386 F.3d 263 (3rd Cir. 2004), 03-2833, C.E.R. 1988, Inc. v. Aetna Cas. and Sur. Co.

Docket Nº:03-2833.
Citation:386 F.3d 263
Party Name:C.E.R. 1988, INC. v. THE AETNA CASUALTY AND SURETY COMPANY, Appellant.
Case Date:October 12, 2004
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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386 F.3d 263 (3rd Cir. 2004)

C.E.R. 1988, INC.

v.

THE AETNA CASUALTY AND SURETY COMPANY, Appellant.

No. 03-2833.

United States Court of Appeals, Third Circuit

October 12, 2004

Argued May 6, 2004

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Gerald J. Nielsen, (Argued), Metairie, LA, for Appellant.

Francis J. D'Eramo, Nancy V. Young, (Argued), Nichols, Newman, Logan & D'Eramo, Christiansted, St. Croix, USVI, for Appellee.

Before BARRY, AMBRO, and SMITH, Circuit Judges.

AMBRO, Circuit Judge.

We address in this appeal whether the National Flood Insurance Program (the "Program") is sufficiently comprehensive to preempt a state tort suit arising from conduct related to the Program's administration. We conclude that the overarching purpose of the Program-to provide affordable flood insurance in high-risk areas in order to reduce pressures on the federal fisc-would be compromised by state court interference. Thus the plaintiff's state law tort claims are preempted.

Factual and Procedural History

The Program is administered by the Federal Emergency Management Agency ("FEMA") pursuant to the National Flood Insurance Act of 1968 ("NFIA"), 42 U.S.C. § 4001, et seq. C.E.R.1988, Inc. ("C.E.R.") seeks state law remedies for improper handling of the Program's Standard Flood Insurance Policy (the "Policy") issued in favor of C.E.R. by defendant Aetna Casualty and Surety Company ("Aetna"). Aetna is a "Write-Your-Own" ("WYO") insurance company, meaning that it is a private insurer authorized by FEMA to provide Policies in its own name. It collects premiums in segregated accounts, from which it pays claims and issues refunds. When the funds are inadequate (as frequently occurs), Aetna pays claims by drawing on letters of credit issued by the United States Treasury.

C.E.R. purchased a Policy from Aetna to cover Hamilton House, a property in St. Croix. In September 1995 the property was damaged by flooding during Hurricane Marilyn. C.E.R. received an insurance payment of $200,000 as a result of damage to Hamilton House. One year later, in September 1996, the facility again was damaged by flood waters, this time during Hurricane Hortense. C.E.R. filed a claim for $716,916, but the receipts it submitted in conjunction with the claim, documenting repairs made since Hurricane Marilyn, totaled under $20,000.

Given the disparity between the claim amount and the receipt totals, Aetna required C.E.R. to submit a "Comparison Estimate" detailing when the relevant damage occurred. The Comparison Estimate, prepared by an architect, reported new losses of $325,300.55 resulting from Hurricane Hortense. Nonetheless, Aetna's adjustment company refused to consider the estimate and recommended payment in the amount of $25,177.61, minus a $750 deductible. C.E.R. refused the settlement, and Aetna closed its file on the claim, without payment, in March 1997.

In 1997 C.E.R. filed a seven-count complaint against Aetna, alleging contract and tort causes of action, in the United States District Court of the Virgin Islands. Aetna subsequently hired a second adjustment

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company, which estimated C.E.R.'s losses at $263,757.58. In February 1998 the parties settled C.E.R.'s contract claims for $278,392. Thus only C.E.R.'s tort claims remain. They allege negligent adjustment of C.E.R.'s insurance claim resulting in lost income and business opportunities, tortious bad faith conduct, and outrageous and reckless conduct entitling C.E.R. to punitive damages. C.E.R. also seeks attorney's fees and costs.

In January 2000, Aetna moved for summary judgment on these claims alleging, among other defenses, that C.E.R.'s territorial law tort claims are preempted by federal law. In April 2001, the District Court denied Aetna's motion, holding that the tort claims were not preempted and that a genuine issue of material fact existed as to whether Aetna had acted in bad faith. Aetna filed a motion for reconsideration of the preemption issue. As an alternative request for relief, it asked the District Court to certify the question for interlocutory appeal in accordance with 28 U.S.C. § 1292(b). The District Court pursued that course. We granted Aetna's petition for permission to appeal in May 2003. 1

Discussion

Our preemption analysis turns on congressional intent. We must determine whether the purposes of the Program will be jeopardized if disputes involving federal flood insurance policies are governed by state law. 2 Because we have examined this issue in a previous case, Van Holt v. Liberty Mutual Fire Insurance Co., 163 F.3d 161 (3d Cir. 1998) (on rehearing), our role today is limited. Although we left open in Van Holt the question of whether the NFIA preempts state law, id. at 169 n. 6, our reasoning in that case leads us to answer in the affirmative.

I. Overview of the National Flood Insurance Program

Congress created the Program to provide standardized insurance coverage for flood damage at or below actuarial rates. Gowland v. Aetna, 143 F.3d 951, 953 (5th Cir. 1998). Prior to its enactment, few insurance companies offered flood insurance because private insurers were unable profitably to underwrite flood policies. The Program was intended to minimize costs to taxpayers by "limit[ing] the damage caused by flood disasters through prevention and protective measures." Van Holt, 163 F.3d at 165. It is operated by FEMA and supported by the federal Treasury. Id. at 165 n. 2. The Program encompasses 4.5 million policies aggregating $500 billion dollars of coverage.

In its early years, the Program was administered under what is known as "Part A" of the NFIA. A pool of private insurance companies issued policies and shared the underwriting risk, with financial assistance from the federal Government. As of January 1, 1978, however, the Government bears full responsibility for the Program pursuant to 42 U.S.C. § 4071. Under "Part B" of the NFIA, FEMA "carr[ies] out the program of flood insurance authorized under [the NFIA] through the facilities of the Federal Government." Id. The Program is funded through the National Flood Insurance Fund established by FEMA in the United States Treasury.

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Congress authorized FEMA to "prescribe regulations establishing the general method or methods by which proved and approved claims for losses may be adjusted and paid for any damage to or loss of property which is covered by flood insurance." 42 U.S.C. § 4019. The resulting regulatory scheme is set out at 44 C.F.R. §§ 61.1-78.14. States have no regulatory control over the Program's operations. 3 Linder & Assocs. Inc. v. Aetna Cas. & Sur. Co., 166 F.3d 547, 550 (3d Cir. 1999) ("It is well settled that federal common law governs the interpretation of [Policies]. Accordingly, neither the statutory nor decisional law of any particular state is applicable to the case at bar.... [W]e interpret the [Policy] in accordance with its plain, unambiguous meaning, remaining cognizant that its interpretation should be uniform throughout the country and that coverage should not vary from state to state.") (quotations omitted).

Pursuant to 42 U.S.C. § 4081(a), FEMA created the WYO program whereby Policies may be issued by private insurers like Aetna. Though FEMA may issue Policies directly, more than 90% are written by WYO companies. These private insurers may act as "fiscal agents of the United States," 42 U.S.C. § 4071(a) (1), but they are not general agents. Thus they must strictly enforce the provisions set out by FEMA and may vary the terms of a Policy only with the express written consent of the Federal Insurance Administrator. 44 C.F.R.§§ 61.4(b), 61.13(d) & (e), 62.23(c) & (d). In essence, the insurance companies serve as administrators for the federal program. It is the Government, not the companies, that pays the claims. And when a claimant sues for payment of a claim, "the responsibility for defending claims will be upon the Write Your Own Company and defense costs will be part of the ... claim expense allowance." 4 44 C.F.R. § 62.23(i) (6).

Our Court recently evaluated the NFIA in Van Holt. In light of the strong federal interests intertwined with the...

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