As hurricane season swings into full measure, the flooding of Hurricane Harvey has ravaged Texas, and Irma’s path remains uncertain, it is time to revisit the law of flood insurance.  

In May of this year, Nexsen Pruet wrote about the Woodson decision from the United States Court of Appeals for the Fourth Circuit, which ruled that the FEMA 1-year statute of limitations covered flood insurance claims. Now, the United States District Court for South Carolina considered a motion to remand a bad faith action involving another FEMA flood insurance claim. 

Briefly, in Roberts v. Discovery Home Loans, Inc., 2017 WL 3316047, Plaintiff William A. Roberts sued Discovery Home Loans, its servicing company, and Allstate Insurance Company in South Carolina state court over the failure of the servicing company to renew Roberts’ flood insurance policy on his home.  Despite having sufficient funds in escrow to pay Roberts’ flood renewal premium, the servicing company failed to pay the renewal, and Allstate canceled the policy.  Following cancellation, Roberts could only find replacement flood insurance at vastly higher premiums.  Roberts alleged he would have to pay these higher premiums over the life of the loan.  In his state court complaint, Roberts alleged causes of action for gross negligence, negligence, negligent misrepresentation, breach of contract, breach of fiduciary duty, unfair trade practices and unjust enrichment. 

Allstate removed the action to the district court, arguing federal question jurisdiction.  To begin its analysis, the district court confirmed that Allstate serves as a Write-Your-Own carrier (“WYO”), which issues flood insurance policies under the government program in its own name. WYO carriers’ flood insurance policies under the WYO program must mirror the exact terms and conditions found in FEMA flood regulations promulgated by the U.S. government.  As such, “Federal common law alone” governs the insurance policy at issue.  Nevertheless, the district court looked further, and held that federal question jurisdiction exists when the plaintiff’s “well-pleaded complaint establishes ... that the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal law....”  Following the United States Supreme Court opinion in Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg.(2005), the district court considered four factors to decide whether Roberts’ state law claims raised a substantial federal question:

(1) whether the state law claim necessarily raises a federal issue;
(2) whether the federal issue is disputed;
(3) whether there is a substantial federal issue; and
(4) status of federal/state balance in light of the federal issue.

The district court easily resolved the factors in favor of federal question jurisdiction.  The flood insurance policy was issued pursuant to the National Flood Insurance Program, and its terms must mirror federal flood regulations. As a result, federal law establishes the standard of care. Citing cases from the Seventh and Eleventh Circuits, the district court found a complaint alleging breach of a flood insurance policy raises “a substantial federal question on its face.” Finally, the district court found “federal rules, federal regulations or federal common law govern all disputes involving the handling of a [flood] claim”, such that those claims are restricted to federal court. As a result the exercise of federal question jurisdiction over all flood insurance policies “will not disturb the balance of federal and state power.” 

Roberts argued some of his claims arose out of the “procurement” of the flood insurance policy rather than the handling of a claim under the policy. Relying on a line of Fifth Circuit decisions, Roberts argued such claims did not implicate federal question jurisdiction.  Under Campo v. Allstate Insurance Co.(5th Cir. 2009), federal law does not preempt state law procurement-based claims. The district court found the resolution of the issue turned on “the status of the insured at the time of the interaction between the parties.” Because Roberts was covered by a federal flood insurance policy at the time he alleges Allstate owed him a duty of care, then Roberts’ claims fall under “handling,” not procurement. Therefore, federal law, not state law, controlled.

When it comes to flood insurance policy claims, there is a deluge of decisions, including the Woodson decision, confirming federal question jurisdiction and federal pre-emption of this area. The next time you and your client are faced with a flood insurance claim—and in light of current conditions, it could be soon—either file it in the district court or be prepared for it to float up there on removal.