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Filing a National Flood Insurance Claim in State Court is No Better Than Filing it in the Kitchen Drawer

In Woodson v. Allstate Ins. Co. (Woodson v. Allstate Ins. Co., Nos. 16-1935, 16-2018, 2017 U.S. App. LEXIS 7862 (4th Cir. May 3, 2017), the United States Court of Appeals for the Fourth Circuit recently opined that a Claimant’s action was time-barred when he filed a breach of contract and bad faith action in state court within one day of the applicable statute of limitations, notwithstanding a federal statute that required all claims made under their policy to be filed in a federal district court.  The Court concluded that the federal authority governing the National Flood Insurance Program (“NFIP”) preempts state law, but it left open the question as to whether the NIFP preempts all state authorities within its scope or merely conflicting state authorities. In the wake of Woodson, insurers and underwriters would be prudent to carefully assess the interplay between federal and state statutes and regulations as the governing authority of their policies. 

In Woodson, the Claimant maintained a National Flood Insurance Policy issued to them by a private insurer under the NFIP  that stated: “[A]ll disputes arising from the handling of any claim under the policy are governed exclusively by the floods insurance regulations issued by FEMA, the National flood insurance Act of 1968, as amended (42 U.S.C. § 4001, et seq.), and Federal common law.”  Additionally, the NFIP requires all lawsuits to be initiated “in the United States District Court for the district in which the covered property was located” and “within one year after the date of the written denial” of the claim.

In Woodson, the Claimant demanded $272,473.00 in property damage to his waterfront home following a hurricane. The insurer disputed the claim, the parties presented conflicting engineering reports, and the insurer denied the claim on February 28, 2012.  On the eve of the NFIP’s one-year statute of limitations the Claimant filed a state court action against the insurer for breach of the insurance contract and for violation of the state’s unfair and deceptive trade practices act.  The insurer removed the action to federal court on April 1, 2013.  At trial, the judge found that the insurer engaged in “the worst kind of misconduct,” found in favor of the Claimant, and trebled the damages for a total of $764,071.50. 

On appeal, the insurer argued that the district court erred by failing to dismiss the Claimant’s action because it was not filed in the proper court by February 28, 2013.  The appellate court concurred, relying on the principle that: “The commencement of an action in a clearly inappropriate forum . . . will not toll the statute of limitations.”  Simply put, filing a NFIP claim is state court is analytically no different than filing it in the kitchen drawer.  The Court held that because the NFIP requires all actions to be brought in the proper forum within one year of the denial of the claim, the Claimant’s action was time-barred because the action was not removed to the proper court until over one year after the insurer’s denial.  While the Court in Woodson employed a relatively straightforward application of a one-year statute of limitation, the broader question raised by Woodson is what to make of the Court’s statement that “federal law exclusively governs claims made on policies issued under the National Flood Insurance Program and to disputes arising out of the handling of those claims, thus preempting state law.”

In Woodson, there was no question that the NFIP’s one-year statute of limitation prevailed over any conflicting state law. The Court, however, infused ambiguity into its decision by holding that the federal law preempted the state law without specifying whether it was relying on the doctrine of “conflict” or “field” preemption.  Essentially, field preemption occurs when the federal government takes a whole area of law and places it beyond the regulation of the states;  whereas conflict preemption merely holds that both federal and state authorities are free to regulate an area of law, but to the extent the laws conflict, the federal law will prevail.  Although the Court in Woodson did not expressly hold that it was employing the doctrine of field preemption, the Court’s statement that “federal law exclusively governs claims made on policies issued under the National Flood Insurance Program” as well as some of the cases relied upon by the Court suggest that it would be inclined to do so if presented squarely with that question. 

The distinction between “conflict” and “field” preemption here has immense consequences for insurers and underwriters. As the federal government becomes more ubiquitous in the arena of insurance programs and regulation, the probability increases that it will occupy legislative fields so thoroughly that it renders them off limits to state regulation; thus, rendering the state laws unenforceable. Most notably, Maryland’s Unfair Claims Settlement Practices Act,  and its authorities regarding bad faith claims,  would not apply to any federal insurance program where Congress has preempted the entire field of that industry.  If, however, the Court was only applying the doctrine of conflict preemption, then the state authorities could co-exist with the federal insurance programs so long as they are not inconsistent with federal laws.

Even if Woodson employed the doctrine of field preemption as its use of the word “exclusive” might suggest; Woodson is not a per se invitation for insurers to abuse their insureds with impunity knowing that they risk no exposure for bad faith claims. At oral argument in Woodson, counsel for the Government was quick to note that that agencies administering federal insurance programs employ other means of “administrative oversight” to hold insurers accountable for their claims decisions. (Audio link: Of course, this “administrative oversight” is of little benefit to an aggrieved claimant who loses his cause of action due to federal preemption—as they are only administrative penalties and may not have the same deterrent effect as a bad faith claim.

In summary, Woodson illustrates how federal preemption of state insurance regulations can reduce, or at least alter, the statutory and administrative requirements imposed by state law authorities governing the handling of claims. While the Court in Woodson could have been more explicit about the variety of preemption it employed, the case invites insurers to tailor their claims handling practices based on the federal program involved and the state statutes involved. Therefore, determining which federal insurance programs preempt state authorities requires a nuanced understanding of the program’s statutory mandate, its applicable regulations, and the state laws that conflict with or impede the objective of the federal program.

Craig D. Roswell is Managing Partner of Niles, Barton & Wilmer, LLP, practicing in commercial litigation and business law, as well as property insurance law, first party and third party insurance coverage matters and the defense of complex general liability claims. Bryant S. Green is an associate attorney in the Litigation Department, concentrating his practice in general commercial litigation, appellate law, insurance coverage matters in the state of Maryland.

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