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Commonwealth of Pennsylvania v. National Association of Flood Insurers

June 13, 1975.

COMMONWEALTH OF PENNSYLVANIA, BY WILLIAM SHEPPARD, INSURANCE COMMISSIONER; WILLIAM H. WILCOX, SECRETARY OF THE DEPARTMENT OF COMMUNITY AFFAIRS AND ISRAEL PACKEL, ATTORNEY GENERAL, AND COMMONWEALTH OF PENNSYLVANIA UPON THE RELATION OF AND AS REPRESENTATIVE OF THOMAS S. DOTY, BERNICE RABIN, WALTER S. KINNS, JR., MARTHA W. DANCHECK AND MARILYN SAIDMAN, AND ALL OTHERS SIMILARLY SITUATED, APPELLANTS,
v.
NATIONAL ASSOCIATION OF FLOOD INSURERS, AN UNINCORPORATED ASSOCIATION AND GENERAL ACCIDENT FIRE AND LIFE ASSURANCE CORPORATION LIMITED AND ZURICH INSURANCE COMPANY AS CLASS ACTION REPRESENTATIVES OF THE MEMBERS OF THE NATIONAL ASSOCIATION OF FLOOD INSURERS AND JAMES T. LYNN, SECRETARY OF HOUSING AND URBAN DEVELOPMENT, AND UNITED STATES OF AMERICA, APPELLEES



ON APPEAL FROM ORDER OF THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA (D.C. Civil Action No. 73-683).

Aldisert, Gibbons and Garth, Circuit Judges.

Author: Garth

Opinion OF THE COURT

GARTH, Circuit Judge:

The Commonwealth of Pennsylvania ("Commonwealth") appeals from the decision of the district court dismissing its complaint.*fn1 As to all but one count of the complaint, we affirm the district court;*fn2 as to that count of the complaint which seeks mandamus relief against the federal defendants, we reverse and remand to the district court for a hearing.

The Commonwealth, on relation of its Commissioner of Insurance, its Secretary of the Department of Community Affairs and its Attorney General, instituted suit in the district court seeking declaratory and injunctive relief, mandamus*fn2a and money damages against defendants National Association of Flood Insurers,*fn3 James T. Lynn, Secretary of Housing and Urban Development and the United States of America (collectively referred to as the "federal defendants"). The gravamen of the complaint was that the defendants had failed to publicize in Pennsylvania the availability of flood insurance prior to the occurrence of the 1972 and 1973 floods and that consequently the properties damaged by the floods were uninsured. The Commonwealth sought an award of damages in excess of one billion dollars.

The Commonwealth also sued in the capacity of parens patriae and as a representative of a class comprised of all citizens and residents of Pennsylvania who sustained uninsured flood damage.*fn4

Count I of the Commonwealth's three count complaint alleged that all defendants failed to perform obligatory statutory duties required by the National Flood Insurance Act of 1968, 42 U.S.C. § 4001 et seq. Count II alleged a breach of the agreement between the Secretary of HUD, and the Flood Insurers. The agreement was allegedly entered into for the purposes of providing flood insurance and of having a pool of private insurance companies and the federal government share financial responsibility for the payment of claims arising from insured losses under the flood insurance program. The Commonwealth alleged that both it and its citizens are third-party beneficiaries of this agreement and, as such, may properly maintain a claim based on its breach by the defendants. The third and last count of the complaint sought equitable relief in the nature of an injunction, specific performance and mandamus to insure that the defendants would carry out their statutory and contractual duties.

Subsequent to the filing of the complaint, all defendants moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12. The district court granted the motions to dismiss all three counts of the complaint against both the Flood Insurers and the federal defendants on the grounds that subject matter jurisdiction was lacking as to the federal defendants, Fed. R. Civ. P. 12(b)(1), and that the complaint failed to state a claim upon which relief could be granted as to the Flood Insurers.*fn5 Fed. R. Civ. P. 12 (b)(6). The Commonwealth has timely appealed.*fn6

I. STATUTORY SCHEME

This action arose as a consequence of the damages to property suffered by the Commonwealth and its citizens and residents following Hurricane Agnes in 1972 and from widespread flooding and mud slides in 1973. The Commonwealth asserted in its complaint that the losses incurred were insurable under the National Flood Insurance Act of 1968 which, but for the acts and omissions of the defendants, would have provided flood insurance coverage and thereby compensation for the damage suffered.

The National Flood Insurance Act of 1968, which underlies the Commonwealth's tort (Count I) and contract (Count II) claims, establishes a legislative scheme to make flood insurance available, principally by private insurers,*fn7 in high-risk, high-rate areas. The Act provides that flood insurance is to be made available only in those states or political subdivisions which have adopted adequate land management policies concerning flood control, flood zoning and flood damage prevention. 42 U.S.C. §§ 4012(c), 4014(e), 4101-02. The Act establishes guidelines within which the Secretary is granted broad and flexible authority to implement its provisions. For example, the Secretary is authorized to determine the priorities for insurance coverage, the manner in which insurance premiums are to be set, the mechanics of funding, the methods of paying claims, the limitations on payments and on the total amount of outstanding coverage, and the extent of federal financial subsidies for the insurance premiums. See 42 U.S.C. §§ 4012-4027; 1968 U.S. Code Cong. & Ad. News 2967-73. Of major importance here, the Act also provides that flood insurance information be disseminated. 42 U.S.C. § 4020. As with the other statutory provisions in the first Subchapter of the Act,*fn8 § 4020 speaks only as to what the Secretary is authorized to do.*fn9

Under the Act, 42 U.S.C. § 4041, the Secretary is first directed to implement the program by encouraging the formation of a pool of private insurance companies. The Secretary is then authorized to enter into an agreement with this insurance pool to make flood insurance policies available to the public with premiums subsidized by federal funds. 42 U.S.C. §§ 4041, 4051, 4052. The members of the insurance pool are to sell the insurance, adjust and pay claims and provide risk capital. 42 U.S.C. §§ 4052, 4053. The Secretary is authorized to make payments to the pool to subsidize premium rates and can make arrangements for reinsurance of the pool in case of excessive loss. 42 U.S.C. § 4055. Under this statutory scheme, flood insurance has been available since 1969, the year in which the implementation agreement was executed.*fn10 See App. 34a-50a.

Under the agreement between the Secretary and the Flood Insurers, the Flood Insurers undertake to "exercise [their] best efforts to provide a continuous program of flood insurance pursuant to the Act and the terms of [the] agreement."*fn11 More particularly, the Flood Insurers are to "use [their] best efforts to arrange for the issuance of policies of flood insurance to any person or organization qualifying for such coverage . . . pursuant to applications submitted by any such person or organization . . . ."*fn12

Article VI of the Agreement requires that the Flood Insurers keep records "which fully disclose the total cost of the program undertaken or services being rendered . . . ,"*fn13 and mandates periodic reports on the operation of the program.*fn14 The agreement defines "operating costs" as "all costs for an accounting period incurred in the offering, selling, and servicing of policies of flood insurance . . . ."*fn15

In addition to the Act and the agreement, the flood insurance program is governed by the HUD regulations. In pertinent part, the regulations establish a degree of state participation whereby among other state directed activities the state is to provide local communities with information on the program. 24 C.F.R. § 1910.25. Such information is to be provided to assist communities to become qualified in order for subsidized flood insurance policies to be sold to parties within their respective jurisdictions.

II. THE FLOOD INSURERS

Regardless of the capacity in which the Commonwealth sues, we agree with the district court that as against the Flood Insurers, Counts I (statute), II (contract), and III (equitable relief) of the complaint fail to state a claim upon which relief can be granted.

Count I alleges that plaintiffs' injuries were incurred by the Flood Insurers' tortious conduct. It is alleged that the Flood Insurers failed to perform or negligently performed their statutory obligations to publicize the availability of flood insurance. To succeed under this Count, it must appear that such statutory duties are indeed imposed upon the Flood Insurers. Our analysis of the statute reveals no statutory obligation, express or implied, imposed upon the Flood Insurers to publicize the availability of flood insurance. The obligations under the Act are those required of the Secretary in all instances. Indeed, in the very first instance the Secretary must determine the feasibility of a program which relies principally upon private insurance companies. See 42 U.S.C. § 4071 and note 10 supra.

Moreover, although the statute defines the Flood Insurers' reimbursable operating costs to include expenses "incurred in connection with selling and servicing flood insurance coverage", 42 U.S.C. § 4018(b)(1)(A) (emphasis supplied), we do not read this provision as imposing a statutory duty to publicize and we have been shown no legislative history which would support such a construction. Count I was properly dismissed.

We also agree with the district court's analysis that the Flood Insurers are under no contractual obligation to "publicize" as is alleged in Count II. The contractual provisions are clear and unambiguous in this respect. Although broader than the statutory definition of reimbursable expenses in that the contract allows for reimbursement for the "offering, selling and servicing of policies", we do not find that the inclusion of the term "offering" in that context imposes an affirmative obligation to publicize. Indeed when the contract is read in its entirety, as we must read it, the Flood Insurers' activities and obligations commence only after an application for insurance has been submitted.*fn16 See Contract Agreement, Art. II, Par. 1; App. 36a. Even if we were to adopt the Commonwealth's argument that the Flood Insurers have a right to reimbursement of expenses ...


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