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Spong v. Fidelity Nat'l Property & Casualty Insurance Co.

United States Court of Appeals, Fifth Circuit

May 22, 2015

ROBERT SPONG; KERRY SPONG, Plaintiffs-Appellees,
v.
FIDELITY NATIONAL PROPERTY AND CASUALTY INSURANCE COMPANY; FIDELITY NATIONAL INSURANCE SERVICES, L.L.C., Defendants-Appellants

Page 297

Appeal from the United States District Court for the Southern District of Texas.

For ROBERT SPONG, KERRY SPONG, Plaintiffs - Appellees: Jeffrey Lynn Doggett, Houston, TX.

For FIDELITY NATIONAL PROPERTY AND CASUALTY INSURANCE COMPANY, FIDELITY NATIONAL INSURANCE SERVICES, L.L.C., Defendants - Appellants: Gerald Joseph Nielsen, Esq., Trial Attorney, Kim Tran Britt, Esq., John Dennis Carter, Esq., Nielsen, Carter & Treas, L.L.C., Metairie, LA.

Before STEWART, Chief Judge, and BENAVIDES and OWEN, Circuit Judges.

OPINION

Page 298

PRISCILLA R. OWEN, Circuit Judge:

This interlocutory appeal pursuant to 28 U.S.C. § 1292(b) arises from the issuance and subsequent renewals of a flood insurance policy under the National Flood Insurance Program (NFIP) covering property owned by Robert and Kerry Spong. Hurricane Ike swept away all improvements on the Spongs' property and all personal belongings. The insurer, Fidelity National Property and Casualty Insurance Company, subsequently advised the Spongs that the policy was void from its inception because the property was ineligible for flood insurance under the NFIP. The Spongs sued Fidelity National Property and Casualty Insurance Co., its affiliate Fidelity National Insurance Services, L.L.C., and the United States, asserting a number of federal and state-law claims. The Fidelity entities (collectively " Fidelity" for purposes of this opinion) sought summary judgment, asserting, among other grounds, that the Spongs' claims were preempted by federal law. Fidelity seeks

Page 299

review of the denial of that motion. Based on precedent that binds this panel, we conclude that the Spongs' state-law causes of action are not preempted by federal law to the extent that they are insurance procurement claims, but claims that pertain to or arise out of " claims handling" after the policy issued are preempted. Additionally, even though not preempted, certain claims cannot succeed as a matter of law. We remand for further proceedings.

I

Fidelity National Property and Casualty Insurance Co. is a " Write-Your-Own" (WYO) Program insurance carrier that participates in the issuance of flood insurance under the National Flood Insurance Act (NFIA). Fidelity National Insurance Services, L.L.C. is a third-party vendor that services the federal flood insurance policies issued by Fidelity National Property and Casualty Insurance Co. The Federal Emergency Management Agency (FEMA) administers the federal flood insurance program.

In at least two prior decisions, our court has explained the NIFP's workings in more detail,[1] and we will not repeat those details today, other than to note that the exact terms and conditions of NFIP policies and eligibility for federal flood insurance are dictated by federal law. It is now beyond debate that the property at issue in the present case is and has been ineligible for federal flood insurance even before the Spongs purchased it. But two federal agencies, FEMA and the Fish and Wildlife Service, had erroneously concluded otherwise at the time the Spongs obtained a policy from Fidelity.

In recounting the pertinent facts, we consider the record in the light most favorable to the Spongs who were not the movants for summary judgment.[2] The Spongs contracted to purchase an elevated home in the Caplen Shores subdivision located on the Bolivar Peninsula in Galveston County, Texas. The Spongs knew that this property was located within a flood zone and that to secure a mortgage loan, they were required to obtain flood insurance. Under federal law, however, if property is located in the John H. Chafee Coastal Barrier Resources System (CBRS), the NFIP is prohibited from issuing a flood insurance policy.[3] The CBRS, created by Congress in the Coastal Barrier Resources Act,[4] was designated to " minimize the loss of human life, wasteful expenditure of Federal revenues, and the damage to fish, wildlife, and other natural resources." [5] It was not determined with finality that the Spongs' property was within the CBRS until three years after they had purchased their property and after Hurricane Ike had destroyed all improvements on it. Because government entities vacillated over a period of years as to the property's eligibility for flood insurance,

Page 300

we recount the evidence in this regard in some detail.

The Spongs purchased the property from the Hogans. The Hogans owned two adjacent lots, 549 Caplen Shores Circle and 553 Caplen Shores Circle. The Spongs purchased the 553 Caplen Shores property. It was not until several years afterwards that Fidelity ascertained that many of the documents that relate to the present dispute, including the application for insurance and the flood insurance policy itself, referred to 549 Caplen Shores, rather than 553 Caplen Shores. However, none of the parties contends that this error or the resulting confusion is material to the issues presently before this court, and we will not differentiate between the two addresses in our references to " the property" unless otherwise indicated.

FEMA requires applicants for federal flood insurance to obtain elevation certificates, which provide a risk profile of the property to be insured, to assist in the administration of the NFIP. Eight years before the Spongs purchased their property, the Hogans had obtained an elevation certificate, dated October 22, 1998, from a private company, and that certificate said that 549 Caplen Shores was " within the Coastal Barriers Act." The U.S. Fish and Wildlife Service, however, subsequently concluded otherwise. The Fish and Wildlife Service is the agency tasked with overseeing NFIP and CBRS mapping. In 2004, two years before the Spongs purchased the property, the Fish and Wildlife Service wrote a letter, dated April 15, 2004, to the NFIP that said the " property located at 549 Caplen Shores . . . is not located within the Coastal Barrier Resources System nor an Otherwise Protected Area." The Spongs' predecessors, the Hogans, were accordingly issued a SFIP flood insurance policy on October 5, 2005, from Fidelity covering 549 Caplen Shores Circle, four months before the Spongs agreed to buy the adjoining property, in February 2006.

As part of the Spongs' purchase process, another private entity was engaged to prepare a Standard Flood Hazard Determination. That form, dated February 22, 2006, reflected that the home on the property " is in a Coastal Barrier Resources Area (CBRA) or Otherwise Protected Area (OPA)" and stated " [f]ederal flood insurance may not be available." It also stated " CBRA/OPA designation date: 10/1/1983." However, that same form contained a box entitled " Compliance Quick Check" and " YES" was typed onto a line next to the question, " Is NFIP Insurance Available?" The form further stated: " This determination is based on examining the NFIP map, any Federal Emergency Management Agency revisions to it, and any other information needed to locate the building/mobile home on the NFIP map." This certificate was prepared for Fidelity's use in the flood insurance application process, but it is not clear whether the Spongs saw or were provided this form prior to closing.

However, a realtor involved in the Spongs' purchase transaction provided to Kerry Spong a copy of the 1998 elevation certificate, which stated that the 549 Caplen Shores Circle property was " within the Coastal Barriers Act." The Spongs had sought the services of an insurance agency, Crystal Beach Insurance, in obtaining coverage for the property they were purchasing from the Hogans, and Kerry Spong sent the 1998 certificate in PDF format to Crystal Beach Insurance. That agency submitted an application for a federal Standard Flood Insurance Policy (SFIP) on 549 Caplen Shores Circle to Fidelity on March 15, 2006, which included the April 15, 2004, letter from the Fish and Wildlife Service stating that the property was not in the CBRA. Fidelity subsequently issued

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a SFIP, effective March 15, 2006, covering 549 Caplen Shores Circle. The following day, March 16, 2006, the Spongs consummated the purchase of 553 Caplen Shores Circle.

About five months after the Spongs closed the purchase of the property, FEMA sent a " critical error" notice to Fidelity, dated August 8, 2006, stating that as of June 30, 2006, the flood insurance policy was invalid because the property was located in the CBRA. The notice further stated the Spongs' policy " ha[s] no tolerance and must be cancelled[,] corrected[,] or appealed." Within the next few weeks (on August 17 and August 23, 2006), Fidelity appealed this notice and, based on the April 15, 2004, Fish and Wildlife Service letter, twice requested FEMA to remove the invalid policy code on the Spongs' policy. A month after these requests, in a letter dated September 13, 2006, the Fish and Wildlife Service once again advised the NFIP that 549 Caplen Shores Circle " is not located within the Coastal Barrier Resources System nor an Otherwise Protected Area." Based on this Fish and Wildlife Service letter, FEMA agreed that the policy was valid.

But shortly thereafter, in October 2006, FEMA sent Fidelity another critical error notice stating that the policy was invalid. A private entity prepared another Standard Flood Hazard Determination, dated November 13, 2006, which reflected that the property was located in the CBRA or Otherwise Protected Area. Fidelity appealed the October 2006 notice from FEMA, on November 27, 2006, requesting that FEMA remove the invalid policy code. FEMA again concluded that the policy was valid. The Spongs' policy was renewed in 2007 and 2008 without further incident. Fidelity did not notify the Spongs that questions had arisen regarding the policy's validity.

Hurricane Ike destroyed all improvements on the Spongs' Bolivar Peninsula property on September 12, 2008. The Spongs submitted a Proof of Loss claim under the SFIP for $208,300. Fidelity investigated the claim and discovered, for the first time, that the address of the property listed on the policy was incorrect and that the Spongs owned 553 Caplen Shores Circle, rather than 549 Caplen Shores Circle. A Standard Flood Hazard Determination was completed (dated January 2, 2009) on 553 Caplen Shores, and it reflected that the property was within the CBRS or Otherwise Protected Area. Fidelity made an inquiry to FEMA to determine whether the Spongs' property was within the CBRS, indicating to FEMA that although the flood insurance policy was written to cover 549 Caplen Shores Circle, the property intended to be insured was the adjacent lot at 553 Caplen Shores Circle. FEMA contacted the Fish and Wildlife Service once again to obtain its determination, but this time, the Service advised that the property was located in the CBRS.

The Fish and Wildlife Services' September 25, 2009, letter to Fidelity states that its earlier April 15, 2004, letter, which had said that the property was not in the CBRS, was incorrect, explaining that the earlier determination " was based on a depiction of the subject property location provided by the homeowner's insurance agency" in the form of handwritten notes on a copy of the Flood Insurance Rate Map (FIRM) for the area. Those notes incorrectly identified the location of the property on the map as being outside of the CBRS by thousands of feet. The 2009 Fish and Wildlife Service letter did not reference or explain its 2006 determination that the property was not in the CBRA or Otherwise Protected Area. In any event, in the final analysis, the federal agencies determined

Page 302

that the Spongs' property was not insurable under the NFIP because it was located within the CBRS. As noted, the Coastal Barrier Resources Act prohibits the issuance of NFIP policies in CBRS zones,[6] as do the express terms of the SFIP issued to the Spongs.[7] Pursuant to federal regulations,[8] and the terms of the SFIP,[9] the Spongs' flood insurance policy was void from its inception. In accordance with federal regulations,[10] Fidelity denied the Spongs' claim for the full policy limits of $208,300 and returned all of the premiums they had paid.

The Spongs filed suit in state court, asserting a number of tort claims and statutory violations. Fidelity removed the case to federal court. The Spongs sought a remand claiming lack of federal jurisdiction, but the court denied their request, concluding federal funds were at risk as FEMA would likely pay any judgment the Spongs obtained against Fidelity. Fidelity then moved for summary judgment asserting that federal law preempted the Spongs' state-law claims and that even if not preempted, the state-law claims failed because justifiable reliance on any representations by Fidelity could not be established as a matter of law. The magistrate judge denied that motion on both grounds but certified the order denying summary judgment for interlocutory appeal, specifically certifying the preemption question.

The Spongs have sued the United States as well as the Fidelity entities. The Spongs also initially included their insurance agent, Crystal Beach Insurance Agency in the suit, but Crystal Beach filed bankruptcy and was severed from the case. Only issues pertaining to ...


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