Padalino v. Standard Fire Ins. Co.

616 F.Supp.2d 538

Lawrence PADALINO, et al. v. The STANDARD FIRE INSURANCE COMPANY, et al.

Civil Action No. 2:08-cv-01553.

United States District Court, E.D. Pennsylvania.

October 15, 2008.

Richard K. Hohn, Hohn & Scheuerle, Philadelphia, PA, for Lawrence Padalino, et al.

Neal Robert Troum, Stradley Ronon Stevens & Young, Denis C. Dice, Joel Matthew Wertman, Marshall Dennehey Warner Coleman & Goggin, Philadelphia, PA, for The Standard Fire Insurance Company, et al.

MEMORANDUM

LEGROME D. DAVIS, District Judge.

Presently before the Court are Defendant WNC First Insurance Services' Motion to Dismiss Plaintiffs' Complaint (Doc. No. 5), Plaintiffs' Response in opposition (Doc. No. 11), Defendant WNC First Insurance Services' Reply thereto (Doc. No. 16), Defendant The Standard Fire Insurance Company's Motion to Dismiss (Doc. No. 7), Plaintiffs' Response in opposition (Doc. No. 10), and Defendant The Standard Fire Insurance Company's Reply thereto (Doc. No. 12). For the reasons set forth below, the Motion by Defendant WNC First Insurance Services is denied, and the Motion by Defendant The Standard Fire Insurance Company is granted in part and denied in part.

I. FACTUAL BACKGROUND

In 2004, Plaintiffs Lawrence and Hope Padalino sought to purchase two plots of land in Accomack County, Virginia. Before making the purchase, Plaintiffs contacted Defendant WNC First Insurance Services ("WNC First"), an insurance broker serving as an agent for Defendant The Standard Fire Insurance Company ("Standard Fire"), to inquire into flood insurance coverage for the property. Following this conversation, Plaintiffs decided to purchase the two Virginia lots and insure the properties against flood damage through Defendant Standard Fire.

When a storm flooded the Virginia lots on September 1, 2006, Plaintiffs submitted a claim to Standard Fire for the flood damage to the properties. Defendant Standard Fire denied Plaintiffs' claim on November 27, 2006, for failure to submit a documented proof of loss within sixty days of the loss. (Def. WNC First's Mot. Dismiss, Ex. A.) When Plaintiffs submitted additional information related to their claim, Defendant Standard Fire responded with a letter on January 25, 2007, giving two reasons for their decision to deny the claim. (Id.) First, Standard Fire re-asserted Plaintiffs' failure to submit a documented proof of loss within the allotted time. (Id.) Second, Standard Fire stated that the issuance of payment under the policy was not authorized because Plaintiffs' properties were ineligible for flood insurance under federal law. (Id.) Specifically, the letter referenced the National Flood Insurance Program's ("NFIP") policy prohibiting insurance coverage of buildings within areas subject to the Coastal Barrier Resources Act ("CBRA"). (Id.) Because Plaintiffs' properties fell within these coastal barrier areas, the letter continued, Plaintiffs' policy was "void[] back to [its] original inception." (Id.) Defendant Standard Fire consequently denied Plaintiffs' claim and returned their premiums.

After receiving this letter, Plaintiffs filed suit against Defendants in this Court on April 1, 2008, seeking redress, not for Defendants' refusal to issue payment on Plaintiffs' flood claim, but for the Defendants' conduct during policy procurement. (Compl. ¶¶ 14-21.) In their complaint, Plaintiffs assert the following causes of action: fraud, negligence, negligent misrepresentation, breach of contract, breach of implied warranty, violations of the Pennsylvania Unfair Insurance Practices Act, 40 P.S. Section 1171, et seq., and violations of the Pennsylvania bad faith statute, 42 Pa. Cons.Stat. Ann. Section 8371. (Id.) Defendants now bring separate motions to dismiss the complaint.

II. LEGAL STANDARD

When evaluating a motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(6), we must accept as true all factual allegations set forth in the complaint. See Fed.R.Civ.P. 12(b)(6); Malia v. General Electric Co., 23 F.3d 828, 830 (3d Cir.1994). However, "[f]actual allegations must be enough to raise a right to relief above the speculative level," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007), and a court "need not credit a complaint's `bald assertions' or `legal conclusions.'" Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993) (internal quotation marks omitted). In other words, "`stating ... a claim requires a complaint with enough factual matter (taken as true) to suggest' the required element." Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir.2008) (quoting Twombly, 127 S.Ct. 1955, 1965 (2007)) (ellipses in original). Therefore, a claim may be dismissed when the facts alleged and the reasonable inferences drawn therefrom are legally insufficient to support the relief sought. See Pennsylvania ex rel. Zimmerman v. PepsiCo, Inc., 836 F.2d 173, 179-80 (3d Cir.1988).

III. DISCUSSION

The Defendants in this case raise several arguments in their separate motions to dismiss. Defendant WNC First argues that the National Flood Insurance Act (NFIA), which established the NFIP, acts to preempt Plaintiffs' claims, all of which are based in state law. While Defendant WNC First makes a general attack on all of Plaintiffs' causes of action, Defendant Standard Fire makes specific challenges to each category of Plaintiffs' claims. Defendant Standard Fire asserts that Plaintiffs' tort claims are barred by the statute of limitations, that Plaintiffs' claims under the Unfair Insurance Practices Act, 40 P.S. Section 1171, et seq., are barred because there is no private right of action under that Act, that Plaintiffs' claims under the Pennsylvania bad faith statute, 42 Pa. Cons.Stat. Ann. Section 8371, are barred because Plaintiffs failed to allege bad faith in claim handling, that Plaintiffs' breach of contract claim is barred by Pennsylvania's "gist of the action" doctrine, and that Plaintiffs' breach of implied warranty claim is preempted by the NFIA. We will address each of these challenges in turn.

1. Preemption by the NFIP

The NFIP is a federally subsidized flood insurance program established by the NFIA and administered by the Federal Emergency Management Agency ("FEMA"). 42 U.S.C. § 4011. Congress created this program in order to address the inability of the "private insurance industry alone to make flood insurance available to those in need of such protection on reasonable terms and conditions." 42 U.S.C. § 4001(b). While payment of all flood insurance claims is made out of the National Flood Insurance Fund of the U.S. Treasury, FEMA has authorized private insurers (such as Defendant Standard Fire) to issue Standard Flood Insurance Policies (SFIPs) that comply with federal law. 42 U.S.C. §§ 4017(a), 4051; 44 C.F.R. § 61.13(f). These private insurers are known as "Write Your Own" ("WYO") insurance companies and may not alter, amend, or waive the codified terms of SFIPs without prior government approval. 44 C.F.R. §§ 61.4(b), 61.13(d), 61.13(f). WYO insurers are reimbursed for all "cost incurred in the adjustment and payment of any claims for losses," 42 U.S.C. § 4017(d)(1), as well as any litigation expenses associated with defending claims. 44 C.F.R. pt. 2, app. A, art. III(D)(2).

Defendant WNC First asserts in its motion to dismiss that all state law claims are preempted by the NFIA and that therefore all of Plaintiffs' claims should be dismissed. (Def. WNC First's Mot. Dismiss, 3-5.) There are two flaws in WNC First's argument. First, the scope of NFIA preemption does not extend to the types of claims brought by Plaintiffs. While courts have generally recognized that the NFIA preempts state law remedies involving coverage or claims handling disputes, they have not held that the NFIA preempts state law remedies involving SFIP procurement. Second, even if the NFIA did preempt the types of claims raised by Plaintiffs, the NFIA does not have any preemptive force where an insured has no valid SFIP under federal law.

We will first address the scope of NFIA preemption. In C.E.R.1988, Inc. v. The Aetna Casualty and Surety Co., the Court of Appeals for the Third Circuit decided that the NFIA preempted state law claims that are based on the handling and adjustment of a claim made under an insured's SFIP because the "application of state law would impede Congress's objectives" in reducing "fiscal pressure on federal flood relief efforts." 386 F.3d 263, 270 (3d Cir.2004). The Third Circuit however has not dealt with the preemption issue in a case involving misrepresentations made during the procurement of a SFIP. See id. at 271 n. 12 ("We need not decide today whether a case alleging misrepresentation in claims procurement would also be preempted.").

Many courts have recognized this distinction between claims handling and policy procurement when dealing with questions of NFIA preemption. See, e.g., Spence v. Omaha Indem. Ins. Co., 996 F.2d 793, 796 (5th Cir.1993) (finding that the legislative purposes behind the NFIP that impel the "conclusion that federal common law governs claims under flood insurance policies ... do[] not apply in actions for tortious misrepresentation against WYO insurers"); Reeder v. Nationwide Mut. Fire Ins., 419 F.Supp.2d 750, 761 (D.Md.2006) (holding that "state law tort claims arising out of alleged misrepresentations made during the procurement of an SFIP are not preempted"); Messa v. Omaha Prop. & Cas., 122 F.Supp.2d 513, 521 (D.N.J.2000) (noting that "policy procurement is an entirely different creature than claims handling"). Other courts have decided not to apply such a distinction. See, e.g., Moffett v. Computer Scis. Corp., 457 F.Supp.2d 571, 588 (D.Md.2006) (holding that "the argument for conflict preemption as to procurement fraud claims [is] no less persuasive than the argument for conflict preemption of claims handling fraud"); Scritchfield v. Mut. of Omaha Ins. Co., 341 F.Supp.2d 675, 680 (E.D.Tex.2004) (findi...