Just last week a Federal Court issued an opinion in a case having its roots in Super-storm Sandy.1 At issue in the case was whether the policyholder’s cause of action against the broker for negligent misrepresentation in the procurement of the flood policy was preempted or prohibited by the National Flood Insurance Program. 

The policyholder had a policy of flood insurance issued to her by Fidelity that covered her property. The policy was procured through an insurance broker, one of the Defendants in the case. The policy described the property as a 2–4 family property. The property sustained severe damage from Sandy. Fidelity refused to provide flood coverage for the damages sustained at the rear house located on the property. According to the policyholder, both Defendants were aware that the property consisted of two homes on a single parcel and were deemed two family structures, as evidenced on the declaration page of the insurance policy. The policyholder sought a declaration that Fidelity is obligated under the Policy to pay the claims related to the Sandy damages. The Complaint also sought damages from the broker for misrepresentation involved in the procurement of coverage for the policy.

Originally the case was filed in State Court, but was removed by the Defendants to Federal Court because the National Flood Insurance Act vests Federal District Courts with original jurisdiction over lawsuits by claimants against Write Your Own (WYO) insurance companies based on partial or total denial for claims of flood damage. The broker Defendant sought to dismiss Plaintiff’s state law negligent misrepresentation claim on the basis that it was barred (or preempted) by the National Flood Insurance Act. In particular, the broker argued that: (1) a flood insurance policy and all disputes relating to claims under such a policy are governed exclusively by flood insurance regulations issued by FEMA, the National Flood Insurance Act of 1968 and by federal common law, and (2) under the applicable federal law, standard flood insurance policyholders are presumed to know and understand the provisions of the Standard Flood Insurance Policy regardless of their actual knowledge or understanding. Thus, according to the broker, because Plaintiff is presumed to know and understand all the provisions of the policy, the claim of negligent misrepresentation in the procurement of the policy should be dismissed.

The Court noted that there is no dispute that “federal law preempts state contract law with respect to the interpretation of Policy language.” Also, the Court noted that it is not disputed that the negligent misrepresentation claim at issue sounds in tort and involves allegations of misrepresentations in the procurement of the policy, not in the adjustment of a claim under the policy.

The Court refused to dismiss Plaintiff’s case against the broker Defendant for negligent misrepresentation in the procurement of her flood insurance policy. The Court pointed out that the broker Defendant cited no binding legal authority in support of its position that the National Flood Insurance Act preempted claims dealing with procurement of Standard Flood Insurance Policies. The denial of the broker’s Motion is without prejudice for the broker to re-raise this argument in future motion practice — particularly if discovery reveals that Plaintiff’s negligent misrepresentation claim involves interpretation of policy language.

So it was good news for the policyholder that this portion of her case was not kicked out of court and, at least for the time being, is allowed to proceed against the flood carrier and the broker. It mattered to the Court in issuing its opinion that this portion of the case sought relief for a tort cause of action against the broker for procuring the policy, rather than involving policy interpretation of the standard flood policy under the National program.

1 Danho v. Fidelity Nat. Indem. Ins. Co., No. 13-4547, 2013 WL 5411195 (D. N.J. Sept. 26, 2013).