New Jersey Federal Court Examines Claim Dispute Under Standard Flood Insurance Policy

by Traub Lieberman Straus & Shrewsberry LLP
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The court in Damiano v. Harleysville Ins. Co., Case No. 13-cv-07293-FLW-LHG, 2014 U.S. Dist. LEXIS 97988 (D.N.J. July 17, 2014) recently addressed the scope of claims that can be asserted against property insurers issuing Standard Flood Insurance Policies pursuant to the National Flood Insurance Act (“the Act”).  In Damiano, the homeowner insured purchased a Standard Flood Insurance Policy from Harleysville Insurance Company.  The insured dwelling was damaged during Super Storm Sandy.  Following an investigation, Harleysville paid $15,000 for building damage and $19,632.55 for content damage.

Harleysville denied the insured’s request for additional insurance payments on the basis that damage was either not covered under the policy or supported by sufficient documentation.  The insured filed a state lawsuit against Harleysville (removed to federal court) alleging breach of contract and common law bad faith, and seeking consequential damages and attorneys’ fees.  Harleysville moved to dismiss the insured’s bad faith claims and requests for extra-contractual damages.

Before addressing the merits of the insurance dispute, the court first provided a brief history of the National Flood Insurance Program (“NFIP”) created by the Act.  The court acknowledged that the NFIP was created to “minimize the cost of flood insurance to the public by standardizing insurance coverage, and establishing prevention and protection measures to limit flood damage.”  Starting January 1, 1978, FEMA was charged with carrying out the NFIP and was granted authority to prescribe regulations establishing the methods by which claims for losses are adjusted and paid.

FEMA, accordingly, established a program allowing private insurers to issue Standard Flood Insurance Policies to the public.  Under the program, “private insurers become fiscal, but not general, agents of the United States.”  In other words, private insurers “serve as administrators of the insurance policies” who must strictly enforce FEMA provisions, while “the Government is obligated to pay insurance claims.”  The court also recognized that if a claimant sues the private insurer for payment, the private insurer is responsible for defending the claims but is entitled to reimbursement of defense costs from the Government.

Harleysville’s motion to dismiss argued that all state law claims asserted against it were preempted by the Act.  The court agreed, holding that “all state law claims arising from denials of claims brought under [a Standard Flood Insurance Policy] are preempted by the provisions of the NFIP.”  The court reasoned that state law tort causes of action arising from Standard Flood Insurance Policies “impede the purpose and objectives of Congress” in passing the Act.  The court, accordingly, dismissed the insured’s bad faith claim, recognizing that such a claim is unambiguously based on the common law of the State of New Jersey.  The court used the same reasoning to hold that federal law preempts claims for consequential damages falling outside of the Standard Flood Insurance Policy’s coverage for “direct physical loss by or from flood,” and also for statutory and common laws allowing of attorneys’ fees.

- See more at: http://www.traublieberman.com/first-party-coverage/2014/0808/4932/#sthash.btkXPC8z.dpuf

The court in Damiano v. Harleysville Ins. Co., Case No. 13-cv-07293-FLW-LHG, 2014 U.S. Dist. LEXIS 97988 (D.N.J. July 17, 2014) recently addressed the scope of claims that can be asserted against property insurers issuing Standard Flood Insurance Policies pursuant to the National Flood Insurance Act (“the Act”).  In Damiano, the homeowner insured purchased a Standard Flood Insurance Policy from Harleysville Insurance Company.  The insured dwelling was damaged during Super Storm Sandy.  Following an investigation, Harleysville paid $15,000 for building damage and $19,632.55 for content damage.

Harleysville denied the insured’s request for additional insurance payments on the basis that damage was either not covered under the policy or supported by sufficient documentation.  The insured filed a state lawsuit against Harleysville (removed to federal court) alleging breach of contract and common law bad faith, and seeking consequential damages and attorneys’ fees.  Harleysville moved to dismiss the insured’s bad faith claims and requests for extra-contractual damages.

Before addressing the merits of the insurance dispute, the court first provided a brief history of the National Flood Insurance Program (“NFIP”) created by the Act.  The court acknowledged that the NFIP was created to “minimize the cost of flood insurance to the public by standardizing insurance coverage, and establishing prevention and protection measures to limit flood damage.”  Starting January 1, 1978, FEMA was charged with carrying out the NFIP and was granted authority to prescribe regulations establishing the methods by which claims for losses are adjusted and paid.

FEMA, accordingly, established a program allowing private insurers to issue Standard Flood Insurance Policies to the public.  Under the program, “private insurers become fiscal, but not general, agents of the United States.”  In other words, private insurers “serve as administrators of the insurance policies” who must strictly enforce FEMA provisions, while “the Government is obligated to pay insurance claims.”  The court also recognized that if a claimant sues the private insurer for payment, the private insurer is responsible for defending the claims but is entitled to reimbursement of defense costs from the Government.

Harleysville’s motion to dismiss argued that all state law claims asserted against it were preempted by the Act.  The court agreed, holding that “all state law claims arising from denials of claims brought under [a Standard Flood Insurance Policy] are preempted by the provisions of the NFIP.”  The court reasoned that state law tort causes of action arising from Standard Flood Insurance Policies “impede the purpose and objectives of Congress” in passing the Act.  The court, accordingly, dismissed the insured’s bad faith claim, recognizing that such a claim is unambiguously based on the common law of the State of New Jersey.  The court used the same reasoning to hold that federal law preempts claims for consequential damages falling outside of the Standard Flood Insurance Policy’s coverage for “direct physical loss by or from flood,” and also for statutory and common laws allowing of attorneys’ fees.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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