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NEILL v. STATE FARM FIRE AND CAS. CO.

December 1, 2000

DOLORES M. NEILL AND KENNETH HUTTON,
V.
STATE FARM FIRE AND CASUALTY COMPANY.



The opinion of the court was delivered by: McLAUGHLIN, District Judge.

Opinion

In a 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 Practices 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 and 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, 975 F. Supp. 761, 763 (E.D.Pa. 1997), aff'd, 151 F.3d 1025 (3d Cir. 1998). The court must accept as true the factual allegations in the complaint and all reasonable inferences that can be drawn from them. The claims in question should only be dismissed if no relief could be granted under any set of facts which could be proved. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir. 1990) (citing Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988)).

III. The National Flood Insurance Program: Structure and Purpose

The National Flood Insurance 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, 163 F.3d 161 (3d Cir. 1998). WYOs may not alter, vary, or waive the terms of the Standard Flood Insurance Policies (SFIPs), as promulgated by FEMA. 44 C.F.R. § 61.4(b); 44 C.F.R. § 61.13(d); Gowland v. Aetna, 143 F.3d 951, 953 (5th Cir. 1998).

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, 163 F.3d 161, 165 (3d Cir. 1998).

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 reasonable 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 incentives: 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 II(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, 143 F.3d at 953-955.

FEMA has 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 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.
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, 163 F.3d 161 (3d Cir. 1998). See also Davis v. Travelers Property and Casualty Co., 96 F. Supp.2d 995 (N.D.Cal. 2000) (describing government's ...


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