In this case, plaintiffs Joseph L. Messa, Jr., John McDonald, Carol
McDonald, and 47 West 18th St. Condominium Association ("the
Association") seek compensatory and punitive damages and attorney's fees
from defendant Omaha Property & Casualty Insurance Company ("Omaha"),
1. Background of the NFIP
Id. at 881.
2. Case Law
Policy procurement is an entirely different creature than claims
handling. NFIA regulations provide that FEMA will reimburse WYO insurers
for the claims and the claims handling, as well as for the costs of
defending a lawsuit based on claims handling, and there is thus no
incentive for the WYO insurer to deny a claim in part or in full —
the more claims the WYO insurer agrees to pay, the more money it will
receive from the U.S. Treasury. On the other hand, the WYO insurers may
have the incentive to make fraudulent misrepresentations when trying to
get potential customers to sign up for flood insurance in the first
place. The Spence court was correct that FEMA regulations indicate that
the WYO insurance companies do not act as general agents for the federal
government and that FEMA intended to "leave those insurers responsible
own tortious conduct." Id. at 797. The tortious conduct about
which the Fifth Circuit was concerned in Spence was fraud in policy
procurement, not claims handling. Therefore, the Spence case does not
change this Court's inclination to follow the reasoning of the Fifth
Circuit in West, of Judge Rodriguez in 3608 Sounds, and of a host of
other courts in the Fifth, Ninth, and Eleventh Circuits.
The Cohen case, unlike the Spence decision, did squarely hold the NFIA
does not preempt state law claims regarding coverage issues. Cohen, 68
F. Supp.2d at 1157-58. However, Cohen does not constitute persuasive
precedent for two reasons. First, Cohen is largely based in a the Central
District of California's belief that Spence held that the NFIA does not
preempt state law claims in general, id., which Spence did not do.
Second, Cohen was also based in the Eastern District of California's
decision in Zumbrun, 719 F. Supp. 890. See Cohen, 68 F. Supp.2d at 1155.
The Zumbrun decision, which plaintiffs have also cited in support of
their argument, has no precedential value even in California. Waller v.
Truck Ins. Exchange, 900 P.2d 619 (1995), discussed in Etchell v. Royal
Ins. Co., 165 F.R.D. 523 (N.D.Cal. 1996) (noting that the California
Supreme Court's decision in Waller "limits dramatically the precedential
viability (outside of their peculiar factual settings) of . . . Zumbrun
(. . . which involved federal courts trying to ascertain what pertinent
California law was)."). Therefore, this Court declines to follow Cohen
Stanton, Murray, Lakewood, and Conrad are also distinguishable.
Conrad, 1995 WL 350418, at *3, was rooted in part in the Eastern District
of Pennsylvania's belief that "[t]he WYO company and not the government
is the real party in interest," id., a statement that is directly
contradicted by the Third Circuit's holding, three years later, in Van
Holt, 163 F.3d 161, that a suit against a WYO carrier is the functional
equivalent of a suit against FEMA because FEMA pays all allowable
claims. Conrad was also heavily premised on Zumbrun. Conrad, 1995 WL
350418, at * 3.
Lakewood, like Spence, is a policy procurement case, holding that the
NFIA did not preempt state law claims against an insurance agent for
negligent failure to procure adequate insurance coverage. 1996 WL
227837, at *3. Murray, 1997 U.S. Dist. LEXIS 12843, was repudiated by the
judge who issued it, who held in a response to a Motion for
Reconsideration, that he had no authority to entertain reconsideration of
his remand order, but that he would stay, reconsider, and rescind it if
he could. Murray v. Omaha Property & Casualty Insurance Company, Civil
No. 96-0573-RV-S, Notice to Parties (S.D.Ala. March 20, 1997), in Def.'s
Reply Br. Ex. B. Finally, Stanton relied on Spence (believing that
Spence held that the NFIA does not preempt any kind of state law claim)
and on Cohen, Stanton, 1999 WL 1289137, at *7, two decisions which this
Court has declined to follow.
None of the cases which plaintiffs have cited sway this Court's belief
that Judge Rodriguez correctly determined this issue in 3608 Sounds.
While it makes sense to hold WYO insurers liable when they engage in
fraudulent behavior designed to procure customers to get flood insurance
through them — instead of through other insurers or not at all
— WYO insurers simply have no financial incentive to act in bad
faith in handling claims. If WYO insurers were to be held liable under
different states' differing laws for their behavior during the claims
handling process, it would make it much less likely that private insurers
would be willing to participate in the NFIP, making flood insurance
impossible to obtain at all, and increasing the burden on the federal
treasury from flood-related disaster relief. That is precisely
the situation that the NFIP was designed to remedy.
Plaintiffs' claims against defendant in this case are nothing more than
a disagreement with defendant's decision to pay less on the claim than
plaintiffs believe is warranted. Plaintiffs may still pursue that claim
through their breach of contract action based on the SFIP itself.
However, plaintiffs are not entitled to receive compensatory, punitive,
or consequential damages, or attorney's fees, for alleged bad faith
during the National Flood Insurance Program claims handling process,
because federal law does not provide for those remedies in this type of
For the foregoing reasons, this Court will grant defendant's motion to
dismiss all state law-based, extra-contractual claims for damages,
punitive damages, consequential and incidental damages, and attorney's
fees based on malicious behavior and a violation of a duty to act in good
faith. Plaintiffs may proceed on their claim for breach of contract