In a ruling issued just days before last month’s historic flooding in Texas, the Fifth Circuit Court of Appeals discussed when policyholders can sue private insurers under policies issued under the National Flood Insurance Program (NFIP). The claim in Spong v. Fidelity Nat. Prop. and Cas. Ins. Co., No. 13-41317, 2015 WL 3372293  (5th Cir. May 22, 2015), began when Hurricane Ike destroyed all improvements to the beachside property of Robert and Kerry Spong. After the Spongs submitted a proof of claim for $208,300 to their flood insurer Fidelity National Property and Casualty Insurance, Fidelity denied the claim when it determined that the policy was void from its inception because the property was ineligible for flood insurance under the NFIP. The Spongs filed suit against Fidelity in state court, and Fidelity removed the action to the United States District Court for the Southern District of Texas.

The Spongs purchased an elevated home in a flood zone located on the Bolivar Peninsula in Galveston County. In order to secure a mortgage loan, the Spongs were required to obtain flood insurance, and attempted to do so through Fidelity. From the start of this process, however, there was confusion as to whether the property was located within the John H. Chafee Coastal Barrier Resources Center (CBRS), a protected area under federal law. Federal law prohibited the NFIP from issuing flood insurance for properties located within the CBRS. When the Spongs purchased the property and procured flood insurance from Fidelity, both they and Fidelity had incorrectly determined that the property was not located within the CBRS because of conflicting information from the previous property owners, the Spongs’ insurance agent, the United States Fish and Wildlife Service, and the Federal Emergency Management Agency (FEMA). The Court found that one of the primary reasons for this incorrect determination was inaccurate information provided by the previous property owners’ insurance agent to the Fish and Wildlife Services.

On summary judgment, Fidelity argued that the National Flood Insurance Act (NFIA) preempted state-law claims by policyholders against insurers that issued flood insurance policies governed by the Act. The Fifth Circuit in Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th Cir. 2009), previously held that the NFIA did not preempt state-law claims related to the procurement of insurance policies. After rejecting Fidelity’s attempt to overrule Campo, the Fifth Circuit clarified that while the NFIA does not preempt state-law procurement claims, it does preempt causes of action related to a private insurer’s claims handling. The Court cited Campo to explain that “[t]he key factor to determine if an interaction with an insurer is ‘claims handling’ is the status of the insured at the time of the interaction between the parties. If the individual is already covered…the interactions between the insurer and insured…are ‘claims handling’ subject to preemption.” Because the Spongs were in the position of “potential future policyholder[s]” at the time that Fidelity issued the invalid policy, they were not “already covered.”

Turning to the procurement claims, the Court agreed with Fidelity that “certain aspects of the Spongs’ claims cannot succeed.” Specifically, the Court expressed doubts as to whether the Spongs could establish that they determinately relied on Fidelity’s representations that the property was not located within the CBRS when they purchased the policy. The Court noted that the incorrect property information did not come from Fidelity, but rather from the previous property owners’ insurance agent. The Court also looked to related cases involving the Federal Crop Insurance Act and Medicare for the proposition that that the Spongs had constructive knowledge that the Code of Federal Regulations prohibited the issuance of flood insurance in the CBRS. The Court concluded that the lower court’s denial of Fidelity’s motion for summary judgment was erroneous in part and remanded the case for reconsideration of the motion.

[Editor’s Note: Spong will likely affect many claims arising out of recent catastrophic flooding in Texas. MDJW welcomes the opportunity to help insurers navigate through these potentially complex disputes].

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