Melanson v. U.S. Forensic, LLC et al
MEMORANDUM OF DECISION AND ORDER granting 42 Motion to Dismiss for Failure to State a Claim; granting 48 Motion to Dismiss; granting 49 Motion to Dismiss for Failure to State a Claim; granting 51 Motion to Dismiss; granting 56 Motion to Dismiss for Failure to State a Claim; Based on the foregoing, the Court grants the Defendants motions to dismiss the Plaintiffs complaint in its entirety. Further, the Plaintiffs request for leave to amend the complaint is denied without prejudic e to renewal as a formal motion in accordance with Fed. R. Civ. P. 15, the Local Civil Rules of the Eastern District of New York, and this Courts Individual Rules of Practice. Any such motion to amend shall be filed within 60 days of the date of this order. So Ordered by Judge Arthur D. Spatt on 4/30/16. (Coleman, Laurie)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
DECISION AND ORDER
-againstU.S. FORENSIC, LLC, GARY BELL, HUI ZENG, THE
NATIONAL FLOOD SERVICE, FOUNTAIN GROUP
ADJUSTERS and JASON SAUVE,
The Mostyn Law Firm
Co-Counsel for the Plaintiff
3810 W. Alabama Street
Houston, TX 77027
By: John S. Mostyn, Esq., Of Counsel
Denis G. Kelly & Associates, P.C.
Co-Counsel for the Plaintiff
74 West Park Avenue
Long Beach, NY 11561
By: Denis G. Kelly, Esq., Of Counsel
The Demmons Law Firm, LLC
Attorneys for Defendants U.S. Forensic, LLC and Gary Bell
7461 Jade Street
Metairie, LA 70002
By: Larry E. Demmons, Esq., Of Counsel
Milber Makris Plousadis & Seiden, LLP
Attorneys for Defendant Hui Zeng
1000 Woodbury Road, Suite 402
Woodbury, NY 11797
By: Thomas M. Fleming, II, Esq., Of Counsel
Robinson & Cole LLP
Attorneys for Defendant Standard Fire Insurance Company
280 Trumbull Street
Hartford, CT 06103
By: Stephen E. Goldman, Esq.
Wystan M. Ackerman, Esq., Of Counsel
Foley & Lardner LLP
Attorneys for Defendant National Flood Service
90 Park Avenue
New York, NY 10016
By: Anne B. Sekel, Esq., Of Counsel
Lewis Brisbois Bisgaard & Smith
Attorneys for Defendants Fountain Group Adjusters and Jason Sauve
77 Water Street, 21st Floor
New York, NY 10005
By: Seth I. Weinstein, Esq., Of Counsel
SPATT, District Judge:
On July 8, 2015, the Plaintiff Adam Melanson (“Melanson” or the “Plaintiff”)
commenced this action against the Defendants U.S. Forensic, LLC (“US Forensic”), Gary Bell
(“Bell”), Hui Zeng (“Zeng”), the Standard Fire Insurance Company (“Standard Insurance”),
the National Flood Service (“National Flood”), Fountain Group Adjusters (“Fountain
Group”), and Jason Sauve (“Sauve”), alleging violations of the Racketeer Influenced and
Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and common law breach of
contract. In general, the Plaintiff alleges that the Defendants participated in a fraudulent
scheme to deny his claim for insurance proceeds arising from property damage he
sustained during Superstorm Sandy.
Each of the Defendants has moved to dismiss the complaint.
Overview of the Relevant Statutory Framework
Before delving into the specific facts of this case, the Court finds that it will be
helpful to provide an overview of the complex regulatory framework governing federal
flood insurance policies.
At the heart of the relevant statutory regime is the National Flood Insurance Act of
1968 (“NFIA” or the “Act”), 42 U.S.C. §§ 4001-4127, which was enacted with a legislative
“recogni[tion] that ‘many factors have made it uneconomic for the private insurance
industry alone to make flood insurance available to those in need of such protection on
reasonable terms and conditions,’ ” Jacobson v. Metro. Prop. & Cas. Ins. Co., 672 F.3d 171,
174 (2d Cir. 2012) (quoting 42 U.S.C. § 4001(b)). Thus, under the Act, “ ‘the federal
government provides flood insurance subsidies and local officials are required to adopt and
enforce various management measures.’ ” Id. (quoting Palmieri v. Allstate Ins. Co., 445 F.3d
179, 183 (2d Cir. 2006)).
Within the purview of the Act is a program known as the National Flood Insurance
Program (“NFIP” or the “Program”), which is administered by the Federal Emergency
Management Agency (“FEMA”), and is “supported by taxpayer funds, which pay for claims
that exceed the premiums collected from the insured parties.” Jacobson, 672 F.3d at 174
(citing Van Holt v. Liberty Mut. Fire Ins. Co., 163 F.3d 161, 165 n.2 (3d Cir. 1998)).
stated, “[t]he NFIP is a federally-subsidized program designed to make flood insurance
available to the general public at or below actuarial rates.” Moffett v. Computer Scis. Corp.,
457 F. Supp. 2d 571, 573 (D. Md. Sept. 29, 2006).
Under the Program, among other things, “FEMA is authorized to promulgate
regulations  as to ‘the general terms and conditions of insurability which shall be
applicable to properties eligible for flood insurance coverage,’ and  as to ‘the general
method or methods by which proved and approved claims for losses under such policies
may be adjusted and paid.’ ” Id. at 573 (citing Battle v. Seibels Bruce Ins. Co., 288 F.3d 596,
599 (4th Cir. 2002)). “In other words, FEMA writes the policies and makes the rules as to
claims made under them.” Id.
For example, FEMA has established the precise terms and conditions of coverage
available under the Program in the form of a so-called Standard Flood Insurance Policy
(“SFIP”). See 44 C.F.R. § 61.13 (codifying the terms and conditions of the SFIP); see also
Van Holt, 163 F.3d at 165-66 (“FEMA fixes the terms and conditions of the flood insurance
policies, which, barring the express written consent of the Federal Insurance
Administrator, must be issued without alteration as a Standard Flood Insurance Policy”);
Moffett, 457 F. Supp. 2d at 574 (noting that “[t]he terms and conditions of coverage are
fixed by FEMA regulation in the form of [an SFIP] and do not vary . . .”); Eodice v. Selective
Ins. Co. of Am., No. 08-cv-151, 2010 U.S. Dist. LEXIS 13090, at *2 (D.N.J. Feb. 8, 2010)
“In 1983, FEMA created the Write Your Own [“WYO”] program, which allows private
insurance companies to issue and administer SFIPs in their own names as ‘fiscal agent[s] of
the Federal Government.’ ” Ravasio v. Fid. Nat’l Prop. & Cas. Ins. Co., 81 F. Supp. 3d 274,
277 (E.D.N.Y. 2015) (Spatt, J.) (quoting 42 U.S.C. § 4071(a)(1)). Under this expansion,
private insurance companies are authorized to “write their own” federally-underwritten
SFIPs, Van Holt, 163 F.3d at 165, but in doing so, assume “significant administrative
responsibilities under the NFIP,” Moffett, 457 F. Supp. 2d at 574.
For example, “[f]or the policies they issue, [WYO companies] are responsible for the
adjustment, settlement, payment and defense of all claims.” Id.; see 44 C.F.R. §§ 62.21(a),
62.23. “The Government, in return, . . . reimburse[s] the WYO insurer for claims paid under
the SFIPs and related litigation costs, and pays the WYO insurer a flat 3.3% commission on
claims paid.” Eodice, 2010 U.S. Dist. LEXIS 13090, at *2. Thus, under the WYO program,
“the private insurance companies administer the federal program,” but ultimately, “ ‘it is
the Government, not the companies, that pays the claims.’ ” Ravasio, 81 F. Supp. 3d at 277
(quoting Jacobson, 672 F.3d at 175); see Gunter v. Farmers Ins. Co., 736 F.3d 768, 770 (8th
Cir. 2013) (noting that “WYO insurers deposit SFIP premiums in the United States Treasury
and pay SFIP claims and litigation costs with federal money”) (citations omitted).
Relevant here, the NFIA contains a remedial provision, which creates a right of
action for insureds against the Federal Insurance Administrator, to be brought in federal
court within one year after the cause of action accrues:
[U]pon the disallowance by the Administrator of any such claim [for losses
covered by an SFIP], or upon the refusal of the claimant to accept the amount
allowed upon any such claim, the claimant, within one year after the date of
mailing of notice of disallowance or partial disallowance by the
Administrator, may institute an action against the Administrator on such
claim in the United States district court for the district in which the insured
property or the major part thereof shall have been situated, and original
exclusive jurisdiction is hereby conferred upon such court to hear and
determine such action without regard to the amount in controversy.
42 U.S.C. § 4072; see Moffett, 457 F. Supp. 2d at 575 (explaining that “[if] an insured is
dissatisfied with the handling of a claim, he or she may . . . bring an action in federal district
court”) (citing 44 C.F.R., Part 61, App. A(1), Art. VII(P); 42 U.S.C. § 4072).
With this statutory framework in mind, the Court now turns to the relevant facts of
this case, which, unless otherwise indicated, are drawn from the complaint and construed
in favor of the Plaintiff.
The Relevant Facts
The Plaintiff Adam Melanson is an individual who, at all relevant times, owned and
derived rental income from a residential property located at 101 Michigan Street in Long
Beach (the “Long Beach Residence”). See Compl. ¶ 7. On an unspecified date, the Plaintiff
purchased a policy of flood insurance from the Defendant Standard Insurance (the
“Policy”). See id. ¶ 68. Although the Policy is not attached to the complaint, and few
specific facts are alleged as to its contents, it appears that the Policy was a Standard Flood
Insurance Policy (previously defined as “SFIP”), issued by Standard Insurance in its
capacity as a “Write Your Own” (previously defined as “WYO”) company pursuant to the
National Flood Insurance Program (previously defined as “NFIP” or the “Program”) and its
implementing regulations, and contained coverage limits of $250,000.
Compl. ¶¶ 11, 22, 39, 60.
On October 29, 2012, Superstorm Sandy decimated parts of Long Beach and the
surrounding areas. According to the complaint, the Long Beach Residence sustained severe
damage. See id. ¶ 25. Accordingly, on an unspecified date after the storm, the Plaintiff
submitted a claim to Standard Insurance for coverage under the Policy. See id. ¶ 26.
The complaint alleges that Standard Insurance “contracted with” the Defendant
National Flood “to handle the management and adjustment of its Hurricane Sandy claims,”
id., which, apparently, included the Plaintiff’s claim at issue in this case. Id. It is further
alleged that Standard Insurance, together with National Flood, then retained the Defendant
Fountain Group, a Louisiana-based adjusting firm, and the Defendant Jason Sauve, an
individual claims adjuster, to inspect the Long Beach Residence and investigate the claim.
See id. ¶¶ 12-13, 26.
After performing an inspection of the Long Beach Residence, during which he
allegedly observed substantial damage, Sauve requested that an engineer also inspect the
property. See id. ¶ 26.
Thus, according to the complaint, Standard Fire, National Flood, and Fountain Group
then retained the Defendant US Forensic, a Louisiana-based engineering firm, to evaluate
the Long Beach Residence. See id. ¶¶ 8, 27. Once retained, US Forensic allegedly assigned
one of its New York-based engineers, namely, the Defendant Hui Zeng, to assess the
property. See id. ¶¶ 9, 27.
On December 2, 2012, Zeng inspected the Long Beach Residence. See id. ¶ 27. On
January 18, 2013, she issued a report (the “Damage Report”), which is annexed to the
complaint as Exhibit “2.” Relevant here, the Damage Report concluded that the Long Beach
Residence “was not structurally damaged by hydrodynamic forces, hydrostatic forces,
scour or erosion of the supporting soils, or buoyancy forces of the floodwaters associated
with” Superstorm Sandy. See Compl. ¶ 27 & Ex. “2” at 1.
Allegedly based on Zeng’s findings contained in the Damage Report, Standard
Insurance partially denied Melanson’s claim for coverage, and reimbursed him with a sum
of $65,000. See id. ¶ 28. The Long Beach Residence was eventually condemned by the
municipal authorities and demolished. See id. & Ex. “5.”
The Allegations of Fraud
The gravamen of the Plaintiff’s complaint is not simply that Standard Insurance and
its outside contractors incorrectly assessed the extent of the damage to the Long Beach
Residence and underpaid Melanson’s claim – it is that the events outlined above typify a
larger fraudulent scheme, which was orchestrated by the Defendants to systematically and
falsely deny valid insurance claims for their own economic benefit.
In particular, the complaint alleges that, due to its participation as a WYO company
in the NFIP, Standard Insurance receives reimbursement from the federal government for
coordinating “the adjustment, settlement, payment, and defense of all claims arising under”
the SFIPs that it issues, including costs related to claims handling activities and defending
related litigation (“Recoverable Costs”). Id. ¶ 11. Thus, according to the Plaintiff, Standard
Insurance is motivated to engage in conduct designed to artificially inflate such costs. See,
e.g., id. ¶¶ 22 (alleging that the government’s “methods for reimbursing WYO carriers for
the costs associated with administering” claims under the NFIP means that “Standard
[Insurance] profits by systematically increasing claim handling expenses”), 33 (“Standard
[Insurance] benefits directly from an increase in claims handling and litigation expenses”);
39 & 47 (same).
Further, according to the Plaintiff, the outside contractors that are retained by
Standard Insurance to provide adjustment and engineering services – and thereby generate
additional Recoverable Costs – are motivated to participate in the scheme by a desire to
continue receiving business from Standard Insurance. See id. ¶¶ 21 (alleging that the
Defendants “know that Standard [Insurance] will in turn continue employing [them] and
pay them unwarranted consulting fees for their engineering and claims handling work”),
40 (“The more [the Defendants] contribute[ ] to Standard [Insurance]’s inflated expenses,
the easier it is for [them] to ensure future assignments and expense payments”), 47 (same).
Applied to the facts of this case, Melanson alleges that when Sauve inspected the
Long Beach Property, he observed substantial storm-related damage, but fraudulently
neglected to recommend that Standard Insurance pay out the full coverage limits under the
Policy. See id. ¶¶ 26, 35. Instead, allegedly in furtherance of the scheme, Sauve requested
that an engineer also inspect the property, thereby driving up the Recoverable Costs. See
Further, Melanson alleges that when Zeng subsequently inspected the Long Beach
Residence, she also observed storm-related damage sufficient to trigger the full limits of the
Policy, but falsified the Damage Report to conclude otherwise. See id. ¶ 27. Although it is
somewhat unclear how Zeng allegedly “falsified” or “altered” the Damage Report in this
case, see, e.g., id. ¶¶ 31 & 41 (“altered”), 36 & 42 (“falsified”), the Plaintiff appears to allege
that US Forensic and its engineers have used identical language in as many as 50 similar
engineering reports, regardless of the individual circumstances of a given site inspection,
which, apparently, have also been used to deny other flood insurance claims made under
the NFIP, see id. ¶¶ 27, 29-30. The implication is that the Damages Report in this case was
“predetermined”; consisted of mere “boilerplate” language; and did not accurately reflect
the extensive damage witnessed by Sauve and Zeng. See id. ¶¶ 27, 29.
Consistent with this allegation, the Plaintiff submits a template that was apparently
created by US Forensic for use by its field engineers in preparing reports of their findings.
See Compl. Ex. “3”. In particular, the template consists of a largely pre-drafted damage
report – which is materially indistinguishable from the Damage Report created by Zeng in
this case – with blank spaces for the assigned engineer to insert identifying information
relating to a particular inspection, such as “insured name” and “date of flood.” See id. Of
particular importance, the template contains a fully prepared section entitled “Results and
Conclusions,” which concludes – as did the Damage Report in this case – that the damage to
a potentially covered property was not caused by “the reported flood event of October 29,
2012,” namely, Superstorm Sandy. Id.
Further, the Plaintiff attaches more than 100 pages of similar reports created by US
Forensics and its engineers in other cases. See id. Ex. “4.” In each of the 51 submitted
reports, the template was apparently used to reach the identical conclusion, expressed in
identical language, as Zeng’s conclusion in this case regarding the Long Beach Residence.
Melanson alleges that, in partially denying his claim, Standard Fire and others in the
relevant hierarchy remained “willfully blind” to the fabricated Damage Report and the
manufacturing of other Recoverable Costs, all in the service of the larger fraudulent
scheme. See id. ¶¶ 31, 35-37.
The Plaintiff’s Reliance Upon a Prior Court Order
In an attempt to bolster the allegations of fraud, the Plaintiff attaches to his
complaint a November 7, 2014 Memorandum & Order of United States Magistrate Judge
Gary R. Brown, issued in the matter of Raimey v. Wright National Flood Insurance Co., Case
No. 14-cv-461. See Compl. Ex. “9”.
That case also involved allegations by Long Beach residents – Melanson’s neighbors,
in fact – that their claim for insurance coverage after Hurricane Sandy had been wrongfully
denied. According to Judge Brown’s opinion, the plaintiffs in Raimey claimed to possess
evidence that the engineering report, which had been prepared by US Forensic, and which
was ultimately relied upon by the insurance company to deny the plaintiffs coverage under
an SFIP, had actually been doctored in order to reach a false conclusion about the cause of
their property damage. Judge Brown conducted an evidentiary hearing with regard to
Relevant here, the evidence adduced at the hearing revealed “a process by which the
report authored by the inspecting engineer was rewritten by an engineer who had not
inspected the property and whose identity remained concealed from the homeowner, the
insurer and, ultimately, the Court.” See id. at 9 (emphasis in original). More specifically,
Judge Brown wrote that:
U.S. Forensic, an engineering firm retained by defendant Wright National
Flood Insurance Company (“Wright”) to examine a storm-battered house in
Long Beach, New York, unfairly thwarted reasoned consideration of
plaintiffs’ claims through the issuance of a baseless report. The engineer sent
by U.S. Forensic opined in a written report that the home at issue had been
damaged beyond repair by Hurricane Sandy. A second engineer, who did
little more than review the photographs taken by the inspecting engineer,
secretly rewrote the report, reversing its conclusion to indicate that the
house had not been damaged by the storm, and attributing – without
sufficient evidence – defects in the home to long-term deterioration.
Id. at 2-3.
The complaint in this action makes numerous references to the findings contained
in Judge Brown’s opinion in Raimey. See, e.g., Compl. ¶¶ 18, 20, 32. Apparently, in doing
so, Melanson seeks to draw the inference that, because US Forensic was previously found
to have tampered with some engineering reports relating to property damaged by
Superstorm Sandy, the engineering report relating to the Long Beach Residence in this
case, namely, the Damages Report prepared by Zeng, is similarly fabricated. In regard to
the RICO claim, Melanson appears to suggest that Judge Brown’s findings in Raimey
support the conclusion in this case that the Defendants are engaged in a widespread
fraudulent scheme, of which he fell victim.
Relevant Procedural History and Summary of the Arguments
On these facts, the Plaintiff asserts causes of action based on violations of the RICO
statute, see id. ¶¶ 63-66, and common law breach of contract, see id. ¶¶ 67-73. He seeks to
recover a sum of $180,000 allegedly due under the Policy, plus lost rental income and other
out-of-pocket expenses, in an unspecified amount, which he claims to have incurred as a
proximate result of the denial of insurance proceeds. See id. ¶ 74. Finally, he seeks treble
damages, costs, attorneys’ fees, and interest, as provided for in the RICO statute. See id.
Between November 5, 2015 and December 7, 2015, each of the Defendants filed a
motion to dismiss the complaint, raising one or more of the following arguments:
US Forensic, Bell, Zeng, Standard Insurance, and National Flood contend that
the RICO claim is preempted by the NFIP, which provides the exclusive
remedy for disputes arising out of the handling of claims under SFIPs;
US Forensic, Bell, Zeng, Fountain Group, and Sauve contend that Melanson
lacks standing to maintain a RICO claim;
US Forensic, Bell, Standard Insurance, Fountain Group, Sauve, and National
Flood contend that principles of sovereign immunity preclude RICO liability
against them because, as participants in the NFIP, they acted at all relevant
times as fiscal agents of FEMA, which is exempt from RICO;
All of the Defendants contend that the complaint fails to state enough specific
facts to pass muster under the heightened pleading standard found in
Fed. R. Civ. P. 9(b), or to otherwise make it plausible that they are liable for
RICO violations; and
Standard Insurance contends that the Plaintiff’s breach of contract claim is
The Court will review the applicable legal standards and then proceed to address
the merits of these contentions, so as to resolve the motions to dismiss.
The Standard of Review
Each of the Defendants moves under Fed. R. Civ. P. 12(b)(6), contending that, for the
reasons outlined above, the allegations in the complaint fail to state a claim upon which
relief may be granted.
Under Fed. R. Civ. P. 8(a)(2), a pleading that states a claim for relief must contain “a
short and plain statement of the claim showing that the pleader is entitled to relief.” The
pleading standard announced in Rule 8 “does not require ‘detailed factual allegations,’ but
it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.”
Ashcroft v. Iqbal, 556 U.S. 662, 677-78 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). “A
pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a
cause of action will not do.’ ” Id. at 678 (quoting Twombly, 550 U.S. at 555).
Rather, to survive a motion to dismiss under Rule 12(b)(6), “a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible
on its face.’ ” Id. (quoting Twombly, 550 U.S. at 557). The “[f]actual allegations must be
enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 557.
Furthermore, claims based on fraud are subject to the heightened pleading standard
found in Fed. R. Civ. P. 9(b).
In particular, a party asserting fraud “must state with
particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). “Rule
9(b) is satisfied when the complaint specifies ‘the time, place, speaker, and content of the
alleged misrepresentations;’ how the misrepresentations were fraudulent; and the details
that ‘give rise to a strong inference that the defendant[ ] had an intent to defraud,
knowledge of the falsity, or a reckless disregard for the truth.’ ” Schwartzco Enters. LLC v.
TMH Mgmt., LLC, 60 F. Supp. 3d 331, 344 (E.D.N.Y. 2014) (Spatt, J.) (quoting Cohen v. S.A.C.
Trading Corp., 711 F.3d 353, 359 (2d Cir. 2013)).
The Court notes that the Plaintiff failed to respond in any manner to the motion to
dismiss filed by National Flood. In this regard, although National Flood urges the Court to
grant its motion as unopposed, “the failure to oppose a 12(b)(6) motion does not justify
dismissal of a complaint.” JCG v. Ercole, No. 11-cv-6844, 2014 U.S. Dist. LEXIS 57417, at *21
(S.D.N.Y. Apr. 24, 2014) (Report and Recommendation), adopted, 2014 U.S. Dist. LEXIS
83800 (S.D.N.Y. June 18, 2014) (citing Goldberg v. Danaher, 599 F.3d 181, 183-84 (2d Cir.
2010); McCall v. Pataki, 232 F.3d 321, 322-23 (2d Cir. 2000)). Rather, “[a]s with all
12(b)(6) motions, in deciding an unopposed motion to dismiss, the court is to ‘assume the
truth of a pleading’s factual allegations and test only its legal sufficiency’ according to the
principles ordinarily applicable on a motion to dismiss.’ ” Id. (quoting Johnson v. Agros,
No. 10-cv-8312, 2012 U.S. Dist. LEXIS 117248, at *6-*7 (S.D.N.Y. Aug. 20, 2012)); see also
Straw v. Colvin, No. 13-cv-2470, 2016 U.S. Dist. LEXIS 23962, at *7 (S.D.N.Y. Fed. 26, 2016);
Nardiello v. Maureen’s Kitchen, Inc., No. 14-cv-4070, 2015 U.S. Dist. LEXIS 32574, at *4 n.3
(E.D.N.Y. Mar. 17, 2015).
As to Whether the Plaintiff’s RICO Claim is Preempted by the Provisions of the
National Flood Insurance Program and its Implementing Regulations
The Applicable Legal Principles
As noted above, several of the Defendants contend that the Plaintiff’s RICO claim
must fail, as a matter of law, because it is preempted by the provisions of the NFIP, which,
by its terms, exclusively governs all disputes arising out of the adjustment and handling of
claims made under SFIPs. This argument will be discussed in greater detail below.
The Relevant Statutory Language
Congress gave FEMA broad authority under the NFIP to establish the precise terms
and conditions of insurability under the SFIP, and to regulate the methods by which flood
loss claims are adjusted, approved, and paid. See Davis v. Travelers Prop. & Cas. Co.,
No. C 99-02025, 2000 U.S. Dist. LEXIS 11034, at *20 (N.D. Ca. Apr. 19, 2000) (quoting
42 U.S.C. §§ 4013, 4019). In this regard, a section of the SFIP entitled “What Law Governs”
– which, for purposes of this opinion, the Court will refer to as “Article IX” – provides
specifically that “[t]his 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, and Federal common law.” 44 C.F.R.
Part 61, Appendix (A)(1) at Art. IX (underscore supplied); see 44 C.F.R. § 61.13(a)
(incorporating Appendix “A” into the SFIP).
“The underlined language amended an earlier version of the provision; it was added
to ensure uniform interpretation of [the] 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.’ ” Gunter, 736 F.3d at 772
(quoting 65 Fed. Reg. 34,824, 34,826-27 (May 31, 2000)).
In this case, the Defendants rely upon Article IX to support their contention that the
NFIP is intended to provide the exclusive remedy for claims handling disputes under the
Program, to the exclusion of all other laws, including RICO.
The Preemptive Effect of the NFIP
At the outset, the Court notes that, apparently, this case presents an issue of first
impression. The parties have not cited any cases – nor has the Court’s independent
research revealed any – in which the preemptive effect of the NFIP has been considered in
relation to a civil RICO claim based on alleged misconduct in the claims handling process
under a federal flood insurance policy.
In fact, it appears that no reported case addresses whether the provisions of the
NFIP preempt any federal statute. On the contrary, the body of relevant caselaw deals
exclusively with the preemptive effect of the NFIP on claims based on theories of state tort
liability and federal common law. Nonetheless, the Court notes that every circuit to
address that question has concluded that the NFIA neither creates nor authorizes an extracontractual right of action for insureds who are dissatisfied with the handling of a claim
under the Program. Rather, these same courts have consistently found that Congress
intended for the NFIP to preclude such claims when the underlying facts arise from a WYO
carrier’s administration of the Program.
For example, in Gibson v. American Bankers Insurance Co., 289 F.3d 943 (6th Cir.
2002), the plaintiffs had purchased federal flood insurance from the defendant pursuant to
the WYO program. After the plaintiffs’ home was damaged in a flood, they made a claim
under their SFIP but were denied coverage. So, they commenced an action alleging breach
of contract, breach of fiduciary duty, and other related claims under Kentucky state law.
Relevant here, the court noted that the Sixth Circuit had not previously considered this
question, but nevertheless observed that “most courts ha[d] consistently found that NFIA
preempts state law claims that are based on the handling and disposition of SFIP claims.”
Id., 289 F.3d at 949 (collecting cases). Thus, to the extent that the plaintiffs’ claims involved
the defendant’s alleged “fail[ure] to act promptly on communications, refus[al] to pay the
claim, fail[ure] to affirm coverage, and not attempting a good faith settlement,” they were
“all based on defendant’s handling and denial of coverage under the SFIP,” which fell within
the purview of the NFIP. Id. In this regard, the court noted that “Congress and FEMA have
regulated the claims adjustment process and judicial review of coverage claims under flood
insurance policies. Uniformity of decision requires the application of federal law and
precludes the enforcement of state laws on the same subject.” Id.
In reaching this conclusion, the court in Gibson emphasized the role of the public
fisc in determining which categories of claims are appropriate to allow against WYO
carriers. In this regard, cognizant that these carriers act as fiscal agents of the government
under the Program, the court observed that if the plaintiffs were to prevail, their coverage
claims and associated defense costs would be paid with federal funds – a factor which
militated against allowing such claims to proceed. See id.
Subsequently, in C.E.R. 1988, Inc. v. Aetna Casualty and Surety Co., 386 F.3d 263, 265
(3d Cir. 2004), the Third Circuit also considered “whether the [NFIP] is sufficiently
comprehensive to preempt a state tort suit arising from conduct related to the Program’s
administration.” In that case, a hurricane damaged the plaintiff’s property, which was
covered by a WYO-issued federal flood insurance policy. When a dispute arose over the
defendant’s partial denial of coverage, the plaintiff filed a complaint alleging, among other
things, negligence and tortious bad faith in the adjustment process, as well as claims for
punitive damages, attorneys’ fees, and costs.
Relevant here, in addressing the preemption issue, the court centered its decision on
Congress’s intent in enacting the Program and vesting the federal courts with exclusive
original jurisdiction over related disputes. In particular, drawing on its prior decision in
Van Holt v. Liberty Mutual Fire Insurance Co., 163 F.3d 161 (3d Cir. 1998), the court in
C.E.R. stated that:
The uniformity touted in that decision would be seriously jeopardized if state
tort claims were permitted to proceed, even if those claims were resolved in
federal court. We reasoned [in Van Holt] that “Congress would want federal
courts to adjudicate disputes over federal flood insurance policies for which
the federal government would be responsible.” Van Holt, 163 F.3d at 167. By
the same token, Congress would want federal law to govern those disputes.
And what Congress intends is the crux of our preemption analysis.
C.E.R., 386 F.3d at 268.
Thus, the court noted that “[s]tate tort suits against WYO companies, which are
usually expensive, would undermine th[e] goal” of “reduc[ing] the fiscal pressure on federal
flood relief efforts,” which is “[i]ndisputably a central purpose of the Program.” Id. at 270.
In this regard, the court again emphasized the financial strain that would be placed on the
public fisc if insureds were authorized to pursue state tort remedies for conduct that fell
within the scope of the Program. In particular, since “it appears that FEMA ordinarily will
be responsible financially for the costs of defending a lawsuit against a WYO
company[,] . . . [t]he efficiency goals of the Program[ ] would better be served by requiring
claimants to resolve their disputes by means of the remedies FEMA provides.” Id. at 271.
The alternatives, explained the court, were worse:
If FEMA refused to reimburse WYO carriers for their defense costs, insurers
would leave the Program, driving the price of insurance higher. The
alternative, remuneration for losses incurred in such suits, would directly
burden the federal Treasury.
Id. at 270.
Thus, similar to the Gibson court, the court in C.E.R. concluded that the plaintiff’s
state tort claims were “incompatible with the objectives of the NFIA and therefore [we]re
preempted.” Id. at 272.
In Wright v. Allstate Insurance Co., 415 F.3d 384 (5th Cir. 2005) (“Wright I”), the
plaintiff made a claim under an SFIP for damages sustained to his home during a tropical
storm. When attempts to settle his claim with the issuing WYO carrier were unsuccessful,
the plaintiff commenced an action alleging numerous state law contract and tort theories,
including breach of contract, violations of the Texas Insurance Code and Deceptive
Practices Act, breach of the common law duty of good faith and fair dealing, fraud, and
negligent misrepresentation. The district court dismissed all but the breach of contract
claim, finding the others to be preempted by federal law.
On appeal, the Fifth Circuit expressly adopted the approach of its sister circuits in
Gibson and C.E.R. “in holding that state law tort claims arising from claims handling by a
WYO are preempted by federal law.” Id. at 390. Such a conclusion, reasoned the court, was
consistent with its earlier observation in the case of West v. Harris, 573 F.2d 873, 881 (5th
Cir. 1978), that the NFIP is “a child of Congress, conceived to achieve policies which are
national in scope,” and in which “the federal government participates extensively . . . both
in a supervisory capacity and financially.”
Further, the court took special note of the statutory language which is at issue in this
case, namely, Article IX, and noted that, although “no circuit ha[d] yet addressed whether
this amendment is effective as an express preemption of state law claims, it can obviously
be so argued.” Id. at 390 (citations omitted). Thus, the court in Wright I affirmed the
portion of the lower court’s decision which found that the plaintiff’s state law claims based
on, among other things, fraud and negligent misrepresentation, were preempted by the
Program, and remanded the matter to the district court on separate grounds.
Later, the Wright case was back before the Fifth Circuit after the district court, on
remand, refused to allow the plaintiff to amend his complaint to assert “federal common
law causes of action for fraud and negligent misrepresentation.” Wright v. Allstate Ins. Co.,
500 F.3d 390, 392 (5th Cir. 2007) (“Wright II”). The plaintiff argued that, to the extent
Article IX “specifies that disputes arising from the handling of an insurance claim shall be
governed by federal common law,” the Program expressly or impliedly provides for such
claims. See id. at 393. The court disagreed, holding that:
Even though the NFIA does allow a policyholder to sue a WYO insurer for
amounts due under the contract, nowhere in the NFIA or the SFIP does
Congress explicitly reference any right of a policyholder to bring extracontractual claims against a WYO insurer.
[T]he reference to federal common law in [Article IX of] the SFIP directs
courts to employ standard insurance principles when deciding coverage
issues under the policy. It does not confer on policyholders the right to
assert extra-contractual claims against WYO insurers – which claims, if
successful, would likely be paid with government funds.
Id. at 394 (emphasis in original).
Thus, the court held plainly “that neither the NFIA nor the SFIP expressly authorizes
policyholders to file extra-contractual claims against a WYO insurer.” Id. On the contrary,
in determining that the Program also does not impliedly authorize the right of action
sought to be asserted by the plaintiff, the court noted that “there is no indication in the
legislative history or elsewhere that Congress intended to create or permit additional
causes of action” other than those deliberately written into the statute. Id. at 397 (“We
deem it significant that Congress expressly provided a private remedy for policyholders in
42 U.S.C. §§ 4053 and 4072”).
In dicta, the court further noted that permitting dissatisfied insureds to bring extracontractual claims against WYO carriers would run counter to the policy rationale
undergirding the Program insofar as it would “increase rather than confine the burdens on
the federal government and the federal fisc that the NFIA was created to mitigate.” Id.
More recently, in Gunter v. Farmers Insurance Co., 736 F.3d 768 (8th Cir. 2013), the
Eighth Circuit held that the plaintiffs could not maintain state tort claims against their WYO
carrier under theories of specific performance, unjust enrichment, and insurance bad faith,
as those claims were preempted by the provisions of the NFIP. See id. at 771. In this
regard, the court relied upon the Eleventh Circuit’s decision in Shuford v. Fidelity National
Property and Casualty Insurance Co., 508 F.3d 1337 (11th Cir. 2007), in holding that “the
plain language of [Article IX], as well as FEMA’s stated purpose in amending it, reflects a
clear intent to preempt claims under state law” “that arise from the handling of a claim
under the SFIP.” Id. at 772.
Nor could the plaintiffs proceed with extra-contractual claims allegedly grounded in
the federal common law. Relying on the Fifth Circuit’s decision in Wright I, the court held
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 [v. Mut. of Omaha Ins. Co.], 341 F. Supp. 2d [675,] 681-82
[E.D. Tex. 2004].
Gunter, 736 F.3d at 773 (emphasis supplied).
In sum, the Gunter court affirmed the dismissal of the plaintiffs’ “tort and extracontractual claims under federal common law,” as those claims essentially sought “to
obtain state law remedies otherwise preempted” and would, if allowed, impermissibly
“frustrate the intent of Congress” in enacting the Program. See id.
Guided by these authorities, district courts in this Circuit – including, recently, this
Court – have similarly held that claims by insureds, other than for breach of contract, which
arise from conduct falling within the scope of the NFIP, are preempted. See, e.g., Ravasio v.
Fid. Nat’l Prop. & Cas. Ins. Co., 81 F. Supp. 3d 274, 280 (E.D.N.Y. 2015) (Spatt, J.) (expressly
rejecting the plaintiffs “extra-contractual requests for interest, costs, and attorneys’ fees”
because the NFIP “preempts state law claims for penalties and attorneys’ fees brought
against WYO insurance carriers participating in the” Program); see also Wing Bldg. Holding
Co. LLC v. Std. Fire Ins. Co., No. 1:13-cv-1007, 2015 U.S. Dist. LEXIS 17761, at *10 (N.D.N.Y.
Feb. 13, 2015) (rejecting proposed claims based on fraud and unfair claims settlement
practices because, under Article IX, “the SFIP preempts all state-law claims”); Southbridge
21 LLC v. Std Fire Ins. Co., No. 3:14-cv-374, 2014 U.S. Dist. LEXIS 128960, at *6-*12
(N.D.N.Y. Sept. 16, 2014) (dismissing claim based on an insurer’s alleged “willful and
negligent refusal to bargain in good faith”; noting that “[a]lthough the Second Circuit has
not spoken on this issue,” the weight of authority from other circuits holds that “absent
authorization by the NFIA and/or the SFIP, an insured may not assert extra-contractual
claims against a WYO company”).
The Court notes that the Plaintiff attempts to portray the relevant legal landscape as
being divided on this question. In this regard, he relies only upon a 2014 district court
decision from the District of Connecticut, which allowed an insured’s claims sounding in
negligent misrepresentation, breach of implied covenant of good faith and fair dealing, and
violations of Connecticut’s unfair trade practices statutes, to proceed against a WYO carrier.
See Ragusa Corp. v. Std. Fire Ins. Co., No. 3:12-cv-1609, 2014 U.S. Dist. LEXIS 40812, at *8*11 (D. Conn. Mar. 27, 2014). However, this decision has been recognized as “an outlier”
relative to the existing body of relevant caselaw, see Southbridge 21 LLC, 2014 U.S. Dist.
LEXIS 128960, at *10, and has not been cited as authoritative by any other court.
The Preemptive Effect of Complex Statutory Schemes
Although similar, the legal authority outlined above does not deal directly with the
question presented in this case – namely, whether the provisions of the NFIP preempt
claims based on violations of other federal statutes, including RICO, for conduct that falls
within its scope. The Defendants argue that it is logical to extend the holdings and
reasoning of those cases – which, in this Court’s view, represent a clear majority of federal
appellate authority – in order to conclude that the Plaintiff’s RICO claim in this case is
precluded. In further support of this theory, the Defendants rely on a line of cases holding
that, generally, a precisely-drawn, detailed statute will preempt more general remedies.
See, e.g., Hinck v. United States, 550 U.S. 501, 506 127 S. Ct. 2011, 167 L. Ed. 2d 888 (2007);
Brown v. GSA, 425 U.S. 820, 835, 96 S. Ct. 1961, 48 L. Ed. 2d 402 (1976). From this premise,
the Defendants argue persuasively that the complex regulatory scheme set forth in the
NFIP is not only intended to preempt state law remedies, but also to provide the exclusive
federal remedy for conduct falling within the Program’s scope.
For example, in Norman v. Niagara Mohawk Power Corp., 873 F.2d 634 (2d Cir.
1989), the Second Circuit considered whether an employee of a nuclear power plant could
maintain a RICO claim based on alleged misconduct by his employer. The court held that
he could not, given the clear Congressional intent that the federal Energy Reorganization
Act of 1974 (“ERA”) and its implementing regulations provide the exclusive remedy for
employee grievances of the type asserted by the plaintiff. In reaching this conclusion, the
court noted that “[a]rtful invocation” of the “ubiquitous” and “controversial” civil RICO
statute “[could not] conceal the reality that the gravamen of the complaint” was an
employment grievance falling squarely within the scope of the ERA. Id. at 637-38.
More recently, in DeSilva v. North Shore LIJ Health Systems ,Inc., 770 F. Supp. 2d 497
(E.D.N.Y. 2011), an overtime wage class action, the plaintiffs sued their employers under
the Fair Labor Standards Act (“FLSA”), the New York Labor Law (“NYLL”), the Employee
Retirement Income Security Act (“ERISA”), and RICO, in addition to numerous state
common law theories, including, among others, breach of contract, fraud, and negligent
misrepresentation. The district court (Bianco, J.) relied on Brown v. GSA, supra, “in which
the [Supreme] Court held that the ‘careful blend of administrative and judicial enforcement
powers’ set forth in Section 717 of the Civil Rights Act of 1964 led ‘unerringly to the
conclusion that [Section 717] . . . provides the exclusive judicial remedy for claims’ falling
within its scope.” Id. at 512 (quoting Brown, 425 U.S. at 833-35). Applying this reasoning,
the court found the plaintiffs’ RICO claim to be preempted by the “similarly detailed
statutory scheme” for addressing overtime violations set forth in the FLSA. See id. at 513.
In particular, owing in part to its own “careful blend of administrative and judicial
enforcement powers,” the Court held that, the FLSA “provides the exclusive remedy for
wage and hour violations that fall within the FLSA’s scope.” Id.
Just last month, a district court in the Southern District of New York considered
whether a fashion model could maintain claims against her modeling agency under the
FLSA, the Immigration and Nationality Act (“INA”), and RICO, arising from the employer’s
allegedly illegal labor practices. See Palmer v. Trump Model Mgmt., LLC, No. 14-cv-8307,
2016 U.S. Dist. LEXIS 51061 (S.D.N.Y. Mar. 23, 2016). The court dismissed the RICO claim
under Rule 12(b)(6), finding that the plaintiff’s claims were governed exclusively by the
provisions of the INA for redressing alleged labor violations. See id. at *12 (finding that
“[t]he RICO statute . . . is not the proper avenue for relief” because the INA “set forth the
specific administrative remedies available “ to her, which “indicate[s] Congress’ clear intent
to limit enforcement of alleged violations to administrative mechanisms before resort can
be had to a court action”). In particular, relying on Hinck, Brown, and their progeny, the
court stated that “[c]ourts in this Circuit have routinely precluded RICO claims where the
alleged conduct is already covered by a more detailed federal statute.” Id. at *12-*13 &
n.14 (collecting cases).
The Plaintiff’s reliance on cases suggesting that “one federal statute cannot preempt
another,” see, e.g., Proctor v. UPS, 502 F.3d 1200, 1205 n.2 (10th Cir. 2007) and Baker v.
IBP, Inc., 357 F.3d 685, 687-88 (7th Cir. 2004), is misplaced. It is true that principles of
federal preemption traditionally apply where, by operation of the Supremacy Clause,
federal laws render overlapping state laws ineffectual.
However, as the authorities
outlined above make clear, the legal concept of preemption is also routinely used to analyze
situations where a comprehensive statutory and regulatory scheme provides the exclusive
federal remedial mechanism for a class of potential claims. In this way, modern principles
of “preemption” may appropriately apply in the context of coordinate federate statutes.
The Court declines the Plaintiff’s invitation to rely strictly on the terminology used by the
Defendants in framing their argument – even if it is perhaps not literally or historically apt
– as the legal basis for the relief they seek is obvious.
Application to the Facts of this Case
Applying these standards, the Court is persuaded that the Plaintiff’s RICO claim is
precluded by the provisions of the NFIP, which provides the exclusive remedy for all claims
arising from a WYO carrier’s handling of claims under an SFIP.
Initially, there is no question that the allegations giving rise to Melanson’s complaint
relate directly to the adjustment, processing, and payment of his flood loss claim under the
Policy. Indeed, as outlined above, he alleges that Standard Insurance and its outside
contractors schemed to deliberately misevaluate the extent of the storm damage sustained
by the Long Beach Residence; artificially inflate the associated Recoverable Costs under the
Program; and ultimately underpay his claim for coverage.
To the extent that these
allegations are, at bottom, fundamentally related to the handling of his claim under the
SFIP, they fall comfortably within the purview of Article IX, which designates the remedial
mechanisms in the NFIP as the exclusive method of redress. See Moffett, 457 F. Supp. 2d at
580 (“[W]hat is apparent is that the challenged conduct centers around the adjustment of
the insured Plaintiffs’ flood loss claims. In other words, the thrust of both Counts III and IV
is that they relate to the handling of claims under the SFIP”) (emphasis in original) (internal
quotation marks omitted).
That being said, in the Court’s view, there is little room for disagreement on the law.
As discussed above, every circuit to have considered this question has come down on the
side of the Defendants in this case.
Although the leading cases deal only with the
preemptive effect of the NFIP on overlapping claims based on state and federal common
law theories, the Court discerns no principled basis – and the Plaintiff has not provided any
– for refusing to extend those holdings and their underlying rationale to the facts of this
case. Several relevant factors highlighted in the caselaw support this conclusion.
First, several courts have emphasized the need for uniformity of decision in cases
arising out of the handling of claims under the Program. See DeCosta v. Allstate Ins. Co.,
730 F.3d 76, 84 (1st Cir. 2013) (noting that “[t]he need for uniformity in federal law also
supports strict construction of the SFIP” and that “[s]uch uniformity provides clarity to the
numerous insurance companies issuing the bulk of insurance policies under the NFIP, as
well as the diverse jurisdictions inundated with flood insurance claims after these
disasters”); see also Jacobson, 672 F.3d at 175; C.E.R., 386 F.3d at 269; Gibson, 289 F.3d at
949; Flick v. Liberty Mut. Fire Ins. Co., 2045 F.3d 386, 930 (9th Cir. 2000) (“There is a
compelling interest in assuring uniformity of decision in cases involving the NFIP”)
(citation omitted), cert. denied, 531 U.S. 927, 121 S. Ct. 305, 148 L. Ed. 2d 245 (2000); West,
573 F.2d at 881.
In the Court’s view, it would be patently inconsistent with the federal government’s
overarching goal of promoting uniformity to disallow a wide range of tort and federal
common law claims arising out of claims handling activities by WYO carriers, only to
permit a civil RICO claim to proceed on the same underlying facts. If uniformity of decision
is truly to be achieved under the NFIP, Article IX must be recognized as limiting the
remedies available to policyholders to those expressly set forth in the Act. See C.E.R., 386
F.3d at 271 (“The efficiency goals of the Program[ ] would better be served by requiring
claimants to resolve their disputes by means of the remedies FEMA provides”).
Second, courts have repeatedly emphasized the harmful effect that duplicative flood
loss claims would have on the public fisc. Indeed, as the Court in C.E.R. noted, “[s]tate tort
suits against WYO companies, which are usually expensive, would undermine th[e] goal” of
“reduc[ing] the fiscal pressure on federal flood relief efforts,” which is “[i]ndisputably a
central purpose of the Program.” Id. at 270. In the Court’s view, there is no logical basis for
concluding that this concern is unique to state tort suits. In fact, the prospect of dissatisfied
insureds pursuing civil RICO actions against WYO companies and their outside contractors,
in which treble damages and other statutory forms of relief are authorized, would, in the
Court’s view, pose an equal, if not greater financial risk. This conclusion is supported by
the Fifth Circuit’s observation in Wright II that “[s]ubjecting the government to extracontractual claims on flood insurance policies would increase rather than confine the
burdens on the federal government and the federal fisc that the NFIA was created to
mitigate.” 500 F.3d at 397. Although stated in dicta, this admonition is not limited in scope
to state tort claims – rather, it recognizes that any extra-contractual claims on flood
insurance policies would burden the system.
This point leads to the third relevant factor in the Court’s analysis, namely, that
courts to consider this issue have consistently implied that the preemptive effect of the
NFIP is not limited to state law claims. In this regard, the Court is persuaded by the Fifth
Circuit’s preemption analysis in Wright II, in which it found that “nowhere in the NFIA or
the SFIP does Congress explicitly reference any right of a policyholder to bring extracontractual claims against a WYO insurer” and that the reference to federal common law in
Article IX “does not confer on policyholders the right to assert extra-contractual claims
against WYO insurers – which claims, if successful, would likely be paid with government
funds.” Id. at 394.
In the Court’s view, the use of the term “extra-contractual” in Wright and other
subsequent cases, see, e.g., Gunter, 736 F.3d at 773, Ravasio, 81 F. Supp. 3d at 280, is
reasonably interpreted as referring to any claim – whether grounded in state or federal
law, statute or common law – other than one based on breach of contract, which Congress
saw fit to explicitly provide in the Act, see Gunter, 736 F.3d at 773 (recognizing that “[t]he
NFIP specifically allows a policyholder to sue a WYO insurer for breach of contract”);
Wright II, 500 F.3d at 394 (noting that the “NFIA does allow a policyholder to sue a WYO
insurer for amounts due under the contract”). Again, this view is buttressed by the court’s
reasoning in Wright II, namely, its inability to identify any basis “in the legislative history
[of the Act] or elsewhere that Congress intended to create or permit additional causes of
action” other than those deliberately written into the statute. 500 F.3d at 397 (“We deem it
significant that Congress expressly provided a private remedy for policyholders in
42 U.S.C. §§ 4053 and 4072”).
Finally, the Court is persuaded by the line of cases, exemplified by the Second
Circuit’s opinion in Norman, which hold that civil RICO claims are precluded where the
challenged conduct is already covered by a more comprehensive and specialized federal
statute. See Palmer, 2016 U.S. Dist. LEXIS 51061, at n.14 (observing that courts in the
Second Circuit “routinely preclude[ ] RICO claims where the alleged conduct is already
covered by a more detailed federal statute”). This rule has direct application in the context
of the NFIP because “Congress and FEMA have regulated the claims adjustment process
and judicial review of coverage claims under flood insurance policies.” Gibson, 289 F.3d at
949. Thus, all material aspects of the flood insurance industry – from the unalterable terms
and conditions of flood loss policies, to the structure of a reimbursement system “devised
to minimize the risk that the carriers might be inclined to undervalue claims,” Moffett, 457
F. Supp. 2d at 574, to the timing and manner in which an aggrieved policyholder may seek
redress – are scrupulously prescribed in the statute.
Under the relevant caselaw, this “careful blend of administrative and judicial
enforcement powers” would ordinarily be sufficient to confer upon the NFIP primacy over
other forms of relief with respect to claims handling disputes. See DeSilva, 770 F. Supp. 2d
at 512. However, Congress saw fit to go a step further and amend the Act in order to make
more explicit in the text of Article IX that “all disputes arising from the handling of any
claim under [an SFIP] are governed exclusively by the flood insurance regulations issued by
FEMA, the National Flood Insurance Act of 1968, as amended, and Federal common law.”
In the Court’s view, this reflects a clear legislative intent to limit the available remedies to
policyholders for claims under the Program, and the Plaintiff’s “[a]rtful invocation” of the
“ubiquitous” and “controversial” civil RICO statute “cannot conceal the reality that the
gravamen of the complaint” is a claims handling dispute falling squarely within the scope of
the NFIP. Norman, 873 F.2d at 637-38.
For these reasons, the Court finds that “[t]he RICO statute . . . is not the proper
avenue for relief.” Palmer, 2016 U.S. Dist. LEXIS 51061, at *12. In reaching this conclusion,
the Court rejects the Plaintiff’s argument that the allegations giving rise to his RICO claim
do not actually fall within the purview of the NFIA – and are therefore not preempted –
because, to the extent they allege criminal conduct, they are outside the scope of the WYO
carrier’s agreement with FEMA.
In support of this argument, Melanson relies on a FEMA regulation titled “Loss
Payments,” which provides, in relevant part, that the federal government will not defend or
indemnify WYO insurers for litigation expenses if “the litigation is grounded in actions by
the [WYO] Company that are significantly outside the scope of th[e] [NFIP] Arrangement,
and/or involves issues of agent negligence.” 44 C.F.R., Part 62, App. A(1), Art. III(D)(3)(a).
According to the Plaintiff, this provision of the NFIP – which apparently contemplates a
WYO carrier incurring litigation costs that are not reimbursable because they arise from
conduct, such as negligence, which is outside the scope of the Program – “would be
superfluous if lawsuits arising from those actions were barred.” The Court disagrees.
Contrary to the Plaintiff’s interpretation, the “Loss Payments” regulation is simply a
cost-shifting provision, which authorizes FEMA, under narrow circumstances, and in its
sole discretion, to shift the cost of defending an action under the Program from the
government to the private carrier. There is no reasoned basis for concluding that this
regulation overrides or circumscribes the express limitation of liability contained in Article
IX, or otherwise expands the substantive remedies available to policyholders beyond the
contractual remedy prescribed in the Act.
Under the Plaintiff’s theory, any time a policyholder unilaterally accused a WYO
carrier of negligently adjusting or handling a claim, or otherwise engaging in conduct that
was outside the scope of the NFIP arrangement, the carrier would lose the broader benefits
and protections of the Program, including the explicit limitation of liability contained in
Article IX. In the Court’s view, such a result would impede, rather than further the goals of
As discussed above, courts and Congress have deemed it inefficient to expose WYO
carriers to extra-contractual liability arising from their administration of the Program,
including, specifically, their claims handling activities. See, e.g., Wright II, 500 F.3d at 397.
Indeed, the Program’s subsidized reimbursement arrangement incentivizes private
insurance companies to provide affordable flood loss coverage, and effectively sustains the
existence of a national flood insurance industry, which otherwise might not be feasible. See
C.E.R., 386 F.3d at 270 (speculating that if FEMA refused to reimburse WYO carriers for
their defense costs, “insurers would leave the Program, driving the price of insurance
higher”); Moffett, 457 F. Supp. 2d at 586 (observing that if FEMA regularly declined to
reimburse litigation costs, “WYO carriers might well leave the Program in droves”); cf.
Jacobson, 672 F.3d at 174 (noting that “many factors have made it uneconomic for the
private insurance industry alone to make flood insurance available to those in need of such
protection on reasonable terms and conditions”).
In the Court’s view, the “Loss Payments” regulation does not, as the Plaintiff
contends, supplant Article IX’s limitation of liability by removing from the Program’s
embrace any carrier who is alleged to have acted negligently or outside the scope of the
NFIP arrangement. Rather, consistent with the governmental interest in safeguarding the
federal Treasury, see C.E.R., 386 F.3d at 271 (finding it relevant that “FEMA ordinarily will
be responsible financially for the costs of defending a lawsuit against a WYO company”)
and Wright II, 500 F.3d at 394 (emphasizing that successful extra-contractual claims
“would likely be paid with government funds”), the “Loss Payments” regulation is simply
meant to invest FEMA with the discretion to withhold or deprioritize the use of taxpayer
dollars for certain categories of claims in administering the Program.
Instructive on this point is Moffett, supra, in which substantially the same argument,
based on the same regulation, was made by the plaintiffs with respect to tort claims based
on procurement and adjustment fraud under state law. In particular, similar to Melanson,
the plaintiffs in that case argued that:
“[I]f the accused activity [i.e., procurement fraud, adjustment fraud, and
tortious interference] is outside the scope of the authorized arrangement
between the accused party and FEMA, rather than under the policy, there [is]
no express or field preemption of any kind.” And in this case, say Plaintiffs,
Defendants conspired “to act completely outside the scope of their authority
under the NFIP” by carrying out an “ ‘in-place’ comprehensive scheme” to
deny them the benefits of their SFIPs, a conspiracy starting with FEMA at the
top and running all the way down to the independent adjusters.
See Moffett, 457 F. Supp. 2d at 586.
The district court rejected this argument, noting that it is the sole province of FEMA
and the Federal Insurance Administrator to determine what actions are significantly
outside the scope of the NFIP arrangement and/or involve agent negligence.
See id. at
586-87 (“The regulation leaves the definition of what is within and without the
Arrangement to FEMA’s General Counsel”). If, as the Plaintiff in this case contends, the
“determination of what is ‘significantly outside the scope of the Arrangement’ or agent
negligence were left to the pleader, FEMA would ostensibly be obliged to decline to
reimburse any activity that the pleader might assert in a complaint was ‘significantly
outside the scope of the Arrangement’ or that arguably amounted to agent negligence.” Id.
at 287. Indeed, the court in Moffett observed that, as in this case, “[e]very time an
aggrieved insured might use these magic words, the WYO carrier would be left to twist in
the wind. This would obviously not be in the best interest of the NFIP; WYO carriers might
well leave the Program in droves.” Id.
The Court finds the reasoning in Moffett to be persuasive. Although the Plaintiff in
this case characterizes the Defendants’ conduct in such a way as to cast it far outside the
scope of the NFIP arrangement, see, e.g., Pl. Opp., DE , at 9 (“If conspiring to defraud
policyholders by forging engineering reports is not significantly outside the scope of the
WYO carriers’ fiscal agency, it is difficult to imagine what would be”), the Plaintiff has no
authority to make such a determination. As noted by the court in Moffett, the regulation
relied upon by the Plaintiff is triggered only after “the FEMA OCC finds that the litigation is
grounded in actions by the Company that are significantly outside the scope of th[e]
Arrangement.” Id. at 586 (quoting 44 C.F.R., Part 62, App. A, Art. III(D)(3)(a)) (emphasis in
original). And even then, it only operates to make the carrier responsible for bearing its
own costs, not to expose it to unlimited liability.
In any event, in this case, there is no allegation that FEMA has made any such
finding; that it has declined to defend this action; or that any other rational basis exists for
treating this action as outside the scope of the relevant NFIP agreement. In the Court’s
view, this result is particularly warranted since the Plaintiff’s factual allegations, assuming
them to be true, relate clearly to a claims handling dispute, which under Article IX is
redressable only through a contract claim. The Plaintiff’s conclusory allegations of fraud
and forgery do not require a different result.
Further, the Plaintiff’s reliance on Houck v. State Farm Fire and Casualty Co., 194
F. Supp. 2d 452 (D.S.C. 2002), which dealt primarily with allegations of procurement fraud,
and not with any dispute arising from the adjustment and payment of a flood loss claim,
does not alter the Court’s reasoning.
Accordingly, the Court grants the motions to dismiss by US Forensic, Bell, Zeng,
Standard Insurance, and National Flood Service to the extent that they seek to dismiss the
Plaintiff’s civil RICO claim as being preempted by the NFIP. The Court’s reasoning in this
regard applies with equal force to each of the named Defendants in this action, and the
Plaintiff’s First Cause of Action is therefore dismissed in its entirety. Having so held, the
Court need not reach the Defendants’ remaining contentions directed at the RICO claim.
Further, the Court denies the Plaintiff’s request for leave to amend the complaint at
this juncture, as it is procedurally improper. See Garnett-Bishop v. N.Y. Cmty. Bancorp, Inc.,
No. 12-cv-2285, 2014 U.S. Dist. LEXIS 157806, at *13-*14 (E.D.N.Y. Nov 6, 2014) (Spatt, J.)
(“[N]umerous courts have held that a bare request to amend a pleading contained in a
brief, which does not also attach the proposed amended pleading, is improper under Fed.
R. Civ. P. 15”) (citing Curry v. Campbell, No. 06-cv-2841, 2012 U.S. Dist. LEXIS 40341, at *22
(E.D.N.Y. Mar. 23, 2012) (“To satisfy the requirement of particular[it]y in a motion to
amend a pleading, the proposed amended pleading must accompany the motion so that
both the Court and opposing parties can understand the exact changes sought”); Evans v.
Pearson Enters., Inc., 434 F.3d 839, 853 (6th Cir. 2006) (“We agree with several of our
sister circuits that a bare request in an opposition to a motion to dismiss—without any
indication of the particular grounds on which amendment is sought . . . —does not
constitute a motion within the contemplation of Rule 15(a)”)). This ruling is made without
prejudice to the Plaintiff’s renewal of his request as a formal motion under Rule 15(a).
As to Whether the Plaintiff’s Breach of Contract Claim is Time-Barred
As noted above, Standard Insurance also seeks to dismiss the Plaintiff’s Second
Cause of Action, based on breach of contract, on the ground that it is time-barred. In
particular, Standard Insurance relies upon the statute of limitations contained in the SFIP,
which states, in relevant part, that an action to recover monetary damages under the Policy
must be commenced “within one year after the date of the written denial of all or part of
the claim.” See 44 C.F.R., Part 61, App. A(1), Art. VII(R). In this regard, Standard Insurance
further relies upon a December 6, 2013 letter, in which it advised Melanson that his claim
for coverage under the Policy was partially denied. See Compl. Ex. “6.” Thus, because this
action was commenced on July 8, 2015, i.e., more than one year after the carrier provided
written notice of its denial of coverage, Standard Insurance argues that this matter is timebarred.
The Plaintiff failed to respond to this contention in his opposition to the motion to
dismiss, and therefore, is deemed to have abandoned the breach of contract claim. See
Thomas v. N.Y.C. Dep’t of Educ., 938 F. Supp. 2d 334, 354 (E.D.N.Y. 2013); see also Gorfinkel
v. Vayntrub, No. 13-cv-3093, 2014 U.S. Dist. LEXIS 116313, at *13 (E.D.N.Y. Aug. 20, 2014);
Alzheimer’s Disease Res. Ctr., Inc. v. Alzheimer’s Disease & Related Disorders Ass’n, 981
F. Supp. 2d 153, 163 (E.D.N.Y. 2013); Hardy v. City of New York, 732 F. Supp. 2d 112, 12526 (E.D.N.Y. 2010); Blake v. Race, 487 F. Supp. 2d 187, 217 (E.D.N.Y. 2007).
In any event – and particularly in the absence of any argument to the contrary – the
Court discerns no substantial basis for finding that this action is timely. The plain language
of the SFIP establishes a one-year statute of limitations for policyholders to commence an
action, running from the date on which the insured received a written denial of his claim.
In this case, the evidence annexed to the Plaintiff’s complaint indicates that he received
notice of Standard Insurance’s intention to partially disclaim coverage on December 6,
2013, but did not commence this action until July 8, 2015, more than one year later.
The Court notes that, in his complaint, the Plaintiff alleges that:
After revelations of widespread fraud in the claims handling processes
following Hurricane Sandy, FEMA waived its proof of loss requirement by
reopening all Hurricane Sandy claims, including Plaintiff’s. Beginning on or
about May 18, 2015, FEMA sent letters to all 144,000 Sandy claimants,
including Plaintiff, informing them of the claims reopen process and giving
them the opportunity to submit additional evidence in proof of loss of their
claim. FEMA is allowing claimants the opportunity to request an additional
inspection by an adjuster or an engineer, if required. The NFIP’s reopening
of all Hurricane Sandy cases has at least extended the time for Plaintiff to
present evidence of flood damage ignored or wrongfully denied by Standard
Fire (and other WYO carriers) and claim additional Policy proceeds to which
he is entitled. Accordingly, the deadline for Plaintiff to seek redress from the
Court for Defendants’ wrongful conduct has also been restarted, or at least
Compl. ¶ 72.
The alleged correspondence referenced in this paragraph is not annexed to the
complaint. However, the Court finds that this allegation, even if taken as true, is insufficient
to justify tolling the statute of limitations.
A similar issue arose in the case of the Wagner v. Director of FEMA, 847 F.2d 515,
521 (9th Cir. 1988), where the court held that “[o]nce FEMA has triggered a statute of
limitations by issuing a denial, reconsideration of that denial or responding to further
inquiries about the case has no effect on the running of the limitations period. Only where
the Federal Insurance Administrator expressly and in writing sets aside the previous
disallowance of a plaintiff’s claim does a new limitations period commence upon a
subsequent denial of the claim.” In this case, the Plaintiff does not allege that the Federal
Insurance Administrator expressly and in writing set aside the initial denial of coverage by
Standard Insurance. Nor does he allege that, upon submission of additional information,
his renewed claim for flood loss coverage was denied a second time, thus commencing a
new limitations period. Under these circumstances, the Court is of the view that the
present action was commenced beyond the expiration of the statutory limitations period,
Accordingly, the Court grants the motion to dismiss by Standard Insurance to the
extent that it seeks to dismiss the Plaintiff’s Second Cause of Action as time-barred.
Based on the foregoing, the Court grants the Defendants’ motions to dismiss the
Plaintiff’s complaint in its entirety.
Further, the Plaintiff’s request for leave to amend the complaint is denied without
prejudice to renewal as a formal motion in accordance with Fed. R. Civ. P. 15, the Local Civil
Rules of the Eastern District of New York, and this Court’s Individual Rules of Practice. Any
such motion to amend shall be filed within 60 days of the date of this order.
It is SO ORDERED
Dated: Central Islip, New York
April 30, 2016
/s/ Arthur D. Spatt____________________________________________
ARTHUR D. SPATT
United States District Judge
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