Bad Faith - Fifth Circuit Holds That State Law Bad Faith Claims Arising Out of Policies Issued Under the National Flood Insurance Program Are Preempted by Federal Law
The United States Court of Appeals for the Fifth Circuit recently held in Gallup v. Omaha Property & Casualty Co., 2005 WL 3485890 (5th Cir. Dec. 21, 2005), that a policyholder could not assert a bad faith claim against
its insurer where the subject insurance policy was purchased through the National Flood Insurance Program ("NFIP"). The NFIP is a federally-funded program administered by the Federal Emergency Management Agency ("FEMA").
Although private insurers issue the policies and administer claims under the policies, the Standard Flood Insurance Policy is promulgated by FEMA and the federal government reimburses insurers for claims payments. In 2000, FEMA implemented
a regulation providing that claims arising from policies issued under the NFIP were subject exclusively to federal law.
The plaintiffs in Gallup submitted a claim to their insurer under a Standard Flood Insurance Policy issued through the NFIP. After the policyholders and the insurer could not agree on the amount of covered damages resulting
from two floods, the policyholders sued the insurer for breach of contract and bad faith. The insurer filed a motion to dismiss, asserting that the FEMA regulations preempted state law tort claims against the insurer. However, the
U.S. District Court for the Eastern District of Louisiana denied the motion with respect to plaintiffs’ claim for bad faith breach of contract under La. Civil Code Art. 1997.
On interlocutory appeal, the insurer relied on the Fifth Circuit’s June 2005 decision in Wright v. Allstate Ins. Co., 415 F.3d 384 (5 th Cir. 2005), which held that state law tort claims against insurers in the NFIP were preempted. The plaintiffs argued that FEMA was not authorized to promulgate a regulation to preempt state law claims under the NFIP. The Fifth Circuit reversed the district court’s ruling, and held that FEMA’s regulation mandating that federal law applied to policies in the NFIP was a valid exercise of FEMA’s authority. Accordingly, the court found that the plaintiffs’ state law claims were in fact preempted by federal law. The Fifth Circuit acknowledged that some of its earlier opinions prior to Wright had been interpreted as permitting state law claims against insurers in the NFIP. In its opinion in Gallup, the Fifth Circuit clarified its position based on Wright and joined two other circuits in holding that federal law preempts bad faith and other state law claims arising out of claims submitted under the Standard Flood Insurance Policy.