Filed Under:Claims, Catastrophe & Restoration

When flood insurance procurement is not a federal issue

The National Flood Insurance Program (NFIP) is different from commercial insurance because all claims are paid from the treasury of the United States.

For that reason the NFIP is strictly construed by the federal courts.

In Harris v. Nationwide Mutual Fire Insurance Co., the U.S. Court of Appeals for the Sixth Circuit was called upon to resolve a dispute relating to the priorities and federal preemption required of claims against an NFIP policy.

Plaintiffs Michael and Beverly Harris, appealed the district court's orders dismissing their claims against Nationwide Mutual.

Case background


In August 2006, the Harrises procured a mortgage from Regions, a bank, to purchase a home near the Cumberland River outside of Nashville, Tenn. The deed of trust for the property obligated Regions to ensure that the flood-zone designation was correct, and that the plaintiffs had proper insurance coverage. The National Flood Insurance Act (NFIA) requires mortgagors to obtain flood insurance for properties in flood zones.

CoreLogic provided Regions with flood-zone certification services for the property. The 1981 NFIP Flood Insurance Rate Map (FIRM) for the area showed that the property was in a Special Flood Hazard Area (SFHA), but CoreLogic informed the Harrises that they did not need flood insurance because their property was in an “X” (non-SFHA) flood zone.

The Federal Emergency Management Agency (FEMA) issued a revised FIRM for the area in September 2006, and Regions promptly contacted the plaintiffs to inform them that their home was in an “AE” flood zone, and that they must procure flood insurance within 45 days. The Harrises hired David Vandenbergh to purchase flood insurance from Nationwide.

The Standard Flood Insurance Policy (SFIP) that Vandenbergh procured was a pre-FIRM policy, that is, a policy for a home constructed before the effective FIRM for the property. The plaintiffs’ home, however, was built in 1984, after the 1981 FIRM for the area, and required a post-FIRM policy, under which the Harrises could receive full coverage only after obtaining an elevation certificate showing sufficient elevation above the base flood zone. The plaintiffs received copies of their pre-FIRM SFIP reflecting no coverage for their personal property, and did not opt to alter their coverage.

Related: Groups join to push flood insurance reform

A flood struck the area in May 2010, submerging the plaintiffs’ home in 16 inches of water. Nationwide informed the Harrises that the flood-zone rating information on their property was incomplete, due to the pre-/post-FIRM discrepancy, and Nationwide required an elevation certificate for full building coverage.

Flooding surrounds an arcade and miniature golf course

Flooding surrounds an arcade and miniature golf course Tuesday, Jan. 10, 2017, in Guerneville, Calif. (AP Photo/Eric Risberg)

The plaintiffs obtained an elevation certificate showing that their home's lower level was below the base flood-zone elevation. Nationwide adjusted the plaintiffs’ Flood claim according to post-FIRM criteria, and did not cover certain building and personal property losses excluded in the relevant coverage limitations. Specifically, because the plaintiffs’ home was post-FIRM and situated below the base flood-zone elevation, their SFIP did not cover all building and personal property losses “below the lowest elevated floor.” Following administrative review, FEMA upheld Nationwide's coverage determination.

Related: What will flood insurance look like after 2017?

The Harrises sued in both state and federal courts seeking damages for claim underpayment, diminution in property value and wrongful purchase of the home. With the exception of one claim against Vandenbergh, the district court granted each defendant's motion to dismiss and accepted a stipulation dismissing Nationwide as a defendant. In light of the plaintiffs’ inaction, the district court dismissed the case without prejudice.

Cases analysis


The NFIA aims to foster availability of affordable Flood insurance. The plaintiffs rightly concede that the NFIA does not provide them, as borrowers, with a private right of action against lenders or flood-zone certifiers. On appeal, they renewed only their state-law claims arising from procurement of their SFIP — namely, that they would not have purchased their home absent defendants-appellees’ negligence and breach of fiduciary duty in mistakenly determining their flood zone. At issue is whether the NFIA preempts such claims.

The NFIA indisputably preempts state-law causes of action based on the handling and disposition of SFIP claims. In determining whether a plaintiff's cause of action arises from claim handling or policy procurement, the Sixth Circuit looked to whether the plaintiffs were already covered by an SFIP, or instead were potential future policyholders.

NFIA does not preempt policy-procurement claims such as the claims presented by the plaintiffs. Damages stemming from policy-procurement claims, unlike those arising from policy-coverage claims, are not Flood policy claim payments. That being so, the U.S. Treasury bears no responsibility for damages awarded in policy-procurement actions.

Related: Getting into the habit of offering flood insurance

Therefore, because policy-procurement damages pose no danger to the federal interests prompting preemption in the claims-handling context, that is, reducing fiscal pressure on federal flood relief efforts, the policy-procurement claims of the plaintiffs are not preempted by federal law.

The district court's partial grant of summary judgment to Vandenbergh was granted and its orders dismissing the remaining defendants was vacated. The case was remanded to the district court for proceedings consistent with its opinion.

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, claims handling, bad faith and fraud. Contact him at zalma@zalma.com.

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