Reilly et al v. Philadelphia Indemnity Insurance Company

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
BRENDAN REILLY and TIFFANY REILLY,
Plaintiffs,
vs.
PHILADELPHIA INSURANCE COMPANY,
Defendant.
4:20-CV-4173-LLP
MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING IN
PART DEFENDANT'S MOTION FOR
PARTIAL SUMMARY JUDGMENT AND
GRANTING DEFENDANT'S MOTION
TO QUASH JURY DEMAND
Pending before the Court is Defendant Philadelphia Insurance Company's Motion for
Partial Summary Judgment and Motion to Quash Jury Demand. (Docs. 17,21). For the following
reasons. Defendant's Motion for Partial Summary Judgment is granted in part and denied in part
and Defendant's Motion to Quash Jury Demand is granted.
BACKGROUND
National Flood Insurance Program
Plaintiffs' property in Madison, South Dakota was insured by a Standard Flood Insurance
Policy (SFIP) issued by Philadelphia Indemnity Insurance Company ("PIIC"), a private insurer
participating in the National Flood Insurance Program ("NFIP") which was established pursuant
to the National Flood Insurance Act of 1963,42 U.S.C. § 4001. The NFIP was created because it
was uneconomical for private insurance companies to provide flood insurance with reasonable
terms and conditions to those in flood prone areas. See 42 U.S.C. § 4001(b); Copeland v. Fed.
Emergency Mgmt. Agency, Civ. No. 03-2704, 2004 WL 325577, *1 (E.D. La. Feb. 18, 2004). In
administering the NFIP,FEMA creates regulations that govern the process of adjusting and paying
claims for flood loss. 42 U.S.C. §§ 4011, 4019. Exercising regulatory authority granted by 42
U.S.C. § 4081(a), FEMA established the Write-Your-Own("WYO")program in 1983, whereby
private insurance company participants would issue Government-designed Standard Flood
Insurance Policies("SFIPs"), charge premiums on behalfofthe Government, adjust elaims arising
under the SFIPs, and defend against related legal actions. See McGair v. Am. Bankers Ins. Co. of
1
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Fla., 693 F.Bd 94, 96 (1st Cir. 2012). The NFIP establishes private insurers as "fiscal agents of
the United States,"42 U.S.C. § 4071(a)(1), and prohibits them from waiving, altering, or amending
any provision of the SFIP without the express, written consent of the Federal Insurance
Administrator. 44 C.F.R. § 61.13(d); (Docs. 20, 9; 27,	|	9). The Government, in retum,
reimburses the WYO insurer for claims paid under the SFIPs and related litigation costs, including
defense costs, for the adjustment and payment of claims by private insurers in the WYO program,
and pays the WYO insurer a flat 3.3% commission on claims paid. See Grissom v. Liberty Mut.
Fire Ins. Co., 678 F.3d 397, 402(5th Cir. 2012); 44 C.F.R. pt. 62, app. A., art. III.D.1-2; Stanton
V. State Farm Fire & Gas. Co., 169 F.Supp.2d 1109,1117(D.S.D. 2001)(citing 44 C.F.R. Pt. 62,
App. A,Art 111(C)(1)).
Private insurers join the WYO program by entering into an agreement with FEMA, the
details of which are codified in the "Arrangement," 44 C.F.R. Pt. 62, app. A. FEMA specified the
terms ofthese Arrangements in the regulations goveming the Program. C.E.R. 1988, Inc. v. Aetna
Cas. &Sur. Co.,386 F.3d 263,271 (3d Cir. 2004). The Arrangement requires companies to notify
FEMA of litigation expenses and requires FEMA's Office of the Chief Counsel to ensure the
litigation is based on actions within the scope of the Arrangement and does not involve agent
negligence. Grissom, 678 F.3d at 402 (citing 44 C.F.R. pt. 62 app. A. art. lll(D)(2)-(3)(a)). If
FEMA's Chief Counsel, along with the Federal Insurance Administrator, determine "that the
litigation is grounded in actions by the Company that are significantly outside the scope of[the]
Arrangement, and/or involves issues ofagent negligence"the Federal Insurance Administrator has
thirty days to inform the insurer that the litigation expenses (in whole or in part) will not be
covered. Id. (citing 44 C.F.R. pt. 62 app. A. art. lll(D)(3)(a)-(d)). 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 resulting damages awards. Id.
Philadelphia Indemnity Insurance Co.
PllC is a Write-Your-Own Program Carrier participating in the U.S. Government's
National Flood Insurance Program ("NFIP") pursuant to the NFIA and is a signatory to the
Arrangement written by FEMA. (Docs. 20,11; 27, Tf 1). PllC maintains a segregated account of
Federal flood insurance funds, as required by Article V1(B) of the Arrangement. (Doc. 20, 2;
27,^ 2). PllC investigates, adjusts, settles and defends all claims or losses arising from the SFIPs
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issued under the Arrangement. (Docs. 20,	|	3; 27,	|	3). All flood claim payments are binding
upon the Federal Insurance Administration, as per Article III(F) ofthe Arrangement, and all flood
claim payments by PIIC, the WYO carrier, are made directly with federal funds. (Docs. 20,	|	3;
27, Tf 3). PIIC pays all claims payments under SFIPs with federal funds as stated at Article VI(B)
ofthe Arrangement. (Docs. 20,14; 27,^ 4). PIIC pays judgments rendered against it as a WYO
flood carrier with federal funds unless the Federal Insurance Administrator determines that the
claim falls significantly outside the scope of the Arrangement or involves an issue of agent
negligence. (Docs. 20,^ 5; 27,^ 5).
Plaintiffs' Flood Insurance Policy
On June I, 2011, Plaintiffs applied for a SFIP for their seasonal dwelling located at 602
Best Point Dr., Madison, South Dakota 57402. (Docs. 20,1 10; 27,	|	10). In its capacity as a
WYO Program carrier, PIIC issued SFIP number 8704819483 to Plaintiffs for their seasonal
dwelling and with a policy term from June 20, 2011 to June 30, 2012. (Docs. 20, Tf 11; 27,f 11).
The SFIP provided building limits of $150,000 and contents limits of $60,000, each subject to
$1,250 deductibles on the date ofthe flood at issue. (Docs. 20,^ 14; 27,114). Plaintiffs renewed
the SFIP annually for the next nine (9) years until June 30, 2020, when the SFIP expired. (Docs.
20,112; 27,112). In 2019,PIIC mailed Plaintiffs a renewal notice that allowed Plaintiffs to elect
to renew their SFIP for the same coverage or to increase their coverage limits to $200,000 for their
building and $80,000 for their contents. (Docs. 27, T| 3; 33,13; 30-1).
In case of loss. Plaintiffs' SFIP provides that:
J. Requirements in Case of Loss
In case of a flood loss to insured property, you must:
1. Give prompt written notice to us;
2. As soon as reasonably possible, separate the damaged and undamaged property,
putting it in the best possible order so that we may examine it;
3. Prepare an inventory ofdamaged property showing the quantity, description, actual
cash value, and amount ofloss. Attach all bills, receipts, and related documents;
4. Within 60 days after the loss, send us a proof of loss, which is your statement of
the amount you are claiming under the policy signed and sworn to by you, and
which furnishes us -with the following information:
a. The date and time of loss;
b. A brief explanation of how the loss happened;
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c. Your interest (for example, "owner") and the interest, if any, of others in
the damaged property;
d. Details of any other insurance that may cover the loss;
e. Changes in title or occupancy ofthe covered property during the term ofthe
policy;
f. Specifications of damaged buildings and detailed repair estimates;
g. Names of mortgagees or anyone else having a lien, charge, or claim against
the insured property;
h. Details about who occupied any insured building at the time ofthe loss and
for what purpose; and
i. The inventory of damaged personal property described in J.3. above.
5. In completing the proof of loss, you must use your own judgment concerning the
amount of loss and justify that amount.
6. You must cooperate with the adjuster or representative in the investigation of the
claim.
7. The insurance adjuster whom we hire to investigate your claim may furnish you
with a proof of loss form, and she or he may help you complete it. However, this
is a matter of courtesy only, and you must still send us a proof of loss within 60
days after the loss even if the adjuster does not furnish the form or help you
complete it.
8. We have not authorized the adjuster to approve or disapprove claims or to tell yo
whether we will approve your claim.
9. At our option we may accept the adjuster's report ofthe loss instead of your proof
of loss. The adjuster's report will include information about your loss and the
damages you sustained. You must sign the adjuster's report. At our option, we
may require to swear to the report.
(Doc. 19-2 at 122). Plaintiffs' SFIP further provides that PIIC may,in its sole discretion "request,
in writing, that you furnish us with a complete inventory of the lost, damaged or destroyed
property, including: a. Quantities and costs; b. Actual cash values or replacement cost(whichever
is appropriate); c. Amounts of loss claimed; d. Any written plans and specifications for repair of
the damaged property that you can reasonably make available to us; and e. Evidence that prior
flood damage has been repaired. (Doc. 19-2 at 122). Section V11(R)ofPlaintiffs' SFIP provides:
You may not sue us to recover under this policy unless you have complied with all
the requirements ofthe policy. If you do sue, you must start the suit within 1 year
after the date of the written denial of all or part of the claim and you must file the
suit in the United States District Court ofthe district in which the covered property
was located at the time ofloss. This requirement applies to any claim that you may
have under this policy and to any dispute that you may have arising out of the
handling of any claim under the policy.
(Doc. 19-2 at 124).
Plaintiffs' Flood Loss
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On September 13, 2019, Plaintiffs reported a claim to PIIC under their SFIP for damages
to their insured property resulting from a flood, which occurred on or about September 11, 2019
and into September 12, 2019. (Docs. 20,^15; 27,^15;27,19; 33,f 9). Plaintiff Brendan Reilly
traveled to the property on September 13, 2019. (Docs. 27,	|	6; 33,f 6). Mr. Reilly needed to
park at a distant neighbor's residence and walk through water to get to his home. (Docs. 27,	|	6;
33, Tf 6). According to Mr. Reilly, it "looked like our cabin was in the lake. .."and he believed
the water was "knee high" on this date. (Docs. 27,^ 7; 33, ^ 7). The standing water stayed in
Plaintiffs' dwelling for 13 days. (Docs. 27,f 8; 33,^ 8).
PIIC acknowledged the flood claim and assigned the loss to an independent adjusting firm.
Colonial Claims Corporation pursuant to Article VII(J)(7) ofthe SFIP. (Docs. 20,116; 27,116).
The claim was assigned to independent adjuster Jerrold Hill. (Docs. 20, Tf 16; 27, Tf 16). At the
time the claim was reported, another Colonial adjuster, Robert Holmes, was working in the area
and met with Mr. Reilly on September 25, 2019,to conduct an inspection ofthe property. (Docs.
20,116; 27,116). Mr. Reilly was accompanied during the inspection by local contractor Jason
Seykora who had done some work for Plaintiffs previously. (Docs. 27,110; 33,110;29-2, Reilly
Dep. 39:24-40:3). When Mr. Holmes entered the building, he concluded that he was seeing "an
extraordinary flood claim." (Docs. 27,111; 33,111). Holmes concluded it was "extraordinary"
because mold had grown throughout the property higher than 48 inches from the floor due to an
inability to aecess the house to start the mitigation process. ^ (Docs. 27,1 11; 33,111; Holmes
Dep. 41:18-22). Holmes determined that Plaintiffs' property had been inundated with
approximately 14 inches of water on the exterior and 18 inches of water on the interior of the
dwelling for approximately 13 days. (Docs. 20, T| 16; 27, Tf 16).
After Holmes's inspection, independent adjuster, Jerrod Hill assisted Plaintiffs in
presenting the claim pursuant to SFIP Art. VII(J)(7). (Docs. 20,117; 27,117). Mr. Hill asked
Plaintiffs to prepare a list detailing the personal property that was destroyed by the flood and
associated values. (Docs. 27, Tf 13; 33,f 13). Plaintiffs provided a list documenting their personal
^ Mr. Holmes testified that with normally, with "14 inches of[standing] water, the flooring, and the walls are
removed, the doors are removed, the cabinets are removed [and[ [t]he wails are removed only up to four feet."
(Doc. 29-3, Holmes Dep. 41:5-9). However, Mr. Holmes testified that when mold has gone above four feet, the claim
is classified as an "extraordinary" flood claim because they have to go above and beyond the normal scope of
damages. (Doc. 29-3, Holmes Dep. 41:10-17).
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property that was damaged by the flood and their estimated value and sent it to Mr. Hill by email
on September 29,2019. (Docs. 27,113; 33, 13; 19-11 at 165). Mr. Hill acknowledged receipt
of this email and asked for photos of some of the items listed by Plaintiffs as well as additional
price verification listing the company name, brand, model, etc. so he could verify the pricing,
especially for some of the higher priced items^. (Docs. 27, Tf 14; 33, ^ 14; 19-11 at 166). With
regard to categories of goods lists such as "pots and pans" and "tools," Mr. Hill requested that
Plaintiffs provide more details of the items and more photos. (Docs. 27,115; 33,115; 19-11 at
169). On October 7,2019, Mr. Reilly responded to Mr. Hill with prices from an internet search of
the products and photographs for many of the items Mr. Hill had requested. (Docs. 27, T| 15; 33,
115).
Sometime prior to October 22, 2019, Mr. Hill prepared an estimate of Plaintiffs' building
losses, and sent Plaintiffs a proposed damages estimate in the amount of$83,314.12(less than the
$150,000 policy amount for building damages) for the repair of the dwelling—an estimate that
Plaintiffs disagreed with. (Docs.20,117;27,f 17; 19-11 at 190; 19-16 at 237). Plaintiffs insisted
that Mr. Holmes, the adjuster who inspected the property, had stated that the dwelling was not
salvageable and would have to be knocked down and that the cost to rebuild would exceed the
policy limits. (Docs. 19-16 at 237). Because Plaintiffs had raised concems about possible
structural damage. Hill requested an inspection of the dwelling by an engineer. (Docs. 20,117;
27,f 17; 27, T| 16; 33, ^ 16; 19-8 at 158). On October 22, 2019, Erik Moore, engineer expert,
inspected Plaintiffs' property. (Docs. 20,	|	17; 27, Tf 17). In the report he issued after his
inspection, Mr. Moore indicated that he was informed by Mr.Reilly that"[Mr. Reilly] had received
information from the county building department that the house was required to be raised at least
4 feet from its current elevation due to the flood event." (Doc. 19-10 at 162). Moore stated in his
report that there was "[n]o evidence of structural movement at the dwelling due to flooding," that
"[t]he walls were relatively plumb over the handheld bubble level and no cracks were noted in the
interior finishes to indicate structural movement." (Docs. 20, Tf 17; 27,	|	17; 19-10 at 163).
Moore's report stated further than "[rjepairs to the interior [were]technically possible but may not
^ Hill requested pricing verification for the foilowing items: 1) a $3,500 patio set; 2) a $2,400 patio set; 3) a
$7,000 ieather sectional; 4)a $ 2,500 leather chair with reciiner; 5)a $4,750 queen frame, box, mattress, headboard;
5) a $6,400 king bed frame; 6) a $360 king Company store sheet. (Doc. 19-11 at 169).
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be economically feasible due to lack of mitigation and required elevation ofthe building." (Docs.
20,If 17; 27,117; 19-10 at 163).
During his deposition, Mr. Moore testified that during his inspection visit, he spoke to Mr.
Reilly about the "need to do repairs as far as removing the wetted interior finishes and the moldy
areas... and discussed[]the possibility of elevating the huilding." (Docs. 27,118;33,118; 29-
5, Moore Dep. 28:7-25). Mr. Moore testified that "[w]e talked ahout possible cost,just roughly,
of what needed to be done," and that he told Mr. Reilly that "it was more than likely going to cost
more to repair the huilding than what it was possibly worth and that it may be more economically
feasible to start over." (Doc. 29-5, Moore Dep. 28:7-9; 29:1-9). Mr. Moore testified that once he
became aware that the elevation requirements applied only to new and not existing construction,
he testified that the structure was "salvageable" and "could have heen saved" by "guttfing] the
house down to the studs," drying the materials and mitigating for mold, and leaving the wall
framing, the roof framing, and the floor slab, but that he did not know whether it "was cost-
effective to do so." (Doc. 34-4, Moore Dep. 30:21-31:2; 43:10-17, 55:9-22; 33,119).
On November 4, 2019, Mr. Hill sent an email to Mr. Reilly containing Mr. Moore's
engineer report. (Doc. 19-11 at 190). Mr. Hill stated that Mr. Moore "did not find any additional
damages" and that the building estimate therefore did not change. (Doc. 19-11 at 190). In this
same email, Mr. Hill stated that the price verification list that Plaintiffs had sent on Octoher 7,
2019 was insufficient. (Doc. 19-11 at 190). Mr. Hill asked Mr. Reilly if he had original invoices
for any ofthe higher priced items and asked whether it was possible to go back to where the items
were purchased and see if they could print out an invoice. (Doc. 19-11 at 190). Mr. Hill also
asked whether it was possible to get a photo ofthe tags on the sectional, love seat and beds so that
he could verify the hrand ofthese items. (Doc. 19-11 at 190). Mr. Hill relayed that Plaintiffs had
several options with regard to their claim for contents damages. (Doc. 19-11 at 190). If Plaintiffs
could fully verify the brand, cost with actual invoice or tag verification, Mr. Hill stated that he
could add these costs to the contents estimate. (Doc. 19-11 at 190). If Plaintiffs were unahle to
do so, Mr. Hill stated that he could apply like kind and quality pricing for the items from FEMA's
database or, once Plaintiffs completed their proof of loss form, Mr. Hill could include items still
requiring verification in a denial request directly to the carrier and then Plaintiffs could appeal to
the carrier. (Doc. 19-11 at 190-91). Mr. Hill requested that Mr. Reilly review the contents
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spreadsheet again and provide him with further verification so that Mr. Hill could add these
contents to the claim. (Doc. 19-11 at 191). Mr. Hill advised Mr. Reilly that the 60-day deadline
to submit their signed proof ofloss form was rapidly approaching. (Doc. 19-11 at 191).
On November 7,2019, Mr. Hill sent Mr. Reilly an email with an updated estimate for Mr.
Reilly's review. (Doc. 19-11 at 192). Mr. Hill indicated in the email that the estimate included
all remaining contents items that Mr.Reilly had requested payment on,but that he applied database
pricing for some ofthe items because there was no documentation that Mr. Hill could use to verify
the prices of some of these contents. (Doc. 19-11 at 192).^ Hill also included several items in a
denial request"^ which Plaintiffs could appeal. (Doc. 19-11 at 192). Hill's final estimate for
building damages totaled $95,814.47 Replacement Cost Value ("RCY"). (Docs. 20,^ 20; 27,	|
20). After deducting the non-recoverable depreciation of $11,250.35 and the $1,250 deductible,
the net total building claim was $83,314.12. (Docs. 20,	|	20; 27, Tf 20). Hill's final estimate for
contents damages totaled $28,648.89 RCY. (Docs. 20,121; 27,f 21). After deducting the non-
recoverable depreciation of $7,422.86 and the $1,250, the net total contents estimate was
$19,976.03.5 (Doc. 20,121; 27,121).
On November 8, 2019, Plaintiffs emailed a Proof of Loss form, signed on November 8,
2019,to Jerry Hill at an incorrect email address. (Docs. 20,124; 27,124; 27,^ 21; 33,^ 21; 30-
7 at 551-52). On November 11, 2019, Mr. Hill sent Mr. Reilly an email indicating that the next
day, November 12th, was the 60-day deadline to submit the signed proof of loss. (Doc. 30-7 at
552). That same day, Mr. Reilly responded by forwarding two emails to Mr. Hill that he had
inadvertently sent to the wrong email address. (Doc. 30-7 at 552). The first email that was
® Mr. Hill Indicated In his email to Mr. Reilly that he applied like, kind and quality pricing for the following
Items: patio set with round table and 4 chairs; leather sections with pullout bed and recllner; leather chair with
recllner; king bed frame, box spring, mattress; king company store comforter; kind company store sheet. (Doc. 19-
11 at 192).
" Mr. Hill Indicated In his email to Mr. Reilly that he Included the following Items In a denial request: patio set
-6 chairs, 2 ottomans, table, 2 side tables (I only see the 6 chairs In my photos and yours) I can Include to cover if
we can provide the photos); ATV helmet (Policy restrictions); 25 Life Jackets (Policy restrictions); Tools(No details ..
. Need what Is damaged item by Item); MIsc Supplies (No details ... Need what Is damaged Item by Item); Boat
Stereo (Policy restrictions); Portable AC Unit In Bedroom (Do not see this item); Clothes(No details ... Need what Is
damaged Item by Item). (Doc. 19-11 at 192-93).
^ Because the dwelling was not the primary residence of the Insured, PIIC paid covered building damages on
an Actual Cash Value basis as required by SFIP Art. VII(V)(4)(I). Contents or personal property damages were also
paid on an ACV basis as required by SFIP Art. VII(V)(e). Actual Cash Value Is defined under the SFIP as "[t]he cost to
replace an Insured Item of property at the time of loss, less the value of Its physical depredation." (Doc. 34-1 at
S93).
8
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forwarded to Mr. Hill contained Plaintiffs' proof of loss form, signed on November 8, 2019.
(Docs. 30-7 at 551-52; 20,124; 27,^ 24; 27,121; 33, T| 21). The Proof of Loss listed the actual
cash value of the building structure as $200,000 and value for destroyed contents as $63,585.
(Docs. 27,^ 22, 33,122). The second email that Mr. Reilly forwarded to Mr. Hill supplemented
Plaintiffs' proof of loss form with additional information. (Doc. 30-7 at 549). In the supplement,
Mr. Reilly indicated that the basis oftheir claim for $200,000 in building damages were comments
made by Mr. Moore, the engineer, during his inspection of the structure that repairs were not
economically feasible and that stripping the structure down to the studs, raising the structure over
4 feet, and refinishing would cost at least $200,000. (Docs. 30-7 at 550; 27,124; 33,124).
After sending the proof ofloss form and supplement to Mr. Hill, Mr. Reilly sent a follow-
up email to Mr. Hill on November 12, 2019, to ensure he had received the Proof of Loss. (Docs.
27,f 27; 33, Tf 27). Mr. Reilly sent the emails out ofconcern that he may have sent his prior emails
to an incorrect email address. (Docs. 27, ^ 27; 33, ^ 27). On November 12, 2019, Mr. Hill
responded to Mr. Reilly indicating that he received the two emails forwarded by Mr. Reilly on
November 11, 2019. (Doc. 30-7 at 549).
In Mr. Hill's fmal report dated November 11, 2019, he recommended that a portion of
Plaintiffs' building claim for $200,000 to rebuild the structure be denied because the wall and
ceiling framing, as well as the roof shingles and associated roofitems, were not listed as damaged
in the engineer report. (Docs. 19-15 at 234; Doc. 20,f 23). Mr. Hill also recommended denying
additional payments for particular contents on the basis that Plaintiffs were rmable to provide
documentation and recommended denial of particular contents that were not covered as well as
contents that were not confirmed to be at the property at the time ofthe loss. (Docs. 20,f 23; 27,
I 23). Mr. Hill requested that PIIC pay this claim with payment in accordance with his fmal
estimates—$83,314.12 for building damages and 19,976.03 for contents damages. (Doc. 19-15 at
235).
On November 12, 2019, Mr. Hill submitted his final report to PIIC, along with his final
building and contents estimate and Plaintiffs' proof of loss for review and approval. (Docs. 20,If
24; 27,124; 19-3,	|	24). PIIC revised and verified the adjustment and recommendations of the
independent adjuster in compliance with 44 C.F.R. § 62.23(a)(2), and determined that the covered
and payable amount of the claim pursuant to the terms of the SFIP was $83,314.12 for building
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damages under Coverage A and $19,976.03 for contents damage under Coverage B. (Doc. 20,^
28; 27, ^ 28). Plaintiffs' proof of loss form was reported to Federal Insurance Administrator
("FIA")on November 14,2019. (Doc. 19-18at251). PIIC filed a waiver with the FIA requesting
a waiver in the amount of $83,314.12 in building damages and $19,976.03 in contents damages,
stating that the "reason for late reporting" was that "[t]he insured was not in agreement with the
initial estimate and anticipated full coverage payout on the claim. We however explained the
claims process and they submitted their signed proof of loss." (Doc. 19-18 at 251-52). On
November 14, 2019,the FIA granted a limited waiver for $83,314.42 in building damages and for
$19,976.03 in contents damages as recommended by Hill and the estimate he provided. (Docs.
19-18 at 252; 20,129; 27,129).®
On November 15,2019, Defendant sent a letter to Plaintiffs accepting in part and rejecting
in part their proof of loss. (Docs. 27, ^ 28; 33, ^ 28). This November 15, 2019, letter from
Defendant was signed by Defendant's adjuster Emmanuel Ayoo. (Docs. 27,128; 33,128). This
letter provided, that PIIC was "accepting $103,290.15 of the Proof of Loss and rejecting
$139,510.98."(Docs. 20,^ 32; 27,^ 28; 33,^ 28). The letter further provided that Plaintiffs were
owed $83,314.12 of the $150,000 policy limit for covered building damages and $19,976.03 of
the $60,000 policy limit for covered contents damages, after subtracting their applicable
deductibles ($1,250 for contents and $1,250 for building damages). (Docs. 20, 31-32; 27,
31-32,28; 33,^ 28). The November 15,2019, denial letter did not indicate that Plaintiffs had been
late in submitting their proof of loss. (Docs. 27,^ 29; 33,129).
On December 9,2019,Plaintiffs appealed the partial denial oftheir claim to FEMA. (Docs.
20,1 33; 27,^ 33). As part oftheir appeal. Plaintiffs submitted estimates prepared by contractor
Jason Seykora, dated November 18, 2019,to repair the cabin and to knock the structure down and
rebuild. (Docs. 27, 34-35; 33, 34-35; 28-1 at 460). In Mr. Seykora's estimation, it would
® The waiver provided that;
Based on the information you submitted, your request for a waiver of the 60 day Proof of
Loss policy provision is approved. This limited waiver is for only the amount of the loss and scope
of the damages outlined in this request and otherwise does not waive the proof of loss or any
other requirement of the Standard Flood insurance Policy and makes no other comment because
of a lack of information, if it is later determined that an improper payment was made,the granting
of this waiver does not constitute a waiver of the right to seek repayment of any such improperly
paid amounts.
(Doc. 19-18 at 252-53).
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cost $449,628.75 to remodel the property using the existing frame and whatever structure was
potentially salvageable and would cost $361,335 to knock down and build the residence. (Doc.
27, ^ 35; 33, ^ 35). On January 5, 2021, after Plaintiffs filed their Complaint in federal court,
FEMA issued its decision affirming PIIC's decision to deny coverage for the building and personal
property items. (Docs. 27, Tf 35; 33,^ 35; 19-22 at 269).
B. Federal Lawsuit
On November 6, 2020, Plaintiffs filed their Complaint in federal district court. (Docs. 1;
20, Tf 34; 27,134). In Count I ofthe Complaint, Plaintiffs allege a claim for breach ofcontract for
failing to pay the policy limits they allege they were entitled to under the terms ofthe SFIP. (Doc.
1). Plaintiffs allege in Count II that PIIC's refusal to pay the full amount oftheir loss was vexatious
and without reasonable cause, thus entitling them to attomey's fees under SDCL § 58-12-3 and
Stanton v. State Farm Fire & Cas. Co., 78 F.Supp.2d 1029(D.S.D. 1999). (Doc. I). In Count III,
Plaintiffs allege a claim for negligent misrepresentation in procurement of policy. (Doc. I).
Specifically, Plaintiffs allege that PIIC advised Plaintiffs that at the time they renewed their policy
of insurance with Defendant in 2019, that it would provide coverage to the "building" in the
amount of $150,000 and eoverage to the "contents" in the amount of$60,000. (Doc. I). Despite
making these representations. Plaintiffs allege that PIIC refused to offer the amounts available
under the policy for damages directly caused by the flood. (Doc. I). Plaintiffs allege that PIIC
made these representations to Plaintiffs about the amount ofinsurance as a statement offact, which
was untrue at the time of the representation, with the intent to induce the Plaintiffs to renew their
policy of insurance with PIIC. (Doc. I). In Count IV, Plaintiffs allege a claim for fraudulent
misrepresentation in which they allege that in 2019,PIIC made representations to Plaintiffs about
the amount ofinsurance coverage it would make available to Plaintiffs rmder the insurance policy
for damages eaused directly by a flood, with the intent to deceive the Plaintiffs and induce them
to renew their insurance policy with the Defendant, and that Plaintiffs justifiably relied on the
representations of PIIC in renewing their policy and suffered damages as a result. (Doc. I). In
their prayer for relief. Plaintiffs seek: I)eompensatory damages in an amount to be proven at trial;
2) a reasonable sum of attomey's fees pursuant to SDCL § 58-12-3; 3) punitive damages; 4)
prejudgment interest, post-judgment interest, and costs of the action; and 5) for such other and
further relief as the Court deems just and equitable. (Doc. I).
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PIIC timely reported this litigation to FEMA immediately after it was served with this
lawsuit as required by the Arrangement. (Doc. 20,16; 27,16). PIIC's legal bills for the defense
of this lawsuit have been submitted periodically to FEMA for reimbursement throughout the
course of these proceedings, and FEMA has reimbursed PIIC for each of those bills throughout
this ease. (Docs. 20, Tf 7; 27,	|	7). PIIC has not received any correspondence from the Federal
Insurance Administration, FEMA, or its Office of General Counsel declaring or suggesting that
this case falls outside the "scope" of the Arrangement as that word is used at Article IV(D)(3) of
the Arrangement (Docs. 20,^ 8; 27,|8).
PIIC has moved for partial summary judgment on the following: Plaintiffs' claims for
additional buildings damages and some of Plaintiffs' claims for additional contents damages;
Plaintiffs' claims for negligent and fraudulent procurement; Plaintiffs' claim for attorneys' fees
under SDLC § 58-12-3 and the Equal Access to Justice Act ("EAJA"); Plaintiffs' request for
interest and costs. (Doc. 17). PIIC has also moved to quash Plaintiffs'jury demand. (Doc. 21).
The motions have been fully briefed by the parties and are ready for disposition.
DISCUSSION
I. Motion for Partial Summary Judgment
As part ofthe WYO program,FEMA promulgated regulations prescribing the terms ofthe
Standard Flood Insurance Policy("SFIP")to be used by WYO companies. McGair v. Am. Bankers
Ins. Co. ofFla.,693 F.3d 94,96(1st Cir. 2012)(citing 44 C.F.R. pt. 61,app. A(l)). By regulation,
"[t]he Standard Flood Insurance Policy and required endorsements must be used in the Flood
Insurance Program, and no provision of the said documents shall be altered, varied, or waived
other than by express written consent of the Federal Insurance Administrator." Id. (quoting 44
C.F.R. § 61.13(d)). When private companies issue WYO policies, they act as "fiscal agents ofthe
United States." Id. (quoting 42 U.S.C. § 4071(a)(1)).
Under the SFIP, the first step that policyholders must take to recover their loss from flood
damages is give their insurer "prompt written notice^" of the flood loss. (Doc. 19-2 at 122, SFIP
art. VII(J)(1)). The SFIP also requires that within 60 days after the loss. Plaintiffs send PIIC "a
^ This initial notice provision is distinct from the requirement that poiicyhoider timely submit a signed and
sworn proof of loss. Gowland v. Aetna Flood Ins. Program, 143 F.3d 951,954(5th Cir. 1998).
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proof ofloss, which is [their] statement ofthe amount [they] are claiming under the policy signed
and sworn by [them], and which furnishes [PIIC] with, among other things, "specifications of
damaged buildings and detailed repair estimates" and "the inventory ofdamaged personal property
as described in [article VII(J)(3)] above." (Doc. 19-2 at 122, SFIP art. VII(J)(4)(f), (i)). Article
VII(J)(3) of Plaintiffs' SFIP provides that in case of flood loss. Plaintiffs must "prepare an
inventory of damaged property showing the quantity, description, actual cash value, and amount
of loss. Attach all bills receipts, and related documents." (Doc. 19-2 at 122, SFIP art. VII(J)(3)).
The SFIP also provides that "[i]n completing the proof of loss, you must use your own judgment
concerning the amount ofthe loss andjustify that amount." (Doc. 19-2 at 122, SFIP art. VII(J)(5)).
As a matter of federal law, it is the policyholder's responsibility to submit a timely proof
of loss regardless of whether the insurer's adjuster provides the insured with a form. (Doc. 19-2
at 122, SFIP art. VII(J)(7)). While it is common for insurance adjusters to send policyholders
proof of loss forms and help them complete it as Colonial Claims did in this case, the policy
explicitly warns policyholders that such adjusters furnish those forms as "a matter of courtesy
only," and that insureds must still submit a proof of loss within 60 days after the loss even if the
adjuster does not furnish the form or help Plaintiffs complete it. Id.
Under the SFIP, insurance companies can reject policyholders' proof of loss in favor of
their own adjusters' estimate of damages. (Doc. 19-2 at 122, SFIP art. VII(J)(9)). Where there is
disagreement about the amovmt of flood damages or coverage, the SFIP allows policyholders to
appeal to FEMA from any denial of their claims or to contest it in federal court. See (Doc. 19-2,
SFIP art. VII(R)). However, to invoke either procedure for review of the denial of a flood
insurance claim, a policyholder must have first filed a timely and compliant proof ofloss. See 44
C.F.R. § 62.20; 44 C.F.R. pt. 61, app. A(l), art. VII(R).
Because the provisions of Plaintiffs' SFIP are embodied in FEMA's codified regulations,
the interpretation of Plaintiffs' SFIP is a matter of federal law. See McGair, 693 F.3d at 99; see
also Mccarty v. S. Farm Bureau Cas. Ins. Co., 758 F.3d 969,972(8th Cir. 2014)(citation omitted)
("It is well settled that federal common law governs the interpretation of the SFIP."). Federal
courts have "recognized that the proofofloss requirement is a regulatory limit on the disbursement
offunds through a federal insurance program; as such 'it is to be strictly construed [for it] serves
as a condition precedent to recovery under the SFIP.'" Dickson v. Am. Bankers Ins. Co. ofFla.,
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739 F.3d 397, 399 (8th Cir. 2014). Substantial compliance with the proof of loss requirement is
insufficient. See Mancini v. Redland Ins. Co., 248 F.3d 729, 734 (8th Cir. 2001). "[PJrecise
adherence to the SFIP's requirements is necessary as a constitutional matter to prevent the
judiciary from drifting beyond Article III. Only Congress can appropriate funds from the U.S.
Treasury, and any judicial decision ordering disbursement offederal funds on terms not authorized
by Congress would breach constitutional barriers." McCarty,758 F.3d at 973 (citing Mancini,248
F.3d at 735). "In fact, '[t]he SFIP's procedural requirements' have jurisdictional implications
because these requirements 'constitute conditions precedent to a waiver by the federal government
of its sovereign immurdty.'" Id. (quoting Wagner v. Dir., FEMA, 847 F.2d 515, 518 (9th Cir.
1988)). '"Not even the temptations of a hard case' will provide a basis for ordering recovery
contrary to the terms of[a] regulation." Forman v. Fed. Emergency Mgmt. Agency, 138 F.3d 543,
545 (5th Cir. 2005)(quoting 0PMv. Richmond,496 U.S. 414,420(1990)).
A. Breach of Contract Claim for Building Damages
PIIC has moved for summary judgment on Plaintiffs' breach of contract claim for building
damages. (Doc.20 at 335). PIIC argues that Plaintiffs failed to submit within sixty(60)days after
the loss,"specifications of damaged buildings and detailed repair estimates" as required by Article
VII(J)(4)(f) of the SFIP. (Doc. 20 at 335). PIIC argues that because Plaintiffs failed to comply
with all conditions precedent prior to filing this lawsuit as required by Article VII(R)ofthe SFIP,
Plaintiffs' claims for additional building damages fail as a matter oflaw. (Doc. 20 at 338).
PIIC asserts that the 60-day deadline to provide a complete and compliant proof of loss
was on November 10,2019. (Doc. 20,125). PIIC acknowledges that Plaintiffs provided Mr. Hill
a proof of loss form for $242,801.13 on November 8, 2019. (Doc. 20, f 24). PIIC also
acknowledges that Plaintiffs emailed Mr. Hill a supplement to their proof of loss form on
November 10, 2019—^within the 60-day deadline. (Doc. 27, ^ 23; 33, ^ 23). The Court will
therefore review Plaintiffs' proof ofloss form,their supplement thereto, along with their contents
itemization, photographs, and email searches for contents damaged by the flood,(Doc. 20,^ 26),
in determining whether Plaintiffs have complied with the requirements ofthe SFIP.
The Eighth Circuit Court of Appeals has held that an insured under a SFIP must "show
actual and complete compliance" with the requirements ofthe SFIP and that "it is not sufficient to
show... substantial[]compli[ance] or that the insurer suffered no prejudice." Mancini v. Redland
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Ins. Co., 248 F.3d 729,734(8th Cir. 2001). The Eighth Circuit Court of Appeals has analyzed the
"actual and complete compliance" requirement in the following cases: Mancini v. Redland Ins.
Co., 248 F.3d 729 (8th Cir. 2001), Gunter v. Farmers Ins. Co., 736 F.3d 768 (8th Cir. 2013), and
McCarty v. S. Farm Bureau Cas. Inc. Co., 758 F.3d 969 (8th Cir. 2014). In Mancini, the
independent adjuster sent the insured a proof of loss form containing all the required information,
together with an adjuster's report and supporting documentation estimating the value oftheir loss
at $56,000. Id. at 732. The adjuster indicated that the proof ofloss must be signed and notarized.
Id. The insureds believed they were entitled to the full policy limit of $93,000. Id. Instead of
signing the forms and returning them to the adjuster, the insured faxed them, neither signed nor
notarized, to the adjuster's claims representative with a hand-printed cover sheet bearing their
printed names and providing that "here is the information you are waiting on from [the adjuster]."
Id. at 132-33. The district court held that the insureds had "technically complied with the proof of
loss provisions ofthe policy" and awarded the insured the approximately $56,000 included by the
adjuster on the proof ofloss form, but denied other items of damages as not having been submitted
to the company in accordance with the policy. Id. at 733.
The Eighth Circuit Court of Appeals in Mancini reversed. Id. at 735. The court stated that
even if it was to accept the printed names of the insured on the cover sheet as the insured's
signature, the insured still failed to comply with the SFIP's requirements because it "does not
appear on a statement by the [insureds] as to the amount they claimed imder the policy." Id. at
734. Instead, the handwritten note stated only that the accompanying fax contained "the
information ... from [the adjuster]"; "[i]t ma[de] no representation that the [insureds] believed
[the adjuster's] figures were correct, or that they wished to use them as a basis for their claim." Id.
The court noted that, in fact, the adjuster testified that his reason for not signing the form was that
"$56,000 was not agreeable." Id. Because the insured failed to submit a signed and sworn
statement as to the amount claimed under the policy,the Court concluded that he failed to strictly
comply with the requirements ofthe SFIP and held that the insured was divested ofthe right to sue
for damages in federal court. Id. at 735.
In Gunter, the insureds held a SFIP through a WYO carrier. Farmers Insurance Company,
and filed claims under their policy, stating that the flood had produced cracks along the interior
and exterior walls oftheir home. 736F.3dat770. Farmers sent an engineer to inspect the property
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who concluded that most of the damage to the home was unrelated to the flood. Id. The insured
submitted to Farmers a proof ofloss claiming $12,488.04 and a building replacement proofofloss
claiming $249.73. Id. Farmers reviewed the proof of loss in light of the engineer's report and
paid $12,237.77 ofthe insured's stated loss. Id. The insured's home was subsequently condemned
and the insured's asked Farmers to inspect the property again and the engineer concluded that
approximately 30% of the building was damaged by settlement during and after the flood. Id. at
771. The insureds sought additional recovery under their Farmers flood policy in federal court.
Id. The district court granted summary judgment to Farmers after concluding that the insured had
failed to submit a proof of loss for any recovery above the amount the eompany had already paid
as required under the SFIP. Id.
On appeal, the insureds in Gunter argued that Mancini did not apply beeause unlike the
appellants in that case, the insureds timely filed a valid proof of loss for the amoimt of their
undisputed damage, thereby fulfilling the prerequisites for suing on the disputed amount of loss
on the same residence. Id. at 773-74. The Eighth Circuit Court ofAppeals found the First Cireuit's
analysis of a similar argument in DeCosta v. Allstate Insurance Company, 730 F.3d 76 (1st Cir.
2013)persuasive and rejected the insureds' argument. Id. at 11A. In.DeCosta,the court concluded
that a signed and sworn proofofloss for building damages "claims only the amounts listed in those
forms," and that the insured must timely file an additional proof of loss to claim any additional
amount of money. Id. (citing DeCosta,730 F.3d at 85). The court in Gunter concluded that "[t]he
proof of loss requirement as strictly construed makes clear that the [insureds] did not timely file
one for the amount they now claim in litigation." Id;see also Dickson v. Am. Bankers Ins. Co. of
Fla., 739 F.3d 397, 399(8th Cir. 2014)(citing Gunter, 736 F.3d at 774).
In McCarty, the insured had purchased from Southern Farm Bureau Casualty Insurance
Co. a standard flood insurance policy shortly before the Mississippi River flooded his riverside
hunting cabin. 758F.3dat971. Farm Bureau assigned adjuster to process his claim. Id. Although
in some cases,the SFIP allows an insurer to "accept the adjuster's report ofthe loss instead of[the
insured's] proof ofloss," the insured "must sign the adjuster's report" and the insured in McCarty
never did so. Id. The insured also never signed a proof of loss at any time nor did he sign any
document listing the necessary information, including loss amounts, required by the proof of loss
form. Id. The Eighth Circuit Court of Appeals held that the insured was precluded from recovery
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for flood damage under his SFIP because he failed to comply with the SFIP's required that he
submit a timely proof of loss. Id. at 973.
The Court finds that unlike in Mancini and McCarty cases, Plaintiffs complied with the
SFIP's requirements to timely submit a signed and sworn proof of loss as to the amount claimed
under their policy and unlike in Gunter,Plaintiffs are not seeking damages in excess ofthe amount
claimed on their proof of loss. PIIC contends, however, that Plaintiffs' proof of loss and
supplement thereto do not fulfill the SFIP's requirement requiring the insured to submit
"specifications of damaged buildings and detailed repair estimates."
The SFIP does not define "specifications of damaged buildings and detailed repair
estimates" and the Eighth Circuit Court of Appeals have not set forth any criteria for what
documentation may satisfy this requirement. Other jurisdictions that have examined the issue, as
Plaintiffs pointed out, have held that "an insured must submit enough support to allow the insurer
to evaluate the merits ofthe claim including the estimated cost of repair." (Doc. 26 at 431)(citing
Sun Ray Vill. Owners Ass'n v. Old Dominion Ins., 546 F.Supp.2d 1283, 1291 (N.D. Fla. 2008)).
In Sun Ray Village Owners Association v. Old Dominion Insurance, which Plaintiffs cited in
opposition to PllC's motion for summary judgment, the court stated that "[t]he language of the
SFIP hidicates, however,that at a minimum hisureds must identify the components ofthe insured
building which have been damaged ("specifications of damaged buildings") and then estimate the
cost of repairing each damaged components ("detailed repair estimates")." Id. "These estimates
may consist of contractors' estimates or the insured's own valuation ofthe cost of repair based on
his or her personal knowledge or research," but must "provide some means by which the insurer
can verify the amount claimed." Id. at 1292, nl9. The court acknowledged, however, that "[t]he
amount and character of the supporting documentation required will depend on the facts of each
individual case." Sun Ray Village, 546 F.Supp.2d at 1292, nl9.
The Court concludes that imder the facts of this case. Plaintiffs' proof of loss and
supplement thereto provided enough support to allow the insurer to evaluate the merits of
Plaintiffs' building damages claim. Plaintiffs made clear in their proof of loss supplement that
"[djating back to the initial meeting with the onsite adjuster it was made clear to [them] that
everything in [Plaintiffs'] cabin would be a total loss," and that their "cabin would need to be
knocked down and all the contents dumped" because significant mold was already present and
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there was no way to get eontractors in to mitigate damages because the cabin was surrounded by
water on all sides for approximately 3 weeks. (Doc. 19-16). Because Plaintiffs' cabin was not
their primary residenee, their SFIP provides that they are entitled to the "actual cash value" ofthe
structure. (Doc. 19-2, SFIP art. VII(V)(4)(i)). Plaintiffs' SFIP defines "actual cash value" as "the
cost to replace an insured item of property at the time of loss, less the value of its physical
depreciation." (Doc. 19-2, SFIP art. 11(B)(2)). Plaintiffs indicated in the supplement to their proof
of loss that based on their eonversation with engineer Erik Moore, they estimated the eost to
replace their cabin "by stripping the structure down to the studs (assuming you would use the
moldy studs),raising the structure over 4 feet, and refinishing would cost at least $200,000." (Doc.
19-16). Plaintiffs also indicated in their proof ofloss form estimated depreciation to be deducted
j&om their claim. (Doc. 19-16). Under the SFIP,PIIC was not required to accept Plaintiffs' proof
of loss and may aecept at its discretion, the adjuster's report of the loss. (Doc. 19-2, SFIP art
VII(J)(9)). However,the Court coneludes that under the facts ofthis case.Plaintiffs have complied
with the SFIP's requirement to timely submit a signed and sworn proof of loss and that the
supplement to their proof ofloss adequately detailed the basis oftheir claim that their cabin was a
total loss.
B. Breach of Contact for Contents Damages
1. Background
Independent adjuster, Mr. Hill, asked Plaintiffs to prepare a list of contents and values for
all ofthe personal property contents destroyed by the flood. (Docs. 27,113; 33,113). Plaintiffs
compiled a list documenting their personal property that was damaged by the flood and the
estimated value and sent it to Mr. Hill in an email on September 29, 2019. (Docs. 27,^ 13; 33,	|
13; 19-11 at 161). Mr. Hill acknowledged receipt ofPlaintiffs' email and asked for photos ofsome
ofthe items listed by them as well as additional priee verification listing the company name,brand,
model, etc. so he eould verify the pricing. (Docs. 27, Tf 14; 33,114; 19-11 at 166). With regard
to categories of goods listed such as "pots and pans" and "tools," Mr. Hill requested that Plaintiffs
provide more details of the items and more photos. (Does. 27,115; 33,115; 19-11 at 169). On
October 7, 2019, Mr. Reilly responded to Mr. Hill with prices from an internet search and
photographs of many ofthe products and items Mr. Hills had requested. (Doc. 27,^ 15; 33,115).
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On November 4, 2019, Mr. Hill sent Plaintiffs an email stating that the price verification
list that Plaintiffs sent on October 7, 2019, was insufficient. (Doc. 19-11 at 190). Mr. Hill asked
Mr. Reilly if he had original invoices for any ofthe higher priced items and asked whether it was
possible to go back to where the items were purchased and see if they could print out an invoice.
(Doc. 19-11 at 190). Mr. Hill also asked whether it was possible to get a photo of the tags on the
sectional,love seat, and beds so that he could verify the brand ofthese items. (Doc. 19-11 at 190).
Mr. Hill stated that Plaintiffs had several options with regard to their claim for contents damages.
(Doc. 19-11 at 190). Mr. Hill stated that if Plaintiffs could fully verify the brand, cost with actual
invoice or tag verification, he could add these costs to the contents estimate. (Doc. 19-11 at 190).
If Plaintiffs were imable to do so, Mr. Hill stated that he could apply like kind and quality pricing
for the items from FEMA's database or once Plaintiffs completed their proofofloss form,he could
include all items that Plaintiffs are unable to verify in a denial request directly to the carrier and
then Plaintiffs could appeal to the carrier. (Doc. 19-11 at 190,192). Mr. Hill concluded the letter
by requesting that Mr. Reilly review the contents spreadsheet again and provide him with further
verification so that Mr. Hill could add these contents to the claim. (Doc. 19-11 at 190-91).
On November 7, 2019, Mr. Hill sent Mr. Reilly an email with an updated estimate for Mr.
Reilly's review. (Doc. 19-11 at 192). Mr. Hill indicated in the email that the estimate included
all remaiiung contents items that Mr.Reilly had requested payment on,but that he applied database
pricing for some ofthe items because there was no documentation that Mr. Hill could use to verify
the prices ofsome ofthe contents. (Doc. 19-11 at 192). Hill also included several items in a denial
request. (Doc. 19-11 at 192). Hill's final estimate for building damages totaled $95,814.47
Replacement Cost Value("RCV"). (Doc.20,f 20;27, 20). After deducting the non-recoverable
depreciation of$11,250.35 and the $1,250 deductible,the net total building claim was $83,314.12.
(Doc. 20,1 20; 27,	|	20). Hill's final estimate for contents damages totaled $28,648.89 RCV.
(Doc. 20,121; 27,1f21). After deducting the non-recoverable depreciation of $7,422.86 and the
$1,250, the net total contents claim was $19,976.03. (Doc. 20, Tf 21, 27,^ 21).
Defendants have moved for summaryjudgment on Plaintiffs' claims for additional contents
damages relating the following items: dishware, utensils, ATY helmet, 25 life jackets, blue tooth
speaker, 3 hoses, hose carrier, 6 lawn chairs, 4 beach chairs, 4 towable tubes, water ski trainer,
custom bean bag boards and bags, toys, rakes, shovel, broom, 2 garbage cans, sump pump, 3
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fishing poles, tackle box, cordless battery charger, electric battery charger, air compressor, ratchet
straps,tarp, wet suit,jumper cables, Honda lawn mover bag,tether ball set, croquet set, grill cover,
miscellaneous lawn care tools, ski and tow ropes, socket set, weed wacker, industrial extension
cords, propane tank,jet ski cover,2 kids scooters, hand saws, drill, Honda lawn mower bag, dock
bumpers,and dock wheels. (Doc.20 at 340). Defendant argues that Plaintiffs have failed to submit
any evidence to prove that the items were located in the cabin and/or shed and were damaged by
the flood to warrant payment ofthe same. (Doc. 20 at 339-40).
Defendant has also moved for summaryjudgment on Plaintiffs' claims for "pots and pans,"
"misc. supplies," "tools", "multiple sizes of shoes and water shoes," "clothes-adult female,"
"clothes-adult male," because Plaintiffs failed to describe these items sufficiently to allow
Defendant to identify and verify the items that sustained flood damage. (Doc. 20 at 340).
Defendant has moved for summary judgment on Plaintiffs' claim for blinds and ceiling
fans because they are not payable under Coverage B (contents), but fall under Coverage A
(building) and are thus not covered contents items. (Doe. 20 at 341).
2. Analysis
Article VII(J)ofthe SFIP provides that in case ofa flood loss to insured property.Plaintiffs
must, among, other things: 1. Give prompt written notice to Defendant; 2. As soon as reasonably
possible, separate the damaged and undamaged property, putting it in the best possible order so
that Defendant may examine it; 3.Prepare an inventory ofdamaged property showing the quantity,
description, actual cash value, and amount ofloss. Attach all bills, receipts and related documents.
Article VII(J)(4)(f) of the SFIP provides that within 60 days after a loss. Plaintiffs must provide
their Proof of Loss which is Plaintiffs' statement ofthe amount they are claiming under the policy
signed and sworn by them,and which furnishes Defendant with an inventory ofdamaged personal
property described in Article VII(J)(3) of the SFIP. Article VII(J)(3) of the SFIP requires that a
claimant "Prepare and inventory of damaged property showing the quantity, description, actual
cash value, and amoxmt ofloss. Attach all bills, receipts, and related documents."
Plaintiffs argue in opposition to Defendant's motion for partial summary judgment that
Defendant did not previously request additional supporting evidence for many of the items
identified in its brief until now and that nevertheless. Plaintiffs submitted evidence supporting the
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vast majority of contents items on which Defendant has moved for summary judgment. (Doc. 26
at 434). Plaintiffs contend that a series of photographs taken between September 25, 2019, and
October 5,2019, which accompany the Affidavit ofBrendan Reilly at Exhibit E,contain examples
of many ofthe items damaged by the flood that Defendant now identifies as lacking support. The
items in these photographs include, hut are not limited to, kid-sized scooters, a jet ski cover, a
propane tank, industrial extension cords, a weed whacker, a socket set, ski and tow ropes, lavra
care tools, a grill cover, a tetherball set, a Honda lawnmower hag, a wet suit, a tarp, ratchet straps,
an air compressor,a shovel,toys, a custom bean bag hoard with hags, a water ski trainer,4 towahle
tubes, 4 beach chairs, 6 lawn chairs, and life jackets. (Doc. 26 at 434). Finally, -with regard to
Defendant's motion for partial summary judgment on Plaintiffs' claims for general categories of
goods such as "pots and pans" and "tools," Plaintiff argues that the SFIP does not require them to
"itemize and separately assign a value to every spring, every screwdriver, every sock, and every
plate that was lost or damaged in the flood." Plaintiff further notes that Defendant accepted
Plaintiffs' use of similar descriptive categories for other items such as "games," "glasses,"
"silverware," "paint supplies," and "toiletries." (Doc. 26 at 435). Plaintiffs do not appear to
contest Defendant's argument that their claim for damages to "blinds" and "ceiling fans" are
covered under their structural loss claim as opposed to their contents claim. (Doc. 26 at 436)
(noting that the estimated value ofthese items is less than $1,200 and that Plaintiffs' damages for
their structure and contents claims each exceed their policy's respective limits and that "it makes
no difference whether the Court considers these items as part of Plaintiffs' contents claim or as
part oftheir structural loss claim.").
The Court finds that questions of fact exist as to whether Plaintiffs' proof of loss and
corresponding documents comply with Article VII(J)(3)-(4) as to Plaintiffs' claim for damages to
personal property. As Plaintiffs have noted. Defendant does not contest that it was unable to
evaluate the merits of some of Plaintiffs' other claims for contents damages for such things as
"glasses" and "silverware." In addition, a jury may conclude that the photographs and internet
printouts with corresponding prices provided to Mr. Hill complied with the SFIP's requirements
as to all or some ofthe contents. Because a reasonable jury could find Plaintiffs' proof ofloss and
supporting documentation as to their claim for contents damages is sufficient to evaluate the merits
ofPlaintiffs' content damages claim, summary judgment is denied as to these claims.
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C. Plaintiffs' Extra-Contractual Claims
Plaintiffs' Complaint alleges extra-contractual claims in this matter, which include (1)
attorney fees pursuant to SDCL § 58-12-3 on the basis that Defendant's refusal to pay the full
amount of Plaintiffs' loss was vexatious and without reasonable cause (Count II); and (2) claims
for negligent and fraudulent misrepresentation in procurement of policy (Counts III and IV).
1. Negligent and Fraudulent Procurement Claims
The parties agree that the Eighth Circuit has held that state law tort claims against a WYO
carrier that arise out of claims handling matters are preempted and barred by federal law. (Docs.
32 at 573; 26 at 437)(citing Gunter v. Farmers Ins. Co., 736 F.3d 768, 772(8th Cir. 2013)("We
conclude that Article IX as amended demonstrates the clear intent to preempt state law claims that
arise from the handling of a claim imder the SFIP."). Although the Eighth Circuit has not directly
addressed the issue, the parties in this case agree that claims for negligent and fraudulent
procurement of a flood policy are frequently not considered by courts to be preempted under
federal law. (Docs. 26 at 437; 32 at 573). Both parties cite to the decision by the Fifth Circuit
Court of Appeals in Campo v. Allstate, 562 F.3d 751 (5th Cir. 2009) for this proposition. The
issue before the Court, then, is whether Plaintiffs' claims are in fact related to claims handling or
claims procurement.
Plaintiffs argue that their claims are for negligent and fraudulent misrepresentation in
procurement of policy and are not preempted by federal law. In Plaintiffs' claims for negligent
and fraudulent misrepresentation in Counts III and lY, Plaintiffs allege that hi 2019, prior to the
flood event. Defendant mailed to Plaintiffs a renewal form and bill for Plaintiffs to renew theh
policy offlood insurance with Defendant. (Docs. 1,130; 30-1 at 489). Plaintiffs allege that at the
time they renewed their policy of insurance with Defendant in 2019, Defendant made
representations hi the renewal form to Plaintiffs about the amount ofinsurance coverage it would
make available to Plaintiffs ($150,000 for building coverage and $60,000 for contents coverage).
(Doc. 1, Til 42, 48). Plaintiffs fiirther allege that Defendant either knew the representations were
untrue at the time they were made, or made them recklessly without a reasonable ground for
believing them to be true—all with the intent to induce Plaintiffs to renew theh policy, and that
Plaintiffs were damaged thereby.
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At no time jfrom the date the initial policy was in effect on June 30, 2011 until the date of
the flood on September 11, 2019, did Plaintiffs have any verbal conversations with anyone at
Philadelphia Indemnity Insurance Company. (Doc. 34-7; Tiffany Reilly Dep. 11:5-19). The basis
ofPlaintiffs' negligent and fraudulent misrepresentation claims is the annual renewal notice mailed
to Plaintiffs to renew their policy for the policy period June 30, 2019 until June 30, 2020 for
$150,000 in building coverage and $60,000 in contents coverage.
Plaintiffs rely on Campo v. Allstate, 562 F.3d 751 (5th Cir. 2009)for the proposition that
their alleged "procurement" claims are not preempted. (Doc. 26 at 437). In Campo, the plaintiff
filed a claim under his expired flood policy which was issued by Allstate Insurance Company, a
WYO carrier, shortly after his home had been destroyed by Hurricane Katrina. Id. at 752-53.
Allstate sent the plaintiff a letter indicating that it had evaluated his claim and requested the NFIP
to issue a check payable to the plaintiff for the policy limit of $98,200 and sent the plaintiff an
advance check of $2,500 for additional living expenses. Id. at 753. Allstate did not inform the
plaintiff that these payments were conditional on Allstate's eventual timely receipt of the $1,237
renewal premium. Id. The extended grace period expired without Campo having submitted the
premium. Id. Allstate sent the plaintiff a letter stating that coverage could not be extended for this
claim and instructing the plaintiff to repay the $2,500 it had advanced because the plaintiffs
coverage had lapsed. Id. The plaintiff filed a lawsuit alleging that Allstate made negligent
misrepresentations that prevented him from renewing his policy. Id.
Reviewing the plaintiffs claim on appeal, the Fifth Circuit Court of Appeals in Campo
acknowledged that federal law preempted state law tort claims arising from claims handling by a
WYO. Id. at 754. In examining the facts of the case, however, the court concluded that the
plaintiffs claim was related to procurement rather than handling. Id. at 755. The court reasoned:
At the relevant time, Campo's policy had expired subject to restoration only in the
event that he paid the premium within the extended grace period. Allstate was thus
by definition incapable of handling any new claims based on post-expiration
occurrences... Campo's coverage had expired', there was thus nothing to continue.
Instead, as a former policyholder, Campo would have had to procure flood
insurance. One way for him to do this was to pay his renewal premium to Allstate
by December 12, which would have caused his expired policy to be reinstated.
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Even though this is not a matter of initial procurement, the discrete facts of
this case nevertheless demonstrate that it is procurement-related: Allstate's alleged
misrepresentations occurred when Campo's only relationship vrith Allstate was that
of a both a former and a potential future policyholder. Further, Allstate's
representations were allegedly of a kind that could lull parties like Campo into
believing that they would receive indemnity without having to submit any
additional payment... while the shot clock ofthe grace period ticked away.
Id. at 756. The court in Campo held that "[i]n light of the peculiar and unusual circumstances of
this case, we hold that Campo's state-law claims are not related to the handling of an insurance
claim, but rather concern a species of insurance procurement." Id. The court further held that
federal law did not preempt procurement-related claims. Id. at 757-58.
Subsequent to Campo,the Fifth Circuit Court of Appeals issued its decision in Grissom v.
Liberty Mutual Fire Ins. Co.,678 F.3d 397(5th Cir. 2012). In Grissom, after the plaintiff's claim
for coverage was granted and paid in full, the plaintiff discovered his eligibility for additional
subsidized coverage. Id. at 401. Only then did the plaintiff raise the negligent misrepresentation
claim against his WYO insurer to obtain additional payments. Id. The basis of the plaintiffs
negligent misrepresentation claim was that while he was aheady insured, his insurer should have
been more proactive in informing him of his eligibility for additional subsidized flood insuranee
coverage. Id. The defendant WYO insurer moved for summary judgment on the plaintiffs
negligent misrepresentation claim, arguing that it was a state law tort claim arising from claims
handling by a WYO and was thus preempted by federal law. Id. at 400. The plaintiff had argued
in opposition that there was no preemption because the WYO insurer's negligence occurred while
seeking to renew the plaintiffs policy rather than in the course ofsome other policy administration
task. Id. In analyzing whether the plaintiffs claim was claim handling or insurance procurement,
the court stated that:
The key factor to determine if an interaction with an insurer is "claims
handling" is 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 ofinsurance, are "claims handling" subject to preemption.
Id. at 401; c.f, Harris v. Nationwide Mut. Fire Ins. Co., 832 F.3d 593, 597 (6th Cir. 2016)
("Beeause plaintiffs were potential future policyholders at the time the alleged wrongs occurred,
to the extent that their state-law claims arise solely from the policy-procurement process,the NFIA
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does not preempt them."); M& KRest. LLC v. Farmers Ins. Co., 29 F.Supp.Sd 1204, 1230(E.D.
Ark. 2014)("[FJacts may come to light which reveal that the [plaintiffs] were in fact covered by
the SFIP starting May 2, 2011. If so, some of the [plaintiffs'] state law-based claims against [the
hisurer] may in fact be claims-handling claims, and thus, expressly preempted by federal law.").
The Grissom court stated that in Campo, it was the lapse in coverage that turned what would
otherwise be a renewal into the procurement of a new policy. Id. at 401. The court distinguished
Campo, stating that "[b]ecause [the plaintiffs] dispute with [the WYO insurer] relate[d] to his
renewal of a policy already in place," it was "claims handling, not the initial procurement of the
insurance policy" and held that''Campo does not control... and [the plaintiffs] state law elaim is
preempted." Id.
Even if the Eighth Circuit Court of Appeals were to conclude, as the Fifth Circuit did in
Campo, that state law tort claims relating to the procurement of flood insurance under the NFIP
were not preempted by federal law,the Court finds that under the facts ofthis case, and the Grissom
decision issued after Campo, Plaintiffs' claims are not procurement-related claims, but rather are
claims-handling related claims. Unlike in Campo,there is no evidence that there was ever a "lapse
in coverage [to] tum[] what would otherwise be a renewal into the procurement of a new policy."
See Grissom, 678 F.3d at 401 (discussing the Campo case). Plaintiffs' initial policy period was
from June 30, 2011 until June 30, 2012. Renewal notices were mailed before the policy expired
on June 30th each year and Plaintiffs renewed their policy annually, -without lapse, until June 30,
2020. As in Grissom, the alleged misrepresentations in this case concern a renewal of a policy
that was already in place.
The Court notes further that Plaintiffs have failed to point to any evidence in the summary
judgment record to support its contention that at the time Defendant offered to renew Plaintiffs'
insurance policy, it did not have a reasonable ground for believing that it would make $150,000 in
building coverage and $60,000 in contents coverage available to Plaintiffs and that this renewal
offer was made -with the intent to induce Plaintiffs to renew their insurance policy -with Defendant.
Celotex Corp. v. Catrett, All U.S. 317, 322-23 (1986) (providing that summary judgment is
warranted if the nonmoving party has failed to present evidence to support an element of the
nonmovant's case on which it bears the ultimate burden of proof). No reasonable juror could
conclude that Defendant did not have a reasonable ground for believing that it would make
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$150,000 in building coverage and $60,000 in contents coverage available to Plaintiffs at the time
it mailed Plaintiffs their renewal notice simply because when Plaintiffs filed a flood elaim several
months later. Defendant ultimately paid less than the policy limits. Plaintiffs' SFIP specifically
provides that PIIC had the discretion to "accept the adjuster's report of the loss instead of
[Plaintiffs'] proof ofloss" and Mr. Hill's report was the only detailed repair estimate that had been
provided to PIIC for consideration by the proof of loss deadline. For these reasons, the Court
concludes that Plaintiffs' state law elaims for negligent and fraudulent procurement are preempted
by federal law.
2. Attorneys' Fees Claims
In Count I ofthe Complaint, Plaintiffs allege that Defendant breach the SFIP by failing to
pay Plaintiffs the policy limits for building and contents damages under their SFIP. In Count II,
Plaintiffs allege that Defendant's refusal to pay the policy limits was vexatious and without
reasonable cause entitling Plaintiffs to attomey's fees pursuant to SDCL § 58-12-3. Defendant
has moved for summary judgment on Plaintiffs' claim for attomey's fees, arguing that such claim
is preempted by federal law.
In support oftheir argument that attomey's fees under SDCL § 58-12-3 are not preempted
by the NFIA,Plaintiffs point to Stanton v. State Farm Fire & Cas. Co., 78 F.Supp.2d 1029(D.S.D.
1999)(Kommann, J.). In Stanton, the plaintiffs suffered damage to their building as a result of
substantial flooding. Id. at 1029. The plaintiffs' WYO insurer offered to settle Plaintiffs' claims
for an amount determined by an independent adjuster—an offer that the plaintiffs rejected. Id. at
1029-30. The plaintiffs filed a lawsuit alleging that the WYO insurer breached its duty of good
faith and fair dealing and intentionally inflicted emotional distress upon the plaintiffs. Id. at 1030.
The WYO insurer defendant moved to dismiss the plaintiffs' claims on the basis that the plaintiffs'
state law tort claims were preempted by the NFIA. Id.
The eourt concluded that the NFIA did not expressly preempt state law tort claims. Id. at
1033. In addressing the defendant's field preemption claim, the court reviewed the regulations
issued under the NFIA and concluded that '"FEMA regulations disclaiming any agency
relationship with WYO eompanies, as well as the terms of the FEMA-WYO agreement, more
indicate intent to leave those insurers responsible for their own tortious conduct' than they indicate
an intent to insulate those insurers from the tortious conduct of their agents." Id. at 1037 (citing
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Spence v. Omaha Indem., 996 F.2d 793, 797(5th Cir. 1993)). The coiirt stated that "[s]ince there
is no provision in the NFIA for holding insurers liable for errors or omissions, the most logical
conclusion to be drawn from [these] statutory provision[s] is that Congress contemplated that state
tort law could apply to the conduct ofinsurers." Id. (quoting Cohen v. State Farm,68 F.Supp.2d
1151,1156-57(C.D. Cal. 1999)). Accordingly,the court in Stanton concluded that the regulations
themselves dispel any conclusion that field preemption was intended. See id. at 1038. The court
acknowledged that attorney's fees under SDCL § 58-12-3 were not recoverable in tort claims, but
permitted plaintiffs statutory attorney's fees claim to move beyond the motion to dismiss, stating
that such claim might be "viable" because there was "apparently no possibility that FEMA could
be held liable for attorney fees." Id. at 1030.
In 2000,® subsequent to the Stanton decision, the SFIP was amended to contain a provision
that reads:
This policy and all disputes arisingfrom the handling ofany claim under the policy
are governed exclusively by the flood insurance regulations issued by FEMA,the
National Flood Insurance Act of 1968, as amended(42 U.S.C. § 4001, et seq.), and
Federal common law.
44 C.F.R. Pt. 61, App. A(l), Article IX(emphasis added); 65 FR 60758-01 (Oct. 12,2000); 65 FR
34823(May 31, 2000); Shuford v. Fidelity Nat. Property & Gas. Ins. Co., 508 F.3d 1337, 1344
(11th Cir. 2007)(stating that the provision became effective on December 31, 2000). Article IX
was included to "ensure uniform interpretation of SFIP and to clarify that 'matters pertaining to
the [SFIP],including issues relating to and arising out ofclaims handling, must be heard in Federal
court and are governed exclusively by Federal law.'" Gunter v. Farmers Ins. Co., 736 F.3d 768,
772 (8th Cir. 2013) (quoting 65 Fed.Reg. 34,824, 34,826-27 (May 31, 2000)). In Gunter v.
® Defendant stated in Its brief that the SFIP was revised in October 2021 to include Article X which reads,
"This policy and ail disputes arising from the insurer's policy issuance, policy administration, or the handling or 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 (42 U.S.C. § 4001, et seq.), and Federal common law." (Doc. 20 at 344).
Plaintiffs contend that Article X does not apply to this case because it did not take effect until after Plaintiffs filed
suit.
The SFIP was most recently amended in October 2021, as Defendant states. However, the SFIP was
previously amended on December 30, 2000 to include this same language in Article IX of the SFIP and was in effect
when Plaintiffs were issued their policy in June 2011 and when it last renewed In June 2019. See Gunter, 736 F.3d
at in (quoting 65 Fed.Reg. 34,824, 34,826-27(May 31, 2000)); 65 FR 60758-01 (Oct. 12, 2000); Shuford v. Fidelity
Nat. Property & Cos. Ins. Co., 508 F.3d 1337, 1344 (11th Cir. 2007)(stating that the provision became effective on
December 31, 2000); Wright v. Allstate Ins. Co., 415 F.3d 384(5th Cir. 2005)(same).
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Farmers Ins. Co.,the District Court for the Eastern District of Arkansas granted the WYO carrier's
motion to dismiss the plaintiffs extra-contractual state law claims. Civ. No.4:11-0161,2012 WL
12895684, at *4 (E.D. Ark. Jul. 11, 2012). The court acknowledged the Stanton ruling that the
NFIA did not expressly preempt state law tort claims, but stated that Stanton was decided before
the 2000 amendment that added the express preemption provision and opined that the court"might
well have come to a different conclusion as to express preemption if the SFIP at issue there
contained the amended article nine." Id. at *3. On appeal, the Eighth Circuit Court of Appeals
affirmed, holding that "Article IX as amended demonstrates the clear intent to preempt state law
claims that arising from the handling of a claim under the SFIP." Gunter, 736 F.3d at 772.
It is clear to the Court that under Article IX of the SFIP that was in effect at the time
Plaintiffs' renewed their policy in June 2019, and the Eighth Circuit's interpretation of Article IX
in Gunter, state law claims arising from the handling of the claim imder the SFIP are expressly
preempted by the NFIA. As discussed above in this opinion, the parties do not dispute this issue.
(Docs. 32 at 573; 26 at 437)(citing Gunter,136 F.3d at 772). However,Plaintiffs appear to argue
that even so, attorney's fees are not preempted and are thus recoverable under SDLC § 58-12-3 if
Defendant's refusal to settle within policy limits during their handling ofthe claim was vexatious
and without reasonable cause. The Court disagrees.
The parties acknowledge that the reason extra-contractual tort claims relating to the
procurement of an insurance policy under the NFIP are not always preempted by federal law is
because such claims are generally not payable from the federal treasury. (Doc. 26 at 437)(quoting
Landry v. State Farm Fire & Gas. Co.,428 F.Supp.2d 531,534(E.D. La. 2006));(Doc. 26 at 439)
(quoting Shapiro v. Wright Nat'I Flood Ins. Co., Civ. No. 2:19-0679, 2020 WL 224538, at *4
(M.D. Fla. Jan. 15, 2020)("[T]he determining factor is whether the government is the source of
the funds or who would pay an award of attorney's fees and costs."). In Landry v. State Farm Fire
& Cas. Co., which was cited by Plaintiffs in their brief opposing summary judgment, the court
explained that:
Policies under the National Flood Insurance Program are paid from the federal
treasury; thus, claims regarding handling ofthose policies also involve the spending
offederal funds. However,under the NFIA,federal funds are not used to reimburse
WYO insurers for liability arising outside the scope ofthe Act. Thus,for tort claims
or extra-contractual claims related to an NFIA policy, an insured can obtain no
reimbursement from the federal treasury because these claims fall outside the scope
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ofthe Act. Therefore,there is no equivalentjustification for federaljurisdiction for
state law tort claims because there is no expenditure offederal funds.
428 F.Supp.2d531,534.
Unlike extra-contractual tort claims relating to procurement of the policy, claims for
attorney's fees under SDCL § 58-12-3 in this case would be paid from the federal treasury. The
NFIA provides that the federal government will both indemnify and defend WYO insurers in the
program for insurance and litigation expenses unless the "litigation is grounded in actions by the
[WYO] Company that are significantly outside the scope of th[e] Arrangement, and/or involves
issues of agent negligence." Grissom v. Liberty Mut. Fire Ins. Co., 678 F.3d 397, 402 (5th Cir.
2012) (quoting 44 C.F.R. pt. 62, app. A; 44 C.F.R. pt. 62, app. A, art 111(D)(3)(a)). The
Arrangement requires companies to notify FEMA of litigation expenses and requires FEMA's
Office of the Chief Counsel to ensure the litigation is based on actions within the scope of the
Arrangement and does not involve agent negligence. Id. (citing 44 C.F.R. pt. 62,app. A;44 C.F.R.
pt. 62, app. A, art III(D)(2)-(3)(a)). If FEMA's Chief Counsel, along with the Federal Insurance
Administrator, determine "that the litigation is grounded in actions by the Company that are
significantly outside the scope of the Arrangement, and/or involves issues of agent negligence"
the Federal Insurance Administrator has thirty days to inform the insurer that the litigation
expenses (in whole or in part) will not be covered. Id. (citing (D)(3)(a)-(d)). 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 resulting damages awards. Id.
In this case,it is undisputed that PIIC has not received any correspondence from the Federal
Insurance Administration, FEMA or its Office of General Counsel declaring or suggesting that
this case falls outside the "scope' of the Arrangement as that word is used at Article IV(D)(3) of
the Arrangement. (Docs. 20, Tf 8; 27, T| 8). It is also undisputed that PIIC's legal bills for the
defense ofthis lawsuit have been submitted periodically to FEMA for reimbursement throughout
the course ofthese proceedings, and FEMA has reimbursed PIIC for each ofthose bills throughout
this case. (Docs. 20,17; 27,17). If allowed to proceed, an award of attorneys' fees under SDCL
§ 58-12-3 based upon a finding that Defendant's refusal to pay full policy benefits was vexatious
and without reasonable cause would likewise be paid from the federal treasury. For these reasons,
the Court finds that Plaintiffs' attorney's fees claim under SDCL § 58-12-3 is preempted by federal
law.
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3. EAJA
Plaintiffs argue that they are entitled to attorney's fees and costs under the Equal Access to
Justice Act. (Doc.26 at 438). Under the EAJA,courts may award attorney's fees to the prevailing
party in a civil case against "the United States or any agency or any official of the United States
acting in his or her official capacity. . . ." 28 U.S.C. § 2412. Several courts that have addressed
this issue have concluded that a plaintiff is not entitled to attorney's fees and costs under the EAJA
in cases for breach of a SFIP brought against a WYO program insurance carrier because WYO
carriers are not considered "agencies" under the EAJA. See Dwyer v. Fidelity Nat'I Property &
Cas. Ins. Co., 565 F.3d 284, 289-90 (5th Cir. 2009) (holding that although a WYO carrier
participating in the NFIP is a fiscal agent for the United States, such does not transform the WYO
carrier into a federal agency under the EAJA); McCarty v. Southern Farm Bureau Cas. Ins. Co.,
Civ. No. 5:12-0148, 2013 WL 593636, at *4(E.D. Ark. Feb. 15,2013)(citing Dwyer,565 F.3d at
290); Hampson v. Wright Nat'l Flood Ins. Co., Civ. No. 4:19-10083, 2019 WL 8060185, at *2
(S.D. Fla. Aug. 12, 2019)(same). However, Plaintiffs argue that this Court should instead follow
Shapiro v. Wright National Flood Insurance Co. which stated that the determining factor in this
analysis is not such much whether a WYO carrier is an "agency" of the United States under the
EAJA, but rather whether the government is the soruce of funds for an award of attorney's fees.
See Shapiro v. Wright Nat'l Flood Ins. Co., Civ. No. 2:19-0679, 2020 WL 224538, at *4 (M.D.
Fla. Jan. 15,2020){ciXmgNewton v. Capital Assurance Co.,245 F.3d 1306,1312(11th Cir. 2001)
(holding that the no-interest rule prohibits the award of prejudgment interest against WYO
companies "because the regulations detailing the financial relationship between FEMA and WYO
companies establish that the interest charges against WYO eompanies are in reality "direct charges
against FEMA.")).The Eighth Circuit Court ofAppeals does not seem to have addressed this issue.
WYO companies, rather than FEMA, are initially responsible for the "adjustment,
settlement, payment, and defense" of claims on their policies. Shapiro, 2020 WL 224538, at *2
(quoting 44 C.F.R. § 62.23(d)). "A WYO company choosing to defend against a claim must
therefore seek reimbursement for its costs rather than merely handing the case over to FEMA."
Id. at *3 {c\tva.g Newton,245 F.3d at 1312(citing 44 C.F.R. § 62.23(9)(6)). In Shapiro,theDistnct
Court for the Middle District ofFlorida construed the defendant's Rule 12(b)(6) motion to dismiss
the plaintiffs request for attorney's fees and costs as a motion to strike under Federal Rule 12(f).
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Id. The court stated that under the federal regulations, whether payment of attorney's fees is a
direct charge on federal funds depends upon whether the WYO company seeks reimbursement for
its defense costs from FEMA and otherwise has an arrangement with FEMA whereby it is entitled
to reimbursement. Id. at *4. The court denied the defendant's motion to strike, finding that "it is
at least plausible at this point in the litigation that attorney's fees may be paid from federal funds
by FEMA." Id.
This case is at a later procedural stage than in Shapiro. Here, the Court is ruling on a
motion for partial summary judgment rather than a motion to dismiss or strike. Even ifthe Eighth
Circuit Court of Appeals were to follow Shapiro and conclude that a plaintiffs request for
attorney's fees and costs under the EAJA in a lawsuit against a WYO carrier is preempted only if
it is shown that such fees and costs are reimbursed by the federal government,the undisputed facts
show that Defendant in this case made a demand for reimbursement and that FEMA has been
reimbursing Defendant's attomey's fees and costs throughout the litigation. Defendants' motion
for summary judgment is granted as to Plaintiffs' request for attomey's fees and costs under the
EAJA because in this case, such fees and costs are direct charge on the federal treasury.
4. Claims for Judicial Interest
Defendants also move for summary judgment on Plaintiffs' claim of relief for judicial
interest because such an award would violate the "no-interest mle." "In the absence of express
congressional consent to the award of interest separate from a general waiver ofimmunity to suit,
the United States is immune from an interest award." Library ofCongress v. Shaw,478 U.S. 310,
314(1986). This courtjoins the many other courts that have examined this issue have concluded
that the regulations detailing the financial relationship between FEMA and WYO companies
establish that interest charges against WYO companies are direct charges on the public treasury
and are therefore barred by the "no-interest mle." See, e.g.. Studio Frames Ltd. v. Standard Fire
Ins. Co., 483 F.3d 239, 253 (4th Cir. 2007); Palmieri v. Allstate Ins. Co., 445 F.3d 179, 193 (2d
Cir. 2006); Newton Capital Assurance Co., 245 F.3d 1306, 1312(11th Cir. 2001); Sandia Oil v.
Beckton, 889 F.2d 258, 261-64(10th Cir. 1989); McCarty v. S. Farm Bureau Cas. Ins., Civ. No.
5:12-0148, 2013 WL 593636, at *5(E.D. Ark. Feb. 15, 2013).
II. Motion to Quash Jury Demand
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A court trial in this case is scheduled to begin on July 26, 2022. (Doc. 35). The Court's
initial Rule 16 scheduling order states:
Plaintiffs also claim punitive damages, and likewise claim the right to a jury trial
on the punitive damages. If there is a remaining claim on punitive damages, the
Court will then have briefing on the issue of the right to a jury trial for punitive
damages. The parties should he aware that it is the Court's preliminary view that
Plaintiffs are entitled to a jury trial ifthere is a remaining punitive damage claim.
(Doc. 15).
Defendants move to quash Plaintiffs' jury demand on the basis that it is U.S. Treasury
funds, and not the assets of Defendant, that are at stake in this litigation. (Docs. 21, 22)(citing
Gunter v. Farmers Inc. Co., 136 F.Bd 768, 773 (8th Cir. 2013)("In an action involving federal
funds, a plaintiff is only entitled to a jury trial if Congress has granted that right by statute.")).
Plaintiffs acknowledge that a jury trial is generally unavailable for most oftheir claims, hut argue
that they have pleaded extra-contractual claims for negligent and fraudulent procurement of an
insurance policy. (Doc. 25 at 417-18). Plaintiffs argue that because federal funds are not at stake
with respect to these types of claims, courts regularly permit such claims to be tried to a jury.
(Doe. 25 at 417-18). Plaintiffs argue that should the Court "deny Defendant's motion for partial
summary judgment on Plaintiffs' extra-contractual claims, then so, too, should the Court deny
Defendant's motion to quash Plaintiffs' demand for ajury trial with respect to those same claims."
(Doc. 25 at 418).
The Court has granted Defendant summary judgment on Plaintiffs' claims for negligent
and fraudulent procurement. As explained above,based on the facts ofthis case,Plaintiffs' alleged
state law tort claims for negligent and fraudulent procurement are preempted by the NFIA.
Defendants' Motion to Quash Jury Demand is therefore granted.
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Accordingly, it is hereby ORDERED:
1) Defendant's Motion for Partial Summary Judgment(Doc. 17)is GRANTED IN PART
AND DENIED IN PART; Defendant's Motion is denied as to Plaintiffs' elaims for
additional building and contents damages, and is granted in all other respects; and
2) Defendant's Motion to Quash Jury Demand (Doc. 21)is GRANTED.
Dated this _^_^day of June, 2022.
BY THE COURT-
lawrence L. Piersol
ATTEST: United States District Judge
MARTHEW W. THE!
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