1The National Flood Insurance Act of 1968 (NFIA), 42 U.S.C. §§ 4001-127, established the

NFIP. Initially, the program operated primarily through a pool of private insurers under the

supervision of and with financial support from the Department of Housing and Urban

Development. In 1977, pursuant to 42 U.S.C. § 4071, the Secretary of HUD terminated that

arrangement and made FEMA principally responsible for its operation. See generally Berger v.

Pierce, 933 F.2d 393 (6th Cir.1991). FEMA by regulation promulgated the SFIP, and provided

for marketing and claims adjustment by private insurers operating as WYO companies. Those

companies issue SFIPs in their own names, see 44 C.F.R. §§ 61.13(f), 62.23(a), collecting

premiums in segregated accounts from which they pay claims and make necessary refunds under

those policies. 44 C.F.R. Pt. 62, App. A, Arts. II(E), III(D), III(E). In the absence of sufficient

funds in the segregated accounts, WYO companies pay claims and make refunds by drawing on

FEMA letters of credit. See 44 C.F.R. Pt. 62, App. A, Art. IV. They may not alter the terms of

the SFIP as dictated by FEMA, see 44 C.F.R. § 62.23(c). They receive a portion of the premiums

collected as reimbursement for expenses incurred as a result of their NFIP participation. See 44

C.F.R. Pt. 62, App. A, Arts. III(B), III(C). 

United States Court of Appeals,

Fifth Circuit.

No. 92-7257.

Harry SPENCE and Nancy Spence Fortner, Plaintiffs-Appellees,

v.

OMAHA INDEMNITY INSURANCE COMPANY, Defendant-Appellant.

Aug. 2, 1993.

Appeal from the United States District Court for the Southern District of Texas.

Before POLITZ, Chief Judge, GOLDBERG and JONES, Circuit Judges.

POLITZ, Chief Judge:

Omaha Indemnity Insurance Company appeals an adverse judgment on verdict in this action

by Harry Spence and Nancy Fortner which raises both ex contractu and ex delicto claims. We affirm.

Background

Spence and Fortner, then husband and wife, purchased a Standard Flood Insurance Policy

(SFIP) from Omaha, through sales agent Whitney-Vaky, Inc. Omaha provides flood insurance

through the National Flood Insurance Program (NFIP) under an agreement with the Federal

Emergency Management Agency (FEMA), which authorizes it to operate as a "Write-Your-Own"

(WYO) insurance company.1 On April 11, 1985, heavy rains flooded the Spence basement, damaging

furniture, appliances, and other belongingstherein, and damaging the basement itself. Roy Yoakum,
 

2They previously had filed suit against Omaha on September 5, 1985, and February 20, 1987. 

Both suits were dismissed, the first for want of jurisdiction and the second for failure to

prosecute. 

 

3The Spences also alleged violations of the Texas Deceptive Trade Practices Act and Insurance

Code in their original complaint, but abandoned these claims before trial. 

a claims adjuster, surveyed the damage a few dayslater. The Spences claimed that repair of damage

to the basement, not including damage to contents, would cost $92,500. Relying on a policy

exclusion for "finished basement walls, floors, ceilings and other improvement to a basement ... and

contents, machinery, building equipment and fixtures in such basement," on May 15, 1985, Omaha

issued a no tice denying the Spences' claim. The Spences contend that they relied upon

representations by Whitney-Vaky and Yoakum about the coverage under the SFIP and, as a result,

suffered substantial losses.

The Spences filed the instant action on May 10, 1989,2alleging breach of the insurance

contract and fraud arising out of representations by Whitney-Vaky and Yoakum.3 The district court

denied Omaha's motion for summary judgment on statute of limitations grounds. The parties

consented to trial before a magistrate judge and the case was submitted to the jury on both fraud and

contract theories of liability. The jury answered special interrogatories finding that: (1) WhitneyVaky and Yoakum were agents of Omaha; (2) both made misrepresentations to the Spences

concerning the scope of their insurance coverage upon which the Spences justifiably relied; (3)

ambiguity in the policy should be resolved favorably to the Spences; and (4) the Spences suffered

a loss of $84,123.30. The trial court denied post-trial motions for judgment as a matter of law and

for new trial and entered judgment upon the verdict, awarding damages asfound by the jury and preand post-judgment interest and costs. Omaha timely appealed.

Analysis

1. Statute of Limitations

Omaha first faults the district court's refusal to dismiss the Spences' claims as barred by

applicable limitations periods. In support of its position, Omaha invites our attention to Article

VIII(Q) of the SFIP, which provides:
 

4

44 C.F.R. Pt. 61, App. A(1), Art. VIII(Q) (emphasis added). 

 

5

42 U.S.C. § 4072 (emphasis added). 

 

6E.g., Clade v. Larsen, 838 S.W.2d 277 (Tex.Ct.App.1992) (four-year limitations period

governs actions for breach of contract) (citing Tex.Civ.Prac. & Rem.Code § 16.004; CertainTeed Prods. Corp. v. Bell, 422 S.W.2d 719, 721 (Tex.1968)); M & M Distrib. v. Dunn, 819

S.W.2d 639 (Tex.Ct.App.1991) (four-year limitations period governs actions for fraud or

misrepresentation) (citing Williams v. Khalaf, 802 S.W.2d 651 (Tex.1990)). 

 

7The district court rejected Omaha's statute of limitations argument, finding both of these

provisions applicable only in actions against FEMA. 

 

8

44 C.F.R. Pt. 61, App. A(1); 44 C.F.R. § 61.13(a) ("Each of the Standard Flood Insurance

Policy forms included in appendix "A" hereto ... and by reference incorporated herein shall be

incorporated into the Standard Flood Insurance Policy."). 

 

9

See 44 C.F.R. § 61.5(i) ("The standard flood insurance policy is authorized only under terms

and conditions established by Federal statute, the program's regulations, the Administrator's

interpretations and the express terms of the policy itself."); id. § 61.13(a); id. § 61.13(d) ("The

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

through the issuance of an appropriate amendatory endorsement, approved by the Administrator

as to form and substance for uniform use."); id. § 62.23(c) (flood insurance provided by WYO

companies "shall be issued under the [SFIP]"). 

You may not sue [the WYO insurer] to recover money under t his policy unless you have

complied with all the requirements of the policy. If you do sue, you must start the suit within

twelve (12) months from the date we mailed you notice that we have denied your claim, or

a part of your claim.4

Omaha also points out that, under 42 U.S.C. § 4072,

upon the disallowance by the Director of any [claim under a flood insurance policy], or upon

the refusal of the claimant to accept the amount allowed upon any such claim, the claimant,

within one year after the date of mailing of notice of disallowance or partial disallowance by

the Director, may institute an action against the Director on such claim.5

Omaha argues that these provisions establish a one-year limitation period which, rather than the

four-year period provided for by Texas law,6controls in this case and bars the Spences' contract and

misrepresentation claims.7 Because the district court entered judgment on alternative bases of

liability, limitations provide a complete defense for Omaha only if both claims are time-barred.

FEMA regulations promulgated under the National Flood Insurance Act establish the terms

of the SFIP which WYO insurers may issue.8 WYO companies may not alter those terms.9 As

Omaha points out, Article VIII(Q) of the SFIP requires the insured to institute any actions against

the WYO insurer "to recover money under this policy" within one year from the date on which it
 

1044 C.F.R. § 61.4(a)(2). 

 

11FEMA has authority to promulgate by regulation "general terms and conditions of

insurability ..., including ... any ... terms and conditions relating to insurance coverage or

exclusion which may be necessary to carry out the purposes of this chapter." 42 U.S.C. § 4013. 

 

12We note that prior to the restructuring of the NFIP, 42 U.S.C. § 4053 provided for a

one-year limitations period in actions on policies issued by private flood insurance pool

participants. Although the present flood insurance scheme does not use the pool provided for in §

4053, that section indicates congressional intent to place a one year limitations period on actions

under flood policies issued by private NFIP participants. Further, as FEMA, in effect, pays all

claims under SFIPs through the letter of credit mechanism, 42 U.S.C. § 4072, establishing a

one-year limitations period for actions directly against the agency on such policies, supports our

conclusion. 

 

13Because we find the Spences' contract action time-barred, we need not consider Omaha's

contentions that the district court erroneously found ambiguity in the policy here at issue, or that

misrepresentations by Whitney-Vaky and Yoakum could not operate to waive policy exclusions. 

 

14Thus, considering the availability of prejudgment interest and penalties for arbitrary denial of

claims in an action seeking recovery on a flood insurance policy, we noted that because

the flood insurance program is a child of Congress, conceived to achieve policies

which are national in scope, and [because] the federal government participates

extensively in the program both in a supervisory capacity and financially, it is clear

that the interest in uniformity of decision present in this case mandates the

application of federal law.

West v. Harris, 573 F.2d 873, 881 (5th Cir.1978), cert. denied, 440 U.S. 946, 99 S.Ct.

1424, 59 L.Ed.2d 635 (1979); see also, e.g., Mason Drug Co. v. Harris, 597 F.2d 886

(5th Cir.1979) (federal law governs interpretation of flood insurance policy). 

mailed notice of disallowance or partial disallowance. Because regulations provide that "all flood

insurance made available under the Program is subject ... [t]o the terms and conditions of the

Standard Flood Insurance Policy, which shall be promulgated bythe Administrator,"10 FEMA, acting

well within its statutory rulemaking authority,11 has established a one-year limitations period

governing actionsto recover against WYO companies under SFIPs.12 That limitation clearly bars the

Spences' contract claim.13

We reach a different conclusion, however, as to the timeliness of the Spences' fraud claims.

While the national policies underlying the NFIP and ext ensive federal role therein impel our

conclusion that federal common law governs claims under flood insurance policies,14 the same does

not apply in actionsfor tortious misrepresentation against WYO insurers. FEMA regulations accord
 

15See 44 C.F.R. § 62.23(e) ("a WYO Company shall utilize its own customary standards, staff

and independent contractor resources, as it would in the ordinary and necessary conduct of its

own business affairs, subject to the [NFIA and regulations promulgated pursuant thereto]."); 44

C.F.R. Pt. 62, App. A, Art. II, sec. G (WYO companies "may market flood insurance policies in

any manner consistent with its customary method of operation, provided that there is adherence to

Program statutes, regulations and explicit guidelines"). 

 

1644 C.F.R. § 62.23(g). 

 

17That agreement, which FEMA has incorporated into regulations governing the NFIP, see 44

C.F.R. § 62.23(a), permits reimbursement of WYO companies for "payments as a result of awards

or judgments for damages arising under the scope of this Arrangement, policies of flood insurance

issued pursuant to this Arrangement, and the claims processing standards and guides set forth at

Article II, Section A, 2.0 of this Arrangement." 44 C.F.R. Pt. 62, App. A, Art. III, Section D(2). 

It also calls for reimbursement of loss adjustment expenses and premium refunds. 44 C.F.R. Pt.

62, App. A, Art. III, Secs. (C), (E). These provisions plainly do not contemplate reimbursement

for judgments on tort claims such as those asserted by the Spences. See also 42 U.S.C. § 4081(c)

("The Director of the Federal Emergency Management Agency may not hold harmless or

indemnify an agent or broker for his or her error or omission."). 

 

18Notably, 42 U.S.C. § 4053, establishing a one-year limitations period for actions against

members of the private insurer pool through which the NFIP operated prior to 1977, also

concerns only actions arising from claims under insurance policies. It does not address tort claims

against such parties. 

 

19Omaha suggests that the SFIP choice-of-law clause, which provides "[t]his policy is

governed by the flood insurance regulations issued by FEMA, the National Flood Insurance Act

of 1968, as amended ... and Federal common law" requires an opposite result. We disagree. The

clause to which Omaha points refers only to the SFIP itself, and does not purport to subject

tortious conduct of WYO insurers to otherwise inapplicable federal law. Omaha also seeks

support for its position in Article XV of its agreement with FEMA. That provision states:

This Agreement and all policies of insurance issued pursuant thereto shall be

substantial autonomy to WYO companies in SFIP marketing and claims adjustment,15 and expressly

provide that "WYO Companies shall not be agents of the Federal Government."16 Further, while

WYO insurers may draw on FEMA letters of credit to pay SFIP claims, the WYO-FEMA agreement

does not permit such draws to cover a WYO company's liability for fraud.17 The more attenuated

federal interests in such claims lead to our conclusion that the limitations period governing them

derivesfromstate rather than federal law. Article VIII(Q) of the SFIP concerns only suits "to recover

money under this policy." Likewise, 42 U.S.C. § 4072 addresses itself solely to actions arising from

partial or complete disallowance of flood insurance policy claims.18 Neither provision sets a

limitations period governing tort actions based o n misrepresentations concerning the SFIP, as

opposed to contract claims under the SFIP itself.19 Absent express preemption of state law fraud
subject to the provisions of the Act and Regulations issued pursuant thereto and all

Regulations affecting the work that are issued pursuant to the Act, during the term

hereof.

Because no FEMA regulation or NFIA provision addresses the Spences' fraud claim, this

assertion founders. 

 

20The NFIA contains no express preemption provision. Compare Burkey v. Government

Employees Hosp. Ass'n, 983 F.2d 656 (5th Cir.1993) (express preemption clause indicated

congressional intent to displace state law remedy for unreasonable delay in processing of federal

employee health benefits insurance claim). Neither Omaha nor the federal government as amicus

suggests preemption of the state law fraud claim. 

actions against WYO insurers20 or conflict with any federal provision, we conclude that the Spences

timely filed their action for misrepresentation under the four-year Texas limitations period.

2. Effect of Misrepresentations by Whitney-Vaky and Yoakum

Omaha next claims that 44 C.F.R. § 61.5(i) absolves it from tort liability for any

misrepresentations of Whitney-Vaky and Yoakum regarding coverage provided by the SFIP. That

regulation provides:

The standard flood insurance policyis authorized only under terms and conditions established

by Federal statute, the program's regulations, the Administrator's interpretations and the

express terms of the policy itself. Accordingly, representations regarding the extent and

scope of coverage which are not consistent with the National Flood Insurance Act of 1968,

as amended, or the Program'sregulations, are void, and the duly licensed property or casualty

agent acts for the insured and does not act as agent for the Federal Government, [FEMA],

or the servicing agent.

Focusing on the second sentence of this provision, Omaha argues that it precludes recovery arising

from misrepresent ations of the sort which the Spences alleged. We are not persuaded. FEMA

regulations disclaiming any agency relationship with WYO companies, as well as the terms of the

FEMA-WYO agreement, more indicate intent to leave those insurers responsible for their own

tortious conduct. The regulation relied on by Omaha, read as a whole, plainly evinces an intent to

prevent expansion of SFIP coverage through misrepresentations by private parties involved with the

program, thereby protecting the government from expanded liability. We decline to accept a reading

of that provision immunizing WYO companies from liability for the tortious conduct of their agents.

3. Effect of Spence's Constructive Knowledge
 

21332 U.S. 380, 68 S.Ct. 1, 92 L.Ed. 10 (1947). 

 

22Ojeda de Toca v. Wise, 748 S.W.2d 449 (Tex.1988); ECC Parkway Joint Venture v.

Baldwin, 765 S.W.2d 504 (Tex.App.1989). 

 

23We note in this connection that the Supreme Court formulated the Merrill constructive

notice rule in the context of an action asserting estoppel against the government. Relying on

Seavers v. Federal Emergency Management Agency, No. 84-2694 (D.N.J. Jan. 2, 1985), Omaha

urges application of Merrill to this case. Unlike the instant case, Seavers involved a contract

claim against the government rather than a tort claim against a private party. 

 Finally, relying on Federal Crop Insurance Corp. v. Merrill,21 Omaha asserts that because

publication in theCode ofFederalRegulations gave theSpences constructive knowledge ofthe policy

terms, t hey could not rely upon and thus cannot recover in tort for any misrepresentations of

Whitney-Vaky or Yoakum. This argument overlooks the rubric that constructive notice affords no

defense under Texaslaw to an action for intentionalor negligent misrepresentation.22 Thus, assuming

arguendo that Omaha may avail itself of the rule in Merrill23 and that publication in the Code of

Federal Regulations gave the Spences constructive notice of policy terms, such notice would not

excuse Omaha from liability for its agents' misrepresentations.

For these reasons, the judgment appealed is AFFIRMED.