Studio Frames Ltd. v. Standard Fire Ins.

Decision Date21 May 2004
Docket NumberNo. 03-1674.,03-1674.
Citation369 F.3d 376
PartiesSTUDIO 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 Carolina, LLC; Philip D. Pearsall; Travelers Property Casualty Insurance Company, Defendants.
CourtU.S. Court of Appeals — Fourth Circuit

John Albert Michaels, Michaels & Michaels, Raleigh, North Carolina, for Appellant. Gerald Joseph Nielsen, Metairie, Louisiana, for Appellee.


Walter E. Brock, Jr., Young, Moore & Henderson, P.A., Raleigh, North Carolina, for Appellant.

Before LUTTIG and MICHAEL, Circuit Judges, and William D. QUARLES, Jr., United States District Judge for the District of Maryland, sitting by designation.

Affirmed in part, reversed in part by published opinion. Judge LUTTIG wrote the opinion, in which Judge MICHAEL and Judge QUARLES joined.


LUTTIG, Circuit Judge:

Appellant, Studio Frames Ltd., d/b/a Somerhill Gallery, is a fine art gallery located in the Eastgate Shopping Center in Chapel Hill, North Carolina. Studio Frames leases its gallery location from the owner of the shopping center, but has made improvements to the space, known as "leasehold improvements," to make it suitable for use as an art gallery.

In October 1996, as a condition of an emergency loan from the Small Business Administration, Studio Frames was required to purchase federal flood insurance under the National Flood Insurance Program (NFIP), 42 U.S.C. § 4001 et seq., to provide coverage both for the leasehold improvements it had made to its rental space and for the contents of its gallery. It did so a month later through appellee Standard Fire Insurance Company ("Standard Fire"), an authorized carrier of federal flood insurance under the Federal Emergency Management Agency's (FEMA) "Write Your Own" or "WYO" program. See 42 U.S.C. §§ 4071(a), 4081; 44 C.F.R. §§ 62.23, 62.24. Like all flood insurance purchased through the NFIP, see 44 C.F.R. § 61.4(b), the terms of Studio Frames' policy were set forth in the Standard Flood Insurance Policy (SFIP), codified in FEMA's official regulations at 44 C.F.R. § 61, App. A(2). The policy purchased by Studio Frames provided coverage of up to $194,700 for flood damage to the portion of the shopping center occupied by Studio Frames (or "building coverage," identified in the SFIP as "Coverage A"), and $287,200 for flood damage to the contents of the gallery (or "contents coverage," identified in the SFIP as "Coverage B"). Over the next four years, Studio Frames paid a premium for the policy that reflected the combined cost of both coverage limits. See J.A. 134, 135, 136.

On July 23-24, 2000, Studio Frames suffered severe flood damage to its gallery, including to its leasehold improvements, and to the gallery's contents. It contacted Standard Fire almost immediately thereafter to report the damage. Standard Fire, in turn, arranged for an adjuster, Leo Soucy, to visit the premises, which he did three days later on July 26, 2000. In the course of his visit, Soucy learned that Studio Frames leased, rather than owned, the portion of the shopping center that housed its gallery, and that Federal Realty Trust Investments, Inc., the owner of the shopping center, maintained a federal flood insurance policy that covered the entire building, including the Studio Frames gallery. J.A. 218. On the basis of these discoveries, Soucy informed Studio Frames that the building coverage, for which Studio Frames had paid premiums for four years, was invalid under the SFIP because Studio Frames did not own the building. J.A. 49. Soucy explained further that, in his view, Art. 4 of the SFIP, J.A. 142 (Coverage B § E), limited a tenant's recovery for damages to its "leasehold improvements" to 10% of the total amount of the tenant's `content' coverage, in this case $28,700. J.A. 98. Consistent with Soucy's representation, Standard Fire attempted to refund to Studio Frames the premium it had paid for building coverage in the past year on August 21, 2000, J.A. 218; and, on September 11, 2000, Standard Fire informed Studio Frames by letter that, "[u]nder the Standard Flood Insurance Policy and [sic] insured/tenant cannot purchase building coverage on a building he does not own." J.A. 208.

As required by Art. 8 § O(3) of the SFIP, J.A. 149, Studio Frames next filed a "proof of loss" with Standard Fire on September 20, 2000, itemizing and valuing its losses due to the flood, and ultimately claiming total losses in excess of the policy limit of $287,200 for contents coverage. J.A. 224-25. The "proof of loss," comprehensive in all other respects, did not include damage that would have been covered under the SFIP's building coverage; instead, it provided only that Studio Frames "reserved the right ... to file an additional Proof of Loss for leasehold improvements coverage." J.A. 225. Studio Frames did not subsequently file an additional proof of loss, however, a decision that its counsel now asserts was made "consciously and intentionally" because Standard Fire had already breached the contract of insurance. J.A. 251.

On September 22, 2000, Standard Fire accepted Studio Frames' proof of loss as complying with the "policy conditions and provisions" of the SFIP, but rejected the values that Studio Frames attached to its losses. J.A. 153. After several months of negotiations, Standard Fire eventually determined that Studio Frames suffered flood damage compensable under the SFIP's contents coverage (Coverage B) in the amount of $143,336.27 and, on January 3, 2001, issued a check to Studio Frames for $93,336.27 ($143,336.27 less $50,000 that Standard Fire had released to Studio Frames at an earlier date). As is relevant to this appeal, this final determination of coverage included $28,700 in recompense for leasehold improvements, as required by section E of the SFIP's contents coverage (Coverage B), J.A. 142, but provided no compensation under its building coverage (Coverage A). J.A. 216. The calculation also excluded, as not covered by the SFIP, the value of certain promotional materials (art cards, slides, and transparencies) that were damaged in the flood.

Within a year of being notified that its claim was partially denied, Studio Frames brought suit in federal district court to challenge Standard Fire's denial of coverage for flood damage to both its leasehold improvements and promotional materials. The district court dismissed Studio Frames' claim at summary judgment. As to the leasehold improvements, the court ruled that Studio Frames was barred by the terms of the SFIP from sustaining a challenge to Standard Fire's denial of coverage because it failed to file a proof of loss detailing the damage to this property. J.A. 235-39; see also J.A. 151 (SFIP Art. 8, § T). And, concerning the promotional materials, the court agreed with Standard Fire that the materials were properly characterized as "valuable papers" and, for that reason, beyond the coverage of the SFIP. J.A. 243-45. Studio Frames appealed the district court's judgment in both respects.


Although the parties have not briefed the issue and the district court did not consider it, we must establish in the first instance that we have subject matter jurisdiction over this case. See American Canoe Ass'n v. Murphy Farms, Inc., 326 F.3d 505, 516 (4th Cir.2003) (explaining that subject matter jurisdiction is the basis for the "very legitimacy of a court's adjudicatory authority"). Studio Frames, alone among the parties, provided a jurisdictional statement in its brief, but we have specifically reserved the question of whether its asserted basis for jurisdiction, 42 U.S.C. § 4072, is sound. Battle v. Seibels Bruce Ins. Co., 288 F.3d 596, 606 (4th Cir.2002) (declining "to tackle the difficult statutory construction question" of whether 42 U.S.C. § 4072 provides the federal courts with "original, exclusive jurisdiction" over NFIP claims against a WYO carrier). And, indeed, there is substantial disagreement among the circuits as to whether section 4072 establishes "original exclusive jurisdiction" over claims, such as this one, brought by an insured against the WYO carrier through whom it acquired flood insurance, as opposed to "an action institute[d] against the Director" of FEMA. See 42 U.S.C. § 4072 (conferring "original and exclusive jurisdiction" upon the federal courts to "hear and determine" claims instituted by claimants under section 4071 "against the Director").1

We once again decline to decide this question because, in this case, even more clearly than in Battle, we possess subject matter jurisdiction over Studio Frames' breach of contract claims pursuant to 28 U.S.C. § 1331. See Battle, 288 F.3d at 606-09. "Federal common law controls the interpretation of insurance policies issued pursuant to the National Flood Insurance Program." Leland v. Fed. Ins. Adm., 934 F.2d 524, 529 (4th Cir.1990). Therefore, Studio Frames'"right to relief" on its claims for breach of contract, both of which hinge on the court's interpretation of a standard form insurance policy issued pursuant to the NFIP and codified in federal regulations, "necessarily depends on the resolution of a substantial question of federal law," Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). Accord Downey, 266 F.3d at 682; Newton v. Capital Assur. Co. Inc., 245 F.3d 1306, 1309 (11th Cir.2001); Van Holt, 163 F.3d at 167.

Having concluded that we have federal question jurisdiction over this cause of action under 28 U.S.C. § 1331, we turn to the substance of Studio Frames' appeal.


Studio Frames first argues that the district court erred by refusing to consider its challenge to the denial of coverage for its leasehold improvements because it had failed to file a corresponding proof of loss. Studio Frames acknowledges, as it...

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