Preemption
Bad Faith-Flood

National Flood Insurance Act preempts state law tort claims.
Gallup v. Omaha Property and Cas. Ins. Co.
No. 04-31213 (5th Cir. Dec. 21, 2005)

    The Fifth U.S. Circuit Court of Appeals ruled that, based on its decision in Wright v. Allstate Ins. Co., 415 F.3d 384(5th Cir. 2005), the district court erred in concluding that the National Flood Insurance Act adn related regulations do not preempt state law tort claims against a "write your own" (WYO) insurer.

    C.W. and Susan Gallup purchased a standard flood insurance policy from Omaha Property & Casualty Insurance Co. for their home and its contents. Omaha provided flood insurance through the National Flood Insurance Program (NFIP) under the Federal Emergency Management Agency (FEMA), acting as a WYO insurer.

    On Dec. 24, 2002, a flood occurred on the Gallups' property, An architect and engineer consulted by the Gallups determined the flood caused damage to the structure of the home. The Gallups filed a proof of loss with Omaha, claiming the replacement value of the home.

    Omaha's engineer inspected the home and recommended repairs to restore the structural integrity of the home, but also stated 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.

    In June 2003, another flood occurred which damaged the Gallup home, causing part of the home to sag and undermining several footings supporting the piers that elevated the home. The Gallups filed another proof of loss with Omaha seeking the total replacement value of the home less the deductible. Omaha denied the claim.

    The Gallups sued Omaha, alleging breach of contract under federal common law, breach of the duty of good faith and fair dealing under federal common law, bad faith breach of contract under state law, and bad faith adjustment under state law. The district court found the Gallup's state law tort claims were not preempted by federal law pursuant to regulations promulgated by FEMA under authority of the Act. Omaha appealed.

    The Fifth Circuit reversed the district courts judgment and remanded the case. The issue in this case was whether the NFIP authorized by FEMA to promulgate a regulation to preempt state law claims made against WYO providers under the NFIP.

    The Fifth Circuit had held in Wright that the Act preempts state law tort claims arising from claims handling by a WYO. This, it necessarily followed that the Act gave FEMA authority to promulgate regulations to that effect.

Stafford Texas Insurance Law & Litigation Alert
January 31, 2006