McCormick v. Travelers Ins. Co.

• Decision Date: 22 January 2001
• Docket Number: No. A088300.,A088300.
• Citation: 103 Cal.Rptr.2d 258,86 Cal.App.4th 404
• Court: California Court of Appeals Court of Appeals
• Parties: Thomas McCORMICK et al., Plaintiffs and Appellants, v. TRAVELERS INSURANCE COMPANY et al., Defendants and Respondents.

103 Cal.Rptr.2d 258

86 Cal.App.4th 404

Thomas McCORMICK et al., Plaintiffs and Appellants, v. TRAVELERS INSURANCE COMPANY et al., Defendants and Respondents.

No. A088300.

Court of Appeal, First District, Division 2.

January 22, 2001.

Review Denied April 18, 2001.

Gumbiner & Eskridge, Joel P. Gumbiner, Jack D. Eskridge, Walnut Creek, for Appellants.

Farbstein & Blackman, Gary R. Gleason, San Mateo, Nielsen Law Firm, Gerald J. Nielsen, Metairie, LA, for Respondents.

RUVOLO, J.

I. INTRODUCTION

Thomas and Stacy McCormick (the McCormicks) appeal from a judgment on the pleadings entered in favor of Travelers Insurance Company (Travelers).¹ Travelers insured the McCormicks against flood loss under a standard flood insurance policy issued as part of the National Flood Insurance Program (NFIP), a federally subsidized program which provides flood insurance at reasonable rates. The McCormicks sued Travelers for wrongfully denying them insurance coverage under the policy, alleging causes of action for breach of the insurance contract, bad faith and fraud. In granting Travelers judgment on the pleadings, the trial court found that under the National Flood Insurance Act (NFIA; 42 U.S.C. §§ 4001 et seq.), the state court did not have jurisdiction over any aspect of the McCormicks' action.

In what is a matter of first impression for any California appellate court, we conclude the McCormicks' action against Travelers must be adjudicated in federal court, based on a provision of the NFIA granting "original exclusive jurisdiction" to federal courts to hear claims arising out of NFIP flood insurance policies. (42 U.S.C. § 4072.) Therefore, we affirm.

II. FACTS AND PROCEDURAL BACKGROUND

On appeal from a judgment on the pleadings, we accept as true all well pled allegations in the complaint and matters properly subject to judicial notice. (American Airlines, Inc. v. County of San Mateo (1996) 12 Cal.4th 1110, 1118, 51 Cal. Rptr.2d 251, 912 P.2d 1198; Edwards v. Centex Real Estate Corp. (1997) 53 Cal. App.4th 15, 27, 61 Cal.Rptr.2d 518.) So viewed, the record reveals that on January 1, 1997, the McCormicks' Orinda, California home was flooded with water from the overflowing creek adjacent to their property. The floodwaters inundated their home, leaving water in places up to eight feet high.

On December 22, 1997, the McCormicks filed a first amended complaint in Contra Costa County Superior Court alleging causes of action against Travelers for breach of the insurance contract, breach of the covenant of good faith and fair dealing, fraud and negligent misrepresentation.² The McCormicks alleged that prior to their home being flooded, they purchased flood insurance from Travelers, and Travelers had represented to the McCormicks that flood damage would be covered by the policy. The McCormicks relied on these representations and were induced to pay premiums for flood insurance. The McCormicks made their claim for the damage caused by the floodwaters inside their home and did all that was required of them under the policy; nevertheless, Travelers wrongfully refused to indemnify the McCormicks under the terms of the policy despite Travelers' knowledge of the facts mandating payment. As a direct and proximate result of Travelers' alleged tortious conduct, the McCormicks sought expenses to repair the flood damage; compensation for their physical, emotional, and mental distress; attorney fees; and punitive damages.

On February 17, 1998, Travelers removed the matter to federal court. Among other things, Travelers contended that it had issued the flood insurance policy to the McCormicks pursuant to the NFIP, that the language of the NFIA indicated the federal courts had original exclusive jurisdiction over the McCormicks' breach of contract claim, and that the McCormicks' extra-contractual state law tort claims were preempted.

On February 27, 1998, the McCormicks filed a motion to remand the case to state court. On April 29, 1998, the federal court remanded the matter to state court. In so doing, the district court's order did not address the federal jurisdictional and preemption issues that had been raised by Travelers. Rather the case was remanded to state court solely based on Travelers' failure to meet the procedural requirements of removal.³

Once back in state court, Travelers filed its motion for judgment on the pleadings again arguing that, under the NFIA, federal courts have original exclusive jurisdiction over disputes arising out of disallowance of flood insurance claims, including those asserted by the McCormicks (42 U.S.C § 4072). Travelers also contended that all state law claims alleged in the McCormicks' complaint were preempted by the NFIA. The McCormicks opposed the motion, arguing that in carrying out its duties as an insurer under the NFIA, Travelers was subject to state law jurisdiction, and that they were not preempted from asserting their causes of action and damages claims. The trial court granted Travelers' motion for judgment on the pleadings. This appeal followed.

III. DISCUSSION

A. Standard of Review

The standard for reviewing a judgment on the pleadings is settled: "A motion for judgment on the pleadings is the equivalent of a general demurrer but is made after the time for demurrer has expired. The rules governing demurrers apply. [Citation.] The grounds for a motion for judgment on the pleadings must appear on the face of the challenged complaint or be based on facts which the court may judicially notice. [Citations.] On review we must determine if the complaint states a cause of action as a matter of law." (Evans v. California Trailer Court, Inc. (1994) 28 Cal.App.4th 540, 548, 33 Cal.Rptr.2d 646.) "We review the complaint de novo to determine whether [it] alleges facts sufficient to state a cause of action under any legal theory. [Citation.]" (Begier v. Strom (1996) 46 Cal.App.4th 877, 881, 54 Cal.Rptr.2d 158.)

B. The Federal Law

The NFIP was established by Congress in 1968 pursuant to the NFIA (see 42 U.S.C. §§ 4001 et seq.) to address the growing unavailability of private flood insurance policies in high-risk geographical areas, while also implementing a unified national program to reduce or avoid future flood losses. (See 42 U.S.C. § 4001; Berger v. Pierce (6th Cir.1991) 933 F.2d 393, 395 (Berger).) As part of the NFIA, Congress expressly stated that its intent in enacting the NFIP was to make flood insurance available to those in need of such protection on reasonable terms and conditions. (See 42 U.S.C. §§ 4001(a) & (b); 4011(a); see also Bolton v. Giuffrida (N.D.Cal.1983) 569 F.Supp. 30, 35.)

Over time, the NFIP has undergone several major changes, especially as to the degree of federal involvement in the operation and administration of the program. Initially, under what was originally designated as Part A of the NFIA, the program was administered primarily through the National Flood Insurers Association, a pool of private insurance companies, under the supervision and financial support of the Department of Housing and Urban Development (HUD). (See generally Spence v. Omaha Indem. Ins. Co. (5th Cir.1993) 996 F.2d 793, 794, fn. 1 (Spence) [discussing initial workings and organization of program under the Act]; Berger, supra, 933 F.2d at p. 395 [same].) However, on January 1, 1978, pursuant to 42 U.S.C. § 4071, the Secretary of HUD terminated that arrangement and assumed complete administration of the program. (See generally In re Estate of Lee (5th Cir.1987) 812 F.2d 253, 256 (Estate of Lee) [discussing HUD takeover of NFIP].)

Then, on April 1, 1979, the Federal Emergency Management Administration (FEMA) was made principally responsible for the program's operation and administration and took full control of the payment or disallowance of all flood insurance claims. (See Berger, supra, 933 F.2d at p. 395.) Under this arrangement, which was designated as Part B of the NFIA, the Director of FEMA was empowered by Congress to carry out the NFIP through the facilities of the federal government. (42 U.S.C. §§ 4071(a) & 4072.) In fulfilling this mandate, the Director of FEMA was authorized to utilize federal employees and/or private insurance companies and other insurers, insurance agents and brokers, and insurance adjustment organizations, who would operate specifically as fiscal agents of the United States while assisting the Director in implementing the NFIP. (See Gowland v. Aetna (5th Cir. 1998) 143 F.3d 951, 953 (Gowland); Estate of Lee, supra, 812 F.2d at p. 256.)

In 1983, FEMA exercised this regulatory authority by creating the Write Your Own (WYO) program to assist it in the marketing and administration of flood insurance through the "facilities of the Federal Government." (See 42 U.S.C. §§ 4081(a), 4071; 44 C.F.R. §§ 62.23 & 62.24); (Van Holt v. Liberty Mut. Fire Ins. Co. (3d Cir.1998) 163 F.3d 161, 165 (Van Holt)). Under this program, private insurance companies like Travelers, operating as WYO insurers, were authorized to issue federal flood insurance policies in their own names, collect the premiums in segregated accounts, and pay or disallow any claims under the policies. (44 C.F.R. § 62.23.)

While flood insurance can be issued either by FEMA or by private WYO insurers, in either case, FEMA fixes the terms and conditions of the policies. (44 C.F.R. §§ 61.4(b); 61.13(d); 62.23(c) & (d); see also Gowland, supra, 143 F.3d at p. 953.) In fact, the standard language to be included in all federal flood insurance policies is set out verbatim in the Code of Federal Regulations, and no provision of the policy may be altered, varied, or waived other than by the express written consent of the Federal Insurance Administrator. (Gowland, supra, at p. 953; see 44 C.F.R. §§ 61.4(b); 61.5(e); 61.13(a), (d) & (e); 62.23(c) & (d).)

Premiums collected from policyholders by the WYO companies, after deduction of the companies' fees and administrative costs, are deposited in the National Flood...