Battle v. Seibels Bruce Ins. Co.

Decision Date29 April 2002
Docket NumberNo. 01-1256.,No. 01-1214.,01-1214.,01-1256.
PartiesJoseph BATTLE, Plaintiff-Appellant, v. SEIBELS BRUCE INSURANCE COMPANY; South Carolina Insurance Company, Defendants-Appellees, and Glasgow Hicks Company; North Carolina Joint Underwriting Association, Defendants. Joseph Battle, Plaintiff-Appellee, v. Seibels Bruce Insurance Company; South Carolina Insurance Company, Defendants-Appellants, and Glasgow Hicks Company; North Carolina Joint Underwriting Association, Defendants.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: Carmen J. Battle, Fayetteville, North Carolina, for Appellant. Gerald Joseph Nielsen, Nielsen Law Firm, Metairie, Louisiana, for Appellees. ON BRIEF: Walter T. Johnson, Jr., Greensboro, North Carolina, for Appellant. Eric Stevens, Poyner & Spruill, L.L.P., Raleigh, North Carolina, for Appellees.

Before WIDENER and WILLIAMS, Circuit Judges, and HAMILTON, Senior Circuit Judge.

Affirmed in part, vacated in part, and remanded by published opinion. Senior Judge HAMILTON wrote the opinion, in which Judge WILLIAMS joined. Judge WIDENER wrote a concurring and dissenting opinion.

OPINION

HAMILTON, Senior Circuit Judge.

This appeal primarily presents a subject matter jurisdiction question with respect to certain claims emanating from a coverage dispute between a homeowner and the South Carolina Insurance Company (SCIC) which involves a flood insurance policy issued under the National Flood Insurance Program (NFIP), see 42 U.S.C. §§ 4001-4129. The claims allege breach of the implied covenant of good faith and fair dealing and the temporary conversion of money. We hold the district court possessed subject matter jurisdiction over these claims under the federal question statute, 28 U.S.C. § 1331, and, therefore, we vacate the district court's remand of those claims to state court. We remand this case to the district court for further proceedings on those claims consistent with this opinion.

We also affirm the district court's grant of summary judgment in favor of SCIC with respect to the homeowner's breach of contract claim against it. We also affirm the district court's grant of summary judgment in favor of codefendant Seibels Bruce Insurance Company (Seibels Bruce)1 with respect to all claims against it.

I.

On October 23, 1995, SCIC issued Joseph Battle (Battle) a flood insurance policy under the NFIP for his beach-front home (the Property) located at 911 Canal Drive, Carolina Beach, North Carolina. Before we continue setting forth the facts and procedural history relevant to the issues on appeal, we deem the immediately following explanation of the NFIP necessary to put such information in proper context.

A.

Congress established the NFIP under the National Flood Insurance Act of 1968, 42 U.S.C. §§ 4001-4129, in order to make flood insurance available on reasonable terms and conditions to those in need of such protection, id. at § 4001. Furthermore, as the Seventh Circuit recently explained:

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. 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. 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.

Downey v. State Farm Fire & Cas. Co., 266 F.3d 675, 678-79 (7th Cir.2001) (internal citations omitted).

For more than twenty years, the Director of the Federal Emergency Management Agency (FEMA) has been charged as the sole administrator of the NFIP. Exec. Order No. 12127, 44 Fed.Reg. 19367 (Mar. 31, 1979), reprinted in 15 U.S.C. § 2201 (making effective Reorganization Plan No. 3 of 1978, 43 Fed.Reg. 41943 (June 19, 1978), reprinted in 15 U.S.C. § 2201). Moreover, the Director of FEMA is statutorily authorized to provide, by regulation, not only "for the general terms and conditions of insurability which shall be applicable to properties eligible for flood insurance coverage" under the NFIP, but also for the general method or methods by which proved and approved claims for losses under such policies may be adjusted and paid. 42 U.S.C. §§ 4013, 4019. Significantly, by FEMA regulation, all policies issued under the NFIP must be issued using the terms and conditions of the Standard Flood Insurance Policy (SFIP) found in 44 C.F.R. Part 61, Appendix A. 44 C.F.R. §§ 61.4(b), 61.13(d), (e), 62.23(c).

The Director of FEMA operates the Government Program of the NFIP "through the facilities of the Federal Government...." 42 U.S.C. § 4071(a). In so doing, the Director of FEMA is authorized to use private insurance companies "as fiscal agents of the United States," id. at § 4071(a)(1), and to enter into with insurance companies any necessary "contracts, agreements, or other appropriate arrangements," id. at § 4081(a).

In 1983, the Director of FEMA used this authorization to create the "Write-Your-Own Program" (WYO Program). The WYO Program is a program whereby private insurance companies are allowed to issue, under their own names as insurers, flood insurance policies under the Government Program. 44 C.F.R. § 62.23. Insurance companies which participate in the WYO Program are known as "WYO Companies." Id. Notably, all flood insurance policies issued by WYO Companies under the WYO Program must mirror the terms and conditions of the SFIP, which terms and conditions cannot be varied or waived other than by the express written consent of the Federal Insurance Administrator. 44 C.F.R. §§ 61.4(b), 61.13(d), (e), 62.23(c), (d). Additionally, "[a] WYO Company issuing flood insurance coverage shall arrange for the adjustment, settlement, payment and defense of all claims arising from policies of flood insurance it issues under the [NFIP], based upon the terms and conditions of the [SFIP]." 44 C.F.R. § 62.23(d).

Premiums collected by WYO Companies, after deducting fees and costs, must be deposited in the National Flood Insurance Fund in the United States Treasury. 42 U.S.C. § 4017(d); 44 C.F.R. Pt. 62, App. A, Arts. II(E) & VII(B). When the funds retained by WYO Companies are insufficient to satisfy outstanding claims and refunds the WYO Companies must draw upon letters of credit from FEMA. 44 C.F.R. Pt. 62, App. A, Art. IV(A). In short, premiums collected on policies written by WYO Companies do not belong to those companies. Newton v. Capital Assurance Co., 245 F.3d 1306, 1311 (11th Cir.2001). Thus, claim payments on such policies are a direct charge on the United States Treasury. Id.; see also 44 C.F.R. § 62.23(f) (characterizing the relationship between the federal government and WYO Companies as "one of a fiduciary nature" and intended to "assure that any taxpayer funds are accounted for and appropriately expended").

B.

SCIC is a WYO Company. As a WYO Company, SCIC issued Battle a SFIP for the Property (Battle's SFIP or his SFIP) for a one-year period beginning October 23, 1995. Significantly, Article 9(R) of Battle's SFIP provides as follows:

Conditions for Filing a Lawsuit: You may not sue us to recover money under this policy unless you have complied with all of the requirements of the policy. If you do sue, you must start the suit within 12 months from the date we mailed you notice that we have denied your claim, or part of your claim, and you must file the suit in the United States District Court of the district in which the insured property was located at the time of the loss.

(J.A. 484).2

On July 18, 1996, a property loss notice was forwarded on behalf of Battle to SCIC indicating that portions of the Property had sustained flood damage on July 12, 1996 as a result of Hurricane Bertha (the Bertha Claim). Specifically, Battle claimed flood damage to two structures built over the water and their miscellaneous contents, an enclosure on ground level under an elevated building, an air conditioning unit on a support stand, and the ceiling under an elevated building.

On September 13, 1996, another property loss notice was forwarded on behalf of Battle to SCIC. This time SCIC was notified that the Property had sustained additional flood damage on September 5, 1996 as a result of Hurricane Fran (the Fran Claim). This second property loss notice reported the damage to the Property as follows: "[R]oof, railing off deck, glass window seal broke, water damage inside, side of out building gone, fence damaged, contents damaged." (J.A. 388).

Following a physical inspection of the Property by an insurance claim adjuster from Insurance Network Services sent by SCIC, Battle was sent a letter dated September 24, 1996, stating that his SFIP provided no coverage for his Bertha Claim.3 Although the letter was on the letterhead of "The Seibels Bruce Insurance Companies," the "RE:" section of the letter correctly referenced the policy number of Battle's SFIP and the date he claimed to have sustained flood damage to the Property as the result of Hurricane Bertha. The letter specifically advised Battle that his SFIP "does not provide coverage for outbuildings, walkways or contents located in the enclosure of an elevated building." (J.A. 386). The letter further advised him that his SFIP "does provide coverage for appurtenant structures, but only detached garages and carports," and quoted the coordinate portions of Battle's SFIP. Id. The closing paragraph of the letter states as follows:

Since you did not sustain a loss that would be covered by your flood policy, I...

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