Court Opinion

ID: 4577946
Source: CourtListenerOpinion
Date Created: 2020-10-16 18:01:52.331058+00
Date Added: 2024-06-11T13:36:50.051829
License: Public Domain

Case: 19-20039     Document: 00515604424          Page: 1     Date Filed: 10/16/2020

              United States Court of Appeals
                   for the Fifth Circuit
                                                                        United States Court of Appeals
                                                                                 Fifth Circuit

                                                                               FILED
                                                                        October 16, 2020
                                   No. 19-20039                           Lyle W. Cayce
                                                                               Clerk

   Younas Chaudhary; Bushra Chaudhary,

                                                            Plaintiffs—Appellants,

                                       versus

   Arthur J. Gallagher & Company; Chris Bettina,

                                                         Defendants—Appellees.

                  Appeal from the United States District Court
                      for the Southern District of Texas
                           USDC No. 4:18-CV-2179

   Before Clement, Higginson, and Engelhardt, Circuit Judges.
   Per Curiam:*
          Plaintiffs—Appellants, Younas and Bushra Chaudhary, appeal the
   district court’s dismissal of their claims as preempted by federal law
   governing federal flood insurance. As stated herein, WE AFFIRM IN
   PART AND VACATE AND REMAND IN PART.

          *
            Pursuant to 5th Circuit Rule 47.5, the court has determined that this
   opinion should not be published and is not precedent except under the limited
   circumstances set forth in 5th Circuit Rule 47.5.4.
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                                        No. 19-20039

                                              I.
           Because their home in Spring, Texas, suffered extensive damage as a
   result of Hurricane Harvey, Plaintiffs—Appellants Younas and Bushra
   Chaudhary sought to recover insurance proceeds from a standard NFIP flood
   insurance policy and a private excess flood insurance policy. The NFIP claim
   was paid in full—$250,000 for the structure and $100,000 for contents.
   However, having determined that the Chaudharys did not have an excess
   flood insurance policy, Chubb & Son, Inc., d/b/a Chubb Group of Insurance
   Companies (“Chubb”), denied the claim for excess flood insurance
   benefits. 1 Thereafter, the Chaudharys sued the insurer, Chubb, as well as the
   Chaudharys’ insurance broker, Arthur J. Gallagher & Co. (“AJG”), and its
   agent, Chris Bettina (“Bettina”), in Texas state court. The Chaudharys
   allege claims under the Texas Deceptive Trade Practices Act, Tex. Bus. &
   Com. Code § 17.01 et seq., and the Texas Insurance Code, Tex. Ins.
   Code § 541.001, et seq., as well as claims for common-law breach of fiduciary
   duty (against Bettina), misrepresentation, fraud, and negligence. After the
   suit was removed to federal court, the district court denied the Chaudharys’
   motion to remand and dismissed their claims with prejudice. 2
           The district court found the Chaudharys’ claim against Chubb to be
   precluded by Texas’s statute of limitations. Tex. Civ. Prac. & Rem.

           1
             In its motion to dismiss, Defendant Bankers Standard Insurance Company
   indicated that the Chaudharys’ complaints incorrectly identifies it as Chubb & Son, Inc.,
   d/b/a Chubb Group of Insurance Companies. Because Bankers Standard Insurance
   Company nevertheless continued to refer to itself as “Chubb,” the district court did the
   same. Because we have not been notified of a reason to change course, we likewise will
   continue to refer to the insurer as “Chubb.”
           2
            The district court’s dismissal orders addressed the motion to dismiss filed by
   Chubb pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and the motion
   for judgment on the pleadings filed by AJG and Bettina pursuant to Rule 12(c) of the
   Federal Rules of Civil Procedure.

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   § 16.003(a). Even if not time barred, the district court concluded, the
   Chaudharys had not pleaded sufficient facts to state a viable claim against
   Chubb for failing to procure excess flood insurance coverage. The
   Chaudharys’ claims against AJG and Bettina were determined to be
   preempted by federal law.
           On appeal, the Chaudharys no longer contest the district court’s
   dismissal of their claims against Chubb. They maintain their challenge,
   however, to the district court’s dismissal of their claims against AJG and
   Bettina. 3 On the instant record, we affirm in part and vacate and remand in
   part. Specifically, we affirm the district court’s dismissal of the Chaudharys’
   claims premised upon “claims handling” under the standard NFIP flood
   insurance policy. On the other hand, we vacate the district court’s federal
   preemption ruling relative to AJG’s and Bettina’s alleged failure to maintain
   and procure sufficient excess flood insurance to provide $20 million of
   coverage and remand for further proceedings consistent with this opinion.
                                                II.
           The Chaudharys argue that that their claims do not relate to the NFIP
   policy that was paid, but instead deal with only “(1) an excess flood policy
   that had already lapsed at the time of Hurricane Harvey due to the negligence
   of [AJG] and Bettina;” as well as a hypothetical additional excess policy that
   AJG and Bettina should have procured, given the value of the Chaudharys’
   home, but did not; and “(2) the failure [of AJG and Bettina] to procure or
   inform [the Chaudharys] that even the [lapsed] excess policy . . . was woefully
   inadequate to insure [their] home.” Although their complaint alleges details

           3
              The instant appeal initially included the district court’s dismissal of Chubb.
   During briefing, however, the Chaudharys advised that they no longer challenge that aspect
   of the district court’s rulings. See Appellants’ Brief at 6-7 n.3. Accordingly, that component
   of the Chaudharys’ appeal is deemed abandoned.

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   about their NFIP policy (i.e., limits of “$250,000 for structure, and
   $100,000 for contents,” and that it was written in 2015 and renewed in 2016),
   it does not include any specifics regarding either the lapsed excess policy or
   additional excess policy that AJG and Bettina allegedly were meant to
   procure. Rather, the Chaudharys’ assertions simply focus on the alleged
   nature of the relationship between them, AJG, and Bettina; the Chaudharys’
   reported reliance upon representations made by AJG and Bettina regarding
   the extent of the Chaudharys’ flood insurance coverage; and AJG’s and
   Bettina’s alleged awareness of the $20 million value of their home and
   contents.
          The Chaudharys contend that they did not worry about the financial
   impact of flood damage when they were evacuating for Hurricane Harvey,
   because of the “full” and “excess” coverage assurances reportedly received
   from AJG and Bettina. The Chaudharys allege that they had “formed a
   special trust in Bettina and [AJG] based on their expertise, their services over
   the years, and their representations about their ability to provide thorough
   and comprehensive insurance to protect [the Chaudharys] from hazards such
   as floods, hurricanes, and the like.” The Chaudharys explain that they had
   asked AJG and Bettina to “provid[e] appropriate insurance coverage for
   [their] home, which including contents, is valued at nearly $20 million.” And
   because of the “level of trust” between AJG, Bettina, and the Chaudharys,
   AJG and Bettina “would customarily take care of the [Chaudharys’]
   insurance needs without consulting [them] about all of the specific details.”
   The Chaudharys state that AJG and Bettina “never disclosed any limitations
   or exclusions to [their] insurance policy [or policies].”
          The Chaudharys maintain that AJG and Bettina “continuously and
   expressly assured [them] that they would be fully covered in the event of
   damage and that there were sufficient insurance policies in place to cover
   both [their] home and its contents.” AJG and Bettina allegedly had visited

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   the Chaudharys “many times in person, talked to them regularly on the
   phone, and visited their house to assess its contents and value in order to
   place insurance for it.” The Chaudharys also say that when Hurricane
   Harvey was approaching, their son, who lives at the house, contacted Bettina
   to confirm that the family would be fully covered by insurance in the event
   that their home sustained damage during the storm, to which Bettina
   “expressly stated that [the Chaudharys] would be fully covered in the event
   that their home sustained any type of damage from the storm, including
   flooding.”
          In granting the dismissal motion filed by AJG and Bettina, the district
   court referenced the distinction that this court has made between state-law
   claims involving claims handling and those concerning policy procurement..
   That is, state-law “handling” claims related to FEMA-backed NFIP policies
   are preempted by federal law, but “procurement” claims are not. Citing our
   jurisprudence, the district court concluded the Chaudharys had failed to
   plead facts sufficient to demonstrate that their claims were not preempted
   “handling” claims related to the NFIP policy. In particular, the district court
   emphasized that the Chaudharys’ amended complaint was especially
   deficient in its timeline and description of coverage and coverage events,
   which, the district court reasoned, is “the key factor” in distinguishing
   between “handling” and “procurement” claims.
                                        III.
          Rule 12(c) states that “a party may move for judgment on the
   pleadings” after “the pleadings are closed—but early enough not to delay
   trial.” Fed. R. Civ. P. 12(c). “A motion brought pursuant to [Federal Rule of
   Civil Procedure] 12(c) is designed to dispose of cases where the material facts
   are not in dispute and a judgment on the merits can be rendered by looking
   to the substance of the pleadings and any judicially noticed facts.” Great
   Plains Tr. Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 312 (5th

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   Cir. 2002). “Pleadings should be construed liberally, and judgment on the
   pleadings is appropriate only if there are no disputed issues of fact and only
   questions of law remain.” Id. The Rule 12(c) standard for judgment on the
   pleadings is the same as the standard for a motion to dismiss for failure to
   state a claim under Rule 12(b)(6). Doe v. MySpace, Inc., 528 F.3d 413, 418
   (5th Cir. 2008).
           “To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must
   contain sufficient factual matter, accepted as true, to ‘state a claim to relief
   that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
   (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see Fed. R.
   Civ. P. 12(b)(6) (stating that claims will be dismissed pursuant to Rule
   12(b)(6) if a plaintiff fails “to state a claim upon which relief can be
   granted”). “A claim has facial plausibility when the plaintiff pleads factual
   content that allows the court to draw the reasonable inference that the
   defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. The
   court must view the well-pleaded facts in the light most favorable to the
   plaintiff. Walker v. Beaumont Indep. Sch. Dist., 938 F.3d 724, 735 (5th Cir.
   2019); see also Iqbal, 556 U.S. at 678. Further, a “complaint must allege
   ‘more than labels and conclusions,’” Norris v. Hearst Tr., 500 F.3d 454, 464
   (5th Cir. 2007) (quoting Twombly, 550 U.S. at 555), and will not “suffice if it
   tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Iqbal,
556 U.S. at 678 (alteration in original) (quoting Twombly, 550 U.S. at 557).
   And though “we must take all of the factual allegations in the complaint as
   true, we ‘are not bound to accept as true a legal conclusion couched as a
   factual allegation.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at
   555).
                                         IV.
           We begin our analysis with a word regarding jurisdiction. In the
   district court, the Chaudharys filed a motion to remand, contending neither

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   diversity of citizenship nor federal question jurisdiction was present. See 28
   U.S.C. §§ 1331, 1332, 1441. Specifically, the Chaudharys argued that their
   claims arise under state law, involve procurement rather than claims
   handling, and, thus, are not preempted by federal law. They additionally
   maintain that Bettina was properly joined as a defendant such that his Texas
   citizenship precludes federal diversity jurisdiction. The district court denied
   the motion, concluding federal question jurisdiction exists.
          On appeal, the Chaudharys agree that certain of their allegations
   involve “handling” and “settlement” (of their insurance claim asserted
   against an insurer), are preempted by federal law, and were properly
   dismissed. See Appellants’ Brief at 9, 20 nn. 4–5 (citing Am. Compl. ¶¶ 38–
   41, 48). They likewise confirm that they “do not question [the] aspect of the
   [district court’s] ruling” determining that “it possessed federal question
   jurisdiction over the handling claims.” Id. at 24. Rather, the Chaudharys
   simply ask that jurisdiction be revisited by the district court if we reverse the
   preemption rulings that remain in dispute. Id.
          On this record, we find no reason to question the district court’s
   denial of the Chaudharys’ motion seeking remand to state court on
   jurisdictional grounds. Of course, should the district court determine, on
   remand from this court, that the remainder of the Chaudharys’ claims are not
   preempted by federal law and diversity jurisdiction is lacking, it may likewise
   consider whether the discretionary supplemental jurisdiction provided by 28
   U.S.C. § 1367 should be exercised.
                                          V.
          We now turn to the Chaudharys’ claims against AJG and Bettina. The
   possibility of federal preemption stems from the National Flood Insurance
   Act of 1968 (“NFIA”), 42 U.S.C. § 4001 et seq., which established the
   National Flood Insurance Program (“NFIP”). As discussed in many of our
   prior opinions, the NFIP, administered by the Federal Emergency

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   Management Agency (“FEMA”), was created by Congress “to make flood
   insurance available on reasonable terms and to reduce fiscal pressure on
   federal flood relief efforts.” Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th
   Cir. 2009). The NFIP includes “Write-Your-Own” (“WYO”) policies that
   allow private insurers to sell flood insurance policies that the federal
   government underwrites. Id. These private insurers are tasked with
   “arrang[ing] for the adjustment, settlement, payment and defense of all
   claims” arising from such policies. Id. (alteration in original) (quoting Gallup
   v. Omaha Prop. & Cas. Ins. Co., 434 F.3d 341, 342 (5th Cir. 2005)).
          The WYO policies must adhere exactly to the terms and conditions
   set forth in FEMA regulations. Id. (citing 44 C.F.R. §§ 61.4(b), 62.23(c)–(d)
   (2008); 44 C.F.R. pt. 61, app. A(1)) (setting forth the Standard Flood
   Insurance Policy (“SFIP”) terms). FEMA regulations also govern WYO
   private insurers’ payment and adjustment of claims. Id. And while the
   insurers selling WYO policies play “a large role,” the federal government
   ultimately pays the claims. Id. The government also reimburses most private
   insurers’ costs incurred defending themselves in WYO suits. See id. (citing
   44 C.F.R. pt. 62, app. A, art. III(D)(3)(a) (defense costs are not reimbursable
   in “litigation [that] is grounded in actions by the [WYO] Company that are
   significantly outside the scope of this [a]rrangement, and/or involves issues
   of agent negligence”)).
          As emphasized by the district court, our preemption jurisprudence
   relating to the NFIP has distinguished between state-law claims involving
   “claims handling” and those involving “insurance procurement.” See, e.g.,
   Spong v. Fid. Nat’l Prop. & Cas. Ins. Co., 787 F.3d 296, 299, 306 (5th Cir.
   2015); Grissom v. Liberty Mut. Fire Ins. Co., 678 F.3d 397, 400–01 (5th Cir.
   2012); Campo, 562 F.3d at 754. One of the FEMA regulations governing the
   NFIP states that “all disputes arising from the handling of any claim under the
   policy are governed exclusively by the flood insurance regulations issued by

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   FEMA, the National Flood Insurance Act of 1968, and Federal common
   law.” 44 C.F.R. Pt. 61, app. A(1), art. IX (emphasis added). Thus, federal law
   preempts state law claims concerning “claims handling” by a private WYO
   insurer. 4 See Wright v. Allstate Ins. Co., 415 F.3d 384, 390 (5th Cir. 2005)
   (holding that “state law tort claims arising from claims handling by a WYO
   are preempted by federal law”); Campo, 562 F.3d at 754 (same).
           However, our precedent dictates that claims concerning “policy
   procurement” are not preempted. See Campo, 562 F.3d at 758 (Congress
   “chose to confine the plain language of its preemption to handling” and
   “unlike in handling-based cases, permitting prosecution of procurement-
   related state-law [] suits does not impede the full purposes and objectives of
   Congress”). According to Campo, the rationale for this disparity in treatment
   is explained, at least in part, in the differing impact on federal funds. See id.,
562 F.3d at 758 (“Suits relating to handling, or claims adjustment, generally
   seek money . . . ultimately . . . disbursed from federal funds thereby directly
   conflicting with Congress’s objective to reduce pressure on the federal fisc.
   In contrast, FEMA does not reimburse carriers for procurement-related
   judgments.”) (citing 44 C.F.R. § 62.23(i)(6) (2008) (WYO defense costs will
   be part of claim expense allowance); 42 U.S.C. § 4017(d)(1) (providing for
   payment of costs for adjustment and payment of claims); 44 C.F.R. pt. 62,
   app. A, art. IX (2008) (FEMA will not reimburse costs incurred due to agent
   negligence); 42 U.S.C. § 4081(c) (FEMA “may not hold harmless or
   indemnify an agent or broker for his or her error or omission”)).
   “Additionally, FEMA extensively regulates the management of existing
   coverage while demonstrating no such interest in procurement.” Campo, 562
F.3d at 758.

           4
            “Federal regulations have no less pre-emptive effect than federal statutes.” In re
   Cajun Elec. Power Coop., Inc., 109 F.3d 248, 254 (5th Cir. 1997).

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          In Grissom, this court undertook to clarify the distinction that our
   jurisprudence has drawn between state-law “handling” claims and those
   involving “procurement,” explaining:
          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 of insurance, are “claims handling” subject to
          preemption.
   Grissom, 678 F.3d at 401.
          The record reveals that, over the course of this action, the Chaudharys
   arguably have sought to distance themselves from certain aspects of their
   original and amended complaints. Nevertheless, on appeal, they admit that
   their pleadings include allegations of inadequate claims handling, relative to
   the standard NFIP flood insurance policy, and, as referenced above, do not
   challenge the district court’s dismissal of at least some of them. Indeed, the
   Chaudharys concede that the district court properly dismissed the portions
   of their state-law claims related to “claims handling.” See Appellants’ Brief
   at 20 n.4 (conceding that the portions of Appellants’ Deceptive Trade
   Practices Act claims alleging “handling claims, such as allegations related to
   investigation and resolution of [their] claim . . . are preempted and were
   properly dismissed”); id. at 20 n.5 (same concerning the portions of their
   Texas Insurance Code claims alleging “settlement”); id. at 24 (“Now that
   the handling claims have been dismissed, only the state law claims against the
   agents remain.”). The district court correctly determined that the
   Chaudharys’ Deceptive Trade Practices Act and Texas Insurance Code
   claims included allegations of “claims handling” preempted by federal law.
   See Grissom, 678 F.3d at 401.

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           Without parsing the entirety of the Chaudharys’ pleadings against
   their appellate concessions, we are satisfied that the district court’s
   determination that certain of the Chaudharys’ assertions allege improper
   “handling” of claims, under the standard NFIP flood insurance policy, does
   not warrant reversal. See September 28, 2018 Mem. Op. at 9 (citing Orig.
   Pet. at ¶¶ 16(e)–(f), 17–19; December 20, 2018 Mem. Op. at 23–24, 26–27
   (citing Am. Compl. at ¶¶ 38-39, 48). Accordingly, we affirm that aspect of
   the district court’s preemption determination.
           On the other hand, proper resolution of the Chaudharys’ allegations
   that, unbeknownst to them, AJG and Bettina allowed a previous private
   excess flood insurance policy to lapse and failed to procure additional private
   excess flood insurance coverage sufficient to fully insure the $20 million
   home and contents, is not as straightforward. Specifically, in characterizing
   these allegations as preempted “handling” claims related to the NFIP policy,
   the district court seemingly applied Grissom’s “interaction timeline”
   analysis without accounting for the fact that the regulatory language
   interpreted in Grissom expressly refers to the “handling of any claim under
   the [NFIP] policy,” but makes no mention of private excess flood policies.
   Furthermore, the policy at issue in Grissom was, in fact, a federal preferred
   risk flood insurance policy, as opposed to the private excess policy not
   procured here. Indeed, it is our understanding (as discussed with counsel at
   oral argument) that the NFIP does not even offer federal flood insurance
   coverage in an amount exceeding the $250,000/$100,000 limits of the
   standard NFIP policy that the Chaudharys had here. Additionally, the
   defendant in Grissom was the NFIP WYO insurer, not an independent broker
   or agent. 5

           5
             On appeal, the Chaudharys argue that AJG’s and Bettina’s statuses as broker and
   agent, respectively, rather than WYO insurers—particularly given the differing risk to
   federal funds—is alone a sufficient basis to preclude federal preemption. This assertion,

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           Lastly, although the district court found the Chaudharys’ allegations
   regarding the timeline, coverage, and coverage events insufficient to state
   unpreempted claims regarding excess flood insurance coverage, it is not
   apparent whether the district court did not allow the Chaudharys an
   opportunity to amend their pleadings, in hopes of stating viable claims,
   because the Chaudharys had not sought leave to do so, because they already
   had had an opportunity to amend, or because of some other reason on the
   record before it.
           Given the foregoing, we find it appropriate to vacate and remand the
   district court’s judgment relative to the private excess policies for further
   consideration in the first instance. To do otherwise would risk overstepping
   our role as an appellate court.
           AFFIRMED IN PART. VACATED AND REMANDED IN
   PART.

   however, was not presented to the district court. Considering that the Chaudharys
   characterize this issue, which dominates their appellate briefs, as a matter of first
   impression, but offer no explanation or justification for not raising it before the district
   court, we will not undertake to assess it further at this juncture. Rather, in this context,
   that argument is best presented, in the first instance, to the district court. We mention it
   only to note it as a factor for possible consideration by the district court, on remand, in
   reassessing the proper application of Grissom’s principles here.

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