Flick v. Liberty Mutual

• Decision Date: 15 February 2000
• Docket Number: No. 98-16485,98-16485
• Citation: 205 F.3d 386
• Parties: (9th Cir. 2000) IRENE FLICK, Plaintiff-Appellant, v. LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant-Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 386

205 F.3d 386 (9th Cir. 2000)

IRENE FLICK, Plaintiff-Appellant, v. LIBERTY MUTUAL FIRE INSURANCE COMPANY, Defendant-Appellee.

No. 98-16485

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted November 5, 1999

Filed February 15, 2000

COUNSEL: Ron Leaf, Law Offices of Ron Leaf, San Mateo, California, for the plaintiff-appellant.

Heidi Loken Benas and James Sell, Lynch, Gilardi & Grummer, San Francisco, California, for the defendant-appellee.

Appeal from the United States District Court for the Northern District of California. William H. Orrick, Jr., District Judge, Presiding. D.C. No. CV-97-00703-WHO

Before: Alfred T. Goodwin, Mary M. Schroeder, and Arthur L. Alarcon, Circuit Judges.

Opinion by Judge Alarcon; Dissent by Judge Schroeder.

ALARCON, Circuit Judge:

Irene Flick ("Flick") appeals from the order granting summary judgment in favor of the Liberty Mutual Fire Insurance Company ("Liberty Mutual"). Flick filed a civil complaint seeking damages resulting from Liberty Mutual's denial of a claim under a standard flood insurance policy that was underwritten by Liberty Mutual as part of the National Flood Insurance Program. The district court granted summary judgment in favor of Liberty Mutual on the basis that Flick had failed to comply strictly with the policy's 60 day sworn proof of loss requirement. Flick contends that the district court erred in applying the rule of strict compliance to the policy's sworn proof of loss requirement. We affirm. We conclude that the strict compliance rule is applicable to policies written by private insurance companies under the National Flood Insurance Program, because those insurers draw funds from the United States Treasury ("Treasury") to pay flood loss claims.

I

Congress enacted the National Flood Insurance Act of 1968 in response to a growing concern that the private insurance industry was unable to offer reasonably priced flood insurance on a national basis. See 42 U.S.C. S 4001(a), (b); Van Holt v. Liberty Mut. Fire Ins. Co., 163 F.3d 161, 165 & n.2 (3d Cir. 1998). A report by the Secretary of the Department of Housing and Urban Development ("HUD") had indicated that it was not feasible for the private insurance industry, acting alone, to provide flood insurance at a reasonable price.¹ See Staff of Senate Comm. on Banking and Currency, 89th Cong., 2d Sess., Insurance and Other Programs for Financial Assistance to Flood Victims 98-99 (Comm. Print 1966) (report from Robert C. Weaver, Secretary of HUD). The HUD report found that private insurers traditionally had refused to write flood policies in the belief that they lacked an adequate actuarial basis for providing coverage and that the public was not interested in purchasing flood insurance. See id . The report also found that, even if the private insurance industry were to have offered flood insurance on a sound actuarial basis, inhabitants of flood prone areas would have rejected unsubsidized coverage as too costly or too uneconomical. ² See id.

The National Flood Insurance Act, therefore, authorizes the federal government to establish the National Flood Insurance Program ("NFIP"), a program with "large-scale" federal involvement, to provide affordable flood insurance on a national basis and to discourage the construction of new structures in flood prone areas. See 42 U.S.C.SS 4001(b), 4011(a); 1968 U.S. Code Cong. & Admin. News 2873, 2966-67, 2969. To accomplish those goals, the act authorizes the federal government to offer flood insurance at below actuarial rates for high risk structures erected before the preparation of a community's flood insurance rate map. See 42 U.S.C. S 4015(a)(c); 1968 U.S. Code Cong. & Admin. News at 2969. The act does not, however, authorize the NFIP to provide a similar subsidy to owners of structures that are built after a community's actuarial rates are set. See 42 U.S.C.S 4015(c); 1968 U.S. Code Cong. & Admin. News at 2969.

The National Flood Insurance Act outlines two alternative frameworks for implementing the NFIP. See generally National Flood Insurers Ass'n v. Harris, 444 F. Supp. 969, 970-72 (D.D.C. 1977) (discussing the two authorized methods for implementing the NFIP). Part A allows an associated pool of private insurance companies to implement a privately operated program. See 42 U.S.C. SS 4051, 4052. Part B authorizes the federal government to implement an alternative program through the "facilities of the federal government." 42 U.S.C. S 4071.

Initially, the NFIP was implemented under Part A and administered by an associated pool of private insurance companies pursuant to an annual contract with HUD. See 42 U.S.C. SS 4051, 4052; National Flood Insurers Ass'n, 444 F. Supp. at 970-71 (discussing the implementation of the NFIP under Part A). The associated pool provided the risk capital, issued flood insurance policies, and paid all claims for flood losses. See Sandia Oil Co. v. Beckton, 889 F.2d 258, 263 (10th Cir. 1989); Kolner v. Director, Fed. Emergency Management Agency, 547 F. Supp. 828, 829 (N.D. Ill. 1982). The federal government made "premium equalization payments" to the associated pool to compensate for premiums that were set below actuarial rates. See 42 U.S.C.S 4054; Sandia Oil Co., 889 F.2d at 263. It also provided reinsurance to cover flood losses that exceeded the insurance risk assumed by the industry pool. See 42 U.S.C. S 4055; Sandia Oil Co., 889 F.2d at 263.

In 1977, HUD decided to discontinue the private operation of the NFIP under Part A. It communicated its intent to Congress to provide flood insurance through the "facilities of the federal government" pursuant to Part B of the National Flood Insurance Act. See 42 U.S.C. S 4071; 42 Fed. Reg. 58569 (1979) (giving Congress notice of the transition to a Part B program); Kolner, 547 F. Supp. at 829-30. On January 1, 1978, HUD assumed full control of the program with the intention of retaining, to the extent practicable, the services of private insurers as "fiscal agents" of the United States. See 42 U.S.C. S 4071; 42 Fed. Reg. 58573 (1977); Kolner, 547 F. Supp. at 829. At that time, all flood insurance policies were deemed issued by the Federal Insurance Administration. See Kolner, 547 F. Supp. at 829.

In 1978, HUD delegated to the Federal Emergency Management Agency ("FEMA") its authority to operate both the NFIP and the Federal Insurance Administration.³ See Reorganization Plan No. 3 of 1978, SS 202, 304, 43 Fed. Reg. 41943, 41943-45 (1978). FEMA assumed managerial responsibility for the operation of the program and took full control of the payment or disallowance of all flood insurance claims. See Berger v. Pierce, 933 F.2d 393, 395 (6th Cir. 1991). It then established the National Flood Insurance Fund in the Treasury of the United States to pay claims and administrative expenses. See 42 U.S.C. S 4017(a), (d); Sandia Oil Co., 889 F.2d at 263.

In 1983, FEMA exercised its regulatory authority under 42 U.S.C. S 4081(a) and created the "Write Your Own" ("WYO") program to assist it in marketing flood insurance through the "facilities of the federal government." See 42 U.S.C. SS 4081(a), 4071; 44 C.F.R.S 62.23-24; 48 Fed. Reg. 46789 (1983) (amending the federal regulations to establish the WYO program); Van Holt, 163 F.3d at 165. The WYO program allows private insurers to write standard flood insurance policies under their own names. See 44 C.F.R. S 62.23. Coverage is provided under the auspices of the NFIP, pursuant to the program's regulations, and is identical in scope and in cost to policies issued directly by FEMA. See 48 Fed. Reg. 46789 (1983). Under the NFIP regulations, a claimant under a standard flood insurance policy must submit a sworn proof of loss within 60 days of any flood loss. See 44 C.F.R. pt. 61, app. A(1), art. 9(J)(3).

II

Liberty Mutual insured Flick for flood loss under an insurance policy that it issued as part of the WYO program. The Liberty Mutual policy, which was written as a standard flood insurance policy, required Flick to submit a sworn proof of flood loss within 60 days of any flood loss. On December 11, 1995, flooding caused the foundation of Flick's house to subside. Flick notified Liberty Mutual of her flood loss on February 6, 1996. She did not, however, submit a sworn proof of loss at that time. Liberty Mutual denied the claim on April 8, 1996, because, among other reasons, Flick had failed to file a sworn proof of loss within 60 days. Flick finally submitted a sworn proof of loss on September 17, 1996, approximately nine months after the flood loss had occurred.

Flick then commenced this lawsuit in district court, asserting state law causes of action for breach of contract and breach of the covenant of good faith and fair dealing. Both parties stipulated that the National Flood Insurance Act preempted those claims. Liberty Mutual moved to bifurcate the trial and to try the issue of whether Flick had failed to submit a sworn proof of loss within 60 days of the flood loss. Flick agreed that the sworn proof of loss issue should be summarily adjudicated before trial. In a pretrial conference, the district court granted summary judgment in favor of Liberty Mutual, because Flick had failed to file a sworn proof of loss within 60 days of her flood loss.

III

In this appeal, Flick contends that the district court erred in granting summary judgment. She argues that the rule of strict compliance, which is applicable to policies issued by the federal government that provide for payment of losses from public funds, is inapplicable to the sworn proof of loss requirement in insurance policies issued under the NFIP. To support that proposition, she asserts that flood insurance losses under the NFIP have been, and will continue to be, paid entirely out of a surplus of retained flood insurance premiums. Flick suggests that we (1) adopt a rule of substantial compliance or notice prejudice to govern the sworn proof of loss requirement...