Supplement To Federal Preemption Of Extracontractual Claims Under Flood Insurance Policies – Butler Weihmuller Katz Craig LLP

December 14, 1998

This is a supplement to the December 1998 article published in Mealey’s Litigation Reports: Bad Faith on “Federal Preemption of Extracontractual Claims Under Flood Insurance Policies” following the U.S. Third Circuit Court of Appeals reversal of its decision on rehearing in Van Holt v. Liberty Mutual Fire Insurance Co. This supplement was originally published in Mealey’s Litigation Report: Bad Faith, Vol. 12, #18, p. 27 (Jan. 19, 1999). Copyright Butler 1999.

The Butler article of December 15, 1998, discussed federal preemption of state law claims arising under policies issued pursuant to the National Flood Insurance Act (NFIA). Practitioners should be aware of a recent decision of the United States Court of Appeals for the Third Circuit.

In Van Holt v. Liberty Mutual Fire Insurance Company, 163 F.3d 161, (3d Cir. Nov. 25, 1998), the Third Circuit reversed its own earlier ruling that a federal district court did not have subject matter jurisdiction over state law claims sounding in tort and arising out of flood insurance policies. In a May 11, 1998 opinion, the court had found that the federal government, through the Federal Emergency Management Agency (FEMA), was “merely a guarantor” of flood insurance claims and that Liberty Mutual was not an agent of the federal government. On rehearing the panel did an about-face, holding that 42U.S.C. §4072 vests the federal district courts with original exclusive jurisdiction over claims arising out of flood insurance policies.

In support of the petition for rehearing, Liberty Mutual and amicus curiae United States had advised the Third Circuit that Liberty Mutual acted as a “fiscal agent” for the United States Government and that it was the federal government that “received premiums and disbursed claims” under Liberty Mutual’s flood insurance policy. Based on the “fiscal agent” status of Liberty Mutual along with the fact that FEMA ultimately is responsible for paying out flood insurance claims, and reimbursing insurance companies defending those claims, the Third Circuit made the reversal.

It is significant to note that while the court upheld the district court’s granting of summary judgment in favor of Liberty Mutual on the state law claims of bad faith and consumer fraud, it did not decide whether the NFIA preempts state law claims. Rather, the court found that plaintiffs did not present sufficient evidence to enable a reasonable jury to return a verdict in their favor on these claims. Thus, the court purposely left open the issue of preemption of state law claims

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