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PENNSYLVANIA v. NATIONAL ASSN. OF FLOOD INSURERS

July 1, 1974

COMMONWEALTH OF PENNSYLVANIA, By Herbert DENENBERG, Insurance Commissioner, et al., Plaintiffs,
v.
NATIONAL ASSOCIATION OF FLOOD INSURERS, an unincorporated association, et al., Defendants



The opinion of the court was delivered by: LATCHUM

LATCHUM, Chief Judge.

This action is before the Court on motions to dismiss filed by the defendants, National Flood Insurers Association ("the Association"), *fn2" General Accident Fire and Life Assurance Corporation ("General Accident"), Zurich Insurance Company ("Zurich") (collectively the "Insurance Defendants"), and by the defendants, James T. Lynn, Secretary of Housing and Urban Development ("HUD") and the United States of America (collectively the "Federal Defendants"). *fn3"

 The complaint alleges that the suit is brought by the Commonwealth of Pennsylvania (the "Commonwealth") on its own behalf *fn4" and on behalf of its citizens *fn5" (collectively the "plaintiffs") for mandamus and injunctive relief and for the recovery of damages in excess of one billion dollars based on the defendants' alleged failure to perform statutory and contractual duties arising from the National Flood Insurance Act of 1968 (the "Act"), 42 U.S.C. §§ 4001-4128. The "in excess of the one billion dollar" recovery sought is to reimburse the Commonwealth and certain of its citizens, who sustained uninsured property losses as a result of floods which occurred in Pennsylvania in June 1972 and June 1973. The complaint alleges that, had the defendants carried out their statutory and contractual duties, that is, had they publicized and informed the public of the availability of flood insurance in Pennsylvania, the property losses which were sustained could have, and would have, been insured but were not.

 Congress adopted the Act in 1968 when it realized that over the years many areas of the nation had suffered from flood disasters which not only created personal hardship and economic distress for many property owners but required unforeseen and expensive public relief assistance because flood risk insurance was unavailable to the public at economically feasible premium rates. The primary purposes of the Act were (1) to make flood damage insurance available in limited amounts for family residential and small business properties, (2) to encourage states and local communities to adopt land control regulations that would restrict the development of land prone to flood damage and to otherwise take steps that would minimize damage in areas already subject to flooding, and (3) to reduce the need for special Federal disaster relief measures by preventing any such assistance from being made available for any loss to the extent it is covered by flood insurance under the program. *fn6"

 The Act confers upon the Secretary of HUD the basic authority to establish and carry out a national flood insurance program that would enable interested persons to purchase flood insurance, to arrange for financial participation in the program on a risk-sharing basis by private insurance companies, and also to provide participation, other than on a risk-sharing basis, by other insurers, agents, brokers and insurance adjustment organizations. *fn7" Pursuant to this authority the Secretary of HUD entered into a contract (the "Agreement") with the Association, a pool of private insurance companies, for the purpose of providing flood insurance and of sharing with the Federal Government financial responsibility for the payment of claims for losses arising under the flood insurance program. *fn8"

 A. THE COMPLAINT IN GENERAL

 The complaint consists of three counts. Count I is based on tort liability and alleges that all the defendants and their agents failed to perform statutory duties required by the Act. Count II avers a breach of the Agreement between the Secretary of HUD and the Association to the detriment of the Commonwealth and its citizens who are alleged to be third party beneficiaries of that contract. Count III seeks equitable relief in the nature of an injunction, specific performance and mandamus to assure that the defendants, particularly the Secretary of HUD, will carry out the alleged statutory and contractual duties in the future.

 Since the Insurance Defendants and Federal Defendants have moved to dismiss the action on different grounds, the claims against each set of defendants will be considered separately.

 B. CLAIMS AGAINST THE INSURANCE DEFENDANTS

 1. Count I -- Statutory Duties.

 Construing the complaint most liberally and favorably for the plaintiffs, Count I alleges that the Insurance Defendants had statutory obligations under the Act to publicize the availability of flood insurance and to authorize funding for expenses incurred to sell and service such insurance policies; that the Insurance Defendants and their agents failed to perform or negligently performed those duties with the result that the Commonwealth and the citizens it represents sustained uninsured flood losses in 1972 and 1973 to their properties which otherwise would have been insured had the Insurance Defendants performed their statutory duties. *fn9"

 The Insurance Defendants have moved to dismiss Count I for failure to state a claim upon which relief can be granted because the Act imposes no such statutory duties upon them as alleged. The Court agrees.

 A close reading and examination of the Act reveals there are no such duties imposed upon the Insurance Defendants. The Act authorizes the Secretary of HUD to encourage and otherwise assist insurance companies that meet the requirements of the Act to join together in a pool to provide flood insurance coverage and to participate financially in underwriting the risks assumed and in adjusting and paying claims for losses. The Act further authorizes the Secretary to prescribe appropriate requirements for private insurers participating in the pool, including minimum capital, surplus or assets requirements. *fn10" The Act does not speak directly to the Insurance Defendants but speaks in terms of authority conferred upon the Secretary of HUD to enter into agreements with insurance industry pools to carry out the program.

 Thus, 42 U.S.C. § 4052 provides that any agreement between the Secretary of HUD and the insurance pool must include terms and conditions relating to: the availability of risk capital; participation in premiums, and profits and losses; maximum amount of profit to be realized by the pool; payment of operating costs and allowances; premium equalization payments; and the contract may also include, as the Secretary deems necessary, provisions respecting a continuity of flood insurance coverage and participation in the pool by all qualified insurers. The Secretary is further authorized by 42 U.S.C. § 4081 to enter into agreements "which may, from time to time, be necessary for the purpose of utilizing, on such terms and conditions as may be agreed upon, the facilities and services of any insurance companies or other insurers, insurance agents and brokers, or insurance adjustment organizations . . . ." In addition, under 42 U.S.C. § 4082 the Secretary has authority to use insurers or others in the private insurance industry to receive and handle claims and payments made under the policies issued.

 It is this type of agreement made by the Secretary of HUD with the Insurance Defendants, not the Act, which imposes duties upon the Insurance Defendants if any exist. The following excerpts from the Act's legislative history confirm this conclusion:

 
"The Secretary will enter into an agreement with any such pool and the agreement will form the basis of the relationship between the Government and the industry. *fn11"
 
"Relations between the Government and the insurance pool will be governed by an agreement which will set forth in detail the conditions of operation. *fn12"
 
"Their [the participating members'] relationship with the pool will be governed by an agreement, the conditions of which will be subject to approval by the Secretary of Housing and Urban Development. *fn13"
 
"The Government-pool relationship will be governed by an agreement setting forth financial and other arrangements." *fn14"

 Neither the complaint nor plaintiffs' brief point to any provision of the Act which places a statutory duty upon the Insurance Defendants. Every section cited by the plaintiffs is directed toward actions of the Secretary of HUD, and in no way can those sections be read as imposing any statutory obligation upon the Insurance Defendants.

 Since it is clear from the face of the Act that it imposes no duty, direct or implied, upon the Insurance Defendants, Count I fails to state a claim upon which relief can be granted and that count will be dismissed with respect to the Insurance Defendants.

 2. Count II -- Contractual Duties.

 Count II of the complaint against the Insurance Defendants is based on an alleged contractual obligation arising out of the Agreement entered into between the Secretary of HUD and the Association under which the Commonwealth and those it represents are allegedly third-party beneficiaries. Although Count II of the complaint is far from concise as to the contractual duty breached, it becomes clear from the Commonwealth's arguments that Count II is founded on the Association's failure to publicize the availability of flood insurance as allegedly required by the Agreement. *fn15"

 The Insurance Defendants have moved to dismiss Count II for failure to state a claim upon which relief can be granted, first, because the Association assumed no duty to publicize by the Agreement, and second, because no actionable third-party right arises out of a contract with a governmental entity of the kind here involved.

 The language of the Agreement upon which the Commonwealth relies to support its claim that the Insurance Defendants had the duty to publicize consists of the following provisions:

 1) a portion of the preamble which reads:

 
"Whereas, the Association has been formed to constitute a pool prepared to provide such insurance and to assume such a portion of responsibility, on such terms and conditions as may be agreed upon from time to time by the Administrator [who was delegated authority by the Secretary to carry out the Flood Act] and the Association;"

 2) a portion of Article I -- Membership, Continuity of Coverage, Co-operation with Others, and Program Limitations -- which reads:

 
"Subject to the right of its members under the Association's Constitution to reduce or terminate their participation, the Association will exercise its best efforts to provide a continuous program of flood insurance pursuant to the Act and the terms of this Agreement."

 3) a portion of Article VI -- Records, Audits, and Reports -- which reads:

 
"1. The Association . . . shall keep such records as may be prescribed by the Administrator, including records which fully disclose the total cost of the program undertaken or services being rendered . . .
 
"2. The Secretary . . . shall have access . . . to any books, documents, papers and records of the Association . . . that are pertinent to the program undertaken or the services being rendered.
 
"3. The Association shall make periodic reports . . . on the operation of the program ...

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