In the wake of any coastal hurricane, the “lucky” local residents are those that have some form of flood insurance.  Although many homeowners in hurricane-prone areas do not have flood insurance (probably because flood insurance is expensive, particularly in coastal areas), FEMA reports that approximately 5,000,000 flood insurance policies issued under the federal National Flood Insurance Program are currently in force. 

Under the NFIP, insureds can purchase the Standard Flood Insurance Policy either directly from FEMA or from private insurers under the “Write-Your-Own program.”  Whether the Standard Flood Insurance Policy is issued by FEMA or a private insurer, the terms of the policy are the same--the private insurer cannot alter or waive any of the terms--and claims for flood damage made against the policies are paid with funds from the United States Treasury, not the insurer’s funds.

The Standard Form Insurance Policy, however, has a number of limitations and conditions, some of which could result in a forfeiture of coverage.  Therefore, hurricane victims who have this insurance should read their policies carefully and be aware of the following limitations and potential pitfalls.

First, the SFIP covers only “direct physical loss” caused by a flood.  Therefore, it does not cover business interruption loss, additional living expenses incurred when the insured property cannot be occupied, or any other economic loss.  It does cover the cost of removal of debris from the property.  If the insured or a member of his or her household performs the debris removal work, the compensation for that work will be based on the federal minimum wage.

Second, the SFIP contains an exclusion for physical loss caused directly or indirectly by “[w]ater, moisture, mildew or mold damage that results primarily from” the “failure to inspect and maintain the property after a flood recedes.”  No case has interpreted this exclusion.  However, the exclusion poses a potential problem for homeowners who are not able to do the necessary cleanup or repair work to prevent the formation or spread of mold resulting from the flooding of their properties because (i) they cannot afford it; (ii) they do not have access to their property; or (iii) they can’t find a qualified and available person to do the work.  It is not clear whether the common law doctrine of impossibility would preclude the application of this exclusion in a situation when the insured simply cannot do the work required to prevent mildew or mold damage.  However, it is clear that insureds covered by a SFIP should make every effort to inspect the property after the flood waters have receded and make every effort to do the work required to prevent the formation of mold and mildew.  To the extent they are unable to do so, the insureds should document the reasons why. 

Third, the SFIP provides that an insured must give the insurer “prompt written notice” of the property damage and must, within 60 days of the loss, send the insurer a proof of loss.  This proof of loss is required to contain nine categories of information including the date and time of loss, a brief explanation of how the loss happened, specifications of damaged buildings and detailed repair estimates, and an inventory of damaged personal property.  FEMA can, and on occasion has, decide not to strictly enforce this requirement.  For example, following Hurricane Harvey in 2017, FEMA released a bulletin stating that to expedite the processing of NFIP claims for Hurricane Harvey, it was waiving the requirement for an initial proof of loss.[1]  Instead, once an insured filed a claim, an adjuster would inspect the damaged property, document the damage, and submit a report to the insurer.  If the insured did not agree with the payment amount, the insured could seek additional payment by submitting a proof of loss to the insurer within one year from the date of filing the initial claim.  Therefore, it is worthwhile for an insured to check the FEMA website or contact the write-your-own insurer to determine whether FEMA is waiving the strict policy requirements following a large-scale storm.  However, if an insured decides to use any alternative method allowed pursuant to such a bulletin, it is recommended that the insured ask for written confirmation from its insurer that the method is acceptable.    

Fourth, if there is a dispute between the insurer and the insured regarding whether there is coverage for an insured’s loss or the amount of such coverage, the SFIP provides: “You may not sue us to recover money under this policy unless you have complied with all the requirements of this policy.  If you do sue, you must start the suit within 1 year after the date of the written denial of all or part of the claim, and you must file suit in the United States District Court of the district in which the insured property was located at the time of the loss.”  This provision has been interpreted strictly--courts have consistently held that suits filed after the one-year time limit fail as a matter of law, as do suits filed within the one-year time period but in state, rather than federal, court.  Even when a lawsuit is filed within the one-year period in state court, and is removed to federal court after the one-year period has expired, courts have found that the state court filing does not toll the statute of limitations.  Woodson v. Allstate Insurance Company, 855 F.3d 628, 634 (4th Cir. 2017).  Only when the Federal Insurance Administrator expressly and in writing sets aside previous disallowance of plaintiff's claim does new limitation period commence upon subsequent denial of claim.  Wagner v. Director, Federal Emergency Management Agency, 847 F.2d 515 (9th Cir. 1988).  In other words, if an insured does not file a lawsuit in federal court within one year of either a full or a partial denial of coverage, the insured loses his or her right to any additional coverage for the claimed loss.  

Fifth, even if, in handling an insured’s claim under a SFIP, the insurer or federal administrator engages in acts that might otherwise be considered bad faith, an insured has no cause of action for bad faith against either FEMA or a write-your own insurer.  Wright v. Allstate Ins. Co., 415 F.3d 384 (9th Cir. 2005); C.E.R. 1988, Inc. v. Aetna Cas. & Surety, 386 F.3d 263 (3rd Cir. 2004).  These cases hold that state law tort claims arising from claims handling are preempted by the federal laws creating the National Flood Insurance Program.

Finally, if an insured files a lawsuit against his or her SFIP insurer, the insured is not entitled to a jury trial.     

In sum, any insured who had the foresight to purchase a SFIP through FEMA or a write-your-own insurer must take affirmative steps to protect that coverage.  The insured should read the policy carefully—if the insured no longer has a copy of his or her policy, the forms can be found online at https://www.fema.gov/national-flood-insurance-program/standard-flood-insurance-policy-forms.  The insured should take careful note of all the deadlines and conditions in the policy, and be aware that failure to meet any of those deadlines or comply with any conditions could result in the loss of coverage.