Sink or Swim – District Court Approves Removing Flood Insurance Claims to Federal Court

R. Bruce Wallace | Nexsen Pruet | September 7, 2017

As hurricane season swings into full measure, the flooding of Hurricane Harvey has ravaged Texas, and Irma’s path remains uncertain, it is time to revisit the law of flood insurance.

In May of this year, Nexsen Pruet wrote about the Woodson decision from the United States Court of Appeals for the Fourth Circuit, which ruled that the FEMA 1-year statute of limitations covered flood insurance claims. Now, the United States District Court for South Carolina considered a motion to remand a bad faith action involving another FEMA flood insurance claim.

Briefly, in Roberts v. Discovery Home Loans, Inc., 2017 WL 3316047, Plaintiff William A. Roberts sued Discovery Home Loans, its servicing company, and Allstate Insurance Company in South Carolina state court over the failure of the servicing company to renew Roberts’ flood insurance policy on his home.  Despite having sufficient funds in escrow to pay Roberts’ flood renewal premium, the servicing company failed to pay the renewal, and Allstate canceled the policy.  Following cancellation, Roberts could only find replacement flood insurance at vastly higher premiums.  Roberts alleged he would have to pay these higher premiums over the life of the loan.  In his state court complaint, Roberts alleged causes of action for gross negligence, negligence, negligent misrepresentation, breach of contract, breach of fiduciary duty, unfair trade practices and unjust enrichment.

Allstate removed the action to the district court, arguing federal question jurisdiction.  To begin its analysis, the district court confirmed that Allstate serves as a Write-Your-Own carrier (“WYO”), which issues flood insurance policies under the government program in its own name. WYO carriers’ flood insurance policies under the WYO program must mirror the exact terms and conditions found in FEMA flood regulations promulgated by the U.S. government.  As such, “Federal common law alone” governs the insurance policy at issue.  Nevertheless, the district court looked further, and held that federal question jurisdiction exists when the plaintiff’s “well-pleaded complaint establishes … that the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal law….”  Following the United States Supreme Court opinion in Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg.(2005), the district court considered four factors to decide whether Roberts’ state law claims raised a substantial federal question:

(1) whether the state law claim necessarily raises a federal issue;
(2) whether the federal issue is disputed;
(3) whether there is a substantial federal issue; and
(4) status of federal/state balance in light of the federal issue.

The district court easily resolved the factors in favor of federal question jurisdiction.  The flood insurance policy was issued pursuant to the National Flood Insurance Program, and its terms must mirror federal flood regulations. As a result, federal law establishes the standard of care. Citing cases from the Seventh and Eleventh Circuits, the district court found a complaint alleging breach of a flood insurance policy raises “a substantial federal question on its face.” Finally, the district court found “federal rules, federal regulations or federal common law govern all disputes involving the handling of a [flood] claim”, such that those claims are restricted to federal court. As a result the exercise of federal question jurisdiction over all flood insurance policies “will not disturb the balance of federal and state power.”

Roberts argued some of his claims arose out of the “procurement” of the flood insurance policy rather than the handling of a claim under the policy. Relying on a line of Fifth Circuit decisions, Roberts argued such claims did not implicate federal question jurisdiction.  Under Campo v. Allstate Insurance Co.(5th Cir. 2009), federal law does not preempt state law procurement-based claims. The district court found the resolution of the issue turned on “the status of the insured at the time of the interaction between the parties.” Because Roberts was covered by a federal flood insurance policy at the time he alleges Allstate owed him a duty of care, then Roberts’ claims fall under “handling,” not procurement. Therefore, federal law, not state law, controlled.

When it comes to flood insurance policy claims, there is a deluge of decisions, including the Woodson decision, confirming federal question jurisdiction and federal pre-emption of this area. The next time you and your client are faced with a flood insurance claim—and in light of current conditions, it could be soon—either file it in the district court or be prepared for it to float up there on removal.

Assignment of Unaccrued or Contingent Benefits

Lawrence Moon | Property Insurance Coverage Law Blog | September 2, 2017

It is widely accepted that insurance policies are generally not assignable by the policyholder unless the insurance company consents to the assignment. In most states, it is also well-established that after a covered loss has occurred, the policyholder ordinarily may assign the claim to another person or entity, even if the policy contains a clause that prohibits assignments. But what does that mean, exactly? Specifically, what rights and benefits can a policyholder assign to a third party after a covered loss has occurred?

Typically, when “post-loss assignments” are discussed, the conversation pertains to the assignment of a payment that has been reduced to a specific amount owed by the insurance company and regarding which there is nothing more that the policyholder must do to be entitled to receive the payment. For example, after a covered loss has occurred and the policyholder has notified the insurer of the loss, other than cooperating with the insurer’s evaluation of the loss and responding to any reasonable requests the insurer may have, ordinarily there is nothing more that the policyholder must do to be entitled to receive payment of the actual cash value (ACV) of the claim. In other words, the insurer’s obligation to pay the ACV of the claim to the policyholder is not contingent on any other specific conditions of the policy being satisfied or excused. In this blog, I will refer to such rights and benefits as “Noncontingent Benefits.”

As a number of my colleagues have written about in other blogs, it is well-established in most states that a policyholder may freely assign Noncontingent Benefits to a third party and the insurer must honor such assignments. For instance, if a policyholder assigns her rights to the ACV payment of her claim and the policyholder has cooperated with the carrier’s evaluation of the claim, the carrier ordinarily must pay the ACV amount of the claim to the assignee and the assignee may enforce the assignment against the carrier. But what about rights and benefits that the policyholder is not yet entitled to either because certain specific conditions of the policy have not yet been satisfied or the claim has not yet been reduced to a fixed amount or judgment? For instance, under a replacement cost property insurance policy, can a policyholder assign the replacement cost value (RCV) benefits, such as the right to receive the “depreciation holdback” payment, before the approved repairs have been completed? In other words, can a policyholder assign a benefit or right that is still subject to the satisfaction or fulfillment of one or more specific conditions of the policy, such as completion of the approved repairs under a replacement cost policy? In this blog, I will refer to such rights and benefits as “Contingent Benefits.”

While the validity of assignments of Noncontingent Benefits has been addressed fairly extensively by the courts in most states, the validity of assignments of Contingent Benefits has not. We are handling separate lawsuits in Arizona in which a national property insurance company has refused to honor assignments of Contingent Benefits—specifically, pre-repair assignments of the depreciation holdback associated with RCV benefits under a replacement cost policy. The carrier has asserted that only the policyholder may complete the approved repairs for it to have an obligation to pay the depreciation holdback. In addition, according to the carrier, if the policyholder assigns her rights to the RCV benefits before the approved repairs are completed and someone other than the policyholder completes the repairs (such as the assignee), the carrier has no obligation to pay the depreciation holdback to the assignee or anyone else.

All of the reported court decisions I have found that address the validity of assignments of Contingent Benefits—and there are only a few courts that have addressed that specific issue—have ruled that Contingent Benefits are as freely assignable as Noncontingent Benefits. For instance, courts in California, Iowa, Tennessee, Florida, Wisconsin (applying Mississippi law), and the District of Columbia have held that post-loss assignments of Contingent Benefits are valid and enforceable by the assignee. The primary distinction between Contingent Benefits and Noncontingent Benefits noted by the courts is that the assignee’s entitlement to the Contingent Benefits only arises when and if all conditions applicable to the Contingent Benefits are fulfilled or excused. If the conditions are not fulfilled or excused, the carrier may raise the unfulfilled conditions as a defense to enforcement of the assignment.

The carrier in our Arizona cases, however, noted that in an unreported decision, a federal district court in Washington held just the opposite, that an assignment of Contingent Benefits was not valid.1 In that decision, the district court held that the policyholders’ assignment of their claim for the replacement cost holdback was not valid or enforceable against their insurance company. Despite acknowledging that Washington follows the general rule that post-loss assignments of policy benefits are valid, the district court in Sherard held that the assignment of a claim for the replacement cost holdback is not valid if the claim is assigned before the approved repairs are completed. The court reasoned that only “accrued” claims could be assigned and a claim for the replacement cost holdback does not “accrue” until the approved repairs are completed. Ultimately, the district court in Sherard ruled that the policyholders could not assign their claim for the replacement cost holdback unless the underlying repairs had been completed.

The holding in Sherard contradicts the holdings and reasoning of the reported court decisions I found that specifically address the validity of assignments of Contingent Benefits. It also contradicts a substantial body of law regarding assignments of contract rights, generally. Perhaps coincidentally, the same year the district court in Sherard held that assignments of Contingent Benefits are not valid in Washington (i.e., 2015), the Supreme Court of California noted that the assignment of Contingent Benefits was an area that insurers had only recently begun to challenge.

In upcoming blogs, I will discuss how the Supreme Court of California has handled the assignment of Contingent Benefits in California, how we addressed the issue in our Arizona cases, and how the courts in Arizona have ruled on the issue.
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1 Sherard v. Safeco Ins. Co. of Amer., 2015 WL 5918397 (W.D. Wash.).

Insurance Co. Not Liable For Theoretical Claims, Judge Says

Rick Archer | Law 360 | August 25, 2017

A Nevada federal judge Thursday found an insurance company had no duty to defend construction companies against theoretical future claims, saying the argument stretched the duty to defend “to the breaking point.”

U.S. District Judge Jennifer A. Dorsey issued a summary judgment rejecting three insurance companies’ attempt to force Ironshore Speciality Insurance Co. to join them in defending against a defective construction suit, saying their argument was based on the theoretical possibility of future liability.

“Although the duty to defend is broad, it is not limitless. A possibility that there could later be a potential for coverage is not the same as an existing potential for coverage — and the latter is needed to trigger the duty to defend,” she said.

Ironshore was sued by American Guarantee & Liability Insurance Co., Assurance Co. of America and Northern Insurance Co. of New York, all of which had written policies to a number of Nevada construction contractors who were sued for allegedly defective construction work.

Ironshore had also written policies for the companies but had refused to defend them, saying the allegedly defective work was done before the policy period and that coverage for prior work could only be triggered by “sudden and accidental” damages caused by the work, which were not being claimed in the suits.

The insurers, however, argued the suits did not expressly state that no accidental damage occurred, therefore making a future claim for accidental possible and triggering the duty to defend.

Judge Dorsey disagreed, saying the underlying suits both do not allege a sudden accident and make no suggestion any sudden accidents occurred.

“The plaintiffs’ argument would expand the duty to defend to the breaking point. Before the duty is triggered, there must be some allegation or evidence to create a current potential for coverage. And an allegation that is so vague that it could possibly encompass covered allegations in the future is not enough,” she said.

In a prior case involving construction defect claims the same parties the court found the exclusion did not apply and awarded the insurance plaintiffs more than $988,000 following an April bench trial.

Counsel for the insurance companies declined comment. Counsel for Ironshore did not immediately respond to requests for comment Friday.

The insurance companies are represented by William C. Reeves of Morales Fierro & Reeves.

Ironshore is represented by William C. Morison of Morison & Prough LLP.

The case is Assurance Co. of America et. al. v. Ironshore Specialty Insurance Co., case number 2:15-cv-00460 in the United States District Court for the District of Nevada.

Calculating Actual Cash Value, Part 29: Oregon

Shane Smith | Property Insurance Coverage Law Blog | August 25, 2017

This week, Oregon made national news as one of the best locations to view the Great American Eclipse. I realized I had not yet covered Oregon in my series on calculating actual cash value, leading to today’s blog.

In Growers Refrigerating Co. v. American Motorists Insurance Company,1 the insured commenced an action to recover for damage to pears stored in its cold storage plant as a result of contamination following an ammonia leak in refrigeration equipment.

Although the issue the court considered did not center on the cost of repairs, the court held the term actual cash value is defined as the market value at the time of the occurrence:2

We recognize that this is not a case involving the cost of repairs. We also agree that it would have been preferable for plaintiffs in this case to offer testimony framed more precisely in terms of the difference in the cash or market value of the pears before and after they were contaminated by ammonia. We nevertheless hold, however, that under the particular facts of this case evidence showing a comparison of the amounts received from contaminated and uncontaminated pears, together with evidence of the amounts paid in the adjustment of claims for contamination damage to the owners of the pears, was not only admissible, but that presumptively, and in the absence of evidence to the contrary, such amounts represented the difference between the value of the pears before and after they were contaminated by ammonia.

The jury in this case was properly instructed on the issue of damages in terms of cash or market value, as required by the provisions of the policy. We hold that there was sufficient evidence to support its verdict awarding damages to plaintiffs.

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1 Growers Refrigerating Co. v. American Motorists Ins. Co., 260 Or. 207, 488 P.2d 1358 (1971).
2 Id. at 1363, 1364.

How Utah Evaluates a Worker’s Entitlement to PTD Benefits

Ryan B. Frazier | Kirton McConkie | August 28, 2017

Have you ever thought about how the word “limit” de­fines our perceptions of and interactions with the world around us? The concept of a “limit” engenders thoughts of a bound­ary, an edge, or an end. When we say something is limited, we are suggesting that it is restricted, constrained, or regulated. Something that is limited is imperfect or incomplete. We speak of pushing things to the limit when we are going to the edge of our abilities, or we declare the “sky’s the limit” to indicate that things are unrestricted.

The word “limit” also carries an abundance of meaning when it’s used in the context of analyzing a worker’s ability to perform basic work activities and whether an injured worker is entitled to permanent total disability (PTD) benefits under Utah’s workers’ compensation statutory scheme. The way the word is used in Utah law was key in a recent decision by the Utah Supreme Court addressing whether a construc­tion worker who was injured on the job was entitled to PTD benefits.

Decision makers go back and forth

Mark Oliver was working for D. Tyree Bulloch Con­struction on March 27, 2000. While he was on a Bulloch construction site, he fell from a suspended porch and was injured. For years after the injury, he worked in a variety of jobs, including as a construction worker, landscape de­signer, and delivery truck driver. In 2007, he stopped work­ing altogether.

Several years after he was injured on the job, Oliver applied to the Utah Labor Commission for PTD benefits under Utah’s Workers’ Compensation Act. The parties presented conflicting medical and vocational evidence to the commission. Both Oliver and Bulloch had medi­cal experts who provided opinions on Oliver’s ability to work. Dr. Mark Passey opined that Oliver is able to perform “just about any activities he wishes to do.” By contrast, Dr. Jacob Corry opined that he suffers from constant attention difficulties because of his pain and is severely restricted in his ability to walk, balance, and crouch.

In addition, the parties had vocational experts who testified about Oliver’s ability to work. Oliver’s voca­tional expert testified that he likely couldn’t perform basic work activities because of his inability to concen­trate. Bulloch’s vocational expert disagreed, opining that Oliver could perform “medium-duty” work and wasn’t limited in his ability to perform basic work ac­tivities. However, Bulloch’s vocational expert conceded that if Corry’s medical opinion was correct, Oliver likely wouldn’t be able to perform basic work activities.

Because of that conflicting evidence, an administra­tive law judge (ALJ) appointed an independent medical panel to perform an impartial review of the medical evidence. The panel determined that Oliver could per­form medium-duty work as long as he was able to be absent from work occasionally, elevate his legs for five to 10 minutes every hour, and take occasional unscheduled breaks. In addition, the panel concluded that he is able to perform basic work activities. It found that he could con­centrate, commute, communicate, work, remain at work, and cope with the work setting.

The ALJ reviewed the evidence, concluded that Oli­ver was permanently totally disabled, and tentatively awarded him PTD benefits. Bulloch appealed the award of benefits, and the commission reversed the ALJ’s deci­sion on two grounds.

First, relying on the medical panel’s report, the commission concluded that Oliver failed to prove that he was limited in his ability to perform basic work activities. The commission noted that although the panel determined that he might require unscheduled breaks and occasionally need to be absent from work, it found that the “indefinite circumstances do not present a rea­sonable limitation on [his] ability to do basic work activi­ties,” particularly in light of its conclusion that he could work, remain at work, and cope with work changes. The commission also noted that being required to elevate his legs for five to 10 minutes every hour wasn’t enough to show that he was reasonably limited in his flexibility and endurance. Second, the commission disagreed with the ALJ’s determination that Oliver couldn’t perform the essential functions of his work as a delivery truck driver.

The commission denied Oliver’s claim for PTD ben­efits for two reasons:

(1) He was not limited in his ability to perform basic work activities.

(2) He was not prevented from performing the essential functions of the work for which he was qualified up to the time of his on-the-job injury.

Oliver appealed the commission’s decision to the Utah Court of Appeals, which reversed the denial of benefits. The court found that the commission misinter­preted the “basic work activities provision” of the stat­ute applicable to permanent total disabilities. The court also consulted the U.S. Bureau of Labor Statistics’ (BLS) Occupational Outlook Handbook (which wasn’t in the record as evidence during the commission proceedings) and concluded that the commission’s determination that Oliver was qualified to work as a delivery truck driver wasn’t supported by substantial evidence. The court of appeals reinstated the ALJ’s PTD benefits award. Bull­och appealed to the Utah Supreme Court.

Proving entitlement to PTD benefits

The Utah Supreme Court reversed the decision of the Utah Court of Appeals and concluded that the com­mission properly denied Oliver’s application for PTD benefits. To put the issues into context, the supreme court first explained what an employee must prove to qualify for PTD benefits. Under Utah Code Section 34A- 2-413(1), an employee seeking an award of PTD benefits must meet six factors:

(1) He sustained a significant impairment as a result of the work-related injury.

(2) He is not gainfully employed.

(3) He has an impairment or a combination of impair­ments that limits his ability to perform basic work activities.

(4) His impairment or impairments prevent him from performing the essential functions of the work for which he was qualified until the time of the accident.

(5) He cannot perform other work that’s reasonably available.

(6) The industrial accident or occupational disease is the direct cause of his permanent total disability.

The court clearly placed the burden of proving each of those elements by a preponderance of the evidence on the employee. Most of the inquiries focus on the employ­ee’s ability to work. If the employee fails to prove even one of the six elements, his claim for PTD benefits will be denied.

Pushing the limits

The Utah Supreme Court first examined the “basic work activities” element of Section 34A-2-413(1)(c)(ii). This element requires employees seeking PTD benefits to prove they have “an impairment or combination of impairments that limit [their] ability to do basic work ac­tivities.” The issue in this case was the meaning of the word “limit” as it is used in the statute.

The court of appeals maintained that employees can show a “limit” on their ability to do basic work activities by producing evidence of any limitation on their abil­ity to work, no matter how slight. In other words, even employees capable of performing basic work activities would be able to establish a claim for PTD benefits if they can show “some limitation” on their performance of basic activities.

The supreme court disagreed with the court of ap­peals’ interpretation, concluding that it was at odds with the “basic work activities” element in the statute. Looking to Provo City v. Utah Labor Commission, a case it decided in 2015, the supreme court explained that it has previously held that “basic work activities” are not just any activities performed in the workplace; rather, they are the activities that are essential to “a broad spectrum of jobs available.” In other words, they are the abilities that allow an employee to perform most jobs, including more sedentary lines of work.

The court then turned to an examination of how “limit” is used in the statute. It acknowledged that “limit” has a variety of possible meanings, but the word is not used in isolation in the statute. According to the court, it’s clear that in the context of the statute, whether an employee is “limited” in his ability to per­form basic work activities depends on whether, irrespec­tive of any impairments, he is meaningfully able to per­form the “core tasks” that are the basic requirements for employment.

Being “limited” in the ability to perform basic work activities is really a question of whether an employee has the abilities and aptitudes necessary for most jobs. If a limitation doesn’t hinder the employee from mean­ingfully engaging in the workforce, he may be limited in performing typical activities, but he isn’t limited in performing “basic” work activities. Thus, the supreme court concluded that the court of appeals incorrectly interpreted the word “limit” in the statute, and the commission correctly interpreted it.

In short, the supreme court concluded that only im­pairments that strike at the heart of the abilities and ap­titudes necessary for most jobs actually limit an employ­ee’s ability to do basic work activities. In other words, an impairment must meaningfully inhibit an employee from performing the core tasks of a wide swath of jobs, making it unreasonable for an employer to ask the em­ployee to perform those tasks.

The supreme court noted that interpretation isn’t consistent with federal disability law. However, federal law doesn’t govern the interpretation of the word “limit” as it’s used in the state’s workers’ comp law. Applying its interpretation, the supreme court concluded the com­mission’s determination that Oliver failed to satisfy the basic work activities element was supported by substan­tial evidence.

Analyzing the essential functions provision

The Utah Supreme Court also analyzed the essen­tial functions provision of the statute when it considered Oliver’s application for PTD benefits. Under the statute, an employee must show that his impairments “prevent [him] from performing the essential functions of the work activities for which [he] has been qualified until the time of the industrial accident.” The commission found that Oliver failed to prove that his impairments prevented him from performing the “essential func­tions” of a delivery truck driver, a job he was qualified to perform at the time of his work-related accident.

The court noted that an employee merely has to present evidence that the only job he is qualified to perform is the job he held at the time of the injury. However, an employer can counter that evidence with proof that the employee is qualified for another job (in this case, deliv­ery truck driver). The employee must then respond with evidence that he cannot perform the essential functions of that position. Oliver couldn’t do that. Accordingly, the court concluded that he failed to meet his burden on the essential functions element of the statute.

The supreme court also noted that the court of ap­peals shouldn’t have considered information about the qualifications of delivery truck drivers from the BLS that wasn’t on the record before the commission. The su­preme court upheld the denial of Oliver’s application for PTD benefits. Oliver v. Utah Labor Commission, Workers’ Compensation Fund, 2017 UT 39 (Utah July 25, 2017).

Lessons learned

This case illustrates that under Utah’s workers’ comp statute, an employee will be entitled to PTD ben­efits only if he is limited in the abilities and aptitudes necessary to perform most jobs. When confronted with a claim for PTD benefits, you should focus on whether the employee has the ability to perform the basic job duties—i.e., the core functions—of the majority of jobs, including sedentary jobs. If you concentrate on satisfy­ing that standard, you will be better able to defeat over­reaching claims for PTD benefits.