Residences At Bay Point Condo. Ass'n, Inc. v. Chernoff Diamond & Co.

THE RESIDENCES AT BAY POINT CONDOMINIUM ASSOCIATION, INC., Plaintiff, v. CHERNOFF DIAMOND & CO., LLC, et al., Defendants.

Civil Action No. 16-5190

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

April 13, 2017

NOT FOR PUBLICATION

OPINION

This matter comes before the Court by way of Defendant Standard Fire Insurance Company's ("Standard") motions to dismiss Defendant/Third-Party Plaintiff Chernoff Diamond & Co. LLC's ("Chernoff") Third-Party Complaint and Defendants/Crossclaimants the Residences at Bay Point, LLC, Albert Dweck and David Schwartz's (the "Sponsors") Cross Complaint pursuant to Fed. R. Civ. P. 12(b)(6). Dkt. Nos. 6, 8. For the reasons set forth below, the motions are GRANTED.

I. BACKGROUND

This insurance dispute arises from damages Plaintiff Residence at Bay Point Condominium Association, Inc. ("Bay Point") sustained during Superstorm Sandy. After unsuccessfully asserting claims against insurer Standard in a prior action in this Court, Bay Point filed suit against its broker, Chernoff, and Sponsors in New Jersey Superior Court, Ocean County. Chernoff and Sponsors then filed a third-party complaint and crossclaims against Standard, which Standard has moved to dismiss.

A. The Policies

Bay Point is the manager of a Point Pleasant Beach, New Jersey condominium complex called the Residences at Bay Point (the "Residences"), which was damaged by Superstorm Sandy on or around October 29, 2012. Chernoff Compl. ¶ 12, Dkt. No. 1-3. Since 2007, Bay Point purchased Flood Insurance Policies (the "Policies") from Standard that were authorized by the Federal Emergency Management Agency ("FEMA"). Id. ¶ 14. At all relevant times, Standard was authorized to issue flood insurance policies through FEMA's Write Your Own ("WYO") program. Id.

Bay Point's initial Policies with Standard were written on the National Flood Insurance Program ("NFIP") General Property Form, which provides coverage on an actual cash value basis. Id. ¶ 15. In or around 2008, Chernoff became the broker of record in connection with the Policies, which were renewed without change. Id. ¶ 16. In 2009, after the Residences became a condominium, it requested that the Policies be amended to provide for reimbursement on a replacement cost basis. Id. ¶ 17. So Chernoff submitted an application to Standard for the policy to be written on the NFIP Residential Condominium Building Association Policy ("RCBAP") form, which provides coverage on a replacement cost basis. Id. ¶ 18. Standard made the requested change. Id. ¶ 19.

Subsequently, Bay Point informed Chernoff that it no longer wanted coverage using the RCBAP form. Id. ¶ 19. Chernoff informed Standard of the requested change, and Standard then re-wrote the coverage back to the General Property Form. Id. ¶ 24-25. Chernoff alleges that Standard failed to advise Chernoff that the RCBAP form was required for the Property, pursuant to FEMA regulations, and that the General Property Form was therefore inappropriate for the Property. Id. ¶ 26-27.

B. Superstorm Sandy Loss

On or around October 29, 2012, the Property was damaged by Superstorm Sandy. Bay Point submitted claims to Standard under the Policies in connection with its loss. Id. ¶ 38-39. Chernoff alleges that in response—for the first time—Standard informed Bay Point that the Policies were wrongfully written on the General Property Form, and should have been written on an RCBAP form. Id. ¶ 40. Accordingly, Standard reformed the policy to the RCBAP form, and applied a co-insurance policy to the loss. Id. ¶ 43. Bay Point alleges that the application of the co-insurance penalty resulted in a recovery that "did not offer adequate or fair compensation for the damages caused by the storm." Bay Point Compl. ¶ 21, Dkt. No. 1-1. Specifically, Bay Point alleges that it was penalized $361,696.87 in co-insurance fees. Id. ¶ 23.

C. Procedural History

The sequence of events leading to the instant motions before the Court began in 2013 when Bay Point filed a lawsuit in this Court against Standard, Chernoff, and Sponsors. Bay Point asserted a federal contract claim and state negligence and fraud claims arising from Standard's reformation of the Policies and subsequent application of co-insurance penalties to its Superstorm Sandy loss. Id. ¶ 3.

In an opinion and order dated December 4, 2013, the Hon. Freda Wolfson, U.S.D.J., dismissed the federal contract claims against Standard as to two of the four allegedly damaged buildings, holding that Standard was correct to use the RCBAP form and apply the co-insurance penalty. See Residences at Bay Point Condominium Ass'n, Inc. v. Standard Fire Ins. Co. et al., No. 13-02380, 2013 WL 6252692 (D.N.J. Dec. 4, 2014) ("Bay Point I"). The Court also dismissed Bay Point's negligence and fraud claims as preempted by the National Flood Insurance Act. Id. at *16. Following the filing of an Amended Complaint, the Court dismissed the federal contractclaims as to the two remaining buildings. See Residences at Bay Point Condominium Ass'n, Inc. v. Standard Fire Ins. Co. et al., 41 F. Supp. 3d 427 (D.N.J. 2014) ("Bay Point II"). The Court declined to exercise supplemental jurisdiction over the state law claims against Chernoff and Sponsors. Id. at 442. Instead of pursuing an appeal of the District Court's decision, Plaintiff Bay Point initiated a separate lawsuit solely naming Chernoff and Sponsors in New Jersey Superior Court, Ocean County in September 2014. See Bay Point Compl., Dkt. No. 1-1.

Meanwhile, Chernoff appealed Bay Point I and Bay Point II. The Third Circuit dismissed Chernoff's appeal, holding that it lacked standing because it had not asserted claims against Standard in the District Court action. Residences at Bay Point Condominium Ass'n, Inc. v. Standard Fire Ins. Co. et al., 641 Fed. App'x 181, 184 (3d Cir. 2016).

Following the Third Circuit's dismissal, Chernoff filed a Third-Party Complaint in the New Jersey Superior Court action, asserting various state claims against Standard and FEMA. See Chernoff Compl. These claims include: (1) negligence; (2) common-law contribution and indemnification; (3) joint tortfeasor's contribution; (4) apportionment of liability; (5) equitable estoppel; (6) declaratory judgment that Standard improperly applied the co-insurance deductible; and (7) statutory indemnification. Id. ¶¶ 51-81. Chernoff seeks recovery for the costs associated with defending Bay Point I and Bay Point II, and the costs of prosecuting the third-party action. Id. ¶ 54.

Sponsors then filed a crossclaim against Standard and FEMA, asserting claims for: (1) common law indemnification or contribution; (2) joint tortfeasor's indemnification; and (3) direct liability to the Sponsor Defendants. See Sponsor Compl., Dkt. No. 1-4. FEMA then removed the action to this Court on the basis that it is a federal government agency pursuant to 28 U.S.C. §1442(a)(1).¹ See Notice of Removal, Dkt. No. 1. Standard moved to dismiss Chernoff and the Sponsor's complaints. Dkt. Nos. 6, 8.

II. DISCUSSION

A. Federal Preemption

Standard argues that most of Chernoff's claims² and all of the Sponsors' cross-claims are expressly preempted by federal law as extra-contractual claims against a WYO insurer. The Court agrees.

The National Flood Insurance Act of 1968 ("NFIA"), 42 U.S.C. §§ 4001-4129, established the National Flood Insurance Program ("NFIP") in order to provide flood insurance at reasonable rates through federal funding. 42 U.S.C. § 4017 (2003); see also Van Holt v. Liberty Mutual, 163 F.3d 161, 164 n.2 (3d Cir. 1998). Under the NFIA, FEMA is permitted to implement the program either by issuing its own flood insurance policies, or by authorizing private insurance companies to implement the policies as agents of the United States. Id. §§ 4071(a), 4081. To this end, FEMA established the WYO program, which allowed private companies to issue policies in accordance with the terms of the NFIP. 44 C.F.R. § 62.63. As such, WYO companies are required to adjust claims in accordance with the terms of the Standard Flood Insurance Policy ("SFIP"). See Bay Point I, 2013 WL 6252692, at *10 (holding that WYO insurer Standard was obligated to follow FEMA Claims Manual). WYOs handle all administration of the policies, including adjustment, settlement, payment, and defense of claims, with the federal government acting as a financial guarantor. 44 C.F.R. § 62.63.

In 2003, FEMA revised the SFIP to include a provision on jurisdiction. It 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 . . . and Federal common law.

44 C.F.R. pt. 61, app. A(2), art. IX. Standard argues that this provision expressly preempts the non-contractual claims asserted against them as they sound in claims handling.

In general, federal courts recognize that claims sounding in policy "handling" are preempted. See C.E.R. 1988 Inc. v. Aetna Cas. And Sur. Co., 386 F.3d 263, 272 (3d Cir. 2004) (holding that a matter arising from the adjustment of a claim was preempted by conflict preemption by the NFIA); Grissom v. Liberty Mut. Fire Ins. Co., 678 F.3d 397 (5th Cir. 2012) (negligent misrepresentation claims in handling by policyholder are preempted by NFIA); Gibson v. Am. Bankers, 289 F.3d 943, 949 (6th Cir. 2002) (state law claims for breach of contract and breach of fiduciary duty were "clearly preempted by NFIA"). While the Third Circuit has expressly declined to decide whether such preemption also extends to claims over policy "procurement," C.E.R., 386 F.3d at 272, n.12, federal courts in general have distinguished between claims sounding in procurement and claims sounding in handling. See Campo v. Allstate Ins. Co., 652 F.3d 751, 757 (5th Cir. 2009) ("federal law does not preempt state-law procurement-based claims"); Reeder v. Nationwide Mut. Fire Ins. Co., 419 F. Supp. 2d 750, 758 (D. Md. 2006) (noting a "critical distinction between...