Mun. Ass'n of South Carolina v. Serv. Ins. Co. Inc.

• Decision Date: 30 March 2011
• Docket Number: 3:08–CV–3879–MJP.,3:08–CV–3073–MJP,Civil Action Nos. 3:08–cv–03072–MJP,3:08–CV–3611–MJP
• Citation: 786 F.Supp.2d 1031
• Parties: MUNICIPAL ASSOCIATION OF SOUTH CAROLINA, Plaintiff,v.SERVICE INSURANCE COMPANY, INC., Defendant.Municipal Association of South Carolina, Plaintiff,v.USAA General Indemnity Co., Defendant.Municipal Association of South Carolina, Plaintiff,v.Hartford Fire Insurance Company, Inc., Defendant.Municipal Association of South Carolina, Plaintiff,v.Nationwide Mutual Fire Insurance Company, Defendant.
• Court: U.S. District Court — District of South Carolina

786 F.Supp.2d 1031

MUNICIPAL ASSOCIATION OF SOUTH CAROLINA, Plaintiff,

v.SERVICE INSURANCE COMPANY, INC., Defendant.Municipal Association of South Carolina, Plaintiff,

v.USAA General Indemnity Co., Defendant.Municipal Association of South Carolina, Plaintiff,

v.Hartford Fire Insurance Company, Inc., Defendant.Municipal Association of South Carolina, Plaintiff,

v.Nationwide Mutual Fire Insurance Company, Defendant.

Civil Action Nos. 3:08–cv–03072–MJP

3:08–CV–3073–MJP

3:08–CV–3611–MJP

3:08–CV–3879–MJP.

United States District Court,D. South Carolina,Columbia Division.

March 30, 2011.

Robert Erving Stepp, Robert E. Tyson, Jr., Sowell Gray Stepp and Laffitte, Columbia, SC, for Plaintiff.Bradish Johnson Waring, Nexsen Pruet Jacobs Pollard and Robinson, Mary Hughes Cherry, Nexsen Pruet Adams Kleemeier, Charleston, SC, Robert E. Tyson, Jr., Sowell Gray Stepp and Laffitte, Columbia, SC, for Defendant.

ORDER GRANTING PARTIAL SUMMARY JUDGMENT TO PLAINTIFF MUNICIPAL ASSOCIATION OF SOUTH CAROLINA AND DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

MATTHEW J. PERRY, JR., Senior District Judge.

Introduction

In these consolidated actions, Plaintiff Municipal Association of South Carolina (“MASC”) complains that Defendants have failed to pay their municipal business license taxes and penalties assessed for license year 2008.¹ In their answers, Defendants raise several defenses. First, Defendants assert that the doctrine of federal preemption is a complete defense to liability for past due business license taxes and assessed penalties. Second, Defendants contend that because they sell flood insurance policies pursuant to the National Flood Insurance Program, a federal flood subsidy program, any municipal business license taxes based upon flood insurance premiums are an impermissible tax by a municipality on the federal government and thus violate principles of sovereign immunity. Third, Defendants contend that the ordinances that provide for the collection of municipal business license taxes do so without providing Defendants with notice and a hearing, and therefore violate the Due Process and Equal Protection Clauses of the Fourteenth Amendment and Article I, Section 5 of the South Carolina Constitution.

The sole issue in this case is whether Defendants, as “Write–Your–Own” (“WYO”) companies, are preempted from adhering to the same terms and conditions as other insurance companies doing business in the State of South Carolina including the payment of municipal business license taxes and, where applicable, assessed penalties for late payment of those taxes.

This Court has jurisdiction over this dispute by virtue of 28 U.S.C. § 1332 in that there is complete diversity of citizenship between the parties and the amount in controversy is in excess of Seventy Five Thousand Dollars ($75,000.00) exclusive of interest and costs. Additionally, because this matter involves the National Flood Insurance Program of which this Court has exclusive jurisdiction, subject matter jurisdiction is proper in this Court under 42 U.S.C. § 4701 and 28 U.S.C. § 1331.

This matter is before the Court pursuant to Rule 56 of the South Carolina Rules of Civil Procedure upon motion of MASC for an order granting partial summary judgment and upon motion of Defendants for an order granting summary judgment.² This matter came before me for hearing on November 10, 2010. Robert E. Tyson, Jr. of Sowell Gray Stepp & Laffitte, L.L.C. and Roy F. Laney of Riley Pope and Laney, L.L.C. appeared on behalf of MASC. Molly H. Cherry and Bradish J. Waring of Nexsen Pruet, L.L.C. appeared on behalf of Defendants Service Insurance Company, Inc. and Hartford Fire Insurance Company, Inc. Robert H. Jordan, John C. von Lehe, Jr., and Merrit Abney of Nelson Mullins Riley & Scarborough, LLP appeared on behalf of Defendants USAA General Indemnity Co. Barbara M. Bowens of the United States Attorney's Office and Scott Risner of the United States Department of Justice, Civil Division, appeared on behalf of the United States of America.³

Thus, having considered the motions and heard arguments from counsel, for the reasons set forth below, the Court grants Plaintiff's Motion for Partial Summary Judgment and denies Defendants' Motions for Summary Judgment.

Background and Facts

The facts underlying this case are largely undisputed.

A. The Parties

MASC is a nonprofit organization existing pursuant to the law of South Carolina whose membership includes virtually all municipalities in the State of South Carolina. MASC administers the Insurance Tax Collection Program (“ITCP”) on behalf of certain municipalities (“Participating Municipalities”) in South Carolina. Participating Municipalities in the ITCP adopted ordinances authorizing the collection of business license taxes from insurance companies. The ordinances of the Participating Municipalities other than the City of Greenville established the tax rate at 2% of gross premiums for property and casualty policies.⁴

The Participating Municipalities also executed agreements with MASC authorizing MASC to act as their agent concerning the administration of the ITCP. Section 38–7–160 of the South Carolina Code (Rev. 2002) authorizes municipalities to impose business license taxes on insurance companies collecting gross premiums within the municipal boundaries. Pursuant to municipal ordinances, the municipal business license tax is due on May 31 for the license year. The municipal business license tax is based upon the gross premiums received in the prior calendar year. Pursuant to ordinances adopted by each Participating Municipality, delinquent taxes are subject to a penalty of 5% of the delinquent amount for each month, or a portion of a month for which the taxes remain unpaid.

Defendants write and sell National Flood Insurance policies in South Carolina, as well as other types of policies. The flood insurance sold by Defendants is part of the National Flood Insurance Program (“NFIP”), which was established by Congress in 1968 pursuant to the National Flood Insurance Act, 42 U.S.C. § 4001, et seq.

B. History of Private Insurer Participation in the National Flood Insurance Program.

Congress passed the National Flood Insurance Act (“NFIA”) in 1968. 42 U.S.C. § 4001. The NFIA established the NFIP for the purpose of, “ ‘among other things ... limit[ing] the damage caused by flood disasters through prevention and protective measures, spread[ing] the risk of flood damage among many private insurers and the federal government, and ... make[ing] flood insurance ‘available on reasonable terms and conditions' to those in need of it.’ ” Houck v. State Farm Fire & Cas. Co., 194 F.Supp.2d 452, 455 (D.S.C.2002) (quoting Van Holt v. Liberty Mut. Fire Ins. Co., 163 F.3d 161, 165 (3d Cir.1998)). The NFIA also serves the “most important public purpose [of] encourag[ing] state and local governments to adopt and enforce appropriate land use provisions” in order to restrict development in flood-prone areas. H.R.Rep. No. 90–1585, U.S. Code Cong. & Admin.News 1968, pp. 2873, at 2966 (1968). These measures were needed to prevent reliance on federal, state, local, and voluntary disaster relief programs, which were both inadequate to provide full restoration to those in need and costly. Id. at 2966–67.

In order to meet its goal of making affordable flood insurance available to all, the NFIP is federally subsidized and administered by FEMA. Houck, 194 F.Supp.2d at 454 (citing 42 U.S.C. §§ 4001–4129). A policy issued under the NFIP is called a Standard Flood Insurance Policy (“SFIP”). The terms of a SFIP are established by “ ‘a regulation of [FEMA], stating the conditions under which federal flood insurance funds may be disbursed to eligible policyholders.’ ” Marseilles Homeowners Condominium Ass'n v. Fid. Nat'l Ins. Co., 542 F.3d 1053, 1054 (5th Cir.2008) (quoting Mancini v. Redland Ins. Co., 248 F.3d 729, 733 (8th Cir.2001)). “FEMA sets the terms and conditions of all SFIP's.” Marseilles, 542 F.3d at 1054.

The NFIP is designed to use premiums collected to pay flood insurance claims and expenses. Studio Frames, Ltd. v. Standard Fire Ins. Co., 483 F.3d 239, 243–44 (4th Cir.2007). Although the program is not entirely self-sustaining, the vast majority of flood insurance policies are actuarially sound. Id. at 243–44 (stating that Congress only subsidizes about twenty-five percent of flood insurance policies, mostly “older structures”). Only when flood losses are “catastrophic” does the NFIP have to rely on a line of credit with the United States Treasury. Id. at 244.

The NFIP was originally a collaborative effort between an association of private insurance companies and the federal government. See Nat'l Flood Insurers Ass'n v. Harris, 444 F.Supp. 969, 970–72 (D.C.D.C.1977) (discussing the original implementation of the NFIP). This pool of companies marketed, issued, and handled claims adjustment of flood insurance policies. In re: Estate of Lee, 812 F.2d 253, 255 (5th Cir.1987). In order to keep the cost low for the policies, the federal government compensated the companies for policies in which the premiums were below actuarial rates and covered flood losses that would exceed the risk covered by the association of insurance companies. Flick v. Liberty Mut. Fire Ins. Co., 205 F.3d 386, 388 (9th Cir.2000). In return for the federal government's support, the insurance pool was subject to heavy federal regulation, including government control over the pool's operating expenses, government access to the pool's financial information, and limits on the companies' maximum profits. See id. (discussing government control over expenses and access to financial data); Lee, 812 F.2d at 255 (noting the government limits on profits and operating expenses). This agreement was renewed annually in a contract between the government and the insurance company. Nat'l Flood Insurers, 444 F.Supp. at 970–71. Disagreement over the terms of this contract led the government to assume full...