Imagine a government could make arbitrary decisions about your rights without question. Do you think that would happen in China or the United States? Well, if it involves your national flood insurance policy, it has been happening in the United States for a long time. One federal judge has seen through the unfairness and called a halt to this practice in the recent case of Thomas L. Moffett v. Computer Sciences Corp., et al,. Civil No. 05-1547 (Md. D. Ct., July 6, 2009).

The case involved a number of late-filed federal proofs of loss for flood claims. The adjusters refused to grant the plaintiffs a waiver for the late filing, while allowing others. I think it is a stupid legal rule to make a piece of paper determinative of whether a proof of loss has been filed on time as an absolute condition precedent to recovery. The best rule, from the policyholder’s standpoint, regarding proofs of loss is in Louisiana, and the most draconian has been under the National Flood Program. Maybe that is about to change. After all, shouldn’t the contract be interpreted to provide coverage and recovery despite immaterial failures of filing pieces of paper? Proofs of Loss are not in the same category as Constitutions, and many documents in commercial settings and life are filed late or imperfectly without releasing the other party from an otherwise valid obligation.

In the National Flood context, most policyholders have “storm trooper” claims adjusters from an independent adjustment company controlled by a “write-your-own” insurer estimate the policyholder’s damage. Usually, the policyholder simply accepts. They may not agree, but they hope money is coming soon and that it is enough to get the structure fixed. Do any of them want to spend their own money to get an independent estimate? Usually, they do not. But, I would suggest that they hire a public adjuster; most estimators make mistakes and Flood estimators make a lot more money by churning out many estimates rather than spending the time getting a few very accurate.

In this case, the administrators for National Flood denied the appeal for the waiver. Usually, that has been the end of the story. Here, the policyholders argued that a court should decide if that decision was right. This is what the Court wrote about the situation before going into its analysis :

Under its regulatory framework, the Federal Insurance Administrator is authorized to waive the proof of loss deadline at his discretion. See 44 C.F.R. § 61.13(d) (2008). Upon receipt of a waiver request, the Administrator, or his delegates, "determine whether it is an appropriate claim to waive the [proof of loss] deadline and whether there is a legitimate reason why the [proof of loss] was not timely submitted"…

During one of several oral arguments before the Court that occurred in these proceedings during 2007, FEMA acknowledged that it had granted waivers for some insureds beyond the January 17, 2004 deadline. But when asked by the Court what criteria were used to determine whose claims might be considered after the deadline and whether such criteria had ever been publicly announced, FEMA was not able at first to articulate the criteria, except to suggest that some claims for additional compensation were deemed to be meritorious and were therefore granted late. Thereafter, per the Woods Affidavit, FEMA advised the Court of the criteria, effectively conceding that they had not theretofore been published.

Because it felt that these criteria for waiver were potentially invalid as to pending claims in that they were not previously-announced, the Court, contingent upon a subsequent finding that the criteria would indeed be held invalid for that reason, granted Plaintiffs leave to file individual requests for waiver of the proof of loss deadline.

Plaintiffs thereupon filed individual waiver requests based upon the newly announced criteria set forth by FEMA. In July and August 2008, FEMA issued a series of letters denying all but five of Plaintiffs’ waiver requests. Plaintiffs now seek review of the denials. FEMA submits that the Court lacks authority to review its waiver decisions.

In a footnote, the Court noted the new criteria that FEMA made and used to determine whether a waiver should be granted:

The criteria included: the severity of the damages caused by flood; whether the damage required an expert to evaluate the extent of structural damages caused by flood; whether the damage required a Certified Public Accountant to review the stock and inventory; whether salvage is involved and if the adjuster must either sell it back to the insured or dispose of it, which would further delay the adjustment process; whether the insured experienced difficulty listing all items damaged by flood due to the extent of personal property inventory involved; whether there were settlement disputes which may have caused delay in finalizing the claim adjustments; whether the insured required additional time due to health conditions (i.e., hospitalization) and required a family member’s assistance in the presentation of their claim; whether the claim involved prior losses and the insured was required to document repairs to the structure and replacement of personal property prior to the recent flood loss; and whether the insured demonstrates that there is additional covered damage for which a supplemental payment is appropriate.

After further outlining the legal position of the parties, the Court held:

The Court agrees with Plaintiffs that it possesses authority to review the waiver decisions pursuant to 42 U.S.C. § 4072. That section authorizes judicial review of “any claims for proved and approved losses covered by flood insurance” that the Director disallows. 42 U.S.C. § 4072 (2006). Defendants concede that section 4072 is a limited waiver of sovereign immunity that applies “with respect to circumstances involving the denial of a claim submitted pursuant to a federally-issued SFIP…”

The key question is whether a request for a waiver of a proof of loss deadline to submit a claim for payment of the loss is itself a “claim.” The Court believes it is.

The term “claim” is not defined by section 4072. Is it nonetheless “unambiguous”? The Court concludes that it is not, or stating the proposition directly, that the word “claim” is ambiguous. Black’s Law Dictionary 247 (6th Ed. 1990), for instance, defines a claim inter alia as a “[m]eans by or through which claimant obtains possession or enjoyment of privilege or thing.” In that sense, one makes a “claim” for possession or enjoyment of a waiver of a proof of loss deadline as much as a claim for the loss itself …

The Court holds that a request for waiver of a proof of loss deadline is a “claim” and, as such, is reviewable by a federal district court.

Policyholders with flood insurance may not appreciate how important this ruling is. We should be vigilant that FEMA does not try to make regulations diluting it. Without a process to appeal and challenge the decision, FEMA administrators can do what they want with impunity. Now those decisions can be challenged.

The Court also set out the standard of review when challenging those decisions:

Having determined that it has authority to review FEMA’s denials of waivers of the proof of loss deadlines in this case, by what standard does the Court review the denials? Since section 4072 does not indicate that the Court’s review should be de novo, the Court accepts the basic standard of the Administrative Procedure Act that the denials not be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A) (2006).

This is a fair and just decision. We all make mistakes and sometimes act arbitrary or capriciously—it is human nature. It is also human to not want to admit our wrongs. Having recourse to challenge such unfairness is a basic concept of American jurisprudence upheld in this case.