ORDER. GRANTING DEFENDANT’S MOTION TO DISMISS PLAINTIFF’S SECOND CAUSE OF ACTION
INTRODUCTION
As Justice Jackson once good-naturedly confessed, “[pjrecedent, however, is not lacking for ways by which a judge may recede from a prior opinion that has proven untenable and perhaps misled others.... Baron Bromwell extricated himself from a somewhat similar embarrassment by saying, ‘The matter does not appear to me now as it appears to have appeared to me then.’ ”
McGrath v. Kristensen,
A little more than one year ago, in
Cohen v. State Farm Fire and Cas.,
First, here Defendant has presented a myriad of facts, arguments and supporting authorities that were not presented to the Court in the Cohen case. Indeed, the insurer in the Cohen case belatedly attempted to present some of these arguments in a motion for reconsideration, which the Court denied as “flagrantly deficient:”
What State Farm has done in purported support of its position that the Court did not consider material facts is (1) submit a declaration that was not previously presented, (2) submit for the first time an Amicus Brief by the United States filed in a Third Circuit case, (8) cite six cases not previously cited, (4) cite three statutes not previously cited, (5) cite two regulations not previously cited, (6) cite two Congressional Reports not previously cited, and (7) cite the Appropriations Clause of the U.S. Constitution, also not previously cited.
Cohen v. State Farm Fire and Cas., No. CV 99-1885, slip op. at 3 (C.D.Cal. Nov. 2, 1999). In denying the Cohen defendant’s motion for reconsideration, the Court observed:
United States District Courts grapple with and resolve numerous motions, many of which involve arcane and complex issues. Although it is common for this Court and others to conduct independent research that goes beyond the authorities submitted by the parties, every court is inevitably dependent on counsel to make their arguments explicit and complete. Here, State Farm’s lawyers complain that the Court erred. Perhaps it did, but not in the manner the lawyers claim. This Court will “consider” carefully what it is asked to consider. It cannot “reconsider” something that was never previously presented to it.
Id. at 6.
Another change is that recently the Ninth Circuit published a decision construing the legislative history of the National Flood Insurance Act.
See Flick v. Liberty Mutual Fire Ins. Co.,
FACTUAL ALLEGATIONS
Scherz holds a SFIP issued by Defendant that insures his residence in Atas-cadero, California. 3 First Amended Corn- *1003 plaint (“FAC”) ¶ 1. In February 1998, heavy rainfall flooded the crawlspace underneath plaintiffs residence. Id. at ¶ 2. A subsequent property inspection performed in September 1998 in connection with plaintiffs efforts to sell the property revealed that “the foundational framing had formed dry rot due to the water saturation that occurred on or around February 1998.” Id. at ¶ 14.
Plaintiff made a claim for coverage in September 1998. Id. In February 1999, a representative of Defendant inspected the foundational frame of plaintiffs residence and calculated the total loss to be approximately $1,766.88. Id. at ¶ 15. In July 1999, a FEMA inspector performed a second inspection of the residence. Id. at ¶ 16. Unlike the previous inspection, the FEMA inspector did not enter the crawlspace underneath the residence, but “inserted a camera under the [residence] and took pictures of what he believed to be the damaged areas as seen through the camera.” Id.
Also in July 1999, plaintiff received an independent bid of $50,000 to repair the residence’s frame and made a demand to Defendant for an appraisal of the amount of damage. Id at ¶ 17. However, in August 1999, Defendant denied coverage under the SFIP on the ground that any damage to his residence was caused by “side slope runoff’ rather than flooding of a creek adjacent to the residence. Id. at ¶ 18.
Plaintiff contends that Defendant’s denial of coverage breached the SFIP. Id. at ¶¶ 22-23. In addition, plaintiff alleges that Defendant tortiously breached the implied covenant of good faith and fair dealing by 1) failing to inform plaintiff of his rights under the SFIP; 2) failing to act reasonably and promptly in response to plaintiffs claim for benefits; 3) failing to conduct a reasonable investigation of plaintiffs claim; 4) denying coverage without sufficient information to justify a denial; 5) denying coverage despite the fact that the SFIP covered the damage to defendant’s home; and 6) failing to attempt to reach a settlement with plaintiff. Id. at ¶ 26(a-g).
LEGAL STANDARDS
On a motion to dismiss pursuant to F.R.Civ.P. 12(b)(6) for failure to state a claim, the allegations of the complaint must be accepted as true and are to be construed in the light most favorable to the nonmoving party.
Wyler Summit Partnership v. Turner Broadcasting System, Inc.,
“Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion. ... However, material which is properly submitted as part of the complaint may be considered” on a motion to dismiss.
Hal Roach Studios, Inc. v. Richard Feiner & Co.,
DISCUSSION
On this motion, understandably, the parties have dealt extensively with the Court’s previous decision in Cohen. To illustrate why, in contrast to Cohen, this plaintiffs claim should be dismissed, in this Order *1004 wherever possible the Court will “track” the analysis in Cohen, without repeating what is set forth in that case unless necessary for clarification.
I. General Preemption Principles
The analysis set forth in
Cohen
is correct and need not be changed. In its most recent term, the Supreme Court issued three decisions concerning preemption, none of which change the analysis and only one of which has any possible bearing on this case.
See discussion of Geier v. American Honda Motor Co., Inc.,
II. Application of Preemption Principles
A. Overview of the National Flood Insurance Act 4
The analysis in Cohen is correct, but the following additional features are important.
First, Cohen did not take into account the fact that although WYO insurers are entitled to receive processing fees and to recover their administrative costs, those payments are not what provide a meaningful economic incentive to such insurers. WYO insurers make money on SFIPs only if they actually approve a claim and authorize payment, in which case they receive a 3.3% commission on the amounts that are paid. 44 C.F.R. Pt. 62, App. A Art 111(C)(1). Therefore, not only does a WYO insurer have an incentive to approve a claim, but the greater the payment, the larger the amount the insurer recovers. In assessing whether precluding state-based claims against those insurers would be consistent or inconsistent with Congress’s policy objectives, this incentive may be an important consideration. (See below.)
Second, FEMA has delegated to the WYO insurers the responsibility for “adjustment, settlement, payment and defense of all claims” arising under SFIPs, 44 C.F.R. § 62.23(d), and “[pjayment of flood insurance claims by the [WYO insurer] shall be binding on the [Federal Insurance Administration (“FIA”) ].”
Id.
at Pt. 62, App. A Art. 11(F); § 62.23(i)(l). Moreover, WYO insurers pay SFIP claims with federal funds, initially with premiums they receive, and when those funds are exhausted, by drawing against Letters of Credit issued by FEMA. 44 C.F.R., Pt. 62, App. A Art. 111(D)(1). “[RJegardless 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 Ins. Co.,
B. Express Preemption
The analysis in Cohen is sound and need not be changed. Thus, the NFIA does not contain an express preemption provision. 5 Indeed, FEMA has recently proposed to add the following provision to all SFIPs:
IX. What Law Governs
This policy and all disputes arising from the handling of any claim under the policy are governed exclusively by the flood insurance regulations issued by FEMA, the National Flood Insurance Act of 1968, as amended (42 U.S.C. 4001, et seq.), and Federal common law.
65 Fed.Reg. 34837. FEMA explained this proposed change as follows:
Exclusive Federal Jurisdiction and Applicable Law
Standard Flood Insurance Policies are sold by a number of private Write Your *1005 Own (WYO) insurance companies and directly to the public by the Federal Insurance Administration. Because the National Flood Insurance Program is national in scope and accomplishes a number of programmatic missions in addition to making affordable flood insurance generally available to the public, the SFIP provides that its terms cannot be altered, varied or waived except by the written authority of the Federal Insurance Administrator. The Administrator intends that the same benefits should be available to insureds wherever the insured property is located, or whether the policy is purchased from a WYO insurance company or from the Federal Government. Thus, there is a need for uniformity in the interpretation of and standards applicable to the policies and their administration. Therefore, we have clarified the policy language pertaining to jurisdiction, venue and applicable law to emphasize that matters pertaining to the Standard Flood Insurance Policy, including issues relating to and arising otit of claims handling, must be heard in Federal court and are governed exclusively by Federal law.
Id. at 34826-34827 (emphasis added).
In certain circumstances, federal agency regulations may preempt state law.
Louisiana Public Service Comm’n v. FCC,
C. Field Preemption
Did Congress intend the Federal Government to “occupy [the field of relationships between flood insurers and their insureds] exclusively?” In
Cohen,
this Court suggested that 42 U.S.C. § 4081(c), which provides that FEMA “may not hold harmless or indemnify an agent or broker for his or her error or omission,” belies any basis for field preemption because it shows “that Congress contemplated that state tort law could apply to the conduct of insurers.” This Court reasoned that § 4081(c) would make no sense unless insurers could be liable for errors or omissions, and since there is no provision in the NFIA imposing such liability, “the most logical conclusion to be drawn ... is that Congress contemplated that state tort law could apply to the conduct of insurers.”
Cohen,
What is more fundamental to Defendant’s attack on
Cohen,
however, is its contention that
Cohen
failed to distinguish between “claims handling disputes,” which are involved here, and disputes involving the initial issuance or procurement of the SFIP. The latter is what was involved in
Spence v. Omaha Indemnity Ins. Co.,
While. the national policies underlying the NFIP and extensive federal role therein impel our conclusion that federal common law governs claims under flood insurance policies, the same does not apply in actions for tortious misrepresentation against WYO insurers ... The more attenuated federal interests in such claims lead to our conclusion that the limitations period governing them derives from state rather than federal law.
Id. at 796.
Defendant argues that before
Cohen,
no court permitted an insured to assert state-based tort claims arising out of the manner in which the WYO handled his claim for payment. Defendant relies on
West v. Harris,
Very telling is the regulatory provision governing reimbursement of a WYO insurer’s litigation costs:
Limitation on Litigation Costs.
Following receipt of notice of [a litigation claim against a WYO insurer], the Office of General Counsel (OGC), FEMA, shall review the information submitted. If it is determined that the claim is grounded in actions by the Company that are outside the scope of this Arrangement, the National Flood Insurance Act, and CFR chapter 1, subchapter B, and/or involve issues of insurer/agent negligence as discussed in Article IX of this Arrangement, the OGC shall make a recommendation to the Administrator 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 by the Company that are significantly outside the scope of this Arrangement, the Company will be notified, in writing, within thirty (30) days of the Administrator’s decision, if the decision is that any • award or judgment for damages arising out of such actions will not be recognized under Article III of this Arrangement as a reimbursable loss cost, expense or expense reimbursement.
44 C.F.R. Pt. 62, App. A Art. 111(D)(4) (emphasis added.). By its plain language (“issues of insurer/agent negligence”), this subsection contemplates negligence actions against a WYO insurer. Defendant asserts that this lawsuit alleges no negligence and that the bad faith claim does not fall “outside the scope” of the WYO insurer-FEMA arrangement. But that is not the issue. The issue is whether this provision is inconsistent with the assertion that Congress, acting through FEMA, intended to occupy the field of relationships between flood insurers and their insureds exclusively by preempting all state law tort claims against WYO insurers arising out of claims handling. The Court concludes that this “Limitation On Litigation Costs” *1007 provision is indeed inconsistent with such an intent. 6
For these reasons, then, this Court finds that Defendant has not established that the field preemption basis for disallowing a state-based claim applies here.
D. Conflict Preemption
This is the basis for finding preemption that Defendant asserts most ardently. Conflict preemption applies where either 1) it is impossible for a private party to comply with both state and federal requirements or 2) where state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”
English v. General Elec. Co.,
1. Impossibility Of Compliance
“Federal law has long recognized that an insured must comply strictly with the terms and conditions of a federal insurance policy.”
Flick v. Liberty Mutual Fire Ins. Co.,
Defendant correctly points out that when it comes to how and when an insured may assert a claim for payment, California law is not so harsh as federal law. Under California law, an insurer may not deny a claim based on a defective notice or proof of loss so long as the insured has “substantially complied with those conditions.”
McCormick v. Sentinel Life Ins. Co.,
Based on the foregoing, it is clear that when an insured substantially — but not completely — complies with a SFIP’s proof of loss requirement, the WYO insurer cannot comply with both California and federal law. 9 The Court might find this argument dispositive if the filing of a proof of loss were an issue in this case, but Defendant does not contend that it denied coverage for Scherz on that ground. Thus, the Court turns to the second prong of the conflict preemption analysis.
2. Frustration Of Congress’s Purposes And Objectives
State law is also preempted where it frustrates the accomplishment and execution of the full purposes and objectives of Congress. It is on this point that Defendant’s argument is most persuasive.
An important premise upon which the Court relied in
Cohen
was that the WYO insurer — not the federal government— would ultimately be responsible for paying any judgment against the insurer for breach of the implied covenant of good faith and fair dealing.
See Cohen,
Moreover, to allow Scherz to assert his second cause of action would also frustrate the purposes of the NFIA by granting different rights to insureds depending on whether their SFIP was issued by FEMA or by a WYO insurer such as Defendant. The terms and conditions of all SFIPs are identical regardless whether issued by FEMA or a WYO insurer.
Flick,
This conclusion finds support in the Ninth Circuit’s recent decision in Flick. Although the primary issue in Flick was whether the Appropriations Clause requires WYOs to strictly construe a SFIP’s proof of loss requirement, the following passage is pertinent here:
Though our decision is premised on the Appropriations Clause, the outcome of this 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. The success of the NFIP, so far, has depended on the ability of the federal government and participating insurers to offer flood insurance at below actuarial rates. We find no reason to conclude that FEMA has structured flood insurance premiums in anticipation of the possibility that the federal government may have to pay the additional claims of policyholders who fail to comply strictly with the sworn proof of loss requirement or who fail to obtain a valid waiver from the Federal Insurance Administrator. 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.
[T]here is a compelling government interest in assuring uniformity of decision in cases involving the NFIP. We note that the disposition suggested by the dissent would lead to the anomalous result that standard flood insurance policies written by WYO insurers would be subject to special rules, such as the rule of notice prejudice or substantial compliance, while standard flood insurance policies written by FEMA would not. Such a result would provide greater coverage at the same price to policyholders who purchase insurance through the WYO program and conflict with FEMA’s goal that flood insurance policies be “standard. ”
Id. at 396 & n. 14 (citations omitted) (emphasis added). The Ninth Circuit’s concern that WYOs not be subjected to “special rules” counsels in favor of finding conflict preemption here, for to allow an insured to bring a state law tort claim for breach of the implied covenant of good faith and fair dealing against a WYO insurer but not against FEMA would amount to a special rule benefitting only some insureds. 10
Next, the Court notes that in an amicus brief submitted to the district court in
Davis, supra,
FEMA argued that both field and conflict preemption bar state law tort claims arising out of a WYO insurer’s claims handling. This view is entitled to deference. In
Geier v. American Honda Motor Co., Inc.,
We place some weight upon DOT’s interpretation of [its regulation’s] objectives and its conclusion, as set forth in the Government’s brief, that a tort suit such as this one would “stan[d] as an obstacle to the accomplishment and execution” of those objectives. Congress has delegated to DOT authority to implement the statute; the subject matter is technical; and the relevant history and background are complex and extensive. The agency is likely to have a thorough understanding of its own regulation and its objectives and is “uniquely qualified” to comprehend the likely impact of state requirements.
Id. at 1926. Here, too, the Court gives weight to FEMA’s view that state law extracontractual claims relating to SFIPs “interfere with the statutory scheme and frustrate the intent of Congress ...” Brief at 16.
Finally, it is noteworthy that to dismiss the second cause of action for bad faith would not frustrate or defeat Congress’s other objective that flood insurance victims be appropriately compensated. “Ordinarily, the threat of punitive damages deters insurance companies from arbitrarily denying legitimate claims in order to be unjustly enriched. In the flood insurance arena however, private insurance companies do not have a pecuniary incentive to deny a claim under a policy issued pursuant to the NFIA because all claims are paid by the federal government.”
3608 Sounds Ave. Condominium Ass’n v. South Carolina Ins. Co.,
For all these reasons, the Court concludes that plaintiffs cause of action for breach of the implied covenant of good faith and fair dealing cannot withstand scrutiny under a conflict preemption analysis. This ruling is narrow; it is limited to the cause of action asserted by plaintiff, which only challenges the manner in which Defendant handled his SFIP claim, not necessarily to other state-based claims against a WYO insurer or an agent. Given this ruling, the Court need not reach Defendant’s alternate argument that the Appropriations Clause bars this cause of action.
CONCLUSION
For the foregoing reasons, and good cause appearing therefor, the Court GRANTS Defendant’s motion to dismiss plaintiffs second cause of action. The Court also dismisses plaintiffs requests for punitive damages and attorneys’ fees, since neither remains a viable remedy for plaintiffs remaining cause of action for breach of contract.
IT IS SO ORDERED.
United States District Judge
Notes
. Since then, in citing
Cohen,
two District Courts have adopted its analysis and reached the same conclusion.
See Stanton v. State Farm Fire and Cas. Co., Inc.,
. Plaintiff alleges causes of action for 1) breach of contract and 2) breach of the implied covenant of good faith and fair dealing. Defendant’s motion attacks only the second cause of action.
. Defendant issued the SFIP in its capacity as a WYO insurer pursuant to the NFIA.
. The statutory and regulatory structure of the NFIA is complex. The Third Circuit’s decision in
Van Holt v. Liberty Mutual Fire Ins. Co.,
. In an amicus brief submitted to the district court in Davis, supra, the United States
and FEMA acknowledged that the NFIA does not contain an express preemption provision. Brief at 11.
. Defendant also asserts that FEMA is currently in the process of deleting this provision from its rules. Reply at 6 n. 5. That the provision may be short-lived does not allow the Court to ignore it for purposes of this motion.
. The Court’s conclusion that the NFIA preempts plaintiff's second cause of action under a conflict preemption theory does not cast doubt on the ruling in
Stanton v. State Farm Fire and Cas. Co., Inc.,
. Defendant also asserts that California requires that an insurer comply with the "reasonable expectations of the insured” and that this, too, is inconsistent with federal law. Mem. at 26. This argument is less persuasive. The "reasonable expectations” principle applies where an insurance contract is ambiguous. In such a situation, the ambiguity is generally resolved against the insurer so as to protect the "objectively reasonable expectations of the insured.”
AIU Ins. Co. v. Superior Court,
. The defendant in Cohen did not raise this argument.
. Moreover, for courts to entertain state-based causes of action involving claims handling could require application of fifty different state laws, which would also frustrate the congressional goal of creating a uniform system for flood insurance.