INSURED'S CONSTRUCTIVE KNOWLEDGE OF LAW PRECLUDES MISREPRESENTATION AND FRAUD CLAIMS UNDER FEDERALLY FUNDED FLOOD POLICY

Last Tuesday, the U.S. District Court for the Southern District of Texas issued two decisions granting summary judgment in favor of an insurance agent, the agency and insurer who issued a flood policy on a property that was not eligible for coverage under the federally funded NFIP, after finding that the insured was charged with knowledge of the applicable federal statutes and regulations.  In Lobeck v. Licatino, 2016 WL 3058300 & 3060020 (S.D. Tex. - Galveston Div. May 31, 2016), the insured purchased a rental property in Gilchrest, Texas unaware that the property was located in the Gulf Coast Barrier Resources System (CBRS) which made the property ineligible for coverage under the NFIP.  The agent submitted the insured's application to the insurer and a policy was issued and, renewed through June 2009.  But on September 13, 2008, the storm surge from Hurricane Ike completely destroyed the property.  The insurer investigated the claim and was about to issue payment when FEMA notified the insurer that the property was located within the CBRS and instructed them to rescind the policy and return the premiums.  They did and this lawsuit against the insurer, agency and agent followed.

In analyzing the motions for summary judgment, the court agreed that "state law non-contractual procurement claims were not preempted" then focused its analysis on several Supreme Court and 5th Circuit decisions observing that "all citizens are charged with the knowledge of the law regarding federal insurance programs, like the NFIP." And, in essence that an insured cannot rely on agent conduct contrary to the law or, agent representations about whether the property was insurable, having their "own duty to determine whether its location in the CBRS disqualifies it." And applying the law to the facts of this case, the court observed that the insured's "claims could never succeed. Even assuming Lobeck had no actual knowledge of any of the impediments to her procurement of a valid SFIP on her property, the law precludes her from using it to her advantage.  She is presumed to know the law." The court found that while the law did not preempt the claims, any claimed ignorance of the law could not provide proof of "reasonable" reliance on any representations to the contrary.  Accordingly, summary judgment was granted on all claims in favor of the insurer, insurance agency and the agent.