.3d ---, 2015 WL 6848323 (5th Cir. Nov. 6, 2015), the insureds, the Pyes, suffered a severe loss to their Galveston duplex home in Hurricane Ike. They filed a claim for damages with their windstorm insurer and their flood insurer, Fidelity.  The Pyes ultimately received $66,765.84 from their windstorm insurer for the wind damage, and Fidelity paid them $76,968.23 for flood damage to the structure and $30,367.49 for flood damage to the contents. At that point, the Pyes had received a total payment of approximately $174,000, of which approximately $143,000 was for damage to the structure. The Pyes then sold the property, unrepaired, for $58,000.

The Pyes still wanted more money, and retained an attorney who obtained an adjuster’s estimate  for the flood damage to the structure in the amount of $175,180. The attorney then submitted a sworn proof of loss claiming the $250,000 flood policy limit.  Upon receiving this new claim, Fidelity retained a new adjuster to measure the damage, who returned an estimate of the actual cash value of flood damage at $147,340.01.

The trial court applied the Texas “one satisfaction” rule and held that between the $143,000 they had already been paid for structure damage, and the $58,000 in sale proceeds of the unrepaired property, the Pyes had been paid more than the pre-Ike market value of the property, which was $195,000, and thus were not entitled to any additional payments.

The primary legal question on appeal was whether Texas common-law principles like the “one satisfaction” rule applied to this interpretation of the Standard Flood Insurance Policy (SFIP). The court held, and the parties agreed, that the SFIP is governed by federal common law, applying standard insurance principles, not state law.   Ultimately, though, the Fifth Circuit held that regardless of whether it is called the “one satisfaction” or the “double recovery” rule, standard insurance principles prohibit the insured from obtaining a double recovery from two carries for a single loss.  This is true even if the two policies cover mutually exclusive risks, such as these wind and flood policies.  While the result may be an immediate windfall to one of the insurers, principles of subrogation between carriers mean the windfall will not necessarily serve to enrich the insurer.