Opinion
In а dispute regarding the application of state law to Standard Flood Insurance Policies (SFIPs) issued under the National Flood Insurance Act (NFIA), 42 U.S.C. 4001-4129, I hold that all extra-contractual state-law causes of action related to the handling of claims under NFIA are preempted by federal law. The plaintiffs’ residence and belongings suffered severe damage as a result of flooding due to Hurricane Floyd. The plaintiffs were holders of a SFIP issued by State Farm Fire and Casualty Company pursuant to NFIA. Plaintiffs have sued State Farm for (1) violation of the Pennsylvania Unfair Trade Practicеs and Consumer Protection Law (UTPCPL), 73 Pa.C.S. § 201-1 et seq., (2). bad faith under 42 Pa.C.S. § 8371, and (3) breach of contract. Currently before the Court is the defendant’s motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) as to Counts 1 and 2 on the ground that those claims are preempted by federal law. I will grant the defendant’s motion.
I. Background
The residence and belongings of plaintiffs Neill and Hutton, holders of a SFIP issued by State Farm, suffered severe damage from flooding on September 16, 1999. On September 17, 1999, the plaintiffs notified State Farm of their claims arising out of the flood. A representative of State Farm inspected the damage to the residence on September 22, 1999. State Farm issued a $5000 check to plaintiffs on October 24, 1999. State Farm issued varying appraisals on October 10, 1999, November 11, 1999, and November 26, 1999. On October 26, 1999, plaintiffs hired ABC Public Adjusters to prosecute the claim. On December 9, 1999, plaintiffs requested that State Farm pay the undisputed portion of the flood claim and also submitted a Partial Proof of Loss form. According to the plaintiffs’ complaint, State Farm first tendered a payment beyond the $5000 advance on February 24, 2000. Plaintiffs allege that State Farm’s appraisals аnd its eventual payment were unreasonably low and came after unreasonable delay.
On March 27, 2000, plaintiffs filed a law suit against State Farm in the Delaware County Court of Common Pleas alleging that State Farm’s claims handling procedures violated state law and constituted a breach of contract. State Farm removed to federal court on April 24, 2000 and filed a Fed. R. Civ. Pro. 12(b)(6) motion to dismiss, arguing that plaintiffs’ extra-contractual state-law claims are preempted by NFIA under a theory of field preemption and/or conflict preemption. Because State Farm had already answered plaintiffs’ complaint, it orally amended the motion to rely on Fed. R. Civ. Pro. 12(c).
II. Standards for a Motion for Judgment on the Pleadings
A motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) is governed by the same standard of review as a Rule 12(b)(6) motion to dismiss for failure to state a claim.
See Jubilee v. Horn,
III. The National Flood Insurance Program: Structure and Purpose
The National Flood Insuranсe Program (NFIP) is a federally subsidized flood insurance program, created in 1968 and currently administered by the Federal Emergency Management Agency (FEMA). 42 U.S.C. § 4001-4129. The flood insurance policies issued under NFIA are called Standard Flood Insurance Policies (SFIPs). In 1983, FEMA promulgated regulations that enabled the agency to use private insurers, called Write-Your-Own insurance companies (WYOs), as intermediaries in providing flood insurance. 44 C.F.R § 61.13(f). As of 1998, over 90% of SFIPs were issued by WYOs, with the remainder issued by FEMA.
See
Brief for the United States as Amicus Curiae, at 8,
Van Holt v. Liberty Mutual,
The U.S. government bears the ultimate responsibility for financing all SFIPs. According to the NFIP regulations, WYOs hold SFIP premiums in separate accounts and also make their payments out of these accounts. 44 C.F.R. Pt. 62, App. A, art. II. A WYO with insufficient funds to make SFIP payments must draw on FEMA letters of credit to cover the necessary payments. 44 C.F.R. Pt. 62, App. A, art. IV. WYOs receive commissions on every payment they make under the SFIP. This relationship between the government and the WYOs was summarized by the Third Circuit as follows: “Thus, regardless whether FEMA or a WYO company issues a flood insurance policy, the United States treasury funds pay off the insureds’ claims.”
Van Holt v. Liberty Mutual Fire Insurance,
The National Flood Insurance Program was developed in order to enable the federal government to reduce the public and private costs of flood relief efforts by establishing a national program of flood insurance combined with land-use measures:
Congress finds that ... from time to time flood disasters have created personal hardships and economic distress which have required unforeseen disaster relief measures and have placed an increasing burden on the Nation’s resources; ... as a matter of national policy, a reasonаble method of sharing the risk of flood losses is through a program of flood insurance which can complement and encourage preventive and protective measures.
42 U.S.C. § 4001.
Congress also explicitly recognized that it would be economically infeasible for private insurance companies to provide flood insurance on their own, but that large-scale federal government participation would support the operation of such a flood insurance program and ensure the availability of reasonably affordable insurance coverage. 42 U.S.C. § 4001. In order to encourage private insurers to provide flood insurance under NFIP, the U.S. government provides a number of incen
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tives: first, the government bears the ultimate responsibility for financing. 44 C.F.R. § 62.23(f); 44 C.F.R. Pt. 62, App. A, arts 11(E), IV(A), VII(A). Second, the government provides commissions on all benefit payments made by WYOs. 44 C.F.R. Pt. 62, App. A, art. III(C)(1). In order to be able to use private insurers to implement NFIA while at the same time maintaining control over the provision of flood insurance and the resulting burden on the Treasury, the U.S. government requires all WYOs nation-wide to use SFIPS — uniform policies that cannot be altered by WYOs. 44 C.F.R. § 61.4(b); 44 C.F.R. § 61.13(d).
See also Gowland,
FEMA hаs expressed its views on the purpose and structure of NFIA to several courts. In the U.S. government’s amicus brief to the Third Circuit in Van Holt, the government stated:
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 (“SFIP”) 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 compеlling 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.
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A federal insurance program is not subject to State law ... There is no role in such cases for State regulators or State courts. The essence of the complaint here is based on execution of the federal insurance contract, and artful pleading cannot transmogrify this federal contract case into a State tort case. State law is preempted as a matter law and contract.
Brief for the United States as Amicus Curiae, at 8,
Van Holt v. Liberty Mutual,
FEMA also published a proposed rule in the Federal Register on May 31, 2000, in which it summarized the goals of NFIP, and proposed “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. 34827-28 (May 31, 2000). On October 12, 2000, FEMA published a “final rule” in the Federal Register, which included the language quotеd above and which will become effective on December 31, 2000. 65 Fed.Reg. 60758-01 (Oct. 12, 2000).
IV. Preemption: Overview and Case Law
State law is preempted by federal law in three circumstances. First, the state law is preempted if such preemption is explicitly contemplated. by the federal statute in question.
English v. General Electric Co.,
The parties in this case agree that the National Flood Insurance Act does not explicitly preempt extra-contractual state law claims. 1 The defendant argues that NFIA preempts extra-contractual state law claims arising out of claims handling disputes under both field and conflict preemption theories.
The Third Circuit has not directly addressed the issue of federal preemption of state law claims arising out of disputes concerning SFIPs. In
Van Holt,
the Third Circuit held that federal courts have exclusive subject matter jurisdiction over suits against WYOs under NFIA. The court noted that FEMA “was a fiscal agent of the United States and that the federal government received premiums and disbursed claims under the defendants’ flood insurance policy.”
For several reasons, a suit against a WYO is the functional equivalent of а suit against FEMA. First, a WYO company is a fiscal agent of the United States. 42 U.S.C. § 4071(a)(1). Second, FEMA regulations require a WYO company to defend claims but assure that FEMA will reimburse the WYO company for defense costs. 44 C.F.R. § 62.23(i)(6). Third, an insured’s flood insurance claims are ultimately paid by FEMA.... Although a WYO company collects premiums and disburses claims, only FEMA bears the risk under the flood insurance program.
The court also acknowledged the argument presented by thе U.S. government in its amicus brief that the “need for nationwide uniformity in the law”,
The Fifth and Ninth Circuits have directly addressed the issue of preemption in the area of flood insurance. In
West v. Harris,
Since the flood insurance program is a child of Congress, conceived to achieve policies which are national in scope, and since the fedеral government participates extensively in the program both in a supervisory capacity and financially, it is clear that the interest in uniformity of decision present in the case mandates the application of federal law.
Id.; see also Hanover Building Materials v. Guiffrida,
In
Flick v. Liberty Mutual,
Because flood losses, whether insured by FEMA or by a participating WYO insurer, are paid out of the National Flood Insurance Fund, a claimant under a standard flood insurance policy must comply strictly with the terms and conditions that Congress has established for payment. See U.S. Const, art I, Section 9, cl. 7 (stating that funds may be drawn from the Treasury only by act of law); ... That is the simple, but powerful command of the Appropriations Clause.
Flick,
The court in Flick also notes:
Though our decision is premised on the Appropriations Clause, the outcome of the case is equally supported by the unique interests involved when the federal government participates extensively in a flood insurance program that is national in scope ... In adhering to a rule of strict compliance, we thus avoid disturbing the delicate balance, which FEMA has sought to strike between the need to pay claims and the need to ensure the long-term sustainability of the NFIP. We also avoid the inconsistent results that would occur were we to treat standard flood insurance policies differently depending on whether they are written by WYO insurers or FEMA.
Without disagreeing with its earlier decision in
West,
the Fifth Circuit later decided against NFIA preеmption of state law in
Spence v. Omaha,
Two recent district court decisions discussed the distinction between claims handling and policy procurement at length. In
Messa v. Omaha Property and Casualty,
The court in
Scherz v. South Carolina Insurance Company,
At oral argument in this case, Counsel for plaintiffs conceded that this case is a claims handling case. We therefore specifically limit our decision to cases concerning claims handling disputes.
Most district courts, faced with a dispute over claims handling — as opposed to policy procurement — have held that federal law governs disputes regarding insurance policies under NFIA.
See e.g. 3608 Sounds Ave. Condominium Association v. South Carolina Ins. Co.,
V. Preemption Analysis
With this backdrop of statutes and case-law, I turn to the application of preemption principles to this case. Although the defendant argues both field and conflict preemption, the stronger and more straightforward argument is the second prong of conflict preemption — sometimes referred to as obstacle preemption: allowing plaintiffs to proceed with their state-law claims would stand “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”
English,
First, allowing state law to apply to the claims handling process of WYO insurers would undermine the ability of the government to ensure adequate provision of affordable flood insurance through NFIP. The federal government does not have the capabilities nor the experience to take on the role of private insurers in flood-prone areas throughout this country. Nor would private insurers, acting without government support, choose to provide affordable flood insurance. 42 U.S.C. § 4001. For this reason, the NFIA requires the government to supervise and finance the program, while allowing private insurers to serve as intermediaries through the WYO scheme.
It seems likely, however, that the very WYO insurers, upon whom the federal government must rely as intermediaries,
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would be less willing to participate in the NFIP program were they to be held subject to state law claims for bad faith or unfair trade practices.
See Messa,
Second, allowing state law to apply to the WYO insurers would undermine Congress’ intention to create a nationally unified program as evidenced in the language of 42 U.S.C. § 4001. If WYOs were subject to state law claims, NFIP insurers and insureds would effectively be subject to differing requirements depending not only on the state in which the policy was issued but also on whether the issuer was FEMA itself or a WYO.
In this context, I “place some weight” on FEMA’s views, as expressed in its brief to the Third Circuit in
Van Holt
and in its rule that becomes effective on December 31, 2000.
Geier v. American Honda,
In its amicus brief in Van Holt, the government stated: “allowing State regulators to breathe down the necks of the WYO companies, as happened here, would make the 50 States co-administrators of the program along with FEMA, a result Congress plainly did not intend. It would also deprive the program of the national uniformity Congress did intend, and make a hodgepodge of the program, undermining thе federal mission.” U.S. Government Amicus Brief in Van Holt, at 13.
Third, allowing state claims to be brought against a WYO insurer under a SFIP would take the ability to control costs under NFIA out of Congress’ hands. In
Van Holt,
the Third Circuit emphasized that WYOs are fiscal agents of the U.S. government.
The plaintiffs in this case argue that applying extra-contractual state law claims to State Farm would not result in a charge on the treasury, because NFIA does not require FEMA to reimburse WYOs for litigation costs or awards arising out of *778 actions outside of the scope of the agreement. NFIA includes the following section under the heading “Limitation on Litigation Costs”:
If it is determined that the claim is grounded in actions by the Company that are outside the Scope of the Arrangement, the National Flood Insurance Act, and 44 C.F.R. chapter 1, subchapter B, and/or involve issues of insurer/agent negligence ..., the Office of the General Counsel shall make a recommendation to the Administrаtor as to whether the claim is grounded in actions by the Company that are significantly outside the scope of this Arrangement. In the event the Administrator determines that the claim is grounded in actions significantly outside the scope of this Arrangement, the Company will be notified ... if the decision is that any award or judgment for damages arising out of such actions will not be recognized .. as a reimbursable loss cost, expense or expense reimbursement.
44 C.F.R. Pt. 62, App. A, art. III(D)(4). Plaintiffs contend that FEMA would not have to reimburse State Farm for any damages arising out of this case. There is no allegation in thе complaint, however, either that FEMA has made any such determination in this case or that State Farm’s actions are “significantly outside of the scope of the Arrangement.”
Even if FEMA were not required to reimburse State Farm in this case, however, allowing extra-contractual state law claims to be brought against WYOs might nevertheless result in an indirect burden on the treasury. Without the guarantee of reimbursements from FEMA, WYOs might have the incentive to overpay claims as a means of decreasing the likelihood of bad faith claims.
Scherz,
For all of these reasons, I hold that extra-contractual state-law causes of action related to the handling of claims under NFIA are preempted by federal law. 4
Although I base my decision on the obstacle prong of conflict preemption, field preemption may also apply. Most of the cases concerning the preemptive effeсt of NFIA do not discuss which type of preemption applies. This may be because the categories are in fact not very distinct. In
English,
the Supreme Court noted that “field pre-emption may be understood as a species of conflict pre-emption: A state law that falls within a pre-empted field conflicts with Congress’ intent (either express or plainly implied) to exclude state regulation.”
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Two recent district court decisions reflect the difficulty of distinguishing between the two types of preemption. In
Messa,
the court held that field preemption is applicable; whereas, in
Scherz,
the court determined conflict preemption to be the appropriate paradigm. The arguments used by the two courts, however, are often overlapping. Both courts note that WYO insurers have no financial incentive to engage in bad faith behavior in claims handling. Both courts further emphasize the importance of uniformity in enabling NFIA to achieve its goals. Messa,
In analyzing a case for field preemption, the first task is to define the field. If the field consists of flood insurance in general, then there might not be field preemption, because most courts have left the regulation of the procurement of flood insurance policies in part to the states. If the field consists of claims handling in the area of flood insurance, then the argument for field preemption is stronger. Some courts have rejected field preemption, however, even when the field is defined as claims handling in the area of flood insurance. In
Scherz,
for example, the court stated that the field of claims handling is not occupied entirely by the federal government under NFIA, because the “limitation on litigation costs” section in Title 44 of the Code of Federal Regulations contemplates negligence actions against a WYO insurer. 44 C.F.R. Pt. 62, App. A, art. 111(D)(4);
Scherz,
Defendant has also moved for summary judgment with regard to plaintiffs’ extra-contractual state law claims on the ground that plaintiff has failed to state a claim under the UTPCPL and under 42 Pa.C.S. § 8371. Because I am granting summary judgment on the basis of preemption, I do not reach those arguments.
An Order follows.
*780 ORDER
AND NOW, this 30th day of November, 2000, upon consideration of Defendant State Farm Fire and Casualty Company’s Motion for a Judgment on the Pleadings, Plaintiffs’ response thereto, and Defendant’s reрly, and after an oral argument on said motion, it is hereby ORDERED and DECREED that said Motion is GRANTED. Counts 1 and 2 of the Plaintiffs’ complaint are dismissed for the reasons expressed in an Opinion of today’s date.
Notes
. Not all courts have rejected the express preemption argument. Some have pointed to the language in 42 U.S.C. § 4053 (no longer applicable since the U.S. government took control of all operational responsibilities of NFIP in 1978) and the parallel provision in 42 U.S.C. § 4072 as express preemption. Section 4072 refers to "claims for proved and approved losses covеred by flood insurance" and then states that "the claimant ... may institute an action against the Director on such claim in the United States district court ...”. Parallel language in Section 4053 led the court in
Mason v. Witt,
. In reaching this conclusion, I take a view that differs from the opinion of another Judge of this Court. In
Conrad v. Omaha Property and Casualty,
. In
Davis,
thе court, after seeking FEMA's views on whether state law was preempted in this area, refused to give any weight to FEMA's position, quoting a passing comment by the Supreme Court in
Smiley v. Citibank,
. The defendant has argued that allowing plaintiffs to proceed with their extra-contractual state-law claims against State Farm would also violate the Appropriations Clause of the United States Constitution. In
Office of Personnel Management v. Richmond,
. In a recent article in the Georgetown Law Journal, Professor Viet D. Dinh makes this same point at length:
*779 Although commentators and the Supreme Court frequently discuss the various mechanisms on this spectrum as deriving from distinct doctrinal sources, the boundaries dividing these doctrines are nоt so clear. But the preemptive effect on state law is similar across doctrinal lines. For example, although the statement in Hines v. Davidowitz, that state law is preempted if it 'stands as an obstacle to the accomplishment and execution of the full purpose and objectives of Congress,' is cited as the classic articulation of obstacle preemption, Hines may be better understood as a field preemption case because the opinion relied on the uniquely national nature of regulating aliens to hold that state laws on the same subject arе displaced. Likewise, in crafting the government contractors’ defense to state tort law liability, the Court in Boyle v. United Technologies Corp. explicitly recognized the kinship its decision shares with traditional preemption analysis. The point is not to suggest that the traditional doctrinal distinctions have no purchase whatsoever, but simply that all of the multifarious ways through which state law can be displaced are closely related to each other analytically and functionally. Thus, neither specific preemption doctrines nor general statutory preemption jurisprudence is an island, entirely of itself, but must be evaluated as part of a wider spectrum of federal displacement of state laws.
Viet D. Dinh, Reassessing the Law of Preemption, 88 Geo. L.J.2085, 2098-99 (2000) (citations omitted).