In a recent decision in the federal district court here in New Jersey, Judge Irenas wrote: “Plaintiff Marjorie Brooks alleges that her insurance company paid her too much money after her home was damaged by Hurricane Sandy. The court thus takes judicial notice of the following facts: pigs can fly and hell has frozen over.”
How can I NOT discuss such a case on this blog?
Brooks had flood insurance under the NFIP. She filed a flood loss claim with Fidelity, the servicing carrier, and hired a public adjuster. The public adjuster negotiated an $80,000 payout with the insurance company’s independent adjuster, which Brooks accepted. She hired a contractor to handle the repairs to her home, but the contractor eventually walked off the job for reasons that are unclear, leaving her with a mess. Brooks then sued the contractor, her public adjuster, and the carrier’s independent adjuster, arguing that there had been “overpayment by fraud.” She contended that the damage to her home only totaled approximately $5000. (She didn’t sue the carrier, and her lawyer represented to the Court during oral argument that she would return the alleged overpayment to the carrier in the event she won her case. I know that this will drive my carrier-side readers nuts – how can she have it both ways? – but I only report the facts, I don’t make them up.)
Why would a policyholder ever claim that damages were actually lower than the insurance company offered? There could be a number of reasons. For one thing, in New Jersey, insurance companies and policyholders constantly fight over whether claims litigation will be in state court (perceived as more favorable to policyholders) or federal court (perceived as more conservative, and therefore more favorable to insurance companies). In an insurance case involving diversity jurisdiction (which generally won’t include residential flood claims, which are governed by federal statute), there must be at least $75,000 in dispute for the case to be heard in federal court (and the case must be between citizens of different states). On a claim in the neighborhood of $75,000, I can envision a policyholder arguing that less than $75,000 is involved, to gain a perceived tactical advantage by being in state court. (The flip side of that is that many of our state courts are short of judges and take forever to move cases.)
Insurance companies also don’t like state court in New Jersey because of a procedural rule relating to “offers of judgment”. Generally, New Jersey law doesn’t allow policyholders to recover attorneys’ fees on first- party claims. (There have been a number of efforts to rectify this problem in the Legislature, and to date all have failed.) There is, however, a mechanism provided under the New Jersey State Court rules, for policyholders to obtain such a recovery. It’s the offer of judgment rule, and it works like this: The plaintiff files a settlement demand with the Court. If the defendant doesn’t accept within 90 days of service of the demand, or 10 days before trial (whichever period expires earlier), and the plaintiff recovers at least 120% of the demand, then the plaintiff gets reasonable attorneys’ fees back, plus 8% interest. (The current interest rate in the New Jersey courts, apart from the offer of judgment provision, is a whopping 0%.) Insurance companies hate this rule, and there’s no rule providing equivalent relief in federal court.
As I indicated above, diversity jurisdiction normally isn’t an issue in residential flood claims, though. As Judge Irenas noted, 42 U.S.C. §4072 provides for original jurisdiction in the federal courts of any claim against FEMA or the servicing carrier for nonpayment, or alleged underpayment, of an insurance claim. The twist here is that neither FEMA nor the servicing carrier were defendants in the Brooks case. Ultimately, Judge Irenas remanded the case to the state court because of a procedural defect – the defendant that removed the case to federal court had not obtained the consent of all other defendants as required by rule.
What other reason could there be for a claimant to argue that the claim payout (or proffered claim payout) was excessive? Well, if a “pre-FIRM” home is determined to have been damaged by any cause for which repair costs are 50% or more of the value of the building, then, by law, the homeowner must elevate the structure upon rebuilding. (“Pre-firm” means a structure built before December 31, 1974 or the date upon which the policyholder’s community began participating in the National Flood Insurance Program.) You can read more about that in this FEMA publication. Since the cost to elevate can be substantial, some homeowners might not want their carriers to determine that there’s been excessive damage to the home.
The Brooks v. Foglio decision is also interesting because Judge Irenas provides a good primer on how the federal flood insurance program works. He writes, for example: “The NFIP is a federally supervised and guaranteed insurance program presently administered by the Federal Emergency Management Agency pursuant to the National Flood Insurance Act and corresponding regulations. Initially, a pool of private insurance companies issued flood insurance policies and administered the SFIP [short for “Standard Flood Insurance Policy”] pursuant to a contract with the United States Department of Housing and Urban Development. This system is referred to as Part A. In 1978, HUD ended its contractual relationship with the private insurers, and established Part B. Under Part B, FEMA began administering the NFIP. In 1983, FEMA created the ‘Write Your Own’ program which allowed private insurance companies to write their own insurance policies. These WYO companies then directly issue federally underwritten SFIPs to the public, and may hire subcontractors or insurance adjustment organizations to investigate and adjust claims made under an SFIP. Regardless of whether FEMA or a WYO company issues a flood insurance policy, the United States treasury funds pay off the insured’s claim. Further, WYO companies have no authority to alter, vary, or waive any SFIP provision.” (Citations and internal quotation marks omitted.)
You can read the entire Brooks v. Foglio decision here.