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Understanding the Federal National Flood Insurance Program as Hurricane Season Approaches

The Federal National Flood Insurance Program (“NFIP”) is a federal program that allows homeowners to protect against flooding because most homeowners insurance does not cover flooding (You can check out their website here). It is offered to homeowners, renters and some business owners. The federal government works with private insurance companies to encourage them to offer insurance. The government sets a standard rate and then the insurance is actually through the private insurance company, but involves the federal government to a great degree. The federal government underwrites, or supports the insurance company, but the private insurance company does all of the related administrative tasks.

Because of the federal government’s involvement, when there are issues with the insurance company, you must follow unique litigation paths in order to recover for any damages in many occasions. For example, the federal government will normally cover any litigation costs for the private insurance company. As such, some procedures that would normally be acceptable at the state level may not be allowed in the federal court.

A case in Mississippi that was appealed to the Fifth Circuit Court of Appeals helps explain these differences. In that case, Grissom, the insured individual, had insurance under the NFIP through Liberty Mutual. He was eligible for a preferred risk insurance policy, but did not know he was eligible. After Hurricane Katrina, he argued that he would have purchased the preferred risk insurance policy if he had known about his eligibility.

When Hurricane Katrina completely destroyed Grissom’s home, the insurance paid $121,000, which was the policy maximum. Grissom sued arguing that he should be awarded the difference between his current policy maximum and the amount he would have gotten if he were under the preferred risk insurance policy. Grissom won at a jury trial on the state level. Under normal circumstances, this case could be resolved easily under state law. However, because federal money may be involved, the court had different questions to consider.

First, the Court considered whether federal law preempted the case. If federal law preempted, then the state court should not have heard the case and Grissom should have brought the case directly to federal court. The court has ruled on this issue several times before and decided that federal law controls when there are “tort claims arising from claims handling” Wright v. Allstate Ins. Co., 415 F.3d 384, 390 (5th Cir. 2005). However, federal law does not control when the individual is getting insurance as a new customer. Campo v. Allstate Ins. Co., 562 F.3d 751 (5th Cir. 2009). That is, only if the individual is getting insurance as a first time customer does state law control. Therefore, the question in this case became whether Grissom was getting insurance for the first time. Grissom was renewing his policy when he became eligible for the preferred risk insurance policy. As such, the court concluded that he was renewing, and not a new customer, so federal law controlled. See Borden v. Allstate Ins. Co., 589 F.3d 168, 173 n.2 (5th Cir. 2009) (explaining that claim renewal is considered claims handling).

Next, since there was a jury in the lower court, the Court considered whether a jury would have been proper. Normally, if federal funds are involved, a jury trial is not appropriate. Under the NFIP, “[t]he federal government pays flood insurance claims and reimburses costs, including defense costs, for adjustment and payment of claims by private insurers.” Therefore, since the government pays for litigation directly, a jury trial is not appropriate.

Lastly, the Court considered whether Grissom’s claim would have won even under state law. Grissom’s argument was that the insurance providers had a duty to inform him of his preferred status when he renewed. He argued that failure to inform him amounted to a negligent misrepresentation. In Mississippi, there is a five-factor test for negligent misrepresentation. The Court concluded that it should not have won at the state level because it failed one of the tests for liability. In fact, Mississippi law explains that there is no affirmative duty to inform buyers of other insurance policies that may be more beneficial to them given their unique circumstances.

Programs such as NFIP create unique litigation situations that mesh federal and state law. Experienced attorneys should be employed to deal with these complicated issues. Call The Berniard Law Firm today and we would be happy to discuss your legal needs with you.