Glenn Gunter, et al v. Farmers Insurance Company, et al

Filing

OPINION FILED - THE COURT: Diana E. Murphy, Michael J. Melloy and Bobby E. Shepherd AUTHORING JUDGE:Diana E. Murphy (PUBLISHED) [4098373] [12-3445]

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 12-3445
___________________________
Glenn K. Gunter; Lisa G. Gunter
lllllllllllllllllllll Plaintiffs - Appellants
v.
Farmers Insurance Company, Inc.; American Security Insurance Company
lllllllllllllllllllll Defendants - Appellees
____________
Appeal from United States District Court
for the Eastern District of Arkansas - Little Rock
____________
Submitted: September 24, 2013
Filed: November 21, 2013
____________
Before MURPHY, MELLOY, and SHEPHERD, Circuit Judges.
____________
MURPHY, Circuit Judge.
After a flood caused damage to their home, Glenn and Lisa Gunter filed claims
under their Standard Flood Insurance Policy (SFIP) with Farmers Insurance Company
Inc. and their supplemental policy with American Security Insurance Company.
Farmers promptly paid the amount claimed in the Gunters' timely filed proof of loss.
When their home was later condemned as uninhabitable, the Gunters sued Farmers
and American for breach of contract and various state law violations, seeking

Appellate Case: 12-3445

Page: 1

Date Filed: 11/21/2013 Entry ID: 4098373

recovery for additional loss. The district court1 dismissed the state law claims as
preempted and concluded that the breach of contract claim could not survive
summary judgment because the Gunters failed to comply with the requirements of the
SFIP. The court also granted summary judgment to American, reasoning that the
Gunters could not collect on their supplemental policy until they had exhausted their
primary policy. The Gunters appeal, and we affirm.
I.
Congress established the National Flood Insurance Program (NFIP) in 1968
in order to reduce the burden on the public fisc after flood disasters. 42 U.S.C.
§ 4001. The program is administered by the Federal Emergency Management Agency
(FEMA). Id. § 4011. FEMA promulgated the Standard Flood Insurance Policy
(SFIP) and directed that these policies may be issued through private insurers known
as "Write Your Own" (WYO) companies. Id.; 44 C.F.R. § 62.23; 44 C.F.R. pt. 62
app. B. As "fiscal agent[s] of the Federal Government," WYO insurers deposit SFIP
premiums in the United States Treasury and pay SFIP claims and litigation costs with
federal money. 42 U.S.C. §§ 4017(a), (d); 44 C.F.R. §§ 62.23(g), (i)(6), (i)(9). WYO
insurers cannot vary the terms of the SFIP without express written consent from the
federal insurance administrator. 44 C.F.R. §§ 61.4(b), 61.13(d)–(e).
The Gunters' home was flooded on December 24, 2009. Their mortgagee held
a SFIP through Farmers, a WYO carrier, in the amount of $87,900, and a
supplemental flood insurance policy through American in the amount of $16,100.
The Gunters initiated claims under these policies, stating that the flood had produced
cracks along the interior and exterior walls of their home.

1

The Honorable Brian S. Miller, Chief United States District Judge for the
Eastern District of Arkansas.
-2-

Appellate Case: 12-3445

Page: 2

Date Filed: 11/21/2013 Entry ID: 4098373

Farmers sent an independent insurance adjuster, Tommy Tipton, and an
engineer from U.S. Forensic, LLC to inspect the property. The engineer's subsequent
report concluded that most of the damage to the home was unrelated to the December
24 flood. Pursuant to the SFIP the Gunters then submitted to Farmers a proof of loss
claiming $12,488.04 and a building replacement proof of loss claiming $249.73.
Farmers reviewed the proof of loss in light of the U.S. Forensic report and paid
$12,237.77 of the Gunters' stated loss. Although American denied liability for any
damage to the residence, it paid $1,610 for damage to a storage shed not covered by
the SFIP.
In early March the Gunters' home was condemned as uninhabitable. In April
the Gunters asked Farmers' adjuster Tipton to inspect the property again. He issued
a new report and attached the findings from U.S. Forensic stating that the structural
damage was not caused by the flood. The Gunters then hired Hall Engineering Ltd.
to conduct an independent inspection of the residence, and it issued a report stating
that approximately 30% of the building was damaged by settlement during and after
the flood. The home was subsequently demolished; $69,487.07 then remained on
their mortgage.
The Gunters sought additional recovery under their policies. They brought five
claims against both Farmers and American: (1) specific performance, (2) unjust
enrichment, (3) insurance bad faith, (4) violation of the National Flood Insurance Act,
Code of Federal Regulations, and federal common law, and (5) breach of contract.
They admit that they never filed a proof of loss for any additional recovery.
The district court granted Farmers' motion to dismiss all but the Gunters' breach
of contract claim, concluding that the state law claims for specific performance,
unjust enrichment, and insurance bad faith were preempted by federal law. It also
decided that the "federal common law" claim was "essentially a re-labeled state-law
claim" and thus preempted as well. The district court determined that a jury trial was
-3-

Appellate Case: 12-3445

Page: 3

Date Filed: 11/21/2013 Entry ID: 4098373

unavailable on the remaining breach of contract claim and granted Farmers' motion
to quash the jury demand. Summary judgment was granted to Farmers after the court
concluded that the Gunters had failed to submit a proof of loss for any recovery above
the amount the company had already paid and they could therefore not recover under
the SFIP. The district court also granted summary judgment for American,
determining that the Gunters could not recover under their supplemental policy until
they had exhausted their primary insurance policy with Farmers. The Gunters object
to each of these conclusions.
II.
We review a district court's grant of a motion to dismiss de novo. Parkhurst v.
Tabor, 569 F.3d 861, 865 (8th Cir. 2009). Dismissal is proper if the plaintiff's
complaint fails to state a claim upon which relief can be granted. Fed. R. Civ. P.
12(b)(6). Accepting all factual allegations as true, we review the complaint to
determine whether its allegations are sufficient "to raise a right to relief above the
speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
The district court granted the motion by Farmers to dismiss the Gunters' state
law claims, ruling that they were preempted by federal law. It is well established that
the Supremacy Clause, U.S. Const., Art. VI, cl. 2, invalidates state laws that frustrate
or interfere with federal law. Hillsborough Cnty., Fla. v. Automated Med. Lab., Inc.,
471 U.S. 707, 712 (1985) (internal quotation omitted). Federal law may preempt state
law expressly by explicitly prohibiting state regulation in a particular field or
implicitly by thoroughly occupying the field of regulation. N. Natural Gas Co. v.
Iowa Util. Bd., 377 F.3d 817, 821 (8th Cir. 2004). Preemption also occurs where
there is a direct conflict between federal and state law. Id. Federal regulations can
have the same preemptive effect as federal statutes. Fid. Fed. Sav. and Loan Ass'n
v. de la Cuesta, 458 U.S. 141, 153 (1982).

-4-

Appellate Case: 12-3445

Page: 4

Date Filed: 11/21/2013 Entry ID: 4098373

We conclude that the Gunters' claims for specific performance, unjust
enrichment, and bad faith are expressly preempted by federal law. The SFIP contains
a provision that reads:
This policy and all disputes arising from the handling of any claim under
the policy are governed exclusively by the flood insurance regulations
issued by FEMA, the National Flood Insurance Act of 1968, as amended
(42 U.S.C. § 4001, et seq.), and Federal common law.
44 C.F.R. Pt. 61, App. A(1), Article IX (emphasis added). The underlined language
amended an earlier version of the provision; it was added to ensure uniform
interpretation of SFIP and to clarify that "matters pertaining to the [SFIP], including
issues relating to and arising out of claims handling, must be heard in Federal court
and are governed exclusively by Federal law." 65 Fed. Reg. 34,824, 34,826–27 (May
31, 2000). We agree with the Eleventh Circuit that the plain language of this
provision, as well as FEMA's stated purpose in amending it, "reflects a clear intent
to preempt claims under state law." See Shuford v. Fid. Nat'l Prop. & Cas. Ins. Co.,
508 F.3d 1337, 1344 (11th Cir. 2007).
The Gunters argue that 42 U.S.C. § 4081(c), which makes an "agent or broker"
liable for his own tortious conduct, demonstrates Congress' intent for state law claims
to proceed against WYO insurers. FEMA regulations make clear, however, that
WYO companies are not "agents or brokers" as used in this part of the code. See,
e.g., 44 C.F.R. § 62.23. Moreover, the federal cases cited by the Gunters in support
of their argument precede the amendment of Article IX of the SFIP and are therefore
inapplicable here. As the Third Circuit explained in C.E.R. 1988, Inc. v. Aetna
Casualty and Surety Co., 386 F.3d 263, 269 n.6 (3d Cir. 2004), the amendments to
Article IX specifically impact the express preemption analysis. We conclude that
Article IX as amended demonstrates the clear intent to preempt state law claims that
arise from the handling of a claim under the SFIP. Because the Gunters' state law

-5-

Appellate Case: 12-3445

Page: 5

Date Filed: 11/21/2013 Entry ID: 4098373

grievances against Farmers arise from the handling of their claim under the SFIP, they
are expressly preempted under Article IX.
The district court also granted Farmers' motion to dismiss the Gunters'
extracontractual claims brought under federal common law, concluding that this was
"essentially a re-labeled state-law claim" and thus also preempted by federal law. We
agree. As explained above, Article IX dictates the governing law of the SFIP. 44
C.F.R. Pt. 61, App. A(1). The term "federal common law," as used in this provision,
requires courts to use "standard insurance principles when deciding coverage issues
under the policy." Wright v. Allstate Ins. Co., 500 F.3d 390, 394 (5th Cir. 2007)
(emphasis in original). The Gunters do not disagree with that principle, but they
argue that "standard insurance law principles" are set and governed by state law. This
argument conflicts with the plain language and prior interpretations of the SFIP.
In Wright, the Fifth Circuit determined that "federal common law" as used in
the SFIP does not give policyholders, either expressly or implicitly, "the right to
assert extra-contractual claims against WYO insurers–which claims, if successful,
would likely be paid with government funds," because such a reading would allow
the court to fashion remedies beyond those Congress provided in the NFIP. 500 F.3d
at 394; see also Scritchfield v. Mut. of Omaha Ins. Co., 341 F. Supp. 2d 675, 678–79
(E.D. Tex. 2004). The NFIP specifically allows a policyholder to sue a WYO insurer
for breach of contract, 42 U.S.C. §§ 4053, 4072, but it does not contemplate
extracontractual claims such as negligence or actions for a declaratory judgment. The
reference to "federal common law" in the SFIP has been understood to direct courts
to look to "standard principles of interpreting insurance contracts when resolving
questions" about coverage, not to expand available remedies or causes of action.
Wright, 500 F.3d at 397; see also Scritchfield, 341 F. Supp. 2d at 681–82.
In sum, the Gunters seek to bring tort and extracontractual claims under federal
common law to obtain state law remedies otherwise preempted. It would frustrate the
-6-

Appellate Case: 12-3445

Page: 6

Date Filed: 11/21/2013 Entry ID: 4098373

intent of Congress to allow preempted state law claims to proceed under the guise of
federal common law. We conclude that this claim was properly dismissed.
We also affirm the grant of Farmers' motion to quash the jury request made by
the Gunters. In an action involving federal funds, a plaintiff is only entitled to a jury
trial if Congress has granted that right by statute. See Grissom v. Liberty Mut. Fire
Ins. Co., 678 F.3d 397, 401 (5th Cir. 2012) (citing Lehman v. Nakshian, 453 U.S.
156, 160 (1981)). The parties agree that the Gunters' breach of contract claim puts
federal funds at stake, and thus a jury trial was not available to the Gunters.
III.
We review de novo a district court's grant of summary judgment. Argenyi v.
Creighton Univ., 703 F.3d 441, 446 (8th Cir. 2013). Construing all facts and drawing
all reasonable inferences in favor of the nonmoving party, summary judgment is
appropriate only if there is no genuine dispute as to any material fact and the moving
party is entitled to judgment as a matter of law. Id.
The district court granted summary judgment to Farmers on the ground that the
Gunters had failed to file a supplemental proof of loss and thus did not satisfy the
prerequisites for suing on their additional claims. Under the terms of the SFIP the
Gunters "may not sue . . . to recover money under th[eir] policy unless [they] have
complied with all the requirements of the policy." 44 C.F.R. pt. 61 app. A(1), art.
VII.R. One of these stated requirements is filing a proof of loss within 60 days of the
flood. Id., art. VII.J.4.
The SFIP defines the proof of loss as "your statement of the amount you are
claiming under the policy signed and sworn to by you." Id. While an insurance
adjuster may provide the proof of loss form or assist the insured in preparing it, the
SFIP is clear that insureds must use their own judgment concerning the amount of
-7-

Appellate Case: 12-3445

Page: 7

Date Filed: 11/21/2013 Entry ID: 4098373

loss. Id., art. VII.J.5, J.7. If the proof of loss is rejected, the insured has the option
under the SFIP to accept the denial, to file an amended proof of loss within the
original sixty days, or to exercise the rights under the policy. Id., art. VII.M.2.
As the proof of loss requirement is a regulatory limit on the disbursement of
funds through a federal insurance program, it is to be strictly construed and serves as
a condition precedent to recovery under the SFIP. Mancini v. Redland Ins. Co., 248
F.3d 729, 733 (8th Cir. 2001). When strictly construing SFIP requirements in
Mancini, we determined that a proof of loss was invalid when accompanied by a
transmittal letter only bearing the printed names of the insured, for it had not been
"signed and sworn" as required by SFIP article VII.J.4. Id. at 734–35. The Gunters
argue that our analysis in Mancini does not apply here because unlike the appellants
in that case, they timely filed a valid proof of loss for the amount of their undisputed
damage, thereby fulfilling the prerequisites for suing on the disputed amount of loss
on the same residence.
A similar argument was rejected by the First Circuit in DeCosta v. Allstate
Insurance Company, 730 F.3d 76 (1st Cir. 2013). The insured in DeCosta included
with two timely filed proof of loss forms a sixteen page estimate from one of his
adjusters claiming additional loss on the property. Id. at 78–79. After the WYO
insurer paid the amount claimed in the proof of loss forms, DeCosta sued for the
additional amount listed in the adjuster's estimate, arguing that the estimate satisfied
a strict construction of the proof of loss requirement because it was submitted
contemporaneously with two proof of loss forms. Id. at 85. The First Circuit rejected
this argument, concluding that a signed and sworn proof of loss for building damages
"claims only the amounts listed in those forms," and the insured must timely file an
additional proof of loss to claim any additional amount of money. Id. The First
Circuit reasoned that a strict construction of the SFIP is needed to protect sovereign
immunity when federal funds are in question and to ensure uniformity in "the diverse
jurisdictions inundated with flood insurance disputes in the aftermath of natural
-8-

Appellate Case: 12-3445

Page: 8

Date Filed: 11/21/2013 Entry ID: 4098373

disasters." Id. at 84. We agree. The SFIP is clear that statements by an adjuster are
provided only as a courtesy, and the proof of loss is the signed and sworn final
statement of the insured as to how much damage is claimed. Id. at 85 (citing
Mancini, 248 F.3d at 735). The proof of loss requirement as strictly construed makes
clear that the Gunters did not timely file one for the amount they now claim in this
litigation.
The Gunters present four arguments as to why their failure to file an additional
proof of loss should not bar recovery. First, the Gunters contend that Farmers should
be estopped from asserting the proof of loss requirement as a bar to recovery. It is
well established, however, that "estoppel cannot be used to compel the government
to pay money from the federal treasury beyond the limits of a congressional
appropriation." Mancini, 248 F.3d at 735 (citing Office of Pers. Mgmt. v. Richmond,
496 U.S. 414, 426 (1990)). In Mancini we explained that "the proof-of-loss
requirement in the SFIP defines such a limit," and the insured's estoppel argument
necessarily failed. Id. While we left open the possibility that "affirmative misconduct
might justify estoppel against the government in some circumstances," the Gunters
have not established misconduct here. Id. (internal citation omitted). The Gunters
did not tell Tipton that they disagreed with the February 2010 proof of loss until after
the 60 days to file a proof of loss had passed. The Gunters' failure to file a timely
proof of loss for the disputed amount thus cannot have been the result of Tipton's
representations, and the Gunters' estoppel argument fails.
Second, the Gunters argue that they are not bound by the amount listed in their
proof of loss because they signed it under duress. To prove duress a party must show
that (1) he involuntarily accepted the terms of the opposing party, (2) the
circumstances permitted no other alternative, and (3) the circumstances were the
result of coercive acts by the opposing party. W.R. Grimshaw Co. v. Nevil C.
Withrow Co., 248 F.2d 896, 904 (8th Cir. 1957). While it is not clear that duress is
available as a defense to a proof of loss, there is no need to reach that issue here
-9-

Appellate Case: 12-3445

Page: 9

Date Filed: 11/21/2013 Entry ID: 4098373

because the Gunters cannot show that they had no alternative to accepting the damage
estimate in the U.S. Forensic report. See Howell v. State Farm Ins. Co., 540 F. Supp.
2d 621, 632 (D. Md. 2008). The SFIP explains that the proof of loss is the Gunters'
own statement; even if assisted by an adjuster, they must use their own judgment in
determining the amount of loss claimed in the form. 44 C.F.R. pt. 61 app. A(1), art.
VII.J. The Gunters were thus not bound by the estimate in the adjuster's report, but
rather were obligated to claim the amount of loss they believed they should recover.
Their duress argument fails.
Third, the Gunters argue that Farmers repudiated the policy, relieving them of
any obligation to file a supplemental proof of loss. We have not yet determined
whether the doctrine of repudiation applies to the SFIP, and other circuits addressing
the question are split. Compare Studio Frames Ltd. v. Standard Fire Ins. Co., 369
F.3d 376, 381–83 (4th Cir. 2004), with Jacobson v. Metro. Prop. & Cas. Ins. Co., 672
F.3d 171, 176–77 (2d Cir. 2012). Here we do not need to decide whether repudiation
can excuse noncompliance with the proof of loss requirement because the doctrine
of repudiation does not apply. Cf. Jacobson, 672 F.3d at 177. Farmers did not
disavow the policy, contend that it was not bound by the policy's terms, or attempt to
return to the Gunters the premiums paid under the policy. Id. at 177–78. Rather,
Farmers timely adjusted the claim and paid the Gunters the amount claimed in their
February 2010 proof of loss.
Fourth and finally, the Gunters argue that the enforcement of the proof of loss
requirement is a violation of due process. Other courts have rejected this argument,
and we agree. The proof of loss requirement is by all indications a "reasonable means
of advancing the NFIP's objectives of quickly compensating insureds while at the
same time managing the program's impact on the federal treasury." Howell, 540 F.
Supp. 2d at 633; see also Schumitzki v. Dir., Fed. Emergency Mgmt. Agency, 656 F.
Supp. 430, 433 (D.N.J. 1987).

-10-

Appellate Case: 12-3445

Page: 10

Date Filed: 11/21/2013 Entry ID: 4098373

We therefore conclude that the Gunters' failure to file a proof of loss for any
supplemental amount is a bar to recovery, and the district court correctly granted
Farmers' motion for summary judgment.
The district court also granted summary judgment for American. The Gunters'
policy with American contains the following provision:
Other insurance. If there is any other valid or collectible insurance
which would attach if the insurance under this policy has not been
effected, this insurance shall apply only as excess and in no event as
contributing insurance and then only after all other insurance has been
exhausted.
Based on this language, the district court concluded that the American policy was
supplemental. The Gunters could thus not recover from American for flood damage
to their home because they had not exhausted their primary policy with Farmers. We
agree.
Arkansas law governs the Gunters' policy with American, which was not issued
under the NFIP. Since Arkansas case law on exhaustion in the flood insurance
context is limited, the district court looked to the more fully developed concept of
exhaustion related to underinsured motorist coverage. Cases in that area are clear that
because such coverage is supplemental, the full limit of a tortfeasor's liability
insurance must be paid before the insured is entitled to underinsured motorist
benefits. Hartford Ins. Co. v. Mullinax, 984 S.W.2d 812, 815 (Ark. 1999); Birchfield
v. Nationwide Ins., 875 S.W.2d 501, 504 (Ark. 1994). We agree that similar
reasoning is applicable here where the flood insurance policy is likewise intended to
be supplemental.
The Gunters rely on Waste Management of Minnesota Inc. v. Transcontinental
Insurance Co., 502 F.3d 769 (8th Cir. 2007), to argue that "the full dollar value of the
-11-

Appellate Case: 12-3445

Page: 11

Date Filed: 11/21/2013 Entry ID: 4098373

Farmers policy of insurance does not have to be exhausted to trigger [American's]
obligations." In Waste Management, however, we were interpreting Minnesota state
law. In that case we also made clear that to show exhaustion, the insured must prove
"that claims aggregating the full amount of the specific policy have been settled
thereunder and full liability of the insurer discharged." Id. at 773 (internal citation
omitted). The Gunters have recovered only $12,237.77 on their $87,900 policy with
Farmers. Applying existing principles of exhaustion under Arkansas law, American's
obligations as an excess insurer have not yet been triggered. The district court did not
err by granting summary judgment for American.
IV.
Accordingly, we affirm the judgment of the district court in all respects.
______________________________

-12-

Appellate Case: 12-3445

Page: 12

Date Filed: 11/21/2013 Entry ID: 4098373