A federal court in New Jersey recently dismissed state law claims brought by third party plaintiffs, including the insured’s broker, against a Write Your Own insurance carrier. The claims at issue in Residences at Bay Point Condo. Ass’n v. Chernoff Diamond & Co., LLC, Civil Action No. 16-5190, 2017 U.S. Dist. LEXIS 56451 (D.N.J. Apr. 13, 2017) arose out of damage sustained to a condominium complex during Storm Sandy. The insured, and later its broker, claimed that Standard Fire had failed to advise that the National Flood Insurance Policy had been written on the wrong form. After the loss, Standard Fire reformed the policy and applied a co-insurance penalty.

Moving to dismiss the third party state law claims against it, Standard Fire argued that such claims were preempted by federal law. The court agreed, turning first to the Standard Flood Insurance Policy (“SFIP”) provision regarding jurisdiction, which states that “all disputes arising from the handling of any claim under the policy” are governed by FEMA regulations, the National Flood Insurance Act, and Federal common law. Noting that federal courts have previously distinguished between claims sounding in policy procurement, which are not preempted, and claims sounding in handling, which are preempted, the court found the broker’s claims to be grounded in policy handling. Central to this determination was the status of the insured’s coverage at the time of the interaction with the Standard Fire. The condo complex’s claims, and consequently the third-party broker’s claims, arose while the condo complex was insured by Standard Fire, leading the court to conclude that the claims related to handling.

The broker sought to avoid preemption by arguing that its status as a third party to the policies meant that its claims were not governed by the FEMA regulations or the National Flood Insurance Act. Citing concerns about opening the door to alternative paths of litigation, the court explained that limiting the jurisdiction provision to preempt only claims brought by policyholders against insurers could lead policyholders to pursue the same claims through their brokers, rather than pursuing claims against the insurer directly. The court was equally concerned that permitting third parties to pursue state law claims against insurers would impede Congress’s goal of providing affordable flood insurance. Reimbursement of defense costs would be costly for the government, while if insurers were required to defend against state law claims at their own cost, they might leave the WYO program.

This decision naturally follows other federal precedent limiting the scope of litigation arising out of claims pursuant to National Flood Insurance Policies.