445 F.3d 179 (2nd Cir. 2006), 05-1920, Palmieri v. Allstate Ins. Co.

Docket Nº:05-1920-CV(L), 05-3010-CV(XAP).
Citation:445 F.3d 179
Party Name:Paul PALMIERI, Plaintiff-Appellant-Cross-Appellee, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.
Case Date:April 13, 2006
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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445 F.3d 179 (2nd Cir. 2006)

Paul PALMIERI, Plaintiff-Appellant-Cross-Appellee,

v.

ALLSTATE INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.

Nos. 05-1920-CV(L), 05-3010-CV(XAP).

United States Court of Appeals, Second Circuit.

April 13, 2006

Argued: Dec. 20, 2005.

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R. Bertil Peterson, Staff Counsel, Coalition of Landlords, Homeowners & Merchants, Inc., Babylon, NY, for Plaintiff-Appellant-Cross-Appellee.

Gerald F. Kirby, Feldman, Rudy, Kirby & Farquharson, P.C., Westbury, NY, for Defendant-Appellee-Cross-Appellant.

Before: SOTOMAYOR and WESLEY, Circuit Judges, and KAPLAN, District Judge. [*]

SOTOMAYOR, Circuit Judge:

This contract dispute over a flood insurance policy requires us to determine whether we have jurisdiction to hear claims involving policies issued by private insurers pursuant to the National Flood Insurance Act ("NFIA" or the "Act"), codified at 42 U.S.C. §§ 4001-4129. We hold that 42 U.S.C. § 4072 gives us jurisdiction to hear such claims. We further hold that prejudgment interest may not be awarded against private insurers acting as fiscal agents of the federal government under the NFIA. We also find that partial summary judgment was properly granted to Allstate on the question of whether Palmieri could recover the full replacement cost of his damaged personal property, and to Palmieri on the question of whether he was entitled to the full replacement cost of his damaged home. We therefore affirm.

BACKGROUND

On October 31, 1991, plaintiff Paul Palmieri's house on the south shore of Long Island suffered heavy flood damage in a massive nor'easter that local newspapers dubbed "the Halloween storm." Roni Rabin, The Shoreline Slips Away, NEWSDAY, Nov. 29, 1991, at 4. The storm was as powerful as a hurricane but lingered longer, causing coastal flooding and erosion throughout the oceanfront communities of eastern Long Island. See Nameless Bully Pummels Island, NEWSDAY, Nov. 1, 1991, at 3.

Palmieri's house was located in Babylon, New York, on the waters of the Great South Bay, where only a few barrier islands protected it from the Atlantic Ocean and the full fury of the storm. Palmieri's house was insured under a flood insurance policy issued by defendant-appellee-cross-

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appellant Allstate Insurance Company ("Allstate") pursuant to the NFIA. As discussed in more detail below, the NFIA was intended to help property owners in flood-prone areas obtain flood insurance. Understandably, private insurers tend to be reluctant to insure houses in flood-prone areas like Babylon. The NFIA created a program under which the federal government bears the financial risk of flood insurance policies issued and administered by private insurance companies.

Palmieri filed two claims under his policy, one for damage to his house and one for damage to its contents. Allstate reimbursed Palmieri in 1992 for the actual cash value of each, but on each claim it held back the depreciation value, i.e., the difference between the actual cash value and the cost of repairing or replacing the property. 1 In November 1996, Palmieri requested that Allstate reimburse him for the monies held back. In September 1997, after Palmieri had submitted checks and receipts as evidence that he had actually made repairs, Allstate informed Palmieri by letter that it was denying both of his claims for replacement costs.

Allstate refused to pay the cost of repairing Palmieri's house because, it said, Palmieri had failed to comply with certain provisions of the policy in making his claim. Allstate also refused to pay the cost of replacing the contents of Palmieri's house, arguing that the policy did not allow Palmieri to recover the cost of replacing personal property.

Palmieri filed a civil action in Suffolk County Supreme Court seeking to recover the $10,074.28 Allstate had held back. That action was dismissed in December 2001 upon a finding by the state court that the United States District Court had exclusive jurisdiction over the action pursuant to the NFIA. On May 10, 2002, Palmieri commenced the instant action in the United States District Court for the Eastern District of New York. The parties consented to jurisdiction by United States Magistrate Judge Arlene R. Lindsay, 2 who granted partial summary judgment to both parties on March 22, 2005. The magistrate judge concluded that Palmieri was entitled to the depreciation value of his dwelling, but was not entitled to the depreciation value of his personal property. From this judgment the parties now timely appeal and cross-appeal.

DISCUSSION

The disagreements in this case primarily concern the costs of replacing Palmieri's house and property. The parties agree that Palmieri was entitled to recover the actual cash value of the property destroyed in the flood; the question is whether he could recover the additional costs of replacing it. Palmieri challenges the magistrate judge's refusal to allow him to recover the replacement cost of his personal property. Allstate challenges the magistrate judge's ruling that Palmieri was entitled to the replacement cost of his home. Before we reach the merits of their

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arguments, we must determine whether we have jurisdiction to hear the case.

I. JURISDICTION OVER CLAIMS AGAINST PRIVATE INSURERS UNDER THE NATIONAL FLOOD INSURANCE ACT

A. The National Flood Insurance Program

Recognizing that private insurers were unlikely to provide adequate flood insurance without some federal subsidy, Congress in 1968 created the NFIA, codified at 42 U.S.C. §§ 4001-4129, to provide subsidized flood insurance through private insurers. See 42 U.S.C. § 4001(b) ("[M]any factors have made it uneconomic for the private insurance industry alone to make flood insurance available to those in need of such protection on reasonable terms and conditions"). Under the Act, the federal government provides flood insurance subsidies and local officials are required to adopt and enforce various management measures. See id. §§ 4002(b)(3), 4012(c), 4022; 44 C.F.R. §§ 60.2-60.7. The National Flood Insurance Program ("NFIP") created by the Act is administered by the Federal Emergency Management Agency ("FEMA") and supported by the federal treasury, which pays for claims that exceed the revenues collected by private insurers from flood insurance premiums. See Van Holt v. Liberty Mut. Fire Ins. Co., 163 F.3d 161, 165 n. 2 (3d Cir.1998). Congress has 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.

Prior to the NFIA's enactment, "few insurance companies offered flood insurance because private insurers were unable to profitably underwrite flood insurance policies." C.E.R. 1988, Inc. v. Aetna Cas. & Sur. Co., 386 F.3d 263, 266 (3d Cir.2004). In its "early years, the Program was administered under what is known as 'Part A' [or the 'Industry Program'] of the NFIA. A pool of private insurance companies issued policies and shared the underwriting risk, with financial assistance from the federal government." Id.; see also Downey v. State Farm Fire & Cas. Co., 266 F.3d 675, 678 (7th Cir.2001) (citing 42 U.S.C. §§ 4051-4056). Under "Part B," known as the "Government Program," the government "run[s] the NFIP itself--offering federally underwritten policies--with the potential for administrative assistance from private insurers." Downey, 266 F.3d at 678 (citing 42 U.S.C. §§ 4071-4072). "In 1977, the Secretary of Housing and Urban Development, who ran the NFIP at the time ..., decided that the Industry Program was unworkable and ended it. He then implemented the Government Program, which has continued to the present." Id. at 678-79.

Pursuant to 42 U.S.C. § 4081(a), FEMA created the Write-Your-Own Program ("WYOP"), which allows private insurers, sometimes called "WYO companies," to issue and administer flood-risk policies under the Government Program. Although FEMA may issue policies directly under the Government Program,

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

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companies serve as administrators for the federal program. It is the Government, not the companies, that pays the claims.

C.E.R. 1988, Inc., 386 F.3d at 267; see also Downey, 266 F.3d at 679 (noting that under the Government Program, "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"). Suits against the FEMA Director upon the disallowance of a claim are authorized by 42 U.S.C. § 4072, and "[b]y regulation, the WYO company [may be] sued in place of the FEMA director." C.E.R. 1988, Inc., 386 F.3d at 267 n. 4; see also Downey, 266 F.3d at 679 (citing 44 C.F.R§ 62.23(d)). Because Allstate is acting here as a WYO company, we must decide whether we have subject-matter jurisdiction over such a suit.

B. Subject-Matter Jurisdiction Under § 4072

In their original briefs to this Court, both parties asserted that 42 U.S.C. § 4053 gives us jurisdiction over this case. 3 Recognizing that our sister circuits have rejected this view, we ordered the parties to...

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