Court Reverses Mississippi Award Over ‘Negligent’ Flood Policy Advice

An insurance company selling federal flood insurance has won a case against a Mississippi homeowner who claimed the insurer was negligent in not informing him that he was eligible to buy a preferred risk policy with more coverage than he had under his regular flood policy.

The U.S. Court of Appeal for the 5th Circuit ruled in favor of Liberty Mutual Fire Insurance Co. against a homeowner who in a Hurricane Katrina claim sought the difference between the coverage he had and the better coverage he could have had under a preferred risk policy at a lower cost.

In a decision written by Justice Edith Brown Clement, the circuit court reversed the district court and erased a jury award for the homeowner.

The key question was whether Liberty Mutual’s failure to inform a current insured that he might be eligible for a richer insurance policy constituted a “claims handling” or “insurance procurement” matter. While federal law does not preempt state law in insurance procurement disputes, it does in disputes related to claims, according to the circuit court, which found this dispute to be claims-related.

According to court documents, James P. Grissom purchased flood insurance for his home in Pascagoula under the National Flood Insurance Program. Liberty Mutual was his carrier under the NFIP’s Write Your Own program.

Following the destruction of his home by Hurricane Katrina, Grissom sued Liberty Mutual for “negligent misrepresentation” to recover the difference between the coverage he had and the coverage he could have purchased under the preferred risk policy. Grissom argued that his claim was related to insurance procurement rather than claims-handling and thus was not precluded by federal law.

The lower court had agreed with Grissom that his claim was an insurance procurement matter and therefore not preempted by federal law.

According to court records, Grissom, a flood insurance customer since 1997, was eligible for a preferred risk insurance policy, but “there was no indication that Liberty Mutual affirmatively informed Grissom” he was eligible for the better policy. The renewal notice from Liberty Mutual mentioned the existence of preferred rate policies, but did not indicate whether Grissom was eligible.

In 2004 Grissom renewed his Liberty Mutual policy with covered total loss of up to $121,200 for a $531 premium. Had he been enrolled in the preferred risk policy, he would have had $350,000 in total covered loss for a $317 premium.

In August 2005, Grissom’s home was destroyed by Hurricane Katrina. Liberty Mutual paid Grissom’s $121,200 claim, the maximum on his policy.

But Grissom then sued Liberty Mutual in state court to recover the difference between the coverage he had and the coverage he could have had under a preferred risk policy.

The court for the Southern District of Mississippi denied Liberty Mutual’s motions and submitted the case to a jury that ended up awarding Grissom $212,900 in compensatory damages. Liberty Mutual appealed.

In its appeal, Liberty Mutual questioned whether the district court erred by determining this was a policy procurement case rather than a claims handling case subject to federal preemption.

Liberty Mutual also questioned whether the district court erred by allowing the matter to go before a jury since federal funds were at risk and whether Mississippi law recognizes negligent misrepresentation in the insurance context.

Liberty Mutual argued that the district court erred in holding that this dispute related to the procurement of insurance and was not preempted by federal law. Grissom said the district court was right in finding there was no preemption, arguing that Liberty Mutual’s negligence occurred while he was renewing his policy rather than in the course a claims-related task. Grissom also alleged that since he was a customer, his insurer should have been more proactive in informing him of his eligibility for additional subsidized flood insurance coverage.

The court said precedent distinguishes between claims handling and insurance procurement cases with the key factor being the status of the insured at the time of the interaction between the parties. “If the individual is already covered and in the midst of a non-lapsed insurance policy, the interactions between the insurer and insured, including renewals of insurance, are ‘claims handling’ subject to preemption,” the circuit court said.

The court said that since Grissom’s dispute related to his renewal of a policy already in place, the dispute is considered to be one of claims handling, not the initial procurement of the insurance policy, and it therefore is preempted.

Although the court held that federal law preempted Grissom’s claim, it also considered whether a jury might hear cases under the NFIP. Liberty Mutual alleged that the district court erred in submitting this case to the jury because the federal government — namely the Federal Emergency Management Agency that oversees the flood insurance program — would be required to pay any damages award and “the government has not affirmatively and unambiguously granted the right to a jury trial for such matters.”

Grissom did not dispute that if federal funds are at stake a jury trial is inappropriate, but alleged that FEMA is not obligated to pay damage awards that result from omissions by WYO insurance companies because the insurance company receives a commission for signing up insureds.

The federal government pays flood insurance claims and reimburses costs, including defenses costs, for adjustment and payment of claims by private insurers in the WYO program. Under the terms of the agreement, the federal government will both indemnify and defend WYO insurers in the program for many insurance and litigation expenses unless the “litigation is grounded in actions by the [WYO] company that are significantly outside the scope” of their arrangement, and/or “involves issues of agent negligence.”

Liberty Mutual claimed the WYO arrangement presumes the government will defend and indemnify insurers while Grissom claimed it presumes WYO insurers bear their own costs.

The court said that unless FEMA explicitly notifies the insurance company of its intent not to defend or indemnify, FEMA is presumed to pay the litigation expenses and any damages awards. In the absence of notification or even any allegation that FEMA notified Liberty Mutual of its intent not to defend or indemnify, FEMA is assumed to be paying the expenses of the litigation. “The right to a jury trial has not been extended by the government to WYO cases. Because FEMA is presumed to be paying both the litigation expenses and any resulting damage award, the district court erred in submitting this case to the jury,” the circuit court said.

Although it found the state law claim preempted, the court went further to rule that Grissom’s negligent misrepresentation claim against his insurer also did not find a basis in Mississippi law.

Liberty Mutual argued that Mississippi law does not recognize a claim for negligent misrepresentation against an insurer because an insurer has no fiduciary duty to insureds and no affirmative duty to advise buyers about their insurance needs. Grissom countered that insurers have a duty to use reasonably prudent diligence and care in “business transactions” and thus misrepresentation may be alleged for Liberty Mutual’s failure to disclose information.

There is no state law directly on point, but Mississippi courts have addressed the relationship between insurers and insureds and have also discussed the duties owed to the insured. The Mississippi Court of Appeals has held that the purchase of insurance is “an arms-length transaction and no fiduciary duty arises between an insurance company or its agents and the purchaser of the insurance.”

In this ruling, the circuit court said that Liberty Mutual was not required to provide advice to insurance customers and because the insurer was not offering insurance advice, it was not a fiduciary of Grissom. “Thus Mississippi law would not recognize negligent misrepresentation as a cause of action against Liberty Mutual and the submission of negligent misrepresentation to the jury was error,” the decision said.

The case is James P. Grisson v. Liberty Mutual Fire Insurance Co.