Just a reminder, my post, FEMA Grants An Additional 60 Day Extension For Ike And Gustav Victims To File Flood Proofs Of Loss, indicated that the deadline for having Flood Proofs of Loss in the hands of the flood insurers is on Friday, August 7, 2009. Please check for any changes and bulletins. In another prior post, A Warning Regarding Federal Flood Proofs Of Loss, I indicated:

"The following must be followed when completing the proofs for flood claims:

  1. Use the exact Federal Form for the Proof of Loss and not a generic form. Failure to do so may jeopardize payment. It would be similar to filing a Federal Income Tax return with a state form.
  2. Figure exact amounts owed. Do not put, "policy limits" or "to be determined."
  3. Document the amounts owed and attach the documentation. Do not just "ballpark" or "estimate" an amount. File the proof with actual estimates, proposals, lists, or some type of documentation which "proves" and substantiates the loss amount.
  4. Get it received and in the hands of the company listed on the policy by the deadline. Do not just send it to the adjuster on the deadline day.
  5. Do not rely upon other oral or written extensions from the field adjuster or his supervisor. Only written extensions coming from the Director or Deputy Director can legally extend the time.

National Flood may, on appeal, rescind these requirements. If you get in this predicament, we strongly suggest you obtain legal counsel. The best course of action is to never place yourself in that position in the first place."

We have been receiving some wrongful responses to properly complete Flood Proofs of Loss and imagine many others have as well. If you submit a properly filled out Proof of Loss, the insurer either pays the claim, pays part of the claim, and if the policy allows, may even replace or repair the property. The one thing some insurance adjusters wrongfully do is reject a properly completed proof of loss. This is technically a breach of the insurance contract by the insurance company because no property insurance contract, even a Flood contract, allows that to be the response.

When I did property insurance defense early in my career over twenty-six years ago, my mentor, Paul Butler, Jr., made this point in a number of insurance seminars, but the wrongful practice of "rejecting" properly completed Proofs of Loss still exists for some reason. We have received a number of these from National Flood and the adjusters with Fidelity. We have talked with them and they are clueless about what to do when a Flood policyholder sends a properly completed and documented Proof of Loss for a claim amount which is higher than what they agree is the amount of damage. I hope Russ Tinsley and others with National Flood are reading this because it is a problem that is harming policyholders.

Most insurance companies will pay the undisputed portion of the claimed amounts and try to adjust the disputed amounts through good faith discussion. This activity goes on all the time. Most property insurance claims being handled with disagreements can end with each side giving some after consideration for the other’s point of view. But, the Proof of Loss is not rejected. Instead, the good faith insurer merely indicates that it disagrees, puts in writing why it disagrees, pays the undisputed amounts, and usually asks to meet right away for a settlement or other adjustment conference trying to resolve differences in good faith.

The alternatives left to resolve the dispute are usually litigation or appraisal. The problem with litigating against National Flood is the unavailability of attorney’s fees and the usual high expense of federal litigation. The policyholder can win the lawsuit, but have no money after attorney’s fees and costs because the disputes are not usually that large.

A good example of this is in Dwyer v. Fidelity National Property and Casualty Insurance Company, 565 F.3d 284 (5th Cir., April 09, 2009). A summary of the facts were:

"…Fidelity paid the policy limit for contents and $86,629 for flooding-related building damages. After the first set of checks did not arrive, Fidelity mailed a second set, which the Dwyers received in December.

On February 21, 2006, Dwyer sent a certified letter to both Fidelity and Traveler’s Insurance Company (“Traveler’s”), whose homeowner’s insurance policy on the Dwyer dwelling covers wind damage. The letter stated that a contractor’s estimate to repair the house was roughly $100,000 more than the combined amounts paid by Fidelity and Traveler’s. Dwyer wrote that neither he nor the contractor could accurately distinguish between wind and flood damage, so Dwyer recommended each company pay the additional expenses in proportion to the amount it had already paid. Based on this calculation, he requested an additional $85,471.89 from Fidelity.

Fidelity instructed the Dwyers to contact the adjuster and faxed a copy of the letter to him. Apparently no further action occurred, and the Dwyers sued Fidelity on August 25, 2006, seeking additional money under the policy and damages under federal common law for bad faith claim adjustment. The complaint does not limit its allegations to undervaluation of the Dwyers’ loss nor does it disavow a claim to increase Fidelity’s share of the wind/water allocation, and it includes claims such as “failing to properly train its adjusters and agents,” which could be related to valuation, coverage, or both.

In its answer, Fidelity denied liability and stated:

If these Plaintiffs’ SFIP claims dispute reaches a point where it is established that there is (1) full and complete compliance with all conditions precedent to the making of a claim, and (2) resolution and agreement upon all issues of both coverage and the scope of the loss, then in that event (but not until that event) Defendant affirmatively asserts and invokes the appraisal clause of the SFIP. 44 C.F.R. Pt. 61, App. A(1), Art. VII(P).

…Fidelity filed a motion to compel appraisal…

Because the trial date was close at hand, the district court denied the motion as untimely. After a four-day bench trial, the court awarded the Dwyers the difference between Velez’s estimate and the money already paid by Fidelity. In addition, the court awarded the Dwyers their attorneys’ fees, finding that Fidelity qualified as a “federal agency” under the Equal Access to Justice Act. Fidelity appeals both rulings."

I assume there was no bad faith award because there is no federal common law bad faith. But the case is not finished and insurance monies paid because of what the Fifth Circuit did on appeal. It held that the matter had to go to appraisal despite the long time of litigating the matter and also held that no attorney’s fees and costs could be awarded against National Flood or the WYO (Write Your Own) carriers.

The appraisal analysis first noted:

"The Dwyers…argue that appraisal cannot be requested after suit has been filed. They offer no authority support their position. Nothing in the clause or the contract as a whole establishes a time limit for invoking the appraisal clause. Contractual clauses cannot be evaded by racing to the courthouse, and appraisal and arbitration clauses are routinely invoked during litigation. E.g., Hill v. G E Power Sys., Inc., 282 F.3d 343 (5th Cir.2002) (arbitration); Terra Indus., Inc. v. Commonwealth Ins. Co., 981 F.Supp. 581, 600 (N.D.Iowa 1997) (appraisal). Consequently, the appraisal clause may be invoked after suit, provided that the failure to do so has not amounted to waiver.

…The district court incorrectly homed in on the interval between the appraisal request and the trial date. The appropriate waiver inquiry examines Fidelity’s knowledge and action-when Fidelity knew that the appraisal clause could be invoked, whether it reacted timely to the knowledge. Fidelity first learned that the Dwyers disputed only the amount of loss, not coverage or other issues, on January 5, when it received the Velez estimate. Five weeks later, after informal requests failed, Fidelity formally moved the court to compel appraisal. Fidelity did not sit on its rights. In the context of the ongoing litigation, Fidelity raised the issue of appraisal in a timely fashion….”

Regarding the attorneys fees, the Court found: 

“Fidelity, a private insurer, cannot be characterized as a department, commission, administration, authority, board, or bureau of the United States. For the Dwyers to recover EAJA fees, Fidelity must qualify as an “independent establishment” or a “corporation in which the United States has a proprietary interest.” An “independent establishment,” however, is “an independent entity within the executive branch.” Scott v. Fed. Reserve Bank of Kansas City, 406 F.3d 532, 535 (8th Cir.2005) (emphasis added). Fidelity is not so situated, nor is Fidelity “a corporation in which the United States has a proprietary interest.” See id.

Finally, although Fidelity acts as a fiscal agent of the United States, “it is possible to be a fiscal agent … of the government without being a federal agency.” Id. (citing In Re Hoag Ranches, 846 F.2d 1225, 1227 (9th Cir.1988)). The SFIP regulations expressly state:

A WYO Company shall act as a fiscal agent of the Federal Government, but not as its general agent. WYO Companies are solely responsible for their obligations to their insured under any flood insurance policies issued under agreements entered into with the Administrator, such that the Federal Government is not a proper party defendant in any lawsuit arising out of such policies.

… In analyzing the definition of “federal agency” under the Federal Tort Claims Act, the Supreme Court admonished that although “[b]illions of dollars of federal money are spent each year on projects performed by people and institutions which contract with the Government” and “the Government may fix specific and precise conditions to implement federal objectives,” such contracts and regulations do not transform private actors into federal agencies. United States v. Orleans, 425 U.S. 807, 815-16, 96 S.Ct. 1971, 1976-77, 48 L.Ed.2d 390 (1976). Likewise, serving as a fiscal agent and a participant in a heavily regulated federal program did not transform Fidelity into a federal agency under the EAJA.

This conclusion is consistent with that reached by several district courts. See Dickerson v. State Farm Fire and Cas. Co., 2007 WL 1537631, at *4, No. 06-5181 (E.D.La. May 23, 2007) (“[W]hile State Farm is a WYO carrier participating in the NFIP as fiscal agent for the United States, it is not an agency of the United States as required by the EAJA.”); Schopen v. State Farm Ins. Co., 1996 WL 696444, at *2, No. 96-1892 (E.D.La. Dec. 2, 1996) (“Section 2412(b) only applies to civil actions which are ‘brought … against the United States.’ State Farm is neither the United States nor an agency of the United States.”). The district court erred in awarding EAJA fees to the Dwyers.

I feel for the Dwyers. It appeared they were awarded only another $56,963.19 which easily gets eaten up by deposition and expert costs even before the cost of their attorneys. Now, they will have to pay for an appraiser and half an umpire’s cost as well. Some may correctly figure that it may not pay to fight the National Flood bureaucracy. Something needs to be done in Congress about this because policyholders are economically forced to take less. There is no meaningful way for them to “win” and be made whole, unless they file a lawsuit to only prove a point.