SLABBED Daily – August 23 (Citations of significant interest)

SLABBED reviews of a brief filed in Katrina litigation are written to tell the story of the disputed claim as it makes it way through the litigation process.  Although the full brief is always linked to the post, citations are often omitted in the story as they interrupt the flow and add to the length.

However, in today’s SLABBED Daily, citations are the story and we have Chip Merlin to thank for posting the information on his Property Insurance Coverage Law BlogFlood Insurance Waivers Concerning Proof of Loss are Subject to Judicial Review: A Recent Flood Case that Makes Sense and  If Insurers Fail to Timely Pay Actual Cash Value Benefits, Policyholders Should Demand Full Replacement Cost Benefits Even if Replacement Has Not Occurred.

Slabbed recently posted We will not now allow defendant to raise as a defense plaintiff’s failure to perform an act which defendant itself greatly hindered plaintiff from performing…,a portion of another recent Merlin post that pointed out:

…courts have found a duty on the insurer to reimburse the insured before rebuilding takes place when…the insured does not have the means to rebuild the facility without insurance proceeds.(emphasis added)

The SLABBED version of his post encouraged readers to use the cases Merlin identified if they had related litigation.

Although Chip is a busy attorney who somehow finds time to write for his firm’s blog, he is also  a reader of SLABBED who took note of what was written and responded with additional citations:

So, to prove that there is a little more legal support than just two cases and that maybe Mississippi jurists have been a little too lenient letting State Farm and other insurers escape replacement cost obligations through their failure to fully or timely pay actual cash value benefits, I am following up with this post. (emphasis added)The rule and argument suggested in the title has applied at least in the following cases:

  1. Zaitchick v. Am. Motorists Ins. Co., 554 F.Supp. 209, 215-16 (DCNY 1982), aff’d., 742 F.2d 1441 (2d Cir. 1983), cert., den., 464 U.S. 851 (1983) (insureds were entitled to recover replacement cost of home destroyed by fire where insurer refused to pay any money to insureds, which made it impossible for them to comply with condition precedent requiring them to first rebuild their home).
  2. Ward v. Merricmack Mut. Fire Ins. Co., 753 A.2d 1214, 1218 (N.J.Super. 2000) (evidence created jury question whether property insurer’s refusal to tender actual cash value made it impossible for insured to satisfy the precondition of replacing structure in order to recover the replacement cost and whether the condition was excused);
  3. McCahill v. Commercial Union Ins. Co., 446 N.W.2d 579, 584 (Mich. Ct. App. 1989) (insurer’s failure to advance funds that insured required in order to rebuild home excused insured from having to rebuild in order to recover for replacement costs of home);
  4. Northrop v. Allstate Ins. Co., 720 A.2d 879, 883 (Conn. 1998) (insurer’s withholding recoverable depreciation determined to be wrongful because it rendered replacement cost coverage illusory);
  5. Bailey v. Farmers Union Co-op of Neb., 498 N.W. 2d 598-599 (Neb. Ct. App. 1992) (insured homeowner who lost home to fire entitled to recover replacement cost where insurer failed to ensure that it would reimburse her up to the policy limits);
  6. Polack v. Fire Ins. Exch., 423 N.W. 2d 234, 235-38 (Mich. 1988) (“no reason to hold an insurer any less accountable for its actions than other contracting parties” replacement cost was proper measure of damages in case where insurer’s refusal to pay prevented insured from rebuilding within 180 day deadline set forth in policy);
  7. State Farm Fire & Cas. Ins, Co. v. Miceli, 518 N.E. 2d 357, 362 (III. Ct. App. 1987) (where insurer’s denial of vandalism claim precluded insured from making repairs, insured entitled to recover replacement costs at trial);
  8. Maine Mut. Fire Ins. Co. v. Watson, 532 A.2d 686, 688-89 (Me. 1987) (insured entitled to recover replacement cost).

SLABBED has published several posts questioning court interpretation of  the federal legislation and/or regulations governing the NFIP.  Merlin’s post on late-filed federal proof of loss for flood claims opens the door to revisiting a number of issues in light of the significant new decision he provides and discusses:

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…

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.

SLABBED wonders when a court will apply that same basic standard to the Expedited Claim Handling Process?