Dwyer v. Fidelity National Property & Casualty Insurance

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

April 9, 2009

No. 07-30831 Charles R. Fulbruge III

Clerk

WILLIAM DWYER, JR.; CYNTHIA DWYER

Plaintiffs-Appellees

v.

FIDELITY NATIONAL PROPERTY AND CASUALTY INSURANCE

COMPANY

Defendant-Appellant

Appeal from the United States District Court

for the Eastern District of Louisiana

Before JONES, Chief Judge, JOLLY, Circuit Judge, and CARDONE,* District

Judge.

EDITH H. JONES, Chief Judge:

William and Cynthia Dwyer (“Dwyers”) sued Fidelity National Property

and Casualty Insurance Company (“Fidelity”) for insurance payments on their

home damaged by Hurricane Katrina. Shortly before trial, Fidelity sought to

compel non-binding appraisal of the damages, pursuant to the contract. The

district court denied this request as untimely and, following a bench trial,

awarded the Dwyers $56,963.19 in damages and $22,927.88 in attorneys’ fees

under the Equal Access to Justice Act. Because the district erred in denying

*

District Judge of the Western District of Texas, sitting by designation.

No. 07-30831

Fidelity’s motion to compel appraisal and in awarding attorneys’ fees, we vacate

the judgment and remand for appraisal as required by regulations of the

National Flood Insurance Program.

I. BACKGROUND

Congress created the National Flood Insurance Program (“NFIP”) to offer

flood insurance at rates that were uneconomical for private companies. Gowland

v. Aetna, 143 F.3d 951, 953 (5th Cir. 1998). The Federal Emergency Manage-

ment Agency (“FEMA”) administers the program and has established, by

regulation, the Standard Flood Insurance Policy (“SFIP”), 44 C.F.R. § 61.13.

SFIPs may be purchased either directly from FEMA or through private insurers.

Marseilles Homeowners Condo. Ass’n, Inc. v. Fidelity Nat’l Ins. Co., 542 F.3d

1053, 1054 (5th Cir. 2008) (per curiam). Private insurers offering these policies

are called “Write Your Own” (“WYO”) companies and act as fiscal agents of the

United States. Any payment on the policy ultimately comes from the United

States treasury. 42 U.S.C. § 4082; Gallup v. Omaha Prop. & Cas. Ins. Co.,

434 F.3d 341, 342 (5th Cir. 2005). WYO insurance carriers may not alter, vary,

or waive the terms of the SFIP contract. 44 C.F.R. § 61.13(d).

The Dwyers purchased an SFIP from Fidelity to protect their home in

Slidell, Louisiana, obtaining $250,000 coverage for the building and $100,000 for

its contents. Hurricane Katrina’s wind and flood buffeted the home in August

2005. Following inspection by an independent adjuster, Fidelity paid the policy

limit for contents and $86,629 1 for flooding-related building damages. After the

first set of checks did not arrive, Fidelity mailed a second set, which the Dwyers

received in December.

On February 21, 2006, Dwyer sent a certified letter to both Fidelity and

Traveler’s Insurance Company (“Traveler’s”), whose homeowner’s insurance

1

The actual estimated damages were roughly $2,700 more but were reduced for

depreciation.

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No. 07-30831

policy on the Dwyer dwelling covers wind damage. The letter stated that a

contractor’s estimate to repair the house was roughly $100,000 more than the

combined amounts paid by Fidelity and Traveler’s. Dwyer wrote that neither he

nor the contractor could accurately distinguish between wind and flood damage,

so Dwyer recommended each company pay the additional expenses in proportion

to the amount it had already paid. Based on this calculation, he requested an

additional $85,471.89 from Fidelity.

Fidelity instructed the Dwyers to contact the adjuster and faxed a copy of

the letter to him. Apparently no further action occurred, and the Dwyers sued

Fidelity on August 25, 2006, seeking additional money under the policy and

damages under federal common law for bad faith claim adjustment. The

complaint does not limit its allegations to undervaluation of the Dwyers’ loss nor

does it disavow a claim to increase Fidelity’s share of the wind/water allocation,

and it includes claims such as “failing to properly train its adjusters and

agents,” which could be related to valuation, coverage, or both.

In its answer, Fidelity denied liability and stated:

If these Plaintiffs’ SFIP claims dispute reaches a point where it is

established that there is (1) full and complete compliance with all

conditions precedent to the making of a claim, and (2) resolution and

agreement upon all issues of both coverage and the scope of the loss,

then in that event (but not until that event) Defendant affirmatively

asserts and invokes the appraisal clause of the SFIP. 44 C.F.R.

Pt. 61, App. A(1), Art. VII(P).

The appraisal clause allows either party to demand non-binding appraisal of the

amount of loss, but FEMA regulations permit a claimant dissatisfied with the

appraisal amount to sue. See 44 C.F.R. § 62.22(a) (“[U]pon the refusal of the

claimant to accept the amount allowed upon any claim after appraisal pursuant

to policy provisions, the claimant . . . may . . . institute an action on such claim

against the insurer . . . .”).

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No. 07-30831

The case proceeded until January 5, 2007, when, as part of their expert

witness disclosure, the Dwyers provided Fidelity with a detailed repair estimate

from Louis Velez, a certified contractor. The Velez estimate duplicates the

adjuster’s earlier estimate but states higher prices for the work. This document

convinced Fidelity that the scope of coverage was undisputed, and the dispute

was limited to costs. The insurer demanded, as stated in its answer, that the

claim undergo appraisal. When the Dwyers refused, Fidelity filed a motion to

compel appraisal on February 13.

Because the trial date was close at hand, the district court denied the

motion as untimely. After a four-day bench trial, the court awarded the Dwyers

the difference between Velez’s estimate and the money already paid by Fidelity.

In addition, the court awarded the Dwyers their attorneys’ fees, finding that

Fidelity qualified as a “federal agency” under the Equal Access to Justice Act.

Fidelity appeals both rulings.

II. APPRAISAL

The relevant portion of the appraisal clause in the SFIP contract states:2

“If you and we fail to agree on the actual cash value or, if applicable,

replacement cost of your damaged property to settle upon the amount of loss,

then either may demand an appraisal of the loss.” 44 C.F.R. Pt. 61, App. A(1),

Art. VII(P). This appraisal is not an arbitration and is not governed by the

Federal Arbitration Act (FAA). See Hartford Lloyd’s Ins. Co. v. Teachworth,

898 F.2d 1058 (5th Cir. 1990) (distinguishing between insurance appraisals and

arbitrations). We thus construe the SFIP according to federal common law,

44 C.F.R. Pt. 61, App. A(1), Art. IX, and do not apply the FAA’s presumption in

favor of arbitration. See Moses H. Cone Memorial Hosp. v. Mercury Const. Corp.,

460 U.S. 1, 24–25, 103 S. Ct. 927 (1983).

2

The appraisal clause also includes procedures for the appraisal, but these are not at

issue here.

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No. 07-30831

The district court did not state why it denied Fidelity’s motion to compel

other than to say “it comes too late on the eve of trial,” suggesting that Fidelity

waived the appraisal provision.3 Like any other contract term, the appraisal

provision may be waived by conduct inconsistent with invocation of the

provision. Burton-Dixie Corp. v. Timothy McCarthy Const. Co., 436 F.2d 405,

407–08 (5th Cir. 1971). The Fifth Circuit treats waiver as a question of law,

which we review de novo, although we review the factual conclusions underlying

that finding for clear error. Price v. Drexel Burnham Lambert, Inc., 791 F.2d

1156, 1159 (5th Cir. 1986).

Fidelity contends that under the terms of the SFIP, it cannot waive this

provision. 44 C.F.R. § 61.13(d). Analogizing to the requirement that SFIP

claimants submit a formal proof of loss statement, Fidelity asserts that the

appraisal clause cannot be waived without the express written consent of the

Federal Insurance Administrator. Gowland v. Aetna, 143 F.3d 951, 954–55 (5th

Cir. 1998) (“When federal funds are involved, the judiciary is powerless to

uphold a claim of estoppel because such a holding would encroach upon the

appropriation power granted exclusively to Congress by the Constitution.”). The

analogy is unpersuasive. The “Requirements in Case of Loss” portion of the

SFIP states: “In case of a flood loss to insured property, you must: [w]ithin

60 days after the loss, send us a proof of loss . . . .” 44 C.F.R. Pt. 61, App. A(1),

Art. VII(J)(4) (emphasis added). A proof of loss is mandated as a requirement

for disbursing funds from the public treasury. Gowland, 143 F.3d at 955. In

contrast, the appraisal clause provides an option for dispute resolution that

either party may invoke. 44 C.F.R. Pt. 61, App. A(1), Art. VII(P). The

3

If the district court believed Fidelity knew earlier that the dispute extended only to

pricing, this finding would be clearly wrong. Before they produced the Velez estimate, the

Dwyers had not clarified that they only disputed the amount of loss, and the relative scope of

flood and wind damage seemed to be at issue.

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No. 07-30831

regulations authorize Fidelity to satisfy a flood insurance claim without

appraisal if Fidelity never requests one. It stands to reason that Fidelity could

also acquiesce in payment by judgment following trial rather than opt for

appraisal. Moreover, Fidelity could acquiesce in the litigation process even after

becoming aware that a claim was limited to a dispute covered by the appraisal

clause. In the last circumstance, waiver of the appraisal option does not

contravene the regulations’ intent but fosters efficiency in claim resolution.

The Dwyers, in contrast, argue that appraisal cannot be requested after

suit has been filed. They offer no authority 4 to support their position. Nothing

in the clause or the contract as a whole establishes a time limit for invoking the

appraisal clause. Contractual clauses cannot be evaded by racing to the

courthouse, and appraisal and arbitration clauses are routinely invoked during

litigation. E.g., Hill v. G E Power Sys., Inc., 282 F.3d 343 (5th Cir. 2002)

(arbitration); Terra Indus., Inc. v. Commonwealth Ins. Co., 981 F. Supp. 581, 600

(N.D. Iowa 1997) (appraisal). Consequently, the appraisal clause may be

invoked after suit, provided that the failure to do so has not amounted to waiver.

With these principles in mind, we turn to the facts. The district court

incorrectly homed in on the interval between the appraisal request and the trial

date. The appropriate waiver inquiry examines Fidelity’s knowledge and

action—when Fidelity knew that the appraisal clause could be invoked, whether

it reacted timely to the knowledge. Fidelity first learned that the Dwyers

4

Footnote 4 on page 17 of the appellees’ brief quotes deposition testimony from the

FEMA Director of Claims in an unrelated case, which states his belief that the appraisal

clause cannot be invoked after a lawsuit has been filed. Quoting this testimony is both

inappropriate, as it is outside the record, and misleading in light of the government’s errata

sheet to the deposition, which the Dwyers’ received before filing their brief. The errata sheet

explained:

The answer was mistaken. There is no FEMA policy that prevents an NFIP

insured or an insurer from invoking the apprisal clause under the appropriate

circumstances after a lawsuit has been filed.

This comes dangerously close to sanctionable behavior. We GRANT Appellant’s motion to

strike footnote 4 on page 17 of Appellees’ brief.

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No. 07-30831

disputed only the amount of loss, not coverage or other issues, on January 5,

when it received the Velez estimate. Five weeks later, after informal requests

failed, Fidelity formally moved the court to compel appraisal. Fidelity did not

sit on its rights. In the context of the ongoing litigation, Fidelity raised the issue

of appraisal in a timely fashion. The district court erred in denying the motion

to compel appraisal.

The Dwyers complain of the costs they incurred for litigation—hiring an

expert, taking depositions, and preparing for trial. However, the responsibility

for the late appraisal request rests entirely upon them. At any time, beginning

with the filing of their complaint, the Dwyers could have clarified that they

sought only to challenge the amount of costs estimated by the adjuster. Their

failure to do so cannot lead to the conclusion that Fidelity waived its right to

appraisal.

Anticipating the result if its appraisal point should prevail, Fidelity

asserts that by not acquiescing in the appraisal, the Dwyers breached the

insurance contract and have forfeited any recovery under the policy. We

disagree. Fidelity cannot exploit noncompliance blessed by a district judge to

reap a windfall under the policy. Fidelity sought appraisal, the district court

found that Fidelity had waived its rights, and the Dwyers acted accordingly.

Contrary to Fidelity’s assertions, the Dwyers did not “refuse[] to comply with the

basic rules of the program.”

Fidelity is correct, however, in its emphasis on the importance of the terms

of the SFIP and the need for compliance with the procedures there set forth.

Although the expenditure of judicial resources that occurred here is unfortunate,

and we are hesitant to vacate the result of a completed trial, the appropriate

remedy is to enforce the contract and provide Fidelity with a nonbinding

appraisal under the SFIP. We vacate the district court’s judgment and remand

with instructions to compel appraisal pursuant to the SFIP.

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No. 07-30831

III. ATTORNEYS’ FEES

Although vacating the judgment perforce eliminates the attorneys’ fee

award at this stage, we address this issue lest it be resuscitated after further

proceedings. The district court predicated its award of attorneys’ fees on

Fidelity’s pre-suit “failure to act upon the Dwyers’ supplemental flood claims.”

The basis for the award was the Equal Access to Justice Act (“EAJA”),

28 U.S.C. § 2412, which states:

Except as otherwise specifically provided by statute, a court shall

award to a prevailing party other than the United States fees and

other expenses . . . incurred by that party in any civil action (other

than cases sounding in tort) . . . brought by or against the United

States in any court having jurisdiction of that action, unless the

court finds that the position of the United States was substantially

justified or that special circumstances make an award unjust.

28 U.S.C. § 2412(d)(1)(A). The statute defines “Unites States” to include “any

agency or any official of the United States acting in his or her official capacity.”

28 U.S.C. § 2412(d)(2)(C). Fidelity is neither the United States nor an official of

the United States. The district court applied the definition of “federal agency”

found in the National Flood Insurance Act. This would be a plausible source

were it not for the portion of Title 28 defining terms as they are used in that title

itself:

As used in this title:

...

The term “agency” includes any department, independent

establishment, commission, administration, authority, board or

bureau of the United States or any corporation in which the United

States has a proprietary interest, unless the context shows that

such term was intended to be used in a more limited sense.

28 U.S.C. § 451. Fidelity, a private insurer, cannot be characterized as a

department, commission, administration, authority, board, or bureau of the

United States. For the Dwyers to recover EAJA fees, Fidelity must qualify as

an “independent establishment” or a “corporation in which the United States has

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No. 07-30831

a proprietary interest.” An “independent establishment,” however, is “an

independent entity within the executive branch.” Scott v. Fed. Reserve Bank of

Kansas City, 406 F.3d 532, 535 (8th Cir. 2005) (emphasis added). Fidelity is not

so situated, nor is Fidelity “a corporation in which the United States has a

proprietary interest.” See id.

Finally, although Fidelity acts as a fiscal agent of the United States, “it is

possible to be a fiscal agent . . . of the government without being a federal

agency.” Id. (citing In Re Hoag Ranches, 846 F.2d 1225, 1227 (9th Cir. 1988)).

The SFIP regulations expressly state:

A WYO Company shall act as a fiscal agent of the Federal

Government, but not as its general agent. WYO Companies are

solely responsible for their obligations to their insured under any

flood insurance policies issued under agreements entered into with

the Administrator, such that the Federal Government is not a

proper party defendant in any lawsuit arising out of such policies.

44 C.F.R. § 62.23(g). In analyzing the definition of “federal agency” under the

Federal Tort Claims Act, the Supreme Court admonished that although

“[b]illions of dollars of federal money are spent each year on projects performed

by people and institutions which contract with the Government” and “the

Government may fix specific and precise conditions to implement federal

objectives,” such contracts and regulations do not transform private actors into

federal agencies. United States v. Orleans, 425 U.S. 807, 815–16, 96 S. Ct. 1971,

1976–77 (1976). Likewise, serving as a fiscal agent and a participant in a

heavily regulated federal program did not transform Fidelity into a federal

agency under the EAJA.

The district court correctly noted that the EAJA would apply to a suit

against FEMA. See In re Estate of Lee, 812 F.2d 253 (5th Cir. 1987). The district

court might be correct in concluding that allowing suit against private insurers

is a mere formality imposed by regulation, but regardless, the EAJA must be

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No. 07-30831

applied according to its terms. This court does not second-guess Congress’s

policy decisions. See Harbison v. Bell, ____ U.S. ____, ____ S. Ct. ____, 2009 WL

838173, at *11 (Apr. 1, 2009) (Thomas, J., concurring).

This conclusion is consistent with that reached by several district courts.

See Dickerson v. State Farm Fire and Cas. Co., 2007 WL 1537631, at *4,

No. 06-5181 (E.D. La. May 23, 2007) (“[W]hile State Farm is a WYO carrier

participating in the NFIP as fiscal agent for the United States, it is not an

agency of the United States as required by the EAJA.”); Schopen v. State Farm

Ins. Co., 1996 WL 696444, at *2, No. 96-1892 (E.D. La. Dec. 2, 1996) (“Section

2412(b) only applies to civil actions which are ‘brought . . . against the United

States.’ State Farm is neither the United States nor an agency of the United

States.”). The district court erred in awarding EAJA fees to the Dwyers.

III. CONCLUSION

Because the district court incorrectly held that Fidelity waived its right to

appraisal under the SFIP, we vacate the judgment, including the attorneys’ fee

award, and remand for appraisal and for further proceedings consistent

herewith.

JUDGMENT VACATED AND REMANDED.

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