Van Holt v. Liberty Mut. Fire Ins. Co.

• Decision Date: 23 January 1998
• Docket Number: No. 97-5098,97-5098
• Parties: Re VAN HOLT, Jo Van Holt, Appellants, v. LIBERTY MUTUAL FIRE INSURANCE COMPANY, Liberty Mutual Group. . Submitted Under Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 161

163 F.3d 161

Re VAN HOLT, Jo Van Holt, Appellants, v. LIBERTY MUTUAL FIRE INSURANCE COMPANY, Liberty Mutual Group.

No. 97-5098.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit LAR 34.1(a) Jan. 23, 1998.

Original Opinion Filed May 11, 1998.

Rehearing Granted July 21, 1998.

Opinion and Judgment Vacated Nov. 24, 1998.

Decided Nov. 25, 1998.

James F. Villere, Jr., Morristown, NJ, for Appellant.

Eli L. Eytan, Law Offices of Mauro C. Casci, Leonardo, NJ, for Appellee.

Marc Richman, Civil Div., Dept. of Justice, Washington, DC, for Amicus Curiae.

Gerald J. Nielsen, Nielsen Law Firm, Metairie, LA, for Amicus Curiae.

BEFORE: SLOVITER, LEWIS, and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal presents an important question of jurisdiction arising out of the interface between state consumer legislation and the enactment of the National Flood Insurance Act as well as issues relating to liability pertaining to National Flood Insurance policies. The threshold issue is whether the federal courts have subject-matter jurisdiction over a complaint by an insured predicated on the National Flood Insurance Act of 1968 ("NFIA" or "the Act") but actually sounding in tort.

The plaintiffs' complaint alleges that Liberty Mutual Fire Insurance Company and Liberty Mutual Group ("Liberty Mutual"), a private insurer acting as a fiscal agent of the federal government, violated New Jersey state law during its investigation and adjustment of a claim under a policy issued by it pursuant to the NFIA. The plaintiffs assert exclusive federal jurisdiction under the NFIA. The district court entered summary judgment for the defendants on the plaintiffs' claim for damages. On appeal, we initially held that the district court did not have subject-matter jurisdiction. We subsequently granted panel rehearing and vacated the opinion and judgment. In light of new information furnished on the petition for rehearing, we now hold that the district court had subject-matter jurisdiction under 28 U.S.C. § 1331 and 42 U.S.C. § 4072. We have reviewed the plaintiffs' claims for damages and will affirm the district court's grant of summary judgment.

I.

The plaintiffs, Re and Jo Van Holt, own a home in Sea Bright, New Jersey. The town of Sea Bright is located on a narrow strip of land bounded by the Shrewsbury River on one side and the Atlantic Ocean on the other. The Van Holts' home is located in an area that floods frequently. In October 1991, Sea Bright was flooded, resulting in damage to the Van Holts' home and personal property. In connection with this flood, the Van Holts filed two claims with their insurer, Liberty Mutual. Liberty Mutual paid the claims by check in the Summer of 1992. The Van Holts received and cashed Liberty Mutual's checks without objection. On December 11, 1992, the Van Holts' home and personal property were again damaged by flooding that resulted from high winds and rain. The present dispute between the Van Holts and Liberty Mutual primarily centers on the damage caused by the December 1992 flood.

The Van Holts held two insurance policies issued by Liberty Mutual. The first was a homeowner's policy, and the other was a flood insurance policy issued pursuant to the National Flood Insurance Program ("NFIP"). See 42 U.S.C. §§ 4001-4129 (codification of the NFIA). The Van Holts made claims on both policies for the damages resulting from the December 1992 flood. The claims made under the homeowner's policy do not affect the result in this case, and we do not discuss them. The Van Holts hired their own claims adjuster, Robert C. Ascher. Following an inspection of the Van Holts' home and property, Ascher submitted a list of the damaged property to Kevin Grelle, Liberty Mutual's claims adjuster. On behalf of Liberty Mutual, Grelle refused to approve the claimed damages because the plaintiffs failed to submit a properly sworn proof of loss as required by the standard flood insurance policy. According to a letter from Grelle to Ascher dated June 7, 1993, Grelle rejected Ascher's list because it did not set forth the values of the items claimed and the Van Holts had not signed each page as the insurance policies required.

When six months passed without payment of their claims, in June 1993, the Van Holts, through Ascher, filed a complaint against Liberty Mutual with the New Jersey Department of Insurance. The department forwarded the complaint to Liberty Mutual and requested Liberty Mutual's reasons for taking so long to evaluate the claim. In response, Grelle stated that he believed that the Van Holts had attempted to defraud Liberty Mutual by inflating the extent of their damages and claiming damage to property that had been destroyed or damaged, not in the December 1992 flood, but in the earlier October 1991 flood. In his investigation report, Grelle stated that, among other things, the Van Holts made claims for damage to property stored in the basement of their home that was caused by the October 1991 flood. Liberty Mutual had denied coverage for this damage when it partially paid the October 1991 claim because the flood insurance policy excluded coverage for damage to property stored in the insured's basement. After additional investigation, including an under-oath examination of the Van Holts by Liberty Mutual's attorneys, on June 16, 1995, Liberty Mutual formally denied the Van Holts' claims on the ground that they were fraudulent.

On December 15, 1995, the Van Holts sued Liberty Mutual in the United States District Court for the District of New Jersey. In their complaint, the Van Holts alleged that Liberty Mutual committed two state-law torts and asserted subject-matter jurisdiction pursuant to 42 U.S.C. § 4053, a provision of the NFIA. ¹ They cited no other statutory provision. Specifically, the plaintiffs averred that Liberty Mutual's failure to pay their claims and the company's allegation that the claims were fraudulent violated the New Jersey Consumer Fraud Act, N.J.S.A. §§ 56:8-1 to 56:8-48, and New Jersey common law requiring parties to an insurance contract to act in good faith, see Pickett v. Lloyd's, 131 N.J. 457, 621 A.2d 445, 451-52 (N.J.1993) (describing insurer's duty of good faith); see also Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 690 A.2d 575, 587 (N.J.1997) (discussing duty of good faith in other contractual contexts). Following discovery, the district court entered summary judgment for Liberty Mutual.

The court held that the plaintiffs could not state a Consumer Fraud Act claim because they had failed to present evidence of fraud by Liberty Mutual and because an alleged violation of the Unfair Claims Act did not constitute a violation of the Consumer Fraud Act. The court granted summary judgment for Liberty Mutual on the Van Holts' bad faith claim because the plaintiffs failed to demonstrate that the denial of the insurance claim was not supported by Liberty Mutual's reasonable belief that the plaintiffs were not entitled to benefits. Lastly, the court rejected the plaintiffs' claim for punitive damages because they failed to present evidence of egregious or malicious conduct by Liberty Mutual. The Van Holts filed a timely notice of appeal.

Believing that the Federal Emergency Management Agency ("FEMA") was merely a guarantor of the plaintiffs' flood insurance claims and that Liberty Mutual was not an agent of the federal government, we initially vacated the district court's December 2, 1996 judgment and remanded this case with instructions to dismiss for lack of subject-matter jurisdiction. Liberty Mutual thereafter petitioned for rehearing. In support of the petition, Liberty Mutual and amicus curiae United States informed us, for the first time, that Liberty Mutual was a fiscal agent for the federal government and that the federal government received premiums and disbursed claims under the defendants' flood insurance policy.

II.

A.

It is undisputed that Liberty Mutual issued the flood insurance policy to the Van Holts pursuant to the NFIP. The NFIP is a federally supervised and guaranteed insurance program presently administered by the Federal Emergency Management Agency ("FEMA") pursuant to the NFIA and its corresponding regulations. See 44 C .F.R. §§ 59.1-77.2. Congress created the program, among other things, to limit the damage caused by flood disasters through prevention and protective measures, spread the risk of flood damage among many private insurers and the federal government, and make flood insurance "available on reasonable terms and conditions" to those in need of it. ² See 42 U.S.C. § 4001(a).

Initially, under what is referred to as Part A of the NFIA, a pool of private insurance companies issued flood insurance policies and administered the NFIP pursuant to a contract with the United States Department of Housing and Urban Development. See 42 U.S.C. §§ 4051-53; see generally Spence v. Omaha Indem. Ins. Co., 996 F.2d 793, 794 n. 1 (5th Cir.1993) (discussing initial workings and organization of program under the Act); Berger v. Pierce, 933 F.2d 393, 394-96 (6th Cir.1991) (same). Under Part A, if a pool company refused to pay a claim under a flood insurance policy, the insured was permitted to sue the pool insurance company "on [the] claim" in federal district court regardless of the amount in controversy. See 42 U.S.C. § 4053.

On January 1, 1978, pursuant to 42 U.S.C. § 4071, HUD, although retaining the assistance of the private insurance industry, ended its contractual relationship with the pool of private insurers and assumed greater responsibility for operating the NFIP. See generally In re Estate of Lee, 812 F.2d 253, 256 (5th Cir.1987) (discussing HUD takeover of NFIP). Under this arrangement, which is presently in force and designated Part B, FEMA began administering the NFIP through the Flood Insurance Administration.

In 1983, pursuant to regulatory authority granted by Congress in 42 U.S.C....