You know it is not going well when the court cites the Constitution at you in a breach of contract case. But so it went in DeCosta v. Allstate Insurance Co., where the First Circuit last Friday reversed the trial court and granted summary judgment to Allstate on a suit involving a Standard Flood Insurance Policy (SFIP) under the National Flood Insurance Program (NFIP).
The case was relatively simple on both its facts and on the law. DeCosta suffered a flood loss in 2009 and tendered his claim to his flood insurer, Allstate, who wrote coverage under the Write-Your-Own program of the NFIP.
DeCosta submitted four sworn proofs of loss. Two were timely, submitted within 60 days of the loss. Allstate paid those sums in full "within days." Id. at 5. Two were untimely, but Allstate submitted a waiver request, which FEMA granted. Allstate paid those sums in full as well. DeCosta also submitted an unsigned, unsworn estimate by his appraiser, which tallied approximately $100,000 in additional building damage. Allstate refused to pay it. Suit followed in state court, which Allstate removed.
First, over Allstate's objection the trial court ordered the parties to an appraisal. When the appraisal came back in the amount of $99,805.67 in favor of DeCosta, Allstate moved to strike the award and for summary judgment. The court confirmed the award and denied Allstate's request for summary judgment. Throughout, Allstate had argued that DeCosta had failed to comply with the SFIP's requirement that payment under the policy could only be made upon a signed and sworn proof of loss, which had not been submitted. The trial court found that Allstate had waived that argument by paying on the claim in the first place. Id. at 10-11. Allstate also asserted that the appraisal panel determined scope of coverage, rather than the value of the loss, again in violation of the SFIP's terms. The court rejected that argument as well. Id. at 10.
The First Circuit overturned the ruling fundamentally because "DeCosta's SFIP is not an ordinary insurance policy; rather, his SFIP's provisions are also embodied in FEMA's codified regulations ... and interpretation of DECosta's SFIP is a matter of federal law.” Id. at 15. The court was not considering federal common law, which might have brooked some flexibility. Instead, this was federal regulatory, statutory, and even constitutional law.
That made the Court’s decision simple. It had “already held that federal law mandates strict compliance with the SFIP, including its proof-of-loss requirement.” Id. Other circuits had ruled likewise. See Mancini v. Redland Ins. Co., 248 F.3d 729, 734-35 (8th Cir. 2001); Evanoff v. Standard Fire Insurance Co., 534 F.3d 516, 520-21 (6th Cir. 2008). Strict compliance was compelled for a number of reasons.
First, under the NFIP the insurance companies act as administrators of the federal program; they do not pay the claims, the government does. Accordingly, the companies are “fiscal agents of the United States”. DeCosta. at 15. Since the Appropriations Clause of the Constitution “prohibits the judiciary from awarding claims against the United States that are not authorized by statute” and the authorizing statute “authorized payment of flood insurance funds to only those claimants that submit a timely sworn proof of loss,” a court could not “award an unauthorized money claim based on a theory of substantial compliance.” Id. at 16-17.
Second, sovereign immunity prohibited payment. “The proof-of-loss provision serves as a ‘condition precedent to a waiver by the federal government of its sovereign immunity.’” Id. at 17.
Third, “the need for uniformity in federal law … supports strict construction of the SFIP.” Id. at 18. Uniformity promotes clarity both to the companies issuing the policies, and the jurisdictions construing them.
Because DeCosta did not submit a signed and sworn proof of loss for the additional $100,000 he sought, he did not strictly comply with the requirements of the SFIP and his claim had to be denied. Further, his argument that Allstate had waived the requirement also was rejected. “Mere payment of claims properly submitted in a proof of loss does not waive objections to further sums not submitted as required by the SFIP’s proof-of-loss provision.” Id. at 24. The SFIP “explicitly precludes oral waiver or waiver by conduct.” Id. at 25.
Having found DeCosta not entitled to any payment of the claimed funds, the Court did not need to reach the issue concerning the appraisers' scope versus value determinations.
For practitioners, DeCosta v. Allstate is a valuable reminder that federal flood insurance policies are quite unlike the usual insurance contracts. As the Court held, strict compliance is required even though under state insurance law "a lesser form of compliance might suffice." Id. at 15. As stated by the Third Circuit, “In the realm of private insurance, common law doctrines (such as `reasonable expectations,' `notice/prejudice,' and `substantial compliance') govern the evaluation of claims. By contrast, a WYO insurer must strictly follow the claims processing standards set out by the federal Government"). C.E.R.1988, Inc. v. Aetna Cas. & Sur. Co., 386 F.3d 263, 270 (3d Cir. 2004). Thus, when the policy language and even the policy handbook is federal law, one needs to take a second look at all the usual tenets.