Phelps v. Federal Emergency Management Agency, 85-1591

• Decision Date: 07 January 1986
• Docket Number: No. 85-1591,85-1591
• Citation: 785 F.2d 13
• Parties: M.D. PHELPS and Irene K. Phelps, Plaintiffs, Appellees, v. FEDERAL EMERGENCY MANAGEMENT AGENCY, Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 13

785 F.2d 13

54 USLW 2459

M.D. PHELPS and Irene K. Phelps, Plaintiffs, Appellees, v. FEDERAL EMERGENCY MANAGEMENT AGENCY, Defendant, Appellant.

No. 85-1591.

United States Court of Appeals First Circuit.

Heard Jan. 7, 1986.

Decided Feb. 28, 1986.

Evan Slavitt, Asst. U.S. Atty., Boston, Mass., with whom William F. Weld, U.S. Atty., Boston, Mass., was on brief, for defendant, appellant.

Robert Sweeney Troy, Buzzards Bay, Mass., for plaintiffs, appellees.

Before COFFIN, Circuit Judge, ALDRICH and ROSENN, ^* Senior Circuit Judges.

ROSENN, Circuit Judge.

This appeal raises the troublesome question whether a government insurance agency is barred from asserting as a defense the failure of its insured to file a written proof of loss when misrepresentations of the agency induced the failure. Our specific task is to determine whether, under the circumstances we have here, the insurer's status as a federally subsidized agency precludes the application of traditional estoppel against it.

Because many factors have made it uneconomical for the private insurance industry to make flood insurance available to those in need of such protection from flood disasters on reasonable terms and conditions, Congress established a National Flood Insurance Program (NFIP), 42 U.S.C. Sec. 4001 et seq (1982). The Director of the Federal Emergency Management Agency (FEMA) is presently authorized to carry out the program, ¹ 42 U.S.C. Sec. 4011 (1982). The Secretary of the Treasury has been authorized to establish in the United States Treasury a National Flood Insurance Fund. 42 U.S.C. Sec. 4017.

On February 11, 1974, the plaintiffs, M.D. and Irene Phelps, initially purchased a policy of insurance under the program against loss to their home in Wellfleet on the Massachusetts coast. On March 13, 1980, while the policy was in full force and effect, the plaintiffs sustained serious damage to their home as a result of a severe storm. FEMA denied coverage and plaintiffs sued in the United States District Court for the District of Massachusetts. FEMA contended that the loss was outside the scope of the policy and that the insured had failed to comply with the requirement that a claimant file a written proof of loss. Following a trial with an advisory jury, the court ruled in favor of the insured for the full amount of the policy. FEMA appeals and we reverse.

I.

The facts in this case are undisputed. On March 14 and 15, 1980, a fierce storm struck the Wellfleet coast. Winds reached 67 miles per hour and waves reached levels attained only twelve times in twelve years. Thirty-three feet of land immediately in front of the Phelps' home collapsed.

The Phelps inspected the loss about one week later and learned that because of the devastating damage to their home, the local building inspector had condemned it. M.D. Phelps telephoned Liberty Mutual, the agent listed on the flood insurance policy. He spoke to Paul Amoroso, a claims supervisor, who referred him to the NFIP offices in Maryland. Phelps called the NFIP offices and talked to Burke Gabriel, a claims supervisor who identified himself as the head of investigations for the NFIP. Gabriel was an employee of Electronic Data Services Federal Corp. (EDS), the "servicing agent" authorized by government regulations to "assist in issuing flood insurance policies under the Program in communities designated by the [Federal Insurance] Administrator [see 44 C.F.R. Sec. 2.64], and to accept responsibility for delivery of policies and payments of claims for losses as prescribed by and at the discretion of the Administrator." 44 C.F.R. Sec. 62.3(a) (1985). Phelps described the loss to Gabriel, who assured Phelps that the information he had furnished fully reported the loss, that the investigative process would begin immediately, and that Phelps need do nothing further. Phelps inquired about filing a written report but Gabriel told him it was unnecessary. Phelps testified that he called EDS several times, and each time they assured him that he had properly reported the loss and that the investigation process was underway.

FEMA instructed its agent, John McNamara of Crawford and Company, an insurance adjustment firm, to investigate the loss. Crawford inspected the property and noted that the house had been deemed "uninhabitable" by the Wellfleet building inspector. On May 20, 1980, McNamara filed a "Preliminary Report of Inspection" that concluded: "We feel there is coverage."

On May 22, 1980, McNamara wrote to the insured to inform them that he had inspected the property and reported to NFIP. His letter consisted primarily of a check list of documents required for the investigation but the only item checked was an enclosed non-waiver agreement. He neither checked item 3 referring to a proof of loss, nor enclosed a form for proof of loss. The Phelps signed and returned the enclosed non-waiver agreement which stated that investigation of the claim did not cause waiver of any rights by either party. At no time during the process did anyone notify the insured to submit a proof of loss form. M.D. Phelps testified that he relied on assurances by FEMA's duly authorized representative that he need do nothing further to properly file his claim.

The investigation continued until January 1981 and at no time did FEMA or its agents suggest that they required a proof of loss or that one should be filed. On the contrary, FEMA's agents specifically assured the Phelps that they need do nothing further. FEMA never raised the issue of the absence of the proof of loss form during the claims period and they completed their investigation without it. FEMA eventually denied coverage of the loss because it concluded that the loss was not due to a "flood" and was therefore outside the scope of the policy's coverage. The Phelps brought suit to recover on their policy. The district court found that the damage was due to a "flood" within the meaning of the regulation, and that FEMA was estopped from raising as a defense the Phelps' failure to file a written proof of loss.

II.

The Standard Flood Insurance Policy (SFIP) in effect at the time required the insured to submit a "proof of loss" to the insurer within 60 days of the alleged loss. Within 60 days after the loss, unless such time is extended in writing by the Insurer, the Insured shall render to the Insurer, a proof of loss, signed and sworn to by the Insured ... as to the following: the time and origin of the loss, the interest of the Insured and all others in the property, actual cash value of each item thereof and the amount of loss thereto, all encumbrances thereon, all other contracts of insurance, whether valid or not, covering any of said property, any changes in the title, use, occupation, location, possession or exposure of said property since the issuing of this policy, by whom and for what purpose any building herein described and the several parts hereof were occupied at the time of the loss....

44 C.F.R. Sec. 61, App. A(1), Dwelling Form p N (1979) (current version at 44 C.F.R. Sec. 61, A(1), General Conditions and Provisions, p I.4 (1985)). Failure to comply with this requirement ordinarily barred recovery:

No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all of the requirements of this policy have been complied with....

Dwelling Form, General Conditions and Provisions, p S, 44 C.F.R. Sec. 61, App. A(1) (1979) (current version at 44 C.F.R. Sec. 61 App. A(1), General Conditions and Provisions, p Q (1985)).

Thus, if FEMA can raise as a defense the Phelps' failure to comply with the written proof of loss requirement, it can bar recovery on the policy. ² The threshold question presented is whether the principles of estoppel should apply to prevent FEMA from raising this defense. Our review of this question of law is plenary. Molerio v. Federal Bureau of Investigation, 749 F.2d 815, 820 (D.C.Cir.1984). In order to give the insured the benefit of any doubt, we assume, without deciding the question, that the substantive claim of the insured under the policy is meritorious.

A.

Equitable estoppel is a judicially-devised doctrine which precludes a party to a lawsuit, because of some improper conduct on that party's part, from asserting a claim or a defense, regardless of its substantive validity. Courts invoke the doctrine when "one person makes a definite misrepresentation of fact to another person having reason to believe that the other will rely upon it and the other in reasonable reliance upon it" acts to his or her detriment. Restatement (Second) of Torts Sec. 894(1) (1977).

Thus, the party claiming the estoppel must have relied on its adversary's conduct "in such a manner as to change his position for the worse," and that reliance must have been reasonable in that the party claiming the estoppel did not know nor should it have known that its adversary's conduct was misleading. See Wilber National Bank v. United States, 294 U.S. 120, 124-125, 55 S.Ct. 362, 364, 79 L.Ed. 798 (1935).

Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 59, 104 S.Ct. 2218, 2223-24, 81 L.Ed.2d 42 (1984).

The elements of traditional estoppel are plainly present in this case. Had the Phelps purchased their flood insurance from a private carrier, there would be no doubt whatsoever that they could have invoked the doctrine. FEMA's agents represented to the insured that they need not file a written proof of loss, and that FEMA could conduct its investigation without it. The agents, whom the law required the insured to deal with, made the representations reasonably believing that the Phelps would rely on them. The Phelps reasonably relied on these assurances and as a result changed their legal position to their detriment. The Supreme Court, however from its early decision in Lee v. Munroe & Thornton, 11 U.S. (7 Cranch) 366, 3 L.Ed. 373 (1813), to its most recent decision in ...