In the concluding part of his year in review series, Barry Zalma selects his final choice of the most significant insurance law cases of 2012:
Case 3: Standard Flood Policy Must Be Enforced
The National Flood Insurance Program (“NFIP”) is a federal program created by the National Flood Insurance Act of 1968 (“NFIA”). Noting that private insurers were not providing adequate flood insurance in many areas, Congress designed the NFIA to increase the availability of flood insurance by offering subsidized insurance. The NFIP is administered by the Federal Emergency Management Agency (“FEMA”) and backed by the federal treasury, which is responsible for paying insurance claims that exceed the revenue generated by premiums paid under policies issued pursuant to the program. FEMA established a standard form of insurance that must be used, without modification, by a private insurer issuing a flood insurance policy protected by the NFIP. It does not cover all damages caused by flood, such as mold and construction defects. It only covers the damages promised by the FEMA created standard policy.
The First Circuit Federal Court of Appeal was called upon to resolve a dispute over the scope of a flood insurance policy in Mary Jane McGair; Joseph McGair v. American Bankers Insurance Company of Florida, No. 11-2179 (1st Cir. 09/04/2012). In July 2006, appellants Mary Jane and Joseph McGair purchased a flood insurance policy from appellee, American Bankers Insurance Company of Florida (“American Bankers”), only to find most of the damaged property in their basement was not covered by the policy.
The policy was issued pursuant to NFIP under which private insurers issue and administer standardized flood insurance policies, and all claims are paid by the government. After a 2010 flood damaged their home in Warwick, Rhode Island, including the contents of their basement, the McGairs sought compensation. American Bankers disallowed much of the amount claimed, asserting that the contents of the McGairs’ basement were not covered by their policy. The McGairs brought suit in federal court, arguing that the declarations page of their policy created an ambiguity as to the scope of coverage and that, under federal common law and general insurance law principles, this ambiguity should be resolved in their favor. The district court disagreed, entering summary judgment in favor of American Bankers.
The National Flood Insurance Program
The McGairs’ flood insurance policy was written pursuant to the National Flood Insurance Program (“NFIP”), a federal program created by the National Flood Insurance Act of 1968 (“NFIA”). FEMA provides a standard text for all NFIP policies and forbids Write Your Own Policy (WYOP) companies from making changes; FEMA’s interpretations of the policy bind all WYOP participants; FEMA decides what rates may be charged; all premiums are remitted to FEMA (minus a small fee); if WYOP companies pay out on an insurance claim they get reimbursed by FEMA, likewise with litigation costs.
Two limitations on coverage provided by the Standard Flood Insurance Policy (SFIP) are relevant to the McGairs’ claim. The SFIP states that coverage for items located in the basement of a dwelling is limited, and it identifies seventeen categories of fixtures (e.g., central air conditioners, furnaces, insulation) covered under the policy. The SFIP similarly limits coverage for personal property in a basement and identifies only three covered categories of personal property (all major appliances). By the terms of the SFIP, these items are the only contents of a basement for which a policy-holder may seek reimbursement.
The McGairs’ policy, purchased from American Bankers in 2006, is a Preferred Risk Policy (“PRP”) incorporating the SFIP. The McGairs’ policy also included a declarations page indicating the coverage purchased, the policy limits and the deductible. The “Rating Information” section of the declarations page indicates that the McGairs have a finished basement and states that the contents of their home are located in the “basement and above.” The declarations page also provides that the contents of the home are covered by the policy, up to $100,000, and identifies none of the limitations stated in the SFIP.
Although American Bankers issued a check to the McGairs, based on the amount determined by its adjuster, the McGairs refused to accept the payment. Claiming $40,614.52 in damages, the McGairs sent American Bankers documentation of the repair estimates totaling this amount. The primary disagreement between the parties concerned the scope of the policy’s coverage of the contents of the McGairs’ basement.
Trial Court Decision
The district court granted summary judgment for American Bankers, explaining that the regulations governing the NFIP provide that parties cannot alter the terms of the SFIP and that the McGairs were charged with knowledge of that prohibition. Thus, it found that the SFIP’s limitations on coverage of the contents of a basement applied in this case.
The McGairs’ policy is labeled as a “Standard Flood Insurance Policy” and states that it “provides flood insurance under the terms of the National Flood Insurance Act of 1968 and its amendments, and Title 44 of the Code of Federal Regulations.” Accordingly, the policy itself belies the assertion that it is anything other than an SFIP. Furthermore, as noted, FEMA regulations require that all WYO policies issued pursuant to the NFIP use the SFIP.
Even if the court was willing to acknowledge that the declarations page creates an ambiguity as to the scope of coverage, which it was not, general insurance law principles applicable to the interpretation of ambiguities must give way in light of the prescription by federal regulation of the terms of the SFIP. Because American Bankers had no authority to alter the terms of the SFIP through the declarations page, there is no need to resolve any supposed inconsistency between the SFIP and the declarations page. The terms of the SFIP control and the trial court’s decision was affirmed by the appellate court.
Governments are not insurers. They are unconcerned with profit. A government controlled plan, like the NFIP, is bound by what Congress and FEMA say it is and nothing more. FEMA requires that all private insurers writing an NFIP backed flood insurance program must use the SFIP without modification. The insurer in this case did so and, as a result, had an unhappy insured who did not read or understand the limitations of the SFIP.
The insureds tried to change the policy by stating there existed an ambiguity in the policy the insurer issued to them. Since the flood insurance issued was, as the law required, the SFIP terms, conditions and limitations applied and no federal court has the ability to change it.
About the Author
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and is the author of Insurance Claims: A Comprehensive Guide, Mold: A Comprehensive Claims Guide, and Construction Defects: Litigation and Claims.