Normal Legal Principles May Not Apply With Government Backed Insurance Programs

Reynolds v. Southern Farm Bureau Cas. Ins. Co., #SA-06-CV-0700 RF (W.D. Tex. March 13, 2008)

This flood insurance case stands in bold contrast to the last case I described illustrating courts' aversion to the often harsh effects of absolute legal forfeitures.  See Conditions Precedent Continue Under Attack in Insurance Policies.  But the law can be a tricky thing, as the Reynolds case shows.  "Estoppel," not condition precedent, is the legal principle at stake in Reynolds.  Estoppel, as my contracts law professor explained, means nothing more than "shut up!" and bars a party from asserting an otherwise valid legal right under a contract based on that party's earlier conduct inconsistent with that right and the other party's reliance on that conduct.  Example:  The policy requires submission of of proof of loss within 60 days after loss.  Insured asks for a week extension, and the insurer agrees.  The insurer will normally be estopped from enforcing the 60 day deadline based on its earlier indication that it would grant the request for an extension.  In other words, the court will tell the insurer, "shut up" if the insurer tries to assert its legal right to enforce the deadline.

The facts in Reynold are a little more complicated.  in fact, it's hard to see that the insured was treated unfairly, but, as the court observed, it would come to the same result even if the equities tilted dramatically in the insured's favor.  The Reynolds purchased flood insurance under the National Flood Insurance Program (NFIP) for their vacation home.  The floods came -- twice.  After the first flood in 2002, the insureds submitted their proof of loss for the flood damage a couple of months after the 60 day deadline.  However, FEMA granted a waiver, and the Reynolds' claim of $16,000 was paid.

The same home was damaged again after a 2004 flood, a claim for which was again paid under the policy.  However, the Reynolds also submitted an additional proof of loss for more than $40,000 for unreported repairs resulting form the 2002 flood.  FEMA refused to waive the 60 day deadline for these damages, and the Reynolds cried foul: Insurer should be estopped based on its earlier waiver of the deadline.

Under these facts, a court might not have applied estoppel in any case, particularly since the reason given for the refusal was not the 2-year delay but that the repairs were done before any investigation could be made.  But that is not the point.  Let's assume the fact pattern that I stated above.  60 day deadline--insurer agrees in writing to a week's extension--insured relies on the extension and files a week late--insurer denies.  A court would reach the same result under those facts as in the Reynolds case in the absence of FEMA's written acceptance of the extension.

Why FEMA?  The NFIP is a government-backed program under which private insurance companies issue flood policies that are underwritten by the federal government and administered by FEMA.  That makes all the difference.  The normal principles of law and equity that allow courts to bend conditions precedent to favor coverage or shut up insurers that try to assert policy defenses unfairly have no effect before the federal government because of Constitutional reservation and separation of powers.  As the Reynolds court observed (quoting Growland v. Aetna, 143 F.3d 951 (5th Cir. 1998):

When federal funds are involved, the judiciary is powerless to uphold a claim of estoppel because such a holding would encroach upon the appropriation power granted exclusively to Congress by the Constitution.  "Any exercise of power granted by the Constitution to one of the other branches of Government is limited by a valid reservation of congressional control over funds in the Treasury." (citation omitted)

Pretty scary stuff for a homeowner without a law degree (or even with a law degree).  In this case FEMA probably acted fairly.  But even if it acted unfairly, the courts would not interfere.  The lesson is this:  when dealing with a contract with, or backed by, the federal government, authorized approval is crucial.  The adjuster or the insurance company may not, and probably does not, have authority to bind the government.  Any deviation from the terms of the flood policy should be pre-approved by the authorized federal agent.  Who is that?  I don't know.  You might get approval from a FEMA representative, only to learn later that her boss now says she didn't have the authority to grant the approval.  I can only say that right now Michael Chertoff has the requisite authority.