Hurricane Matthew flood claims may not be entirely preempted by federal law

In the wake of Hurricane Matthew and its associated flooding (particularly in North Carolina and South Carolina), a recent case of first impression in the Sixth Circuit may be cited by both damaged businesses and insurers and insurance brokers in the Carolinas. Harris v. Nationwide Mutual Fire Insurance Company, __ F.3d __, 2016 WL 4174381 (6th Cir. Aug. 8, 2016).

Writing for a unanimous panel, Judge Ralph B. Guy, Jr. held that the National Flood Insurance Act (established in the wake of flooding in Florida and Louisiana after Hurricane Betsy in 1965) did not preempt claims based on state law for negligence in the procurement of an insurance policy for a home situated in a flood-prone area. Although this case was decided on principles of federal abstention, it has major ramifications for those practicing insurance law. While it is not binding on any courts in the area affected by Hurricane Matthew, policyholder counsel will likely cite to it as persuasive authority in support of negligence claims against insurance brokers and other professionals involved in the purchase of homes or insurance.  

The case arose when a married couple suffered a flood loss during a 2010 flood of the Cumberland River. They brought a claim against their mortgage bank (Regions), a flood-zone certifier, their insurance company (Nationwide) and their insurance broker (David Vandenbergh). On appeal, the issue was whether the homeowers’ state law claims for negligence during the procurement of their Standard Flood Insurance Policy were preempted by Congress when it passed the National Flood Insurance Act (NFIA) The panel unanimouslyheld that while the NFIA preempted coverage claims against the insurer, it did not preempt negligence claims regarding procurement of the policy.
The case was remanded to the district court for further proceedings and, presumably, for trial.

The Court explained that:

“The NFIA indisputably preempts state-law causes of action based on “the handling and disposition of SFIP claims.” Gibson [v. American Bankers Ins. Co.], 289 F.3d at 949. . . . . The Fifth Circuit has distinguished claims-handling causes of action from policy-procurement causes of action, and held that the NFIA does not preempt state-law claims “to the extent that they implicate [insurers'] acts or omissions regarding issuance of the policy because those claims are procurement-based, not claims-handling-based.” Spong v. Fid. Nat'l Prop. and Cas. Ins. Co., 787 F.3d 296, 306 (5th Cir. 2015). In determining whether a plaintiff's cause of action arises from claim handling or policy procurement, the Fifth Circuit looks to whether the plaintiff was “already covered” by a SFIP, or instead was a “potential future policyholder.” Id.  We agree with the Fifth Circuit's approach and hold that the NFIA does not preempt policy-procurement claims such as plaintiffs'.”

In adopting the same distinction as the Fifth Circuit, the Court noted that:

“Damages stemming from policy-procurement claims, unlike those arising from policy-coverage claims, are not “flood policy claim payments.” 44 C.F.R. § 62 App. A, Art. I. . . . . Policy-procurement damages, therefore, pose no danger to the federal interests prompting preemption in the claims-handling context, i.e., “reduc[ing] fiscal pressure on federal flood relief efforts.” C.E.R. 1988, Inc., 386 F.3d at 270.”

Addressing questions of federal abstention:

“[G]eneral conflict-preemption principles do not compel barring state-law policy-procurement claims. It is possible to comply with both state tort laws and FEMA regulations, and state laws regarding misrepresentation and breach of fiduciary duty in the policy-procurement process do not “stand[ ] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in enacting the NFIA. Id. at 269Id. at 269 (quoting Green v. Fund Asset Mgmt., L.P., 245 F.3d 214, 222 (3d Cir. 2001)).”

As Hurricane Matthew's floodwaters recede from the Carolinas, Harris and Spong are likely to be cited as the parties duel over whether claims for negligent procurement in the purchase of insurance can proceed to trial. 

Hurricane Matthew insurance tips for businesses

With Hurricane Matthew downgraded to a tropical cyclone, it is time for affected businesses, property owners, and insurers to focus on quantifying the amount of damage caused by the storm.  By some estimates, Hurricane Matthew will generation over 100,000 insurance claims and between $4 billion and $7.5 billion in property losses.  Although the focus is typically on pre-storm preparation, the immediate steps taken this week will be important to any business owner seeking to present an adequate claim to its insurer for property damage.

Safety is always the first priority.  Do not put yourself, your employees, of first responders in danger.  Currently in North Carolina, the predictions are for worsening flooding in many low lying parts of the eastern part of the state, with peak flooding not reaching some areas until Wednesday (four days after the storm passed). 

Once the threat of imminent danger has receded, the next step should be to document your loss.  Thorough documentation of the damage to your property will be invaluable.  Hopefully you will also have photographs or video from before the storm, so that any claim presented to an insurer can show both the before and after photographs of the condition of the property.  Because cell phones and digital cameras are not limited by physical film, do not hesitate to shoot dozens or hundreds of photographs.  Videos may be helpful as well. 


At the same time you are documenting the damage, you should immediately put your insurer on notice of the loss.  You should call your insurer to begin putting them on notice as soon as you arrive at the property if you assess any physical loss.  After you give initial notice, you can follow up with complete details, provide the photographs you have taken, etc.  The insurer will likely eventually send an adjuster to physical inspect the damage to the property. 


It is important to quickly give notice for several reasons.  As a legal matter, giving prompt notice prevents having a claim denied by an insurer on the basis of a late notice defense.  As a practical matter, because of the large number of claims that will be filed within a short period of time, some insurers will likely handle the claims on a first-come, first-serve basis.  Getting your claim in quickly gets you closer to the front of the line.   


If immediate repairs are needed, take plenty of additional photos of the damage, the repairs in progress, and the final repairs.  Maintain copies of documentation regarding the repairs, and provide those to your insurer.  If your business had to buy or rent additional equipment as a result of the damage, or you suffered inventory loss, you will want to maintain detailed documentation of these costs as well. 


Finally, whichever employee you assign to provide information to the insurer should maintain a journal or notebook.  This should include copies of all documents submitted to the insurance company, along with a log of all conversations with the insurer or its representatives.  The log should include the contact information of anyone from the insurer that you have contacted with, the date and time, the topics you discussed, and any additional information which you believe may be useful in the future or in the event of a dispute.