Ninth Circuit Holds Failure to Submit Proof of Loss Does Not Bar Coverage Under NFIP Policy
September, 2005
In June 2005, just a few months before Hurricanes Katrina and Rita devastated the Gulf Coast, the Ninth Circuit addressed the respective duties of insurers and insureds under flood insurance programs established by the Federal Emergency Management Agency (“FEMA”). The court held that an insured who purchased a FEMA Standard Flood Insurance Policy from a Write-Your-Own flood insurer was not bound by provisions of FEMA’s Flood Insurance Manual that prohibit insurers from waiving a proof of loss in certain circumstances. Pecarovich v. Allstate Ins. Co., 135 Fed. Appx. 23, 2005 WL 1331803 (9th Cir. 2005).
Background
The National Flood Insurance Program
In 1968, Congress passed the National Flood Insurance Act (“NFIA”) intending to make flood insurance more readily obtainable. The NFIA also sought to reduce the potential for flood damage by making the insurance available only to communities that implemented floodplain management ordinances. Prior to passage of the NFIA, flood coverage was either unavailable to the general public or unaffordable. The national response to floods was, moreover, generally limited to disaster relief and construction of flood-control works such as dams, levees, sea walls, and the like. These approaches did not sufficiently reduce losses or encourage the implementation of preventive measures.
Pursuant to the NFIA – codified at 42 U.S.C. §§ 4001 et seq. – the National Flood Insurance Program (“NFIP”) was established to provide flood insurance to communities that adopt and enforce floodplain management ordinances in a manner consistent with standards set forth in the NFIA. Because FEMA lacked sufficient resources to administer the NFIP on its own, the Write-Your-Own (“WYO”) program was created to allow private insurers to serve as fiscal agents of the United States – issuing federal flood policies through the NFIP. WYO companies have a fiduciary obligation to the NFIA as stewards of the federal funds received in premiums and paid on claims arising from flood losses. 44 C.F.R. pt. 62 and its appendices specify the procedures that these companies must follow as a condition for reimbursement.
Facts
The insured in Pecarovich purchased a Standard Flood Insurance Policy (“SFIP”) – issued by Allstate through the WYO program – for his home in Laguna Beach, California. As a result of damage sustained at that property, the insured submitted a claim to Allstate for over $200,000. The insured did not, however, submit a proof of loss. No reason is given for the insured’s failure to do so. However, an explanation may lie in the fact that an NFIP representative initially told Allstate that the damage was not covered under the SFIP. After Allstate informed the insured of the initial coverage determination, the company indicated that it might reconsider coverage if certain reports and cost estimates were prepared. Allstate agreed to pay for the reports and further agreed that the insured could select the engineers. Despite several requests by Allstate, the structural engineer selected by the insured did not submit a report. With neither a proof of loss nor the requested report, Allstate did not have sufficient information to reconsider the initial coverage determination – and the insured’s claim was denied.
During the course of the litigation, Allstate argued, among other things, that it was entitled to summary judgment because the insured failed to file a proof of loss. The insured contended that Allstate had, in fact, waived the proof of loss requirement, pointing to a clause in the SFIP which provided that the insurer “may…waive the requirement for the completion and filing of a proof of loss in certain cases….” SFIP, p. 26, cited in Pecarovich v. Allstate Ins. Co., 272 F. Supp. 2d 981 (C.D. Cal. 2003), rev’d and remanded, 135 Fed. Appx. at 23, 2005 WL 1331803 (2005). Allstate countered that it could not have waived the proof of loss requirement since a guideline in the FEMA Flood Insurance Manual allowed waivers only for claims under $7,500. Allstate submitted FEMA’s NFIP Adjuster Claims Manual and Flood Insurance Manual in support of its position, asserting that the insured was bound by the provisions in the manuals because a clause in the SFIP stated that the policy was issued “pursuant to ‘Applicable Federal Regulations in Title 44 of the Code of Federal Regulations.’”
Analysis
The Ninth Circuit disagreed and found in favor of the insured, holding that there was no contractual provision – binding on the insured – that governed the dollar limits of Allstate’s discretion to waive a proof of loss. The court found further that the insured did not have notice of that limitation by the “bare reference” to Title 44 in the SFIP:
…Allstate, not the insured, is obligated to obtain a proof of loss form in cases of loss over $7,500. Allstate may have breached its obligation to the NFIP when it waived the proof of loss…but it cannot pass this responsibility on to its insured.
Thus, a waiver by Allstate of the proof of loss requirement was not nullified by the waiver cap in the Adjuster’s Manual.
Learning Point:
The quantity and severity of Hurricane Katrina flood losses are unprecedented in the history of the NFIP – and many more claims will arise in the wake of Hurricane Rita. Federal regulations provide that “WYO Companies will adjust claims in accordance with general Company standards, guided by NFIP Claims manuals.” 44 C.F.R. §62.23(i)(1). WYO insurers adjusting recent hurricane and flood losses across the Gulf coast should take note – while NFIP guidelines may be binding upon insurers, they may not be binding upon insureds. •
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