Saturday, February 5, 2011

Preemption and the Insurance Aspects of the NFIP

Preemption, the NFIP and some analysis

1. Government and WYO arguments in litigation that Preemption of State law are in error. Reason there first of all are no federal concepts of insurance law in the property and casualty arena. Second all concepts of property and interests in property are determined by reference to STATE law as there is no federal definition of property or insurable interest in property.
A. Preemption is a legal doctrine largely associated with the supremacy of federal laws in the event of a direct conflict between a federal statute and state law affecting Interstate Commerce. The Constitutional foundation of the National Flood Insurance Program (42 U.S.C. 4001 et seq.) [Hereinafter NFIP] is the so-called Tax and Spend Clause of the Constitution (Article I, Section 8). This is confirmed by the case upholding the Constitutionality of the NFIP Texas Landowners Rights Assoc. v. Harris 453 F. Supp. 1025 (D.C. 1978), aff’d, 598 F.2d 311 (D.C. Cir. 1979), cert. Denied,100 S. Ct. 267 (1979).
B. There is no direct conflict between federal law and state law in the NFIP statutes because there is no express or implied reference to preemption.
C. The NFIP is a voluntary program and does not regulate Interstate Commerce pursuant to the Commerce Clause of the Constitution.
D. No federal administrator of the NFIP has ever argued that the NFIP preempts State law and in fact as a matter of comity, state premium taxes are authorized to be paid from premium income to all the states and the insurable interests of the insured or potential insureds are determined by application of state law concerning interest in and ownership of property.
E. All courts that have determined that the NFIP either impliedly or expressly preempts state law have done so based on analysis of what is best for the program and in that instance is so-called judicial legislating that has not been approved, condoned, studied, authorized or ratified by Congressional action.

2. Federal courts have properly determined that the original and exclusive language added to Sections 4053 and 4071 in 1981 was reinforcing the need for uniformity of decision on the terms of coverage under the NFIP. Nothing more. Because of niceties of the removal process and the potential that remand back to state courts would cause the loss of uniformity in the judicial review of NFIP issued policies of insurance the modification was required. There was no implied or express preemption of state law in this jurisdiction grant to the federal courts. It also assured that claims for money damages under the so-called TUCKER ACT would not somehow become the prevailing federal judicial oversight of NFIP policies.

3. In the first significant appellate review of a flood claim under policies issued by the NFIP, West v. Harris, 573 F.2d 873 (5th Cir. 1978), cert.denied, 99 S. Ct. 1424 (1979) the court ruled that fashioning a federal common law relying on insurance principles and looking to state law for guidance but not binding precedent was appropriate. This rule has been followed by all federal circuits. But again it is judicial legislating.

4. The distinctions between Part A and Part B operation of the program are completely erroneous. The US Supreme Court has ruled in various statutory construction cases that the headings of sections and parts in federal statutes have no legal significance. This is now black letter law. In fact rather than just four options for administration of the NFIP, often erroneously discussing the 1969 (first policy issued June 1969) to 1978 period when the National Flood Insurers Association was the servicing agent as reinsurance which it was not, there are probably many permutations and combinations of program elements authorized by Congress in the NFIP. What has remained constant is that the federal government is both the underwriter of the NFIP (determines both risks to be covered and the price of that coverage) and the ultimate insurer to the extent that premium income does not cover various administrative overhead costs, various expenses concerning issuance and sales of policies and loss adjustment expense and losses themselves. The program does not have a full actuarial sound mandate but must also consider other factors such as affordability. The objective of course is primarily to substitute the insurance mechanism for what otherwise would be “Free” disaster relief outlays for covered events.
5. All entities not in direct privity of contract with the federal government cannot avail themselves of protection under the Federal Tort Claims Act which makes certain tortuous conduct not involving so-called Bivens or Constitutional torts to be within a waiver of so-called sovereign immunity of the federal government. That statute makes the federal government the exclusive defendant and both representation of and liability of federal employees and agents under the direct control and supervision of the federal government on a day to day basis is provided by the United States Department of Justice and recovery is against the so-called judgment fund of the United States, in essence an indefinite and continuing appropriation. The DOJ must determine of course that the tortuous action was taken while the employee or agent was acting within the official scope of employment, the representation must be requested in writing by the employee or agent if sued individually, and at times the DOJ will give representation but if during the course of the case or depending on the judgment will them proceed back against the employee or agent of the amount of the judgment and interest. Thus, the guarantee of representation may not in fact guarantee freedom from personal liability.
6. Based on a ruling by the Solicitor General of the Department of Labor WYO companies are not considered federal contractors for purposes of application of standard federal contractor requirements concerning DOL requirements primarily equal opportunity and anti-discrimination provisions. Nonetheless, in all other respects they are federal contractors and have represented themselves in litigation as “FISCAL AGENTS” of the federal government. There is a mandate in the NFIP statutes to operate the program as a government controlled corporation pursuant to the Government Controlled Corporation Act. This requirement has been consistently ignored except by the Government Accountability Office in auditing the program and in many years financial statements could not be prepared and were qualified. The term “FISCAL AGENT” is a term of art and implies the highest fiduciary standards. It is currently unknown as to whether WYO companies meet this standard but what is known is that their day to day operations are not under either the direct control or supervision of either the federal government or any entity within DHS, including the OIG. These WYO companies are in all other respects federal contractors and are in privity of contract with DHS by virtue of their annual signing of the WYO agreement.
7. Federal courts have widely varied as to their fashioning of federal common law with respect to determination of coverage under the policy or compliance with procedural predicates such as filing a so-call PROOF-OF-LOSS form. The requirement to file such a form has often been waived or extended but its filing is a predicate to the running of the one-year statute of limitations for filing a suit to recover under a policy. The requirement to do so has reflected the statutory mandate and increased cohesion in the judiciary as to the requirement largely relying on US Supreme Court estoppel cases such as Federal Crop Insurance v. Merrill, (1947).
8. The so-called TUCKER ACT has NO application to the NFIP.

All of the above conclusions should be reviewed for statutory modification in the current efforts to reform the NFIP.