Gulf Coast Inv. Corp. v. Secretary of Housing

• Decision Date: 18 September 1980
• Docket Number: Civ. A. No. 79-810.
• Citation: 509 F. Supp. 1321
• Court: U.S. District Court — Eastern District of Louisiana
• Parties: GULF COAST INVESTMENT CORP. v. SECRETARY OF HOUSING AND URBAN DEVELOPMENT et al.

509 F. Supp. 1321

GULF COAST INVESTMENT CORP. v. SECRETARY OF HOUSING AND URBAN DEVELOPMENT et al.

Civ. A. No. 79-810.

United States District Court, E. D. Louisiana.

September 18, 1980.

Michael H. Bagot, John H. Gniady, New Orleans, La., for plaintiff.

Marc J. Yellin, Asst. U. S. Atty., New Orleans, La., Samuel B. Rothman, U. S. Dept. of Housing and Urban Development, Washington, D. C., for defendants.

OPINION

SEAR, District Judge:

This is an action under a policy of flood insurance issued pursuant to the National Flood Insurance Act of 1968, 42 U.S.C. § 4001 et seq. On May 3, 1978, the insureds, Irvin and Bobbie York, sustained flood damage to their Marrero, Louisiana house. After their claim for flood insurance benefits was denied, the Yorks' mortgagee, Gulf Coast Investment Corporation (Gulf Coast), paid them for their loss and sued the Federal Emergency Management Agency (FEMA),¹ the present operator of the National Flood Insurance Program (NFIP) for the amount it paid.² In denying the Yorks' claim the defendant contends that their policy terminated more than fifteen months prior to the flood loss due to nonpayment of the renewal premium. Plaintiff asserts that the termination is invalid because the defendant failed to comply with a provision of the policy requiring written notice of termination.

As a condition to financing the purchase of the Yorks' home, their mortgage lender, Gulf Coast, required them to purchase a National Flood Insurance policy. The policy was purchased through Jimmy Phillips (Phillips), an insurance agent for Prudential Property & Casualty Insurance Company (Prudential). The Yorks paid the initial premium of $73.00 and the National Flood Insurance Association (NIFA)³ issued policy number FC XXXXXXXXX effective for a one-year term January 21, 1976 to January 21, 1977. Gulf Coast agreed to pay subsequent annual renewal premiums from escrow funds collected with the mortgage payment.

On December 16, 1976, Gulf Coast received a NFIA Form 58 renewal notice covering the York policy which was generated by defendant's computer and dated December 10, 1976. The notice was mailed to Gulf Coast at its correct Houston, Texas mailing address.⁴ The renewal notice advised that the insurance on the Yorks' property would expire January 21, 1977, that no further notice would be sent, and that to avoid a lapse in coverage, the renewal premium for the next annual term would have to be received by NFIA prior to the expiration date. It instructed that if the mortgagee was to pay the renewal premium, it should immediately contact the local agent (Phillips), who had been provided a renewal application. Finally, the form stated that if the policy was allowed to expire, the mortgagee would be provided written notice according to the policy conditions. The policy provided that the premium for successive policy terms must be paid prior to the expiration of the then current term, and

if not so paid, this policy shall then terminate; provided, however, with respect to any mortgagee ..., this insurance shall continue in force only for the benefit of such mortgagee ... for 20 days after written notice to the mortgagee ... of termination of this policy, and then shall terminate.⁵

Rather than contacting Phillips regarding the renewal application, Gulf Coast mailed him a check⁶ on January 13, 1977 to pay the premium for the period January 21, 1977 to January 21, 1978; however the defendant never received a renewal premium, so the Yorks' policy lapsed on January 21, 1977.

Richard E. Hulbirt, Gulf Coast's vice president in charge of flood administration, received the Yorks' loan file and testified that no such notice was received and the file did not contain a policy renewal certificate.

After a computer indicated that the policy had lapsed, Gulf Coast attempted to renew the policy for the following coverage year, January 21, 1978 to January 21, 1979.⁷ Gulf Coast sent the renewal premium to Prudential on February 14, 1978,⁸ more than three weeks after a renewal premium for the January 21, 1978 to January 21, 1979 coverage period would have been due. On February 24, 1978, Prudential returned the payment to Gulf Coast indicating an overpayment remittance on the Yorks' homeowner's policy, which Prudential also issued; Gulf Coast then credited the Yorks' escrow account with an amount equal to the flood insurance premium. Again the Gulf Coast file does not indicate a renewal certificate for the January 21, 1978 to January 21, 1979 policy period.

On April 6, 1978, almost fifteen months after Gulf Coast sent its first renewal check to Phillips, its accounting department discovered that the check had not cleared its bank and on that date wrote the bank, inquiring about the status of the check. On May 9, 1978, six days after the Yorks' flood loss, Janet Thompson, the Gulf Coast employee primarily responsible for handling flood insurance renewals during the period pertinent to this case, requested a new flood insurance policy from another agent, and a new policy was issued, effective May 27, 1978.

In its effort to prove that it complied with the terms of the insurance contract by giving written notice of termination of the Yorks' policy to Gulf Coast, defendant offered the testimony of Mary Ralston, who served as an officer of the NFIA beginning in 1975, and later as a flood insurance consultant for the Department of Housing and Urban Development.⁹ She testified regarding the program of the NFIA's computer for notifying parties with a possible interest in the policy renewal and that a termination notice dated March 18, 1977 was generated and sent to Aetna Technical Services, Inc. (Aetna), the servicing company in this instance.¹⁰

Although Ralston testified that magnetic tapes showing the work of the computer on a particular day, including the exact form generated, the date, and the policy number, were kept,¹¹ neither a copy of the mortgagee's termination notice nor a computer record of its production were offered into evidence. Nevertheless, Ralston testified she could state unequivocally that the NFIA Form 54 termination notice to Gulf Coast was generated, because the computer was programmed to produce the Form 55 termination notice Aetna received only after it produced Form 54. She testified that approximately one-and-one-half million NFIP policies are processed through the renewal programs annually, and she knew of no instance in which the computer omitted one of the notices or failed to complete a cycle. The computer kept a count of the number of items to anticipate from a given cycle, and the number was routinely verified against the items actually produced. The number of notices again was verified after insertion into envelopes, and the notices then were delivered by defendant to the post office and mailed at bulk rates.

Following the May 3, 1978 flood, the Yorks reported their flood damage to the local Prudential office, which, in turn, reported it to defendant, whose adjuster estimated the structural damage at $8,503.06.¹² After defendant denied the claim, Gulf Coast paid the Yorks that amount for their loss,¹³ which it now seeks to recover from defendant.¹⁴

Federal jurisdiction over this matter is invoked pursuant to section 4072 of the National Flood Insurance Act of 1968, 42 U.S.C. § 4001 et seq. Federal law controls disputes over the coverage of insurance policies issued pursuant to the Act. West v. Harris, 573 F.2d 873 (5th Cir. 1978). Accord, Mason Drug Co., Inc. v. Harris, 597 F.2d 886 (5th Cir. 1979). Accordingly, neither the statutory nor decisional law of any particular state is applicable to this case. See West, supra. Rather, I must apply "traditional common-law techniques of decision" by drawing upon standard insurance law principles. See Drewett v. Aetna Cas. & Sur. Co., 539 F.2d 496 (5th Cir. 1976), cited in West, supra. Since insurance policies are contracts, basic contract rules govern the interpretation of a policy's terms. Calcasieu-Marine Nat'l Bank v. American Employer's Ins. Co., 533 F.2d 290 (5th Cir. 1976). Where the terms of an insurance contract are clear and unambiguous, courts will not alter the agreement. Id. The existence vel non of ambiguity is a question of law. Burton v. State Farm Fire and Cas. Co., 533 F.2d 177 (5th Cir. 1976).

The contract provision crucial to determination of this case simply states that the insurance shall continue in force for the mortgagee's benefit for twenty days "after written notice to the mortgagee ... of termination of this policy." This provision is ambiguous because it could be reasonably construed to mean either "after written notice is mailed to the mortgagee" or "after written notice is delivered to the mortgagee."

Where statutes require that notice be given the insured before cancellation of an insurance policy is effective, courts frequently hold that a presumption of delivery is raised when the insurer proves proper mailing. E. g., Broadway v. All-Star Ins. Corp., 285 So.2d 536 (La.1973), construing La.Rev.Stat. 22:636; Traders & Gen'l Ins. Co. v. Mallitz, 315 F.2d 141 (5th Cir. 1963). The purpose of notice provisions, however, is to inform the insured that his policy is being cancelled and to provide him sufficient time to obtain other insurance protection. Broadway, supra; American Fid. & Cas. Co. v. Knox, 164 F.Supp. 3 (W.D.La. 1958). Since an interpretation that permits a deposit in the mails to conclusively terminate coverage undermines the purpose of the notice, Broadway, supra, the presumption of delivery may be rebutted by "positive evidence of lack of delivery or receipt." Mallitz, supra, quoting Skipper v. Federal Ins. Co., 238 La. 779, 116 So.2d 520, 523 (1959). See Broadway, supra. These rules have been developed for disputes involving cancellation notices, but they will be applied by analogy to this termination notice dispute, so that a rebuttable presumption of delivery of the termination notice will be raised upon...