An adjuster inspected Mr. Ekhlassi's house and obtained estimates from contractors for the cost of repair, which exceeded $200,000.

Lloyds also inspected the house, and concluded that flooding from the May 25 storm had not caused much of the damage claimed by Mr. Ekhlassi. Lloyds sent an October 6, 2015 letter to Mr. Ekhlassi that stated that it had reviewed his adjuster's report and would process a claim for $3,768.25 upon receipt of a signed, dated, and sworn proof of loss. The letter also stated it was “denying payment for any building and contents items not subject to direct physical loss by or from flood” and “denying payment for all non-covered items located below the lowest elevated floor of [Mr. Ekhlassi's house], pursuant to the [SFIP].”

The October 6 letter also pointed out the one-year suit limitations period in the policy, which provided, “If you do sue, you must start the suit within one year after the date of the written denial of all or part of the claim, and you must file the suit in the United States District Court of the district in which the covered property was located at the time of loss.”

Mr. Ekhlassi submitted a proof of loss in late December 2015 for $274,940.05. In response, Lloyds' January 11, 2016 letter to Mr. Ekhlassi acknowledged receipt of the proof of loss, and rejected all but $3,768.25 (the amount offered by the October 6 letter).

The January 11 letter also instructed Mr. Ekhlassi to “refer to the denial letter dated October 6, 2015[,] for what Federal law allows under the [SFIP] and for reasons of denial for damages that have been claimed.”

On January 11, 2017, one year from the January 11, 2016 denial, Mr. Ekhlassi sued Lloyds for breach of contract in a Texas state court. Lloyds removed the suit to the U.S. District Court for the Southern District of Texas on April 24, 2017.

Thereafter, the district court granted summary judgment in favor of Lloyds, finding that Mr. Ekhlassi's action was time-barred and concluding that the October letter, not the January 11 letter, had triggered the one-year suit limitations period.

Mr. Ekhlassi appealed to the Fifth Circuit. Among other things, he argued that Section 4072 applied only to actions against FEMA and not to actions against WYO insurers.

Federal Law

Section 4072 provides:

In the event the program is carried out as provided in section 4071 of this title, the Administrator shall be authorized to adjust and make payment of any claims for proved and approved losses covered by flood insurance, and upon the disallowance by the Administrator of any such claim, or upon the refusal of the claimant to accept the amount allowed upon any such claim, the claimant, within one year after the date of mailing of notice of disallowance or partial disallowance by the Administrator, may institute an action against the Administrator on such claim in the United States district court for the district in which the insured property or the major part thereof shall have been situated, and original exclusive jurisdiction is hereby conferred upon such court to hear and determine such action without regard to the amount in controversy.

(Emphasis added.)

The Fifth Circuit's Decision

The Fifth Circuit affirmed, holding that Section 4072 applies to actions against WYO carriers and because Mr. Ekhlassi's action did not arrive in federal court within one-year of his claim's denial, it was time-barred.

In its decision, the circuit court acknowledged that Section 4072 only describes an action against “the Administrator,” later defined in the law as the administrator of FEMA. It reasoned that a suit against a WYO company was “the functional equivalent of a suit against FEMA” because, among other things, a WYO company is a fiscal agent of the United States; FEMA regulations require a WYO company to defend claims but assure that FEMA will reimburse the WYO company for defense costs; and an insured's flood insurance claims ultimately are paid by FEMA.

The Fifth Circuit then ruled that Mr. Ekhlassi's claim was time-barred. The circuit court pointed out that Lloyds' first letter was sent on October 6, 2015; its second letter was sent on January 11, 2016; Mr. Ekhlassi's action was filed in state court on January 11, 2017; and his action was not removed to district court until April 24, 2017, “well over one year from either letter, and, therefore, too late under the statute.”

That Mr. Ekhlassi may have filed his action within one year of an operative denial letter did “not save it,” the Fifth Circuit ruled, because he filed in state court, when Section 4072 required the action to have been filed in federal court within a year. In other words, Mr. Ekhlassi had not timely filed in the correct court, the Fifth Circuit concluded.

The case is Ekhlassi v. National Lloyds Ins. Co., No. 18-20228 (5th Cir. June 4, 2019).

Insurance Coverage Law Center Comment

At least three other circuit courts have applied Section 4072 to WYO carriers. Palmieri v. Allstate Ins. Co., 445 F.3d 179, 187 (2d Cir. 2006) (“holding . . . § 4072 gives rise to jurisdiction over claims against WYO companies”); Gibson v. American Bankers Ins. Co., 289 F.3d 943, 947 (6th Cir. 2002) (“[Section] 4072 provides exclusive subject matter jurisdiction over suits against a WYO insurance company arising out of a disputed flood insurance claim” (citations omitted)); Van Holt v. Liberty Mutual Fire Ins. Co., 163 F.3d 161, 165 (3d Cir. 1998).

The Seventh Circuit, however, has declined to apply Section 4072 to a WYO action. Downey v. State Farm Fire & Casualty Co., 266 F.3d 675, 680 (7th Cir. 2001) (“Because we see no good reason to disregard not only the identity of the litigants but also the fact that § 4072 is limited to suits against the [Administrator], we decline to adopt Van Holt's reasoning.”).