United States Court of Appeals,
Fifth Circuit.
No. 92-7257.
Harry SPENCE and Nancy Spence Fortner, Plaintiffs-Appellees,
v.
OMAHA INDEMNITY INSURANCE COMPANY, Defendant-Appellant.
Aug. 2, 1993.
Appeal from the United States District Court for the Southern District of Texas.
Before POLITZ, Chief Judge, GOLDBERG and JONES, Circuit Judges.
POLITZ, Chief Judge:
Omaha Indemnity Insurance Company appeals an adverse judgment on verdict in this action
by Harry Spence and Nancy Fortner which raises both ex contractu and ex delicto claims. We affirm.
Background
Spence and Fortner, then husband and wife, purchased a Standard Flood Insurance Policy
(SFIP) from Omaha, through sales agent Whitney-Vaky, Inc. Omaha provides flood insurance
through the National Flood Insurance Program (NFIP) under an agreement with the Federal
Emergency Management Agency (FEMA), which authorizes it to operate as a "Write-Your-Own"
(WYO) insurance company.1 On April 11, 1985, heavy rains flooded the Spence basement, damaging
furniture, appliances, and other belongings therein, and damaging the basement itself. Roy Yoakum,
1
The National Flood Insurance Act of 1968 (NFIA), 42 U.S.C. §§ 4001-127, established the
NFIP. Initially, the program operated primarily through a pool of private insurers under the
supervision of and with financial support from the Department of Housing and Urban
Development. In 1977, pursuant to 42 U.S.C. § 4071, the Secretary of HUD terminated that
arrangement and made FEMA principally responsible for its operation. See generally Berger v.
Pierce, 933 F.2d 393 (6th Cir.1991). FEMA by regulation promulgated the SFIP, and provided
for marketing and claims adjustment by private insurers operating as WYO companies. Those
companies issue SFIPs in their own names, see 44 C.F.R. §§ 61.13(f), 62.23(a), collecting
premiums in segregated accounts from which they pay claims and make necessary refunds under
those policies. 44 C.F.R. Pt. 62, App. A, Arts. II(E), III(D), III(E). In the absence of sufficient
funds in the segregated accounts, WYO companies pay claims and make refunds by drawing on
FEMA letters of credit. See 44 C.F.R. Pt. 62, App. A, Art. IV. They may not alter the terms of
the SFIP as dictated by FEMA, see 44 C.F.R. § 62.23(c). They receive a portion of the premiums
collected as reimbursement for expenses incurred as a result of their NFIP participation. See 44
C.F.R. Pt. 62, App. A, Arts. III(B), III(C).
a claims adjuster, surveyed the damage a few days later. The Spences claimed that repair of damage
to the basement, not including damage to contents, would cost $92,500. Relying on a policy
exclusion for "finished basement walls, floors, ceilings and other improvement to a basement ... and
contents, machinery, building equipment and fixtures in such basement," on May 15, 1985, Omaha
issued a no tice denying the Spences' claim. The Spences contend that they relied upon
representations by Whitney-Vaky and Yoakum about the coverage under the SFIP and, as a result,
suffered substantial losses.
The Spences filed the instant action on May 10, 1989,2 alleging breach of the insurance
contract and fraud arising out of representations by Whitney-Vaky and Yoakum.3 The district court
denied Omaha's motion for summary judgment on statute of limitations grounds. The parties
consented to trial before a magistrate judge and the case was submitted to the jury on both fraud and
contract theories of liability. The jury answered special interrogatories finding that: (1) Whitney-
Vaky and Yoakum were agents of Omaha; (2) both made misrepresentations to the Spences
concerning the scope o f their insurance coverage upon which the Spences justifiably relied; (3)
ambiguity in the policy should be resolved favorably to the Spences; and (4) the Spences suffered
a loss of $84,123.30. The trial court denied post-trial motions for judgment as a matter of law and
for new trial and entered judgment upon the verdict, awarding damages as found by the jury and pre-
and post-judgment interest and costs. Omaha timely appealed.
Analysis
1. Statute of Limitations
Omaha first faults the district court's refusal to dismiss the Spences' claims as barred by
applicable limitations periods. In support of its position, Omaha invites our attention to Article
VIII(Q) of the SFIP, which provides:
2
They previously had filed suit against Omaha on September 5, 1985, and February 20, 1987.
Both suits were dismissed, the first for want of jurisdiction and the second for failure to
prosecute.
3
The Spences also alleged violations of the Texas Deceptive Trade Practices Act and Insurance
Code in their original complaint, but abandoned these claims before trial.
You may not sue [the WYO insurer] to recover money under t his policy unless you have
complied with all the requirements of the policy. If you do sue, you must start the suit within
twelve (12) months from the date we mailed you notice that we have denied your claim, or
a part of your claim.4
Omaha also points out that, under 42 U.S.C. § 4072,
upon the disallowance by the Director of any [claim under a flood insurance policy], or upon
the refusal of the claimant to accept the amount allowed upon any such claim, the claimant,
within one year after the date of mailing of notice of disallowance or partial disallowance by
the Director, may institute an action against the Director on such claim.5
Omaha argues that these provisions establish a one-year limitation period which, rather than the
four-year period provided for by Texas law,6 controls in this case and bars the Spences' contract and
misrepresentation claims.7 Because the district court entered judgment on alternative bases of
liability, limitations provide a complete defense for Omaha only if both claims are time-barred.
FEMA regulations promulgated under the National Flood Insurance Act establish the terms
of the SFIP which WYO insurers may issue.8 WYO companies may not alter those terms.9 As
Omaha points out, Article VIII(Q) of the SFIP requires the insured to institute any actions against
the WYO insurer "to recover money under this policy" within one year from the date on which it
4
44 C.F.R. Pt. 61, App. A(1), Art. VIII(Q) (emphasis added).
5
42 U.S.C. § 4072 (emphasis added).
6
E.g., Clade v. Larsen, 838 S.W.2d 277 (Tex.Ct.App.1992) (four-year limitations period
governs actions for breach of contract) (citing Tex.Civ.Prac. & Rem.Code § 16.004; Certain-
Teed Prods. Corp. v. Bell, 422 S.W.2d 719, 721 (Tex.1968)); M & M Distrib. v. Dunn, 819
S.W.2d 639 (Tex.Ct.App.1991) (four-year limitations period governs actions for fraud or
misrepresentation) (citing Williams v. Khalaf, 802 S.W.2d 651 (Tex.1990)).
7
The district court rejected Omaha's statute of limitations argument, finding both of these
provisions applicable only in actions against FEMA.
8
44 C.F.R. Pt. 61, App. A(1); 44 C.F.R. § 61.13(a) ("Each of the Standard Flood Insurance
Policy forms included in appendix "A" hereto ... and by reference incorporated herein shall be
incorporated into the Standard Flood Insurance Policy.").
9
See 44 C.F.R. § 61.5(i) ("The standard flood insurance policy is authorized only under terms
and conditions established by Federal statute, the program's regulations, the Administrator's
interpretations and the express terms of the policy itself."); id. § 61.13(a); id. § 61.13(d) ("The
Standard Flood Insurance Policy and required endorsements must be used in the Flood Insurance
Program, and no provision of the said documents shall be altered, varied, or waived other than
through the issuance of an appropriate amendatory endorsement, approved by the Administrator
as to form and substance for uniform use."); id. § 62.23(c) (flood insurance provided by WYO
companies "shall be issued under the [SFIP]").
mailed notice of disallowance or partial disallowance. Because regulations provide that "all flood
insurance made available under the Program is subject ... [t]o the terms and conditions of the
Standard Flood Insurance Policy, which shall be promulgated by the Administrator,"10 FEMA, acting
well within its statutory rulemaking authority,11 has established a one-year limitations period
governing actions to recover against WYO companies under SFIPs.12 That limitation clearly bars the
Spences' contract claim.13
We reach a different conclusion, however, as to the timeliness of the Spences' fraud claims.
While the national policies underlying the NFIP and ext ensive federal role therein impel our
conclusion that federal common law governs claims under flood insurance policies,14 the same does
not apply in actions for tortious misrepresentation against WYO insurers. FEMA regulations accord
10
44 C.F.R. § 61.4(a)(2).
11
FEMA has authority to promulgate by regulation "general terms and conditions of
insurability ..., including ... any ... terms and conditions relating to insurance coverage or
exclusion which may be necessary to carry out the purposes of this chapter." 42 U.S.C. § 4013.
12
We note that prior to the restructuring of the NFIP, 42 U.S.C. § 4053 provided for a
one-year limitations period in actions on policies issued by private flood insurance pool
participants. Although the present flood insurance scheme does not use the pool provided for in §
4053, that section indicates congressional intent to place a one year limitations period on actions
under flood policies issued by private NFIP participants. Further, as FEMA, in effect, pays all
claims under SFIPs through the letter of credit mechanism, 42 U.S.C. § 4072, establishing a
one-year limitations period for actions directly against the agency on such policies, supports our
conclusion.
13
Because we find the Spences' contract action time-barred, we need not consider Omaha's
contentions that the district court erroneously found ambiguity in the policy here at issue, or that
misrepresentations by Whitney-Vaky and Yoakum could not operate to waive policy exclusions.
14
Thus, considering the availability of prejudgment interest and penalties for arbitrary denial of
claims in an action seeking recovery on a flood insurance policy, we noted that because
the flood insurance program is a child of Congress, conceived to achieve policies
which are national in scope, and [because] the federal government participates
extensively in the program both in a supervisory capacity and financially, it is clear
that the interest in uniformity of decision present in this case mandates the
application of federal law.
West v. Harris, 573 F.2d 873, 881 (5th Cir.1978), cert. denied, 440 U.S. 946, 99 S.Ct.
1424, 59 L.Ed.2d 635 (1979); see also, e.g., Mason Drug Co. v. Harris, 597 F.2d 886
(5th Cir.1979) (federal law governs interpretation of flood insurance policy).
substantial autonomy to WYO companies in SFIP marketing and claims adjustment,15 and expressly
provide that "WYO Companies shall not be agents of the Federal Government."16 Further, while
WYO insurers may draw on FEMA letters of credit to pay SFIP claims, the WYO-FEMA agreement
does not permit such draws to cover a WYO company's liability for fraud.17 The more attenuated
federal interests in such claims lead to our conclusion that the limitations period governing them
derives from state rather than federal law. Article VIII(Q) of the SFIP concerns only suits "to recover
money under this policy." Likewise, 42 U.S.C. § 4072 addresses itself solely to actions arising from
partial or complete disallowance of flood insurance policy claims.18 Neither provision sets a
limitations period governing tort actions based o n misrepresentations concerning the SFIP, as
opposed to contract claims under the SFIP itself.19 Absent express preemption of state law fraud
15
See 44 C.F.R. § 62.23(e) ("a WYO Company shall utilize its own customary standards, staff
and independent contractor resources, as it would in the ordinary and necessary conduct of its
own business affairs, subject to the [NFIA and regulations promulgated pursuant thereto]."); 44
C.F.R. Pt. 62, App. A, Art. II, sec. G (WYO companies "may market flood insurance policies in
any manner consistent with its customary method of operation, provided that there is adherence to
Program statutes, regulations and explicit guidelines").
16
44 C.F.R. § 62.23(g).
17
That agreement, which FEMA has incorporated into regulations governing the NFIP, see 44
C.F.R. § 62.23(a), permits reimbursement of WYO companies for "payments as a result of awards
or judgments for damages arising under the scope of this Arrangement, policies of flood insurance
issued pursuant to this Arrangement, and the claims processing standards and guides set forth at
Article II, Section A, 2.0 of this Arrangement." 44 C.F.R. Pt. 62, App. A, Art. III, Section D(2).
It also calls for reimbursement of loss adjustment expenses and premium refunds. 44 C.F.R. Pt.
62, App. A, Art. III, Secs. (C), (E). These provisions plainly do not contemplate reimbursement
for judgments on tort claims such as those asserted by the Spences. See also 42 U.S.C. § 4081(c)
("The Director of the Federal Emergency Management Agency may not hold harmless or
indemnify an agent or broker for his or her error or omission.").
18
Notably, 42 U.S.C. § 4053, establishing a one-year limitations period for actions against
members of the private insurer pool through which the NFIP operated prior to 1977, also
concerns only actions arising from claims under insurance policies. It does not address tort claims
against such parties.
19
Omaha suggests that the SFIP choice-of-law clause, which provides "[t]his policy is
governed by the flood insurance regulations issued by FEMA, the National Flood Insurance Act
of 1968, as amended ... and Federal common law" requires an opposite result. We disagree. The
clause to which Omaha points refers only to the SFIP itself, and does not purport to subject
tortious conduct of WYO insurers to otherwise inapplicable federal law. Omaha also seeks
support for its position in Article XV of its agreement with FEMA. That provision states:
This Agreement and all policies of insurance issued pursuant thereto shall be
actions against WYO insurers20 or conflict with any federal provision, we conclude that the Spences
timely filed their action for misrepresentation under the four-year Texas limitations period.
2. Effect of Misrepresentations by Whitney-Vaky and Yoakum
Omaha next claims that 44 C.F.R. § 61.5(i) absolves it from tort liability for any
misrepresentations of Whitney-Vaky and Yoakum regarding coverage provided by the SFIP. That
regulation provides:
The standard flood insurance policy is authorized only under terms and conditions established
by Federal statute, the program's regulations, the Administrator's interpretations and the
express terms of the policy itself. Accordingly, representations regarding the extent and
scope of coverage which are not consistent with the National Flood Insurance Act of 1968,
as amended, or the Program's regulations, are void, and the duly licensed property or casualty
agent acts for the insured and does not act as agent for the Federal Government, [FEMA],
or the servicing agent.
Focusing on the second sentence of this provision, Omaha argues that it precludes recovery arising
from misrepresent ations of the sort which the Spences alleged. We are not persuaded. FEMA
regulations disclaiming any agency relat ionship with WYO companies, as well as the terms of the
FEMA-WYO agreement, more indicate intent to leave those insurers responsible for their own
tortious conduct. The regulation relied on by Omaha, read as a whole, plainly evinces an intent to
prevent expansion of SFIP coverage through misrepresentations by private parties involved with the
program, thereby protecting the government from expanded liability. We decline to accept a reading
of that provision immunizing WYO companies from liability for the tortious conduct of their agents.
3. Effect of Spence's Constructive Knowledge
subject to the provisions of the Act and Regulations issued pursuant thereto and all
Regulations affecting the work that are issued pursuant to the Act, during the term
hereof.
Because no FEMA regulation or NFIA provision addresses the Spences' fraud claim, this
assertion founders.
20
The NFIA contains no express preemption provision. Compare Burkey v. Government
Employees Hosp. Ass'n, 983 F.2d 656 (5th Cir.1993) (express preemption clause indicated
congressional intent to displace state law remedy for unreasonable delay in processing of federal
employee health benefits insurance claim). Neither Omaha nor the federal government as amicus
suggests preemption of the state law fraud claim.
Finally, relying on Federal Crop Insurance Corp. v. Merrill,21 Omaha asserts that because
publication in the Code of Federal Regulations gave the Spences constructive knowledge of the policy
terms, t hey could not rely upon and thus cannot recover in tort for any misrepresentations of
Whitney-Vaky or Yoakum. This argument overlooks the rubric that constructive notice affords no
defense under Texas law to an action for intentional or negligent misrepresentation.22 Thus, assuming
arguendo that Omaha may avail itself of the rule in Merrill23 and that publication in the Code of
Federal Regulations gave the Spences constructive notice of policy terms, such notice would not
excuse Omaha from liability for its agents' misrepresentations.
For these reasons, the judgment appealed is AFFIRMED.
21
332 U.S. 380, 68 S.Ct. 1, 92 L.Ed. 10 (1947).
22
Ojeda de Toca v. Wise, 748 S.W.2d 449 (Tex.1988); ECC Parkway Joint Venture v.
Baldwin, 765 S.W.2d 504 (Tex.App.1989).
23
We note in this connection that the Supreme Court formulated the Merrill constructive
notice rule in the context of an action asserting estoppel against the government. Relying on
Seavers v. Federal Emergency Management Agency, No. 84-2694 (D.N.J. Jan. 2, 1985), Omaha
urges application of Merrill to this case. Unlike the instant case, Seavers involved a contract
claim against the government rather than a tort claim against a private party.