Studio Frames Ltd. v. Standard Fire

• Citation: 483 F.3d 239
• Decision Date: 12 April 2007
• Docket Number: No. 05-2342.,No. 05-2063.,05-2063.,05-2342.
• Parties: STUDIO FRAMES LTD., d/b/a Somerhill Gallery, Plaintiff-Appellee, v. The STANDARD FIRE INSURANCE COMPANY, Defendant-Appellant, and Village Insurance Agency, Incorporated; Business Insurers of the Carolinas, LLC; Philip D. Pearsall; Travelers Property Casualty Insurance Company, Defendants. Studio Frames Ltd., d/b/a Somerhill Gallery, Plaintiff-Appellant, v. The Standard Fire Insurance Company, Defendant-Appellee, and Village Insurance Agency, Incorporated; Business Insurers of the Carolinas, LLC; Philip D. Pearsall; Travelers Property Casualty Insurance Company, Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

483 F.3d 239

STUDIO FRAMES LTD., d/b/a Somerhill Gallery, Plaintiff-Appellee, v. The STANDARD FIRE INSURANCE COMPANY, Defendant-Appellant, and Village Insurance Agency, Incorporated; Business Insurers of the Carolinas, LLC; Philip D. Pearsall; Travelers Property Casualty Insurance Company, Defendants.

Studio Frames Ltd., d/b/a Somerhill Gallery, Plaintiff-Appellant, v. The Standard Fire Insurance Company, Defendant-Appellee, and Village Insurance Agency, Incorporated; Business Insurers of the Carolinas, LLC; Philip D. Pearsall; Travelers Property Casualty Insurance Company, Defendants.

No. 05-2063.

No. 05-2342.

United States Court of Appeals, Fourth Circuit.

Argued: September 18, 2006.

Decided: April 12, 2007.

ARGUED: Gerald Joseph Nielsen, Nielsen Law Firm, L.L.C., Metairie, Louisiana, for Appellant/Cross-Appellee. John Albert Michaels, Michaels & Michaels, Raleigh, North Carolina, for Appellee/Cross-Appellant. ON BRIEF: Eric P. Stevens, Poyner & Spruill, Raleigh, North Carolina, for Appellant/Cross-Appellee.

Before NIEMEYER, MICHAEL, and MOTZ, Circuit Judges.

Affirmed by published opinion. Judge MICHAEL wrote the majority opinion, in which Judge MOTZ joined. Judge NIEMEYER wrote a dissenting opinion.

OPINION

MICHAEL, Circuit Judge:

This appeal involves contractual and statutory coverage issues under a Standard Flood Insurance Policy issued pursuant to the National Flood Insurance Program. In a summary judgment awarding coverage to an insured tenant, the district court held that the tenant's leasehold improvements were insured under the building coverage portion of the policy and that the statutory cap on the dollar amount of coverage available did not bar the tenant from acquiring coverage, see 42 U.S.C. § 4013(b)(4). We affirm the summary judgment order. In the cross-appeal we affirm the district court's order denying pre- and post-judgment interest to the tenant because the federal flood insurance program is not a commercial enterprise.

I.

Studio Frames Ltd., a small art gallery, leases a store in the Eastgate Shopping Center in Chapel Hill, North Carolina. The shopping center is owned by Federal Realty Trust Investments (Federal Realty). In 1996 Hurricane Fran caused flood damage to Studio Frames's gallery. Studio Frames, which did not have flood insurance, obtained a disaster relief loan from the Small Business Administration. A loan condition required Studio Frames to buy flood insurance under the National Flood Insurance Program (NFIP) to cover the contents of the gallery and leasehold improvements made by the gallery. Thus, in 1996 Studio Frames bought a Standard Flood Insurance Policy (SFIP) from Standard Fire Insurance Company (Standard Fire), a private insurer authorized to sell federal flood insurance under the Federal Emergency Management Agency (FEMA)'s "Write Your Own" or "WYO" program. See 42 U.S.C. §§ 4071(a), 4081; 44 C.F.R. §§ 62.23, 62.24.

An SFIP provides coverage for both real and personal property. Coverage A, or building coverage, covers the "entire building" as well as "fixtures, machinery and equipment." J.A. 144. Coverage B, or contents coverage, covers the insured's personal property located within the building. The contents coverage portion of an SFIP provides that a tenant "may apply up to 10% of the amount of insurance applicable to the personal property covered under this item, not as an amount of additional insurance, to cover loss to improvements to" the building made at the tenant's expense. J.A. 145. Studio Frames's policy listed $194,700 in building coverage and $287,200 in contents coverage. Studio Frames paid a premium that reflected the cost of these amounts of insurance.

On July 23-24, 2000, Studio Frames again suffered severe flood damage, and it immediately reported the event to Standard Fire. During the investigation of Studio Frames's loss, Standard Fire learned that Studio Frames did not own the building that housed the art gallery but instead leased the space from Federal Realty. Standard Fire further learned that Federal Realty had obtained in 1995, and continued to maintain, a $500,000 federal flood insurance policy with First Community Insurance Company to cover the building that housed Studio Frames's gallery. An adjuster for Standard Fire notified Studio Frames that it could not recover for losses to its leasehold improvements under the SFIP's building coverage provisions because it did not own the building. The adjuster explained, however, that Studio Frames could make a claim for leasehold improvement losses in an amount equal to ten percent of the contents coverage policy limit.

On September 20, 2000, Studio Frames submitted a proof of loss to Standard Fire. The gallery requested $287,200, the policy limit for contents coverage, and stated that it was reserving the right to file an additional proof of loss for damage to its leasehold improvements. (Studio Frames did not file the additional proof of loss because it believed Standard Fire had breached the policy when it took the position that the building coverage portion of the policy did not apply to the gallery.) Standard Fire disagreed with Studio Frames's assessment of its contents losses. After several months of negotiations, Standard Fire paid $143,336.27 under the policy's contents coverage provision, allocated as follows: $114,616.27 for damage to inventory and $28,720 for damage to the leasehold improvements (ten percent of the contents coverage policy limit). Standard Fire also attempted to refund to Studio Frames the premiums it had paid for building coverage under the policy.

Thereafter Studio Frames sued Standard Fire in federal court for breach of contract, seeking (in the claim relevant to this appeal) $132,597.05 under the building coverage portion of the policy. The district court granted summary judgment to Standard Fire, concluding that Studio Frames was barred from recovery under the building coverage portion of the policy because the gallery had failed to submit a proof of loss for its leasehold improvements. In the appeal that followed, this court determined that Studio Frames's failure to submit a proof of loss would not preclude recovery if Standard Fire had repudiated the policy's building coverage before a proof of loss was due. Studio Frames Ltd. v. Standard Fire Ins. Co., 369 F.3d 376, 383 (4th Cir.2004). We remanded for further proceedings, noting that Standard Fire did not repudiate the policy unless it "was mistaken in its belief that the SFIP forbade it from offering [building] coverage to Studio Frames." Id.

On remand the district court concluded that Standard Fire had repudiated the policy because nothing in the SFIP prohibited building coverage for leasehold improvements. The court granted summary judgment to Studio Frames, holding that the gallery had building coverage and was entitled to $132,597.05 for damages to its leasehold improvements. Studio Frames Ltd. v. Standard Fire Ins. Co., 397 F.Supp.2d 674 (M.D.N.C.2005). The court later denied Studio Frames's motion for pre- and post-judgment interest. Standard Fire appeals the summary judgment, contending that Studio Frames is not insured for its leasehold improvements under the building coverage portion of the SFIP. It argues, in the alternative, that Studio Frames has no building coverage because the statutory coverage limit was previously exhausted by Federal Realty's $500,000 SFIP on the building. See 42 U.S.C. § 4013(b)(4). Studio Frames cross appeals the district court's order denying it pre- and post-judgment interest. Our review of the issues is de novo. Battle v. Seibels Bruce Ins. Co., 288 F.3d 596, 603 (4th Cir.2002).

II.

We begin with a discussion of the purpose and nature of the National Flood Insurance Program created by Congress in 1968. See National Flood Insurance Act of 1968, Pub.L. 90-448, 82 Stat. 572 (1968). By the mid-1960s Congress was acutely aware that the country's growing population was occupying more and more land in flood-prone areas, both inland and along the seacoasts. H.R.Rep. No. 90-786, at 5 (1967). Flood losses were increasing at an alarming rate, and flood insurance on flood-prone property was not available from private insurance companies. Id. at 4. Recurring flood disasters required Congress to fund expensive "relief measures" that were "plac[ing] an increasing burden on the Nation's resources." 42 U.S.C. § 4001(a). These circumstances prompted Congress to create the NFIP, which (1) makes federally subsidized flood insurance available in flood-prone areas and (2) encourages states and localities to adopt land use policies and regulations that reduce the risk of flood damage. Id. § 4001(a)-(e); Till v. Unifirst Fed. Sav. & Loan Ass'n, 653 F.2d 152, 159 (5th Cir.1981).

"To the extent possible, the NFIP is designed to pay operating expenses and flood insurance claims with premiums collected on flood insurance policies rather than with tax dollars." Government Accountability Office, Challenges Facing the National Flood Insurance Program, Statement by William O. Jenkins, Jr., October 18, 2005 (GAO Report), at 5. The program is not entirely self-sufficient, however, because Congress authorizes subsidized insurance rates for many older structures. National Flood Insurance Program, Actuarial Rate Review, November 30, 2004, at 7-8. About twenty-five percent of SFIP policyholders pay premiums below actuarial rates. Id. at 4. These subsidized premiums mean that the NFIP cannot accumulate sufficient reserves to cover catastrophic flood losses. Id. at 4-6. Thus, FEMA, which manages the NFIP, must rely on its statutory line of credit at the U.S. Treasury to pay claims arising from catastrophic losses. Id. at 3; see 42 U.S.C. §§ 4016(a), 4056(a).

Although the NFIP is not entirely self-sustaining, the program has reduced the amount of flood disaster relief needed from the federal government. The program has paid billions in claims, "primarily from policyholder premiums that...