Insureds Must Know What’s In Their Flood Policies

In this litigious day and age, lawsuits alleging breach of the insurance policies, bad faith, unfair claims handling, unfair settlement practices or negligence by an insurance agent are so common that they are not considered particularly unique. Attorneys, insurers, insureds and the courts are confronting issues unique and peculiar to flood insurance claims which had not been fully addressed in the past or which were not widely understood.

Two of the more significant issues are whether all claims related to recovery under flood insurance policies are preempted by federal law or whether they are otherwise subject to limitations imposed by federal law. The number of opinions issued since 2005 addressing these two issues illustrates the uncertainty in the answer to these questions. While the judicial decisions have since begun to reach a consensus, the application of that consensus to individual cases still requires some fleshing out.

Because Louisiana, Mississippi and Texas incurred some of the most significant flooding due to recent hurricanes, the Federal Fifth Circuit Court of Appeals and the Federal District Courts within that circuit have issued a number of opinions addressing the issue of federal preemption since 1993.

Courts have come to draw a distinction between state law causes of action arising from claims handling of flood insurance and those arising out of procurement of flood insurance coverage, holding that the latter are preempted but the former are not.

Although these rulings permit state law causes of action to be brought against insurance agents or WYO companies in connection with their procurement of flood policies, at the same time, many courts have issued rulings suggesting that it will be impossible to prevail on most procurement related causes of action.

Specifically, most procurement claims allege misrepresentations by the insurance agent or the Write Your Own company about an insured’s need for flood insurance or the amount of flood insurance coverage available.

The Fifth Circuit has held that insureds have a duty to read and understand the terms of their SFIP, and, even if they do not have a copy of the SFIP, they are charged with constructive knowledge of the terms of the SFIP because it is published in the Code of Federal Regulations. This knowledge is imputed to the insured “regardless of actual knowledge of what is in the regulations or of the hardship resulting from innocent ignorant.”

As a result, numerous district courts in the Fifth Circuit have concluded that even if an insurance agent or WYO company makes a representation that is contrary to the provisions of the SFIP as contained in the Code of Federal Regulations, it is unreasonable as a matter of law for the insured to rely on such representation, notwithstanding that the insured may look to the insurance agent as an expert or how confusing regulations may be.

While further refinement will undoubtedly be forthcoming as additional decisions are issued, insurance agents, WYO companies and their respective attorneys should be aware that other than possibly those claims involving the procurement of flood insurance coverage, all such claims are governed exclusively by federal law and that any claims, even procurement claims, alleging misrepresentations that are contrary to provisions of the SFIP as contained in the Code of Federal Regulations may be deemed unreasonable as a matter of law.

Topics Agencies Legislation Claims Flood