Gallup v. Omaha Property & Casualty Insurance

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT December 21, 2005

Charles R. Fulbruge III
Clerk
No. 04-31213

C.W. GALLUP, also known as Bo Gallup, SUSAN MOCK GALLUP,

Plaintiffs-Appellees,

versus

OMAHA PROPERTY AND CASUALTY INSURANCE COMPANY,

Defendant-Appellant.

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Appeal from the United States District Court
for the Eastern District of Louisiana

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Before DAVIS, SMITH and DENNIS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Omaha Property and Casualty Company, a Write Your Own

insurer under the National Flood Insurance Program, appeals the

district court’s interlocutory order that the plaintiffs’ state

law tort claims against the insurer are not preempted by federal

law pursuant to regulations promulgated by FEMA under authority

of the National Flood Insurance Act of 1968. Based on this

court’s holding in Wright v. Allstate Ins. Co., 415 F.3d 384 (5th

Cir. 2005), we reverse.
 I.

A.

The National Flood Insurance Program (the “NFIP”) was

established by the National Flood Insurance Act of 1968 (the

“Act”), 42 U.S.C. § 4001, et seq. The Federal Emergency

Management Agency (“FEMA”), an agency of the Department of

Homeland Security, administers the NFIP. The NFIP has two

components: (1) a flood insurance program, and (2) a unified

national plan for flood management. 42 U.S.C. §§ 4001(b) and

(c). Initially, the program operated primarily through a pool of

private insurers under the supervision and with the financial

support of the Department of Housing and Urban Development. In

1977, the Secretary of HUD made FEMA primarily responsible for

its operation. 42 U.S.C. § 4071. FEMA by regulation promulgated

the Standard Flood Insurance Policy (“SFIP”) and provided for

marketing and claims adjustment by private insurers operating as

“Write Your Own” (“WYO”) companies. These companies issue SFIPs

in their own names, and arrange for the adjustment, settlement,

payment and defense of all claims arising from the policies.

FEMA regulations establish the terms of the SFIP, rate structures

and premium costs. Claims are ultimately paid out of the U.S.

Treasury. This new arrangement is referred to as Part “B” of the

NFIP.

Section 4072 of the Act, allows suits against FEMA for

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claims on flood policies:

§ 4072. Adjustment and payment of claims; judicial
review; limitations; jurisdiction

In the event the program is carried out as provided in
section 1340 [42 USCS § 4071], the Director shall be
authorized to adjust and make payment of any claims for
proved and approved losses covered by flood insurance,
and upon the disallowance by the Director of any such
claim, 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 in the United States district court for the
district in which the insured property or the major
part thereof shall have been situated, and original
exclusive jurisdiction is hereby conferred upon such
court to hear and determine such action without regard
to the amount in controversy.

42 U.S.C. § 4072. Effective December 31, 2000, FEMA proposed an

amendment to the SFIP, which added the following language to

Article IX of the standard flood insurance policy:

IX. What Law Governs
This policy and all disputes arising from the handling
of any claim under the policy are governed exclusively
by the flood insurance regulations issued by FEMA, the
National Flood Insurance Act of 1968, as amended (42
U.S.C. § 4001, et seq.), and Federal common law.

44 C.F.R. pt. 61, App. A(1), Art. IX (2001).

B.

The Gallups purchased a SFIP from defendant Omaha Property &

Casualty Insurance Company (“Omaha”) for their home and its

contents in Covington, Louisiana in 2002 and 2003. Omaha

provides flood insurance through the NFIP under FEMA, acting as a

“Write Your Own” insurer.

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 On December 24, 2002, a flood occurred on the plaintiffs’

property (“Flood I”). An architect and engineer consulted by the

plaintiffs determined that the flood caused damage to the

structure of the home. The plaintiffs filed a Proof of Loss with

Omaha, claiming damages of $210,000.00 - the replacement value of

their home (“Claim I”). Omaha’s engineer inspected the home and

recommended repairs to restore the structural integrity of the

home but also stated that the home had not suffered any damage

from the flood, other than soil loss from underneath the pilings.

Omaha modified the claim, paying only the amount it would cost to

replace the soil beneath the home, approximately $9,000.

In June 2003, another flood occurred related to Tropical

Storm Bill (“Flood II”). Flood II severely damaged the Gallup

home, causing part of the home to sag and completely undermining

several footings supporting the piers that elevate the home. The

plaintiffs filed another Proof of Loss with Omaha seeking

approximately $209,000, the total replacement value of the home

less the deductible (“Claim II”). Omaha denied the claim after

its attempts to settle for a nominal sum were unsuccessful.

In December 2003, the plaintiffs filed suit against Omaha

alleging (1) breach of contract on Claims I and II under federal

common law, (2) breach of the duty of good faith and fair dealing

under federal common law on Claims I and II, (3) bad faith breach

of contract on Claims I and II under La. Civil Code Art. 1997,

and (4) bad faith adjustment of Claim II under La. Rev. Stat.

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22:1220.

In a Motion to Dismiss, Omaha argued that the plaintiffs’

state law claims are preempted based on the December 2000

regulation which added an express preemption provision to the

SFIP. The district court analyzed the motion as presenting the

issue whether FEMA was authorized to issue the regulation in its

grant of authority from Congress. The district court concluded

that FEMA was not authorized by Congress to preempt the

application of state laws to extra-contractual claims. It also

found that preemption is inconsistent with the purposes of the

Act. Accordingly, it denied the defendant’s Motion to Dismiss

the plaintiffs’ state law claim under La. Civ. Code Art. 1997.

It granted the Motion to Dismiss the plaintiffs’ state law claims

under La. R.S. 22: 1220 because those claims relate to the

coverage of the policy, which is governed by federal law under 42

U.S.C. § 4072. It also granted the Motion to Dismiss the

plaintiffs’ federal common law claims for breach of good faith

and fair dealing as inapplicable because these claims could be

asserted under Civil Code article 1997. The district court

certified its ruling for immediate appeal and Omaha appealed.1

II.

The parties have presented the issue in this case as whether

1
We previously granted Omaha’s Petition for Leave to Appeal
from an Interlocutory Order in December 2004.

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the National Flood Insurance Program authorizes FEMA to

promulgate a regulation to preempt state law claims made against

Write Your Own Insurance providers under the National Flood

Insurance Program. This is understandable because, until this

court’s recent decision in Wright v. Allstate Ins. Co., 415 F.3d

384 (5th Cir. 2005), courts (including this one) have interpreted

our precedent as holding that the NFIP does not preempt state law

tort claims. See Spence v. Omaha Indemnity Ins. Co., 996 F.2d

793 (5th Cir. 1993); Richmond Printing LLC v. Director, FEMA, 72

Fed. Appx. 92 (5th Cir. 2003)(unpublished)(interpreting Spence as

holding that a misrepresentation extracontractual claim was not

preempted by the Act).

In Wright v. Allstate Ins. Co., we concluded that Spence did

not support that conclusion.

A careful reading of Spence, however, reveals that
Spence does not hold that state law tort claims are not
preempted by the NFIA. The issue in Spence was a narrow
one: whether federal or state law determined the
statute of limitations for bringing state law claims
against a WYO. While we held that state law would
govern the statute of limitations for state law tort
claims, we did not foreclose the possibility of field
or conflict preemption. Rather, our holding was
premised on the fact that "the NFIA contains no express
preemption provision" and "neither [the insurer] nor
the federal government as amicus suggests preemption of
the state law fraud claim." 996 F.2d at 797 n.20. Thus,
the issue of whether the NFIA preempted state law tort
claims was not before the court in Spence, and the
court did not address it.

415 F.3d at 389-390. We held in Wright that “state law tort

claims arising from claims handling by a WYO are preempted by

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federal law.” Id. at 390. The case does not rely on the 2000

regulation at issue in this case, but notes that “[w]hile no

circuit has yet addressed whether this amendment is effective as

an express preemption of state law claims, it can obviously be so

argued.” Id. Wright also observed that two other circuits have

held that federal law preempts state law tort claims based on a

WYO’s handling of an insurance claim, citing C.E.R. 1988, Inc.

v. The Aetna Casualty & Surety Co., 386 F.3d 263 (3d Cir. 2004);

Gibson v. American Bankers Ins. Co., 289 F.3d 943 (6th Cir.

2002). Id.

Given this court’s holding in Wright, that state law tort

claims arising from claims handling by a WYO are preempted by the

National Flood Insurance Act, it necessarily follows that the Act

gives FEMA authority to promulgate regulations to that effect.

III.

Based on our decision in Wright, the district court erred in

concluding that state law claims against a WYO carrier are not

preempted by the National Flood Insurance Act and related

regulations. Accordingly, the district court’s judgment to that

effect, denying Omaha’s Motion to Dismiss the Gallups’ claims

under La. Civ. Code art. 1997, is reversed and this case is

remanded to the district court for further proceedings.2

2
Although briefed by the parties, we have no jurisdiction
in this interlocutory appeal to reach the district court’s order
granting Omaha’s Motion to Dismiss the Gallup’s federal common
law claims. Omaha cannot appeal a ruling in its favor and the

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 REVERSED and REMANDED.

Gallups did not seek certification to appeal that ruling.

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