Berger v. Pierce

• Decision Date: 20 May 1991
• Docket Number: No. 90-3274,90-3274
• Citation: 933 F.2d 393
• Parties: RICO Bus.Disp.Guide 7758 Sanford J. BERGER, et al., Plaintiffs-Appellants, v. Samuel R. PIERCE, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 393

933 F.2d 393

RICO Bus.Disp.Guide 7758

Sanford J. BERGER, et al., Plaintiffs-Appellants, v. Samuel R. PIERCE, et al., Defendants-Appellees.

No. 90-3274.

United States Court of Appeals Sixth Circuit.

Argued Dec. 4, 1990.

Decided May 20, 1991.

Sanford J. Berger, Robert M. Fertel (argued), Berger & Fertel, Cleveland, Ohio, for plaintiffs-appellants.

Michael Anne Johnson, Emily M. Sweeney, Asst. U.S. Attys., Office of the U.S. Atty., George J. Moscarino, Jones, Day, Reavis & Pogue, Marvin L. Karp, Ulmer & Berne, Cleveland, Ohio, Charles H. Moellenberg, Jr. (argued), Brian C. Castello, Jones, Day, Reavis & Pogue, Pittsburgh, Pa., for defendants-appellees.

Before RYAN and NORRIS, Circuit Judges, and JOINER, Senior District Judge. ^*

JOINER, Senior District Judge.

Each of the plaintiffs were owners of property along the shore of Lake Erie. Each plaintiff was issued a standard flood insurance policy by the Federal Insurance Administration (FIA) in accordance with the National Flood Insurance Program (NFIP). The policies were renewed annually and were in effect in 1987. Plaintiffs allege that their properties were damaged during that year from causes covered by their flood insurance policies. Plaintiffs filed loss claims during this period of renewal. The claims were submitted to Computer Sciences Corporation (CSC), the fiscal agent of the NFIP, for processing. CSC requested GAB Business Services (GAB), an approved NFIP adjustor, to investigate the claims. GAB's report identified "gradual erosion" as the central cause of plaintiffs' losses. This report was processed through CSC, and the FIA denied plaintiffs' claims because their losses were caused by "gradual erosion."

The complaint, filed on May 6, 1988, alleges seven causes of action. Count I seeks a declaratory judgment that provisions in the insurance contract under which plaintiffs' claims were denied are contrary to law and to the congressional intent and therefore not a valid basis for denying the claims. Count II was a claim against the Secretary of Housing & Urban Development (HUD) and is not appealed here. Count III asserts that the FIA was estopped to deny plaintiffs' claims because of the issuance of policies on properties lying within a geographic zone covered by the NFIP. Count IV asserts a RICO claim against the defendants. Count V states a Bivens claim against the FIA for disparate treatment of four plaintiffs as compared with other similarly situated policy holders. Counts VI and VII assert state law claims; Count VI, breach of an implied covenant of good faith; and Count VII, a fraud claim.

The defendant FIA filed a motion to dismiss all counts. On February 23, 1990, the district court granted the motion with prejudice as to counts I-V and without prejudice as to counts VI and VII. Defendants CSC and GAB filed motions for summary judgment, which the district court granted contemporaneously with its ruling on the motion to dismiss.

For the reasons stated below, the order of dismissal and summary judgments as to Counts III-VII are affirmed. The order of dismissal as to Count I is reversed and the case remanded to the trial court. In addition, Count IV is remanded with specific directions.

I.

The NFIP was established in 1968 by the National Flood Insurance Act, 42 U.S.C. Secs. 4001-4127 (the Act). The NFIP is a federally-subsidized program which provides flood insurance at below actuarial rates. Congress created the program because of the unavailability of flood insurance from private insurance companies, who were unable to write flood insurance policies on an economically-feasible basis. Initially, the Act covered any "flood" event, defined as "hav[ing] such meaning as may be prescribed in regulations of the Director, and may include inundation from rising waters or from overflow of streams, rivers, or other bodies of water, or from tidal surges, abnormally high tidal water, tidal waves, tsunamis, hurricanes or other severe storms or deluge[.]"

In 1973, responding to a wide-spread demand, Congress broadened the scope of the Act by adding to the definition of "flood" the following: "[T]he collapse or subsidence of land along the shore of a lake or other body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels...." 42 U.S.C. Sec. 4121(c).

The operational methods of the NFIP have changed over time. When the Act was drafted, Congress set up two different methods for operating the program: Plan A, for private-industry involvement, and Plan B, for administrative supervision of the program. From 1968 to 1977, NFIP operated under the statutory Plan A, which permitted the private insurance industry to implement and operate the flood insurance program with limited federal involvement. At the end of that time the Secretary of HUD discontinued Plan A and implemented statutory Plan B. Plan B placed primary responsibility for operating the flood insurance program with the federal government. Under Plan B, the Federal Emergency Management Administration (FEMA) has managerial responsibility for the operation of the NFIP, among other federal programs, and complete control of the payment or disallowance of all flood insurance claims. FEMA has promulgated a standard flood insurance policy, the primary policy that is involved in this case. 44 C.F.R. Sec. 61, App.A. The FIA is a component organization of FEMA charged with administering the NFIP. The FIA is headed by the Federal Insurance Administrator.

The Administrator, in carrying out his mandate under the Act, defined "flood" in the policy of insurance as:

(a) A general and temporary condition of partial or complete inundation of normally dry land areas from:

(1) The overflow of inland or tidal waters ...

(b) The collapse or subsidence of land along the shore of a lake or other body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels ... which results in flooding as defined in (a)(1) of this definition."

44 C.F.R. Sec. 61, App.A (1990). This definition closely parallels the statutory language.

The policy, however, goes on to state certain exclusions. Article III, "Losses not Covered," states, "We only provide coverage for direct physical loss by or from flood which means we do not cover: (A) Losses from other casualties, including: (1) Loss caused by ... gradual erosion, or any other earth movement except such ... erosion as is covered under the peril of flood." See 44 C.F.R. Sec. 61, App.A.

To assist in the issuance and processing of flood insurance applications and claims, Congress authorized the appointment of a "fiscal agent" to service the NFIP. 42 U.S.C. Sec. 4071. FEMA's regulations likewise authorize the designation of a "servicing agent" to "assist in issuing flood insurance policies ... and to accept responsibility for delivery of policies and payment of claims for losses as prescribed by and at the discretion of the administrator." 44 C.F.R. Sec. 62.3(a) (1990).

On October 1, 1983, FEMA designated CSC as the fiscal agent for the NFIP. As the fiscal agent, CSC does not underwrite flood insurance policies nor does it have a contractual relationship with the insureds. It merely acts in a ministerial manner as a conduit between FEMA/FIA and the insureds for flood insurance policy applications, claims handling and statistical reporting. FEMA retains ultimate authority over the issuance of policies and the approval or denial of claims. GAB was retained by CSC to investigate claims filed in accordance with 44 C.F.R. section 62.21 and investigated the claims involved in this case. Final decisions regarding claims are not made by GAB, which is an investigating and reporting agency.

To resolve the disputes over disallowed claims under Plan B, Congress established right of action allowing policy-holders to challenge the disposition of their claims in federal court. Section 4072 provides in relevant part:

[U]pon the disallowance by the Director [of FEMA] of any such claim, or upon the refusal of the claimant to accept the amount allowed upon any such claim, the claimant, within one year after the date of mailing of notice of disallowance or partial disallowance by the Director, 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.

42 U.S.C. Sec. 4072. The regulations alternatively permit an action challenging a claimed disallowance to be brought against the FIA, which has decision-making responsibility for the NFIP.

II.

Although the complaint is not as articulate as might be desired, the bottom line of the claims made relates to the question of the policy language's meaning and whether or not that language complies with the mandate of Congress. Before discussing this underlying question, there are preliminary questions that need to be addressed.

A.

CSC and GAB are statutory fiscal agents of the government and at all times were acting pursuant to the instruction and direction of the program's administrators. The statute provides that actions should be brought against the Director. 42 U.S.C. Sec. 4072. The statute does not waive governmental sovereign immunity as to any other persons.

We agree with the reasoning of Central Claims Service v. Computer Science Corp., 706 F.Supp. 463 (E.D.La.1989), cited by the district court. In Central Claims, the district judge drew an analogy to cases analyzing the immunity of fiscal agents under the Medicare Act, which hold that such agents are immune from suit for activities within the scope of the authority delegated to them. CSC alternatively denominates this argument as one that the federal government is the real party in...