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Residences at Bay Point Condominium Association, Inc. v. Standard Fire Insurance Co.

United States District Court, Third Circuit

December 4, 2013



FREDA L. WOLFSON, District Judge.

Before the Court is a Motion for Summary Judgment by Defendant Standard Fire Insurance Company ("Standard"), pursuant to Federal Rule of Civil Procedure 56, to dismiss with prejudice the Federal breach of contract, New Jersey state consumer fraud, and New Jersey state negligence claims of the Residences at Bay Point Condominium Association ("Plaintiff") arising from the 2013 reformation of four (4) Standard Flood Insurance Policies ("SFIP"s) issued by Standard as part of the National Flood Insurance Program ("NFIP").

For the reasons that follow, this Court finds (i) that the reformation of two of Plaintiff's four SFIPs was mandated by federal law, Plaintiff's breach of contract claim based upon those two policies is dismissed with prejudice, and judgment is entered for Standard regarding those two policies; (ii) that Plaintiff has introduced new arguments in briefing, not contained within the Complaint, which Standard agrees may present genuine issues of material fact precluding summary judgment on Plaintiff's breach of contract claim for the other two of Plaintiff's four policies, and, accordingly, Plaintiff's breach of contract claim based upon those two policies is dismissed without prejudice with leave given to Plaintiff to file an Amended Complaint within 20 days; and (iii) Plaintiff's state law claims are preempted by Federal Emergency Management Agency ("FEMA") regulations promulgated under the National Flood Insurance Act of 1968 ("NFIA"), as amended, and are dismissed.

I. Background of the National Flood Insurance Program

Congress passed the NFIA to "limit the damage caused by flood disasters through prevention and protective measures, " namely through the creation of a comprehensive, federally-run system of flood insurance. Van Holt v. Liberty Mut. Fire Ins. Co., 163 F.3d 161, 165 (3d Cir. 1998). The NFIA entrusted FEMA with the administration of the NFIP and funded the Program through the National Flood Insurance Fund, located in the United States Treasury and overseen by FEMA. Id. at 165 n. 2. The NFIA further authorized FEMA to "prescribe regulations establishing the general method or methods by which proved and approved claims for losses may be adjusted and paid for any damage to or loss of property which is covered by insurance." 42 U.S.C. § 4019. The resulting regulatory scheme, promulgated by FEMA, can be found in 44 C.F.R. §§ 61.1-78.14. Because the NFIP is a completely federally funded and administered program, states have no regulatory control over the NFIP's operations. Linder & Assocs. Inc. v. Aetna Cas. & Sur. Co., 166 F.3d 547, 550 (3d Cir. 1999) ("It is well settled that federal common law governs the interpretation of [NFIP policies]. Accordingly, neither the statutory nor decisional law of any particular state is applicable to the case at bar.... [W]e interpret the [policy] in accordance with its plain, unambiguous meaning, remaining cognizant that its interpretation should be uniform throughout the country and that coverage should not vary from state to state.")(quotations omitted).

Pursuant to another part of the NFIA, 42 U.S.C. § 4081(a), FEMA created the "Write-Your-Own" ("WYO") Program whereby SFIPs may be issued by private insurance companies like Standard ("WYO companies"). Though FEMA may issue SFIPs directly, "more than 90% are written by WYO companies. These private insurers may act as fiscal agents of the United States, ' 42 U.S.C. § 4071(a)(1), but they are not general agents. Thus they must strictly enforce the provisions set out by FEMA and may vary the terms of [an SFIP] only with the express written consent of the Federal Insurance Administrator. 44 C.F.R. §§ 61.4(b), 61.13(d) & (e), 62.23(c) & (d). In essence, the insurance companies serve as administrators for the federal program. It is the Government, not the companies, that pays the claims. And when a claimant sues for payment of a claim, the responsibility for defending claims will be upon the Write Your Own Company and defense costs will be part of the... claim expense allowance' [reimbursed by the government]. 44 C.F.R. § 62.23(i)(6)." C.E.R. 1988, Inc. v. Aetna Cas. & Sur. Co., 386 F.3d 263, 267 (3d Cir. 2004).

Private insurers participating in the WYO Program are authorized to issue policies under a number of different forms of the SFIP. Which SFIP form is used to insure a property is determined by the type of the insured property's occupancy. See FEMA National Flood Insurance Manual, GR 5, III, D, effective May 1, 2011, available at (hereinafter "Manual"). For an example relevant to this case, the General Property form of the SFIP is used for apartment buildings, while the Residential Condominium Building Association Policy ("RCBAP") form of the SFIP is used for residential condominium buildings. 44 C.F.R. § 61, app. A(2)-(3). Other than the type of building each insures, the other primary difference between the different forms of the SFIP is the type of compensation and coverage available after a qualifying flood loss has been suffered. The General Property form provides flood insurance coverage on an Actual Cash Value ("ACV") basis. Under ACV policies, insureds are compensated for the cash value of lost or damaged property at the time of the flood loss, up to the total amount of ACV insurance purchased and subject to any deductible on the policy. [RCBAP SFIP, 17]. The RCBAP form, by contrast, provides coverage on a Replace Cost ("RC") basis. Under RC policies, insureds are compensated for the cost to replace lost or damaged property with new versions of the same or substantially similar property at the time of the loss, again up to the total amount of the RC insurance purchased and subject to any deductible, but also subject to "coinsurance penalties" unique to the RCBAP policy. Because FEMA wished to encourage condominium owners insuring their properties under the RCBAP form to carry adequate insurance to replace all or substantially all of the damaged property, it added "coinsurance penalties" or "copays" to the RCBAP SFIP, whereby policyholders who purchased insurance for less than 80% of the replacement value of the insured property would suffer reductions in the payouts of their policies. [RCBAP SFIP, 10]. The dispute presently before the Court arises out of the different eligibility requirements and methods of compensation provided by the General Property and RCBAP forms of SFIPs.

II. Factual Background

Sometime during or before the year 2007, Standard, through a broker not named by any of the parties, issued SFIPs on each of the four buildings comprising the Residences at Bay Point complex. At that time, the units in the building were rented out as apartments. [Albert Dweck Affidavit dated June 13, 2013, ¶ 1]. Plaintiff's unnamed broker collected the required information from Plaintiff and completed an application for NFIP flood insurance with Travelers Indemnity and Affiliates, a division of Standard, on the General Property form of the SFIP, indicating that the buildings to be insured were part of an apartment complex. [Michael Aronson Affidavit, Exhibit D]. It is undisputed that 1) Standard is a registered WYO program insurance company and acted on behalf of FEMA as a fiscal agent of the United States Government in issuing the Plaintiff's policies; 2) the General Property Form issued by FEMA provides coverage for, among other things, apartment complexes; and 3) Plaintiff's properties qualified for coverage under the General Property form at the time, before 2007, when they were initially issued. [Kim Berger Affidavit, ¶¶ 4-5; General Property SFIP, 1]. The source of the present dispute arose later, sometime in 2007, when the Residences at Bay Point were converted from apartment buildings to residential condominiums. [Dweck Aff., ¶ 1].

In or around 2008, after the condo conversion, Defendant Chernoff Diamond & Co., LLC ("Chernoff") took over from the unnamed broker as the insurance broker of record for the Residences' four policies. [Aronson Aff., ¶ 2]. At that time, the four policies were still written on the General Property Form. [Aronson Aff., ¶ 3]. Standard renewed all four policies in 2008 on the General Property Form. [Aronson Aff., ¶ 4]. Standard renewed the policies again in early 2009 for the period from March 30, 2009 to March 30, 2010.[1] Sometime after the renewal, but before August 2009, the bank holding the Residences' mortgages required the Residences to obtain flood insurance on an RC basis, instead of an ACV basis for at least one of the Residences' four buildings. [Chernoff Letter dated August 26, 2009]. According to Chernoff, the Bank requested this change in coverage because at least one building in the Residences was no longer an apartment complex, but had been converted into a residential condominium, and, by bank policy, such condominiums had to be insured on an RC basis. Id. To secure RC coverage, the Residences' SFIP on the building for which the bank held the mortgage would have to be rewritten from the General Property onto the RCBAP form. Id. Accordingly, in a faxed letter dated August 26, 2009, Chernoff Diamond requested that one of the policies written on the General Property form be canceled and re-written onto the RCBAP form. Id. Later that year, in November of 2009, the Residences decided not to cancel and rewrite the other three policies not mentioned by the mortgagee bank. [Ohms Email to Dweck dated November 4, 2009]. Sometime between August 2009 and 2011, a stretch of time not well covered in the record, Plaintiff, through Chernoff, withdrew its request to cancel and rewrite the one policy it had identified in Chernoff's August 28, 2009 letter. Accordingly, as of 2011, all four of the Residences' flood insurance policies were still written on the General Property form of the SFIP. [Aronson Aff., ¶ 7].

During the years in which Plaintiff was obtaining and renewing its policies, FEMA followed its usual semi-annual procedure and issued updates to the National Flood Insurance Manual, one of the documents incorporated by reference into the federal regulations governing all SFIPs. [44 C.F.R. § 62.23(i)(1) (2003)]. The May 2011 revision of the Manual amended the section on "Reformation" to require, for the first time, policies written onto the wrong form of the SFIP to be rewritten onto the correct form at the same coverage limits. The Amendment further specified that the provisions of the correct form, not that on which the policy was erroneously issued or renewed, applied to the reformed policy. [Manual, GR 12, IX, D].[2]

Roughly three months after the new reformation provision of the Manual went into effect, on August 28, 2011, Plaintiff's buildings suffered minor flood damage during Hurricane Irene. Plaintiff timely filed an insurance claim with Standard, which Standard processed and partially paid. There was no damage to the building insured under policy XXXXXXXXXX. The building insured under policy XXXXXXXXXX suffered $4, 309.07 in damage, but this number fell below Plaintiff's $5, 000 deductible, so no payment was made. The remaining two buildings, insured under policies XXXXXXXXXX and XXXXXXXXXX, suffered damage in excess of the deductible, and Standard paid Plaintiff $20.20 and $8, 918.78 respectively in late September or early October 2011. [Dweck Aff., Exhibit A]. Standard paid out on Plaintiff's General Property policies, despite the fact that the insured buildings were no longer apartments but had been converted to condominiums in 2007.

Plaintiff subsequently renewed all four General Property policies with Standard, sometime early in the year 2012, insuring the buildings for the period between March 30, 2012 and March 30, 2013. [Aronson Aff., Exhibit D]. These policies, like all those issued previously, were written on the General Property form and named The Residences at Bay Point, LLC, the company which formerly administered the apartment complex and sponsored the conversion of the Residences into residential condominiums, as the insured. On May 16, 2012, Chernoff wrote to Standard requesting that the Residences at Bay Point Condominium Association, Inc., be substituted as the named insured on all four policies. [White Email to Travelers dated May 16, 2012]. For reasons not contained within the record, no substitution of the named insured occurred and all four policies remained in the name of the Residences at Bay Point, LLC.

On October 29, 2012, Hurricane Sandy made landfall in New Jersey and all four of Plaintiff's buildings insured by Standard suffered significant flood damage. Plaintiff again timely filed a claim for the damage to all four buildings. After reviewing Plaintiff's claim, Standard sent Plaintiff a letter, dated November 29, 2012, explaining that RCBAP policies are required for residential condominium properties, and requesting that an authorized representative of the Residences at Bay Point Condominium Association verify that the four properties for which Plaintiff had submitted claims were indeed "held in the condominium form of ownership." [Berger Aff., Exhibit A-1]. Sometime later, Albert Dweck, on behalf of the Association, returned the letter with a verification that the Residences were held in the condominium form of ownership. Id. On December 11, 2012, Chernoff submitted proof of the replacement cost of the damage to the buildings, signed by Plaintiff. [Berger Aff., Exhibit A-2]. Later, on January 7, 2013, a representative from Chernoff communicated with an employee of Standard via email to request a status update on the reformation of Plaintiff's policies. Id. This email exchange evidences that at least Chernoff, Plaintiff's agent, was aware that some form of policy reformation might occur as early as January 2013.

Standard sent renewal notices for each of Plaintiff's four existing General Property policies on February 13, 2013. [Flood Insurance Renewal Premium Notices, dated February 13, 2013, attached to Dweck Aff.]. In an email exchange between the same two Chernoff and Standard employees that had communicated in January, Standard advised Chernoff to disregard the renewal notices because the reformation process was not yet complete. [Berger Aff., Exhibit A-2]. Finally, in a letter dated May 20, 2013, Standard formally informed Chernoff that Plaintiff's four flood insurance policies, initially written on the General Property form, had been reformed and rewritten onto the RCBAP form. [Travelers Letter to Chernoff dated May 20, 2013]. Standard promptly refunded Plaintiff's excess premiums and began paying out the on the reformed policies.

Standard reformed Plaintiff's policies in accordance with the amendment to the National Flood Insurance Manual added by FEMA in May 2011. It rewrote the General Property polices onto the RCBAP form at the level of coverage that the Residences had held on the General Property form ($250, 000) and applied the terms and conditions of the correct RCBAP form to the policies. As explained above, one of the terms unique to the RCBAP form is the imposition of "coinsurance penalties" on policies covering less than 80% of a property's replacement value. The maximum amount of coverage available under the General Property form is $250, 000, the amount held by the Residences. The RCBAP form, however, can insure a property up to $1, 000, 000 or the replacement cost of the property, whichever is lower. [RCBAP SFIP]. The value of Plaintiff's buildings was such that the $250, 000 of coverage plaintiff held in each of its four reformed RCBAP SFIPs was less than 80% of the replacement value for each of the four insured buildings. [Complaint, pg. 6, ¶8].[3] Plaintiff's claim therefore became subject to the coinsurance penalties imposed by FEMA, and Plaintiff's insurance recovery was reduced in the amount of $361, 696.87. Id. The present dispute arose because Plaintiff received substantially reduced coverage under its SFIPs - lower than that to which it understood itself to be entitled.

III. Procedural History

Plaintiff commenced this action by a Complaint on April 10, 2013, naming the Standard Fire Insurance Company and Chernoff Diamond & Co., LLC as defendants. On May 14, 2013, Standard responded by filing a pre-Answer Motion to Dismiss all claims against it pursuant to Rule 12(b)(6). Chernoff Answered the Complaint on June 10, 2013, and, shortly thereafter, on June 17, filed a Response in Opposition to Standard's Motion. Plaintiff also submitted its Response in Opposition to the Motion on June 17. Standard filed its Reply to both Oppositions on July 29, 2013. Along with their Opposition papers, both Plaintiff and Chernoff submitted affidavits and other evidence not contained within the Complaint, along with a request that Standard's Motion be treated as one for Summary Judgment under Rule 56. Standard, in its Reply, agreed that the Motion should be converted. Accordingly, the Court, pursuant to Rule 12(d), converted Standard's Motion to one for Summary Judgment on October 9, 2013, simultaneously also granting Plaintiff's request to ...

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