Downey v. State Farm Fire & Casualty

• Decision Date: 17 September 2001
• Docket Number: No. 00-3473,00-3473
• Citation: 266 F.3d 675
• Parties: (7th Cir. 2001) Michael Downey, Plaintiff-Appellee, v. State Farm Fire & Casualty Co., Defendant-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 675

266 F.3d 675 (7th Cir. 2001)

Michael Downey, Plaintiff-Appellee, v. State Farm Fire & Casualty Co., Defendant-Appellant.

No. 00-3473

In the United States Court of Appeals For the Seventh Circuit

Argued March 29, 2001

Decided September 17, 2001

Appeal from the United States District Court for the Central District of Illinois. No. 98-1118--Michael M. Mihm, Judge. [Copyrighted Material Omitted] Before Easterbrook, Rovner, and Diane P. Wood, Circuit Judges.

Easterbrook, Circuit Judge.

Michael Downey lives on a hill in Peoria, Illinois. His back yard runs downward at a 35° angle, creating a danger of soil erosion that could compromise the foundation of his house. A retaining wall supported the soil, but in February 1997 heavy rain washed away the wall and much of the soil that it had been retaining. This in turn caused the house's foundation to shift and become unstable. Fortunately (or so he thought) Downey had purchased flood insurance. State Farm Fire & Casualty Co., from which Downey bought the policy, paid to fix cracks in the foundation but denied indemnity for the expense of stabilizing the house to ward off collapse. Injury caused by the failure of the retaining wall, State Farm asserted, is excluded from coverage. State Farm lost in the district court and on appeal challenges the district judge's interpretation of the policy. Before reaching the merits, however, we must consider both subject-matter and appellate jurisdiction.

Our ears pricked up at the assertion that this suit belongs in federal court, for a contract dispute between two private parties typically does not arise "under the Constitution, laws, or treaties of the United States", 28 U.S.C. sec. 1331, and the complaint does not allege diversity of citizenship. State Farm's brief asserts that federal- question jurisdiction exists but does not explain why; Downey concurred in State Farm's presentation. Because the presentations at oral argument were unilluminating, we directed the parties to file supplemental memoranda addressing jurisdictional issues. Their responses focus on the nature of the insurance. Downey bought his policy through the National Flood Insurance Program (nfip), codified at 42 U.S.C. sec. sec. 4001-4129. This national system of flood insurance for residents of high-risk areas regulates the transactions between Downey and State Farm, and the parties offer three reasons why the upshot is a question within federal jurisdiction.

State Farm points to an explicit grant of jurisdiction in 42 U.S.C. sec. 4053:

[U]pon the disallowance by any such company or other insurer of any such claim . . . the claimant, within one year after the date of mailing of notice of disallowance or partial disallowance of the claim, may institute an action on such claim against such company or other insurer in the United States district court for the district in which the insured property or the major part thereof shall have been situated, and original exclusive jurisdiction is hereby conferred upon such court to hear and determine such action without regard to the amount in controversy.

Although Downey is a "claimant" and State Farm an "insurer", Downey's action against State Farm is not a "claim" under sec. 4053--State Farm looked at the wrong part of the statute. When Congress created the nfip it gave the program's administrator two ways to execute the program and discretion to choose between them. The first method, the "Industry Program," allows a pool of private insurers to underwrite flood insurance with financial backing from the government. See 42 U.S.C. sec. sec. 4051- 56. The "Government Program," the second option, allows the government to run the nfip itself--offering federally underwritten policies-- with the potential for administrative assistance from private insurers. See 42 U.S.C. sec. sec. 4071-72. See Edward T. Pasterick, The National Flood Insurance Program, in Howard Kunreuther & Richard J. Roth, Sr., eds., Paying the Price: The Status and Role of Insurance Against Natural Disasters in the United States (1998), for an explanation of the nfip. In 1977 the Secretary of Housing and Urban Development, who ran the nfip at the time (it has since been taken over by the Federal Emergency Management Agency), decided that the Industry Program was unworkable and ended it. He then implemented the Government Program, which has continued to the present. Section 4053, the grant of jurisdiction to which State Farm points, enables only claims brought "under this part"--the nfip as run under the Industry Program. State Farm, then, is 24 years too late to take advantage of sec. 4053. Courts occasionally make the same error. See Froelich v. Catawba Insurance Co., 10 F. Supp. 2d 597 (W.D. Va. 1998); Gagliardi v. Omaha Property & Insurance Co., 952 F. Supp. 212 (D. N.J. 1997). Like the eleventh circuit, Newton v. Capital Assurance Co., 245 F.3d 1306 (2001), we avoid this pitfall.

Downey observes that the Government Program has its own jurisdictional provision, 42 U.S.C. sec. 4072:

In the event the program is carried out as provided in section 4071 of this title, the Director [of fema] shall be authorized to adjust and make payment of any claims for proved and approved losses covered by flood insurance, and upon the disallowance by the Director of any such claim . . . the claimant . . . may institute an action against the Director on such claim in the United States district court for the district in which the insured property or the major part thereof shall have been situated, and original exclusive jurisdiction is hereby conferred upon such court to hear and determine such action without regard to the amount in controversy.

Yet this section allows only "an action against the Director". Downey sued State Farm. He might have thought that State Farm is the only proper defendant: In 1983 fema created the Write-Your-Own Program (wyop), which allows private insurers to issue and administer flood- risk policies under the Government Program. The private insurers also defend suits arising from the policies. 44 C.F.R. sec. 62.23(d). Perhaps Downey figured that, because he contracted with State Farm, he had to sue State Farm. Neither party appears to have noticed 44 C.F.R. sec. 62.22, which permits suits against the Director of fema arising from decisions made by wyop insurance companies. This regulation effectively allows a direct action against the person who is ultimately responsible, rather than the wielder of delegated authority. But Downey sued State Farm rather than the Director and is stuck with that choice. Section 4072 does not mention the wyop or indicate that anyone other than the Director may be sued under this grant of jurisdiction.

Nonetheless, Downey insists, with the support of Van Holt v. Liberty Mutual Fire Insurance Co., 163 F.3d 161 (3d Cir. 1998), that, because "a suit against a wyo company is the functional equivalent of a suit against fema", we should look past the caption of this case and pretend that the Director is the defendant. This position is not without force: fema provides a standard text for all nfip policies and forbids wyop companies from making changes; fema's interpretations of the policy bind all wyop participants; fema decides what rates may be charged; all premiums are remitted on to fema (minus a small fee); if wyop companies pay out on a claim they get reimbursed by fema; likewise with litigation costs. See generally 42 U.S.C. sec. 4081; 44 C.F.R. sec. sec. 62.23-62.24. So although private insurers issue the policies, fema underwrites the risk. The insurance companies handle administrative business for fema by selling policies and processing claims but do little else (unlike the Industry Program, where the private companies underwrite the risks). Arrangements like this make sense. fema likely is unsuited to tasks such as selling insurance and collecting fees, and even less adept at processing individual claims for flood damage. By purchasing the services of a more efficient claims processor, fema saves money. We see a similar structure in the Medicare program: Health care providers seek reimbursement, not directly from the government but from "fiscal intermediaries"--usually private insurance companies--that act as the claims processor in the government's stead. See Your Home Visiting Nurse Services, Inc. v. Shalala, 525 U.S. 449 (1999).

In a sense, then, State Farm is a place- holder for fema, but does this fact have jurisdictional significance? Downey might have something if for jurisdictional purposes courts typically look to see who will be affected by a decision; but we don't. This would be clear enough in an ordinary tort dispute between two Illinois citizens. If the plaintiff in such a suit agreed to pay any proceeds from the judgment to an out-of-state insurance company (who, let's say, in return agreed to pay his medical bills), would a court peek behind the formality of the non-diverse parties and recognize that those who truly have something to gain or lose--the insurance company and the Illinois defendant--are diverse? Surely not. Nor do courts look past corporate form to the citizenship of the shareholders or other investors. There is a special rule for administrators of estates, 28 U.S.C. sec. 1332(c)(2), but normally the status of the named litigant governs--provided that the litigant is an entity rather than a name for an unincorporated association such as a partnership. See Carden v. Arkoma Associates, 494 U.S. 185 (1990); Indiana Gas Co. v. Home Insurance Co., 141 F.3d 314 (7th Cir. 1998). For example, the citizenship of a trustee rather than the trust beneficiary is dispositive under sec. 1332. Navarro Savings Association v. Lee, 446 U.S. 458 (1980). Downey cannot escape the same conclusion: Although a judgment against State Farm may come out of the federal treasury--creating a federal interest--the only litigants are in the private sector. Because we see no good reason to...