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With the start of hurricane season less than a month away, the Gulf Coast is once again preparing to dance with Mother Nature. Residents are hopeful that this season will be known for respectful do-si-dos, rather than the high-velocity mosh pits that residents endured with Hurricanes Katrina, Rita, and Gustav, but gale force winds aren't the area's only foe in a storm. Lawyers and their clients inevitably end up battling insurance companies after every major hurricane.
A recent Fifth Circuit Court of Appeals opinion in a negligent misrepresentation appeal shows that those battles can be almost as devastating to flood insurance policy holders as the hurricanes themselves.
James Grissom purchased a Write Your Own (WYO) flood insurance policy for his home in Pascagoula, Mississippi under the Federal National Flood Insurance Program in 1977. In 1989, a preferred risk policy became available for the flood zone on which Grissom's home was located; Grissom is unsure if he was ever explicitly offered the preferred risk policy.
In 2004, Grissom renewed his flood insurance policy with a 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. A 2004 renewal notice from his carrier, Liberty Mutual, mentioned preferred rate policies, but did not indicate whether Grissom was eligible.
After his home was destroyed in 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. The district court sent the case to the jury, which awarded Grissom $212,900 in compensatory damages. The Fifth Circuit Court of Appeals recently reversed that award, and remanded the case to the district court with instructions to dismiss Grissom's claim.
The federal government underwrites flood insurance policies, so there are limits on what kinds of claims a policy holder can file against an insurance provider. Here, the appellate court found that Grissom's claim stemmed from claims handling, not insurance procurement. Since federal law preempts state law tort claims arising from claims handling by a WYO flood insurance program, Grissom's claim was preempted.
The Fifth Circuit Court of Appeals further concluded that the matter never should have gone to a jury, and that Grissom's negligent misrepresentation claim failed because Liberty Mutual didn't have a fiduciary duty to provide advice to insurance customers.
The nightmare of a hurricane only begins when the storm ends; homeowners can continue cleaning up a legal mess long after the branches and debris are gone. While a flood insurance policyholder may feel cheated upon learning that an insurance company failed to mention his preferred risk policy eligibility, it doesn't mean that he can recover in court.