Liberty Mutual Fire Insurance Co., a company selling federal flood insurance, has won the case filed against the insurer by a Mississippi homeowner. It was claimed in the suit the insurer was negligent in not informing the homeowner that he was eligible to buy a preferred risk policy with more coverage than he had under his regular flood policy. The U.S. Court of Appeals for the Fifth Circuit ruled against the homeowner who in a Hurricane Katrina claim sought the difference between the coverage he had and the better coverage he could have had under a preferred risk policy at a lower cost.

In its decision, the Appeals Court reversed the verdict of the jury which had been for the homeowner in the district court. The key question on appeal was whether Liberty Mutual’s failure to inform its current insured that he might be eligible for a better insurance policy constituted a “claims handling” or an “insurance procurement” issue. While federal law does not preempt state law in insurance procurement disputes, the Appeals Court ruled that preemption applies in disputers related to claims. The Court found the dispute in the case to be claims-related.

James P. Grissom, the homeowner, had purchased flood insurance for his home in Pascagoula under the National Flood Insurance Program. Liberty Mutual was his insurance carrier under the NFIP’s “Write Your Own” program. Following the destruction of his home by Hurricane Katrina, the homeowner 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. He contended that his claim was related to insurance procurement rather than claims-handling and thus was not precluded by federal law. The lower court had agreed with the homeowner that his claim was an insurance procurement matter and therefore not preempted by federal law. The result on appeal was to the contrary, applying preemption to what the Court found to be a claims-handling matter.

Source: Insurance Journal