McCormick v. Travelers Insurance CompanyMcCormick v. Travelers Insurance Company
Opinion
I.
Introduction
Thomas and Stacy McCormick (the McCormicks) appeal from a judgment on the pleadings entered in favor of Travelers Insurance Company (Travelers). 1 Travelers insured the McCormicks against flood loss under a standard flood insurance policy issued as part of the National Flood Insurance Program (NFIP), a federally subsidized program which provides flood insurance at reasonable rates. The McCormicks sued Travelers for wrongfully denying them insurance coverage under the policy, alleging causes of action for breach of the insurance contract, bad faith and fraud. In granting Travelers judgment on the pleadings, the trial court found that under the National Flood Insurance Act (NFIA; 42 U.S.C. § 4001 et seq.), the state court did not have jurisdiction over any aspect of the McCormicks’ action.
In what is a matter of first impression for any California appellate court, we conclude the McCormicks’ action against Travelers must be adjudicated in federal court, based on a provision of the NFIA granting “original exclusive jurisdiction” to federal courts to hear claims arising out of NFIP flood insurance policies. (42 U.S.C. § 4072.) Therefore, we affirm.
II.
Facts and Procedural Background
On appeal from a judgment on the pleadings, we accept as true all well pled allegations in the complaint and matters properly subject to judicial notice.
(American Airlines, Inc. v. County of San Mateo
(1996)
On December 22, 1997, the McCormicks filed a first amended complaint in Contra Costa County Superior Court alleging causes of action against Travelers for breach of the insurance contract, breach of the covenant of good faith and fair dealing, fraud and negligent misrepresentation. 2 The McCormicks alleged that prior to their home being flooded, they purchased flood insurance from Travelers, and Travelers had represented to the McCormicks that flood damage would be covered by the policy. The McCormicks relied on these representations and were induced to pay premiums for flood insurance. The McCormicks made their claim for the damage caused by the floodwaters inside their home and did all that was required of them under the policy; nevertheless, Travelers wrongfully refused to indemnify the McCormicks under the terms of the policy despite Travelers’ knowledge of the facts mandating payment. As a direct and proximate result of Travelers’ alleged tortious conduct, the McCormicks sought expenses to repair the flood damage; compensation for their physical, emotional, and mental distress; attorney fees; and punitive damages.
On February 17, 1998, Travelers removed the matter to federal court. Among other things, Travelers contended that it had issued the flood insurance policy to the McCormicks pursuant to the NFIP, that the language of the NFIA indicated the federal courts had original exclusive jurisdiction over the McCormicks’ breach of contract claim, and that the McCormicks’ extra-contractual state law tort claims were preempted.
On February 27, 1998, the McCormicks filed a motion to remand the case to state court. On April 29, 1998, the federal court remanded the matter to state court. In so doing, the district court’s order did not address the federal jurisdictional and preemption issues that had been raised by Travelers. Rather the case was remanded to state court solely based on Travelers’ failure to meet the procedural requirements of removal. 3
Once back in state court, Travelers filed its motion for judgment on the pleadings again arguing that, under the NFIA, federal courts have original exclusive jurisdiction over disputes arising out of disallowance of flood insurance claims, including those asserted by the McCormicks (42 U.S.C § 4072). Travelers also contended that all state law claims alleged in the McCormicks’ complaint were preempted by the NFIA. The McCormicks opposed the motion, arguing that in carrying out its duties as an insurer under the NFIA, Travelers was subject to state law jurisdiction, and that they were not preempted from asserting their causes of action and damages claims. The trial court granted Travelers’ motion for judgment on the pleadings. This appeal followed.
HI.
Discussion
A. Standard of Review
The standard for reviewing a judgment on the pleadings is settled: “A motion for
B. The Federal Law
The NFIP was established by Congress in 1968 pursuant to the NFIA (see 42 U.S.C. § 4001 et seq.) to address the growing unavailability of private flood insurance policies in high-risk geographical areas, while also implementing a unified national program to reduce or avoid future flood losses. (See 42 U.S.C. § 4001;
Berger v. Pierce
(6th Cir. 1991)
Over time, the NFIP has undergone several major changes, especially as to the degree of federal involvement in the operation and administration of the program. Initially, under what was originally designated as part A of the NFIA, the program was administered primarily through the National Flood Insurers Association, a pool of private insurance companies, under the supervision and financial support of the Department of Housing and Urban Development (HUD). (See generally
Spence v. Omaha Indem. Ins. Co.
(5th Cir. 1993)
Then, on April 1, 1979, the Federal Emergency Management Administration (FEMA) was made principally responsible for the program’s operation and administration and took full control of the payment or disallowance of all flood insurance claims. (See
Berger, supra,
In 1983, FEMA exercised this regulatory authority by creating the Write Your Own (WYO) program to assist it in the marketing and administration
of flood insurance through the “facilities of the Federal Government.” (See 42 U.S.C. §§ 4081(a), 4071; 44 C.F.R. §§ 62.23 & 62.24 (2000);
(Van Holt
v.
Liberty Mut. Fire Ins. Co.
(3d Cir. 1998)
While flood insurance can be issued either by FEMA or by private WYO insurers, in either case, FEMA fixes the terms and conditions of the policies. (44 C.F.R. §§ 61.4(b), 61.13(d), 62.23(c) & (d) (2000); see also
Gowland, supra,
Premiums collected from policyholders by the WYO companies, after deduction of the companies’ fees and administrative costs, are deposited in the National Flood Insurance Fund established by the Director of FEMA in the United States Treasury. (See 42 U.S.C. § 4017(a) & (d);
Sandia Oil Co., Inc.
v.
Beckton
(10th Cir. 1989)
However, “[f]lood losses, when they occur, are typically sudden, widespread, and costly.”
(Flick, supra,
Flood insurance issued by a WYO insurer under the NFIP differs from traditional private sector insurance in several important respects. Primarily,
because the NFIP provides flood insurance at below actuarial rates, the income generated from premiums is not adequate to sustain the program. “[RJegardless whether FEMA or a WYO company issues a flood insurance policy, the United States treasury funds pay off the insureds’ claims. [Citations.]”
(Van Holt, supra,
Furthermore, WYO insurers are not compensated through premiums because they must remit those payments to the federal government, with the exception of a small amount necessary to meet current expenditures.
(Flick, supra,
205 F.3d at pp. 392-393;
Van Holt, supra,
As noted, FEMA regulations also specify the content of each and every flood insurance policy issued under the WYO program. (44 C.F.R. pt. 61, appen. A (2000).) Article 9, paragraph R of the Standard Flood Insurance Policy states as follows: “Conditions for Filing a Lawsuit: You may not sue us to recover money under this policy unless you have complied with all the requirements of the policy. If you do sue, you must start the suit within 12 months from the date we mailed you notice that we have denied your claim, or part of your claim, and you must file the suit in the United States District Court of the district in which the insured property was located at the time of loss.” (44 C.F.R. pt. 61, appen. A, art. 9, ¶ R, italics added.) This provision was included in the standard flood insurance policy issued to the McCormicks. 5
C. Exclusive Original Federal Jurisdiction of Claims Under the NFIA
While the area of insurance has been traditionally occupied by state law, a federal flood policy issued by a WYO insurer is governed by “a pervasive and comprehensive scheme of federal regulations setting forth the rights and responsibilities of insureds and insurers under the NFIP.”
(Davis
v.
Travelers Property and Cas. Co., supra,
The McCormicks point out that section 42 United States Code section 4072 appears to limit exclusive federal jurisdiction to actions against the Director of FEMA, and makes no mention of actions against WYO companies. They argue that this omission is “proof that there never [has] been exclusive federal jurisdiction of these claims.” This argument was rejected in
Van Holt,
in which the court reasoned that because FEMA bears the ultimate risk and financial responsibility on contract claims regardless of whether FEMA or a WYO insurer is the named defendant, it would be illogical to have original exclusive federal jurisdiction over suits against FEMA, but not suits in which a WYO insurer is named as the nominal defendant.
(Van Holt, supra,
A similar result was reached in
Masoner
v.
First Community Ins. Co.
(D. Idaho 2000)
Moreover, as we have noted, the flood insurance policies under the WYO program are issued in the name of the WYO as insurer, despite the reality that the federal fisc stands behind the policies. Included as one of the standard provisions required to be included in all NFIP policies is a provision which reminds insureds that ‘[y]ou may not sue us to recover money under this policy unless you have complied with all the requirements of the policy.” (44 C.F.R. pt. 61, appen. A, art. 9, ¶ R, italics added.) There can be little quarrel that the “us” referred to in the contractual provision includes at least both FEMA and the WYO insurer; in this case, Travelers.
The McCormicks argue prophylactically that, even if their contract claim against Travelers falls within the “original exclusive jurisdiction” of the federal court (42 U.S.C. § 4072), “[t]he gravamen of [their] action sounds in tort under California bad faith law.” (Fn. omitted.) They point out allegations in their complaint that Travelers made material misrepresentations regarding the coverage of their flood insurance policy and acted in bad faith with respect to the handling of their claim. They go on to argue that their “theories of tortuous [sic] breach of the implied covenant of good faith and fair dealing, fraud, and/or negligent misrepresentation overlap with the breach of contract theory,” and if they prevail on these tort theories, “the contract claim becomes moot.” 7
These arguments reflect the McCormicks’ view that, at most, the NFIA merely confers exclusive jurisdiction on the federal courts to adjudicate
contractual
causes of action based on an insurer’s failure to pay a claim—it does not preclude state law tort and statutory claims based
In considering similar arguments, other courts have strictly enforced the mandate of exclusive federal jurisdiction where a WYO insurer is the named defendant, regardless of whether the claims asserted include state law causes of action based on tort or statute. For example, in
Masoner, supra,
Of even more recency is
Jamal
v.
Travelers Lloyds of Texas Ins. Co.
(S.D.Tex. 2000)
In
Gibson v. American Bankers Ins. Co.
(E.D.Ky. 2000)
Recently, in
Jang v. State Farm Fire & Casualty Co.
(2000)
Informed by this analogue, and the above noted authorities, we find no reason to limit federal jurisdiction based on a distinction between whether the asserted claims are based strictly in contract, or whether they include state tort and statutory claims arising from the duties imposed on WYO insurers by the NFIA and NFIP. Indeed, regardless of how the claims are cast, part of appellants’ pleaded damages as to each are the very flood insurance benefits—enhanced by claims for interest, attorney fees, tort, and punitive damages—to which the McCormicks claim they are entitled under their flood insurance policy.
Our conclusion is also consistent with how FEMA views its relationship with its WYO insurers. At Travelers’ request, we take judicial notice of an amicus curiae brief submitted by the United States on behalf of FEMA in
Van Holt
when that case was pending before the Third Circuit Court of Appeals. As FEMA is the agency charged with administering the NFIP, we must give great weight to its “construction of statutes it is charged with implementing and enforcing. Such a construction will be adhered to unless clearly erroneous or unauthorized [citations], that is, unless it was arbitrary, capricious or had no reasonable or rational basis [citation].”
(General American Transportation Corp. v. State Bd. of Equalization
(1987)
In its brief, the United States stresses the imperative of providing for uniformity in the administration of the NFIA: “The United States has a significant interest in how operation of the program is dealt with in the courts, because the terms of the Standard Flood Insurance Policy ... are fixed by FEMA regulation on a nationwide basis; because Congress has vested FEMA with the authority to establish the way claims are to be proved, adjusted, and paid; and because the claims investigation and adjustment process is and must be governed by uniform federal law. The United States thus has a compelling interest in assuring that State regulators and State courts do not—directly or indirectly, by construction of policies or scrutinizing the investigation and adjustment of claims, or by threatening to do so—undermine operation of this federal program.”
FEMA has crystallized its position in a “final rule” published in the Federal Register, which became effective on December 31, 2000. (65 Fed.Reg. 60758 (Oct. 12, 2000).) The rule states “that matters pertaining to the Standard Flood Insurance Policy, including issues relating to and arising out of claims handling, must be heard in Federal court and are governed exclusively by Federal Law.” (65 Fed.Reg. 34827; see also 65 Fed. Reg. 34824 (May 31, 2000).)
After briefing, the McCormicks informed us by letter of
Moore
v.
Allstate Ins. Co.
(Alaska 2000)
After analyzing federal preemption cases, and concluding that state claims were neither preempted by federal law nor subject to exclusive federal jurisdiction under
The court footnoted the authorities it relied on for this conclusion, candidly noting the paucity of analysis provided in the cited opinions supporting the proposition: “See
Phillips v. State Farm Fire & Cas. Co.,
In holding that the federal courts have not retained exclusive jurisdiction over fraud and misrepresentation claims brought against WYO insurers,
Moore
principally relied on
Spence, supra,
Apparently also of importance to the
Moore
court was its conclusion that “the federal government would not indemnify a WYO insurer for a loss caused by fraud or misrepresentation.”
(Moore, supra,
We need not offer our own guess as to the meaning or intent of these provisions for they are not dispositive of the jurisdictional issue presented. While the view adopted by the Moore court may advance a determination of the federal preemption issue, it does not answer the question of whether, assuming state tort and statutory claims are not preempted by the NFIA, a state court has subject matter jurisdiction over them. In short, deciding that state tort remedies may be brought against WYO insurers does not resolve the question as to where these claims may be brought.
Nor do we regard as significant that the state law claims in
Moore
sought recovery for deceit occurring at the inception of the policy, and not for the
manner in which plaintiff’s claim was processed. In enunciating the parameters of its holding, the
Moore
court stated: “[W]hile federal courts have exclusive jurisdiction over direct claims under the policy, the state has jurisdiction over . . . claims that are based on the relationship between” the insured and the WYO’s agent and what the agent “reportedly promised or agreed to obtain.”
(Moore, supra,
We see no basis for turning the jurisdictional question on a distinction between errors allegedly committed while explaining the scope of coverage to a new policyholder and errors allegedly committed in interpreting the amount of insurance proceeds to which the policyholder is entitled following a loss. The breadth of activities WYO insurers pursue in furtherance of the NFIP encompasses procuring policies, servicing the accounts, and processing claims. At all of these stages of the insured/insurer relationship, the workings of the NFIP are intimately involved. Moreover, treating some claims as exclusively within the jurisdiction of the federal courts and some within the concurrent subject matter jurisdiction of state courts invites the very balkanization of lawsuits FEMA forecasts with justifiable dread in its amicus curiae brief.
Our own case illustrates the potential vice in treating misrepresentation claims jurisdictionally unique under the NFIA. In describing the interplay between the claims of misrepresentation and bad faith alleged in the first amended complaint, the McCormicks state in their opening brief: “These causes of action for misrepresentation are essentially alternative causes of action to the ‘Bad Faith’ cause. If coverage is ultimately held to be as interpreted by Travelers (e.g. that the Flood Policy does not cover damage from flood water below the standing water line inside the house), then the policy was misrepresented to the McCormicks at the time of purchase.” (Original underscoring.)
Therefore, were we to follow
Moore,
we would necessarily put our imprimatur on the McCormicks’ strategy of allowing them to litigate in a federal forum their coverage dispute (which a state court unquestionably does not have jurisdiction to decide), while allowing their misrepresentation and related state claims to repose in state court awaiting the outcome of the federal action. Surely, this orphaning of the “child of Congress” to 50 state court jurisdictions was not the intention of Congress in establishing “a pervasive and comprehensive scheme of federal regulations setting forth the rights and responsibilities of insureds and insurers under the NFIP.”
(West, supra,
For all of these reasons we find the decision in
Moore
unpersuasive. Instead,
D. Conclusion
In light of our determination of the jurisdictional issue raised by Travelers, we need not address Travelers’ alternative argument that the state law claims in the McCormicks’ complaint are barred by the doctrine of federal preemption. As we have noted in passing, there is a significant split of federal authority on the question of whether the NFIA precludes state law remedies based on the manner in which the WYO insurer carries out its duties under the NFIP. In addition to those noted in the course of our analysis of the jurisdictional issue, a number of cases hold that NFIA preempts all state law claims, either expressly or impliedly. (See, e.g.,
Stapleton
v.
State Farm Fire and Cas. Co.
(M.D.Fla. 1998)
IV.
Disposition
The judgment is affirmed.
Kline, P. J., and Lambden, J., concurred.
Appellants’ petition for review by the Supreme Court was denied April 18, 2001.
Notes
Judgment was also entered in favor of numerous other business entities, related to Travelers, which the McCormicks also named as defendants. In their complaint, the McCor-micks claimed that these entities were also “responsible in some manner” for their damages. For simplicity’s sake, the term “Travelers” as used herein, shall refer to: Travelers Insurance Company, Travelers Insurance Company of Illinois, Travelers Insurance, Travelers Indemnity Company, Travelers Flood Insurance Program, Travelers Insurance America’s Flood Insurance Services, America’s Flood Insurance Services, America’s Flood Services, Inc., and Aetna Casualty and Surety Company.
The McCormicks also sued the City of Orinda on both inverse condemnation and nuisance theories. However, the City of Orinda was not a party to the judgment on the pleadings; consequently, all facts with regard to the City of Orinda are omitted.
In fact, realizing it had not met the procedural requirements for removal, Travelers filed a non-opposition to the remand to state court. In granting judgment on the pleadings to Travelers, the state trial court concluded that the federal court had not ruled on the NFIA jurisdictional and preemption issues: “although the United States District Court remanded this case to this Court via Judge Thelton Henderson’s order of April 28, 1998, the United States District Court did not address or decide the jurisdictional and/or preemption issues brought by the Travelers defendants’ current motion. Instead, it was remanded for procedural defects occurring in the removal process.”
In the context of the program, it is not at all clear what FEMA intended by the inclusion of this language in its regulations. Judicial interpretation has failed to shed a clarifying light. While it has been noted that WYO insurers are “fiscal agents of the United States"
(Gowland, supra,
The record before us does not contain the actual standard flood insurance policy issued to the McCormicks, although it appears to be uncontroverted that its terms embodied those reflected in the federal regulations.
In 1983, Congress amended United States Code section 4072 by adding the words “original exclusive” to precede the word “jurisdiction.” United States Code section 4053, governing actions against private insurers under part A, was amended in a similar manner. Part A was used until 1978, after which part A was discontinued and part B was implemented. (See
Berger, supra,
In making these arguments, the McCormicks concede, in accordance with the overwhelming weight of authority, that to the extent their causes of action alleging bad faith and misrepresentation require interpretation of the insurance contract, federal common and statutory law preempts state principles of contract law. (See
Flick, supra,
Gibson was filed on March 23, 2000, and the Alaska Supreme Court denied rehearing in Moore on March 21, 2000. Jamal was decided on May 30, 2000.
Of interest is footnote 2 in
Spence
in which the procedural history of the case is discussed.
(Spence, supra,
Two additional cases have found no preemption by substantially relying on another federal district court decision
(Cohen v. State Farm Fire and Cas.
(C.D.Cal. 1999)