Opinion
Civil Nos. A2-97-145, A2-98-31.
January 29, 1999.
MEMORANDUM AND ORDER
Plaintiff Moosbrugger, Dvorak Carter, P.L.L.P., commenced this action seeking additional coverage under its flood insurance policy issued by defendant Auto Owners Insurance Co. (Auto Owners). Currently before the court are the parties' cross-motions for summary judgment. (Doc. #14, 21, 24.) For the reasons articulated in this memorandum, the court grants defendants' motions.
I. Background
Plaintiff owns its office building in downtown Grand Forks, N.D, next to the Red River. After an inquiry by plaintiff's mortgagee regarding whether the property was insured for flood damage, on March 12, 1997, Ralph Carter, plaintiff's managing partner, telephoned defendant Froehlich-Paulson-Moore Inc. (FPM), an independent insurance agency, requesting a quote for flood insurance on plaintiff's building. After getting the information necessary for an application from Mr. Carter over the phone, which included a requested building coverage limit of $200,000 and contents coverage of $75,000, Jody Adair, a customer service representative of FPM, calculated a price quote for an Auto Owners flood insurance policy. Ms. Adair telephoned Mr. Carter that day with a premium quote of $1,489. Later that same day, Mr. Carter went to FPM's office with a check for $1,489 and signed the application on behalf of plaintiff for an Auto Owners flood insurance policy with the above stated coverage limits. The application was countersigned by a licensed agent of FPM and the application and check were mailed to Auto Owners that day, i.e., March 12, 1997.
Auto Owners is authorized by FEMA to issue standard flood insurance policies under the National Flood Insurance Act, 42 U.S.C. § 4001-4129.
After receiving plaintiff's application and premium check, Auto Owners determined that plaintiff's application was incomplete; specifically, Auto Owners needed an elevation certificate for plaintiff's building in order to rate the policy. On March 24, 1997, Auto Owners sent a letter to FPM, notifying it that plaintiff's application was incomplete and that coverage would not be in force until the required elevation certificate was received. Plaintiff was apparently never informed that its application was incomplete. Auto Owners deposited plaintiff's premium check on March 17, 1997.
Plaintiff's application indicated that its building was not a "post-FIRM" (Flood Insurance Rating Map) building, listing a building construction date of 1956. However, the application also indicated that improvements in excess of 50% of the value of the building had been made in 1980, which would make plaintiff's building a post-FIRM building. An elevation certificate must be included with the application for post-FIRM buildings in certain flood plain zones.
On April 1, 1997, Ms. Adair called Auto Owners to inquire about the status of plaintiff's application. Auto Owners informed Ms. Adair that she had used an incorrect contents rate, and as a result, the premium quoted to and paid by plaintiff was too low for the coverage limits requested. Auto Owners told Ms. Adair that plaintiff could either pay an additional $678 in premium to receive the coverage limits requested in its application, or it could reduce its coverage limits to the amount that the quoted $1489 premium allowed. Specifically, if plaintiff elected not to pay the additional premium, its contents coverage would be reduced to $24,000. That same day, Ms. Adair telephoned Mr. Carter and explained to him that she had misquoted the premium and what plaintiff's options were. Mr. Carter testified that Ms. Adair told him that he must make a decision within a few days; Ms. Adair denies giving Mr. Carter such a deadline. Ms. Adair did not discuss with Mr. Carter Auto Owners' March 24 letter requesting an elevation certificate, and in fact, Ms. Adair testified that she was not aware of that letter or that plaintiff's application was incomplete, other than because of the premium underpayment. Mr. Carter elected to not pay any additional premium and to reduce plaintiff's requested contents coverage to $24,000. Ms. Adair immediately called Auto Owners to inform it of plaintiff's choice to reduce its requested contents coverage. Auto Owners' record of this call on April 1, 1997 also indicates that Ms. Adair told Auto Owners to change the date of construction of plaintiff's building to 1956, apparently changing plaintiff's application to indicate that plaintiff's building had not been improved by more than 50% in 1980, which eliminated the requirement for a elevation certificate.
After receiving the additional information from Ms. Adair on April 1, 1997, Auto Owners issued a standard flood insurance policy to plaintiff with an effective date of April 11, 1997. This policy provided building coverage up to $200,000 and contents coverage up to $24,000. Auto Owners mailed plaintiff's policy and declaration sheet to FPM on April 10, 1997. Plaintiff received its policy and declaration sheet on April 11, 1997.
The Flood Insurance Act provides for a 30 day waiting period before a flood insurance policy can be effective. 42 U.S.C. § 4013(c)(1). Thus, since plaintiff completed an application for flood insurance on March 12, April 11 was the earliest plaintiff's flood insurance policy could be effective.
On April 18, 1997, plaintiff's office building was flooded, along with the rest of downtown Grand Forks. Plaintiff notified Auto Owners that it had sustained flood damage, and on May 5, 1997, plaintiff's losses were assessed by Auto Owners as: Building — $148,986.97, Contents — $119,024.95. Plaintiff filed a written proof of loss statement on June 9, 1997. About that same time, Mr. Carter spoke with FPM and indicated that plaintiff believed it was entitled to $75,000 in contents coverage, as originally requested, since it was not notified in writing that it had 30 days to elect to pay the additional premium or to reduce its coverage, as required under its policy. FPM informed Auto Owners of plaintiff's position, and on July 18, 1997, Auto Owners informed FPM by letter that plaintiff's contents coverage was limited to $24,000 under its policy and that Auto Owners would not increase the coverage. Auto Owners paid plaintiff $148.986.97 for the assessed damage to its building, and $24,000 for plaintiff's contents losses.
On October 14, 1997, plaintiff commenced this action in Grand Forks County District Court seeking an additional $50,000 in flood insurance coverage, plus interest. Auto Owners subsequently removed the action to this court. In March 1998, plaintiff filed a separate action in this court, seeking the same relief. The court ordered that the cases be consolidated. (Doc. #11.)
II. Summary Judgment Standard
Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Rule 56 of the Federal Rules of Civil Procedure "mandates the entry of summary judgment . . . against a party failing to make a showing sufficient to establish the existence of an element essential to that party's case." Celotex, 477 U.S. at 322. If the moving party has supported its motion for summary judgment, the nonmoving party has an affirmative burden placed on it to go beyond the pleadings and show a genuine triable issue of fact. Commercial Union Ins. Co. v. Schmidt, 967 F.2d 270, 271 (8th Cir. 1992). However, the court considering a motion for summary judgment must view the evidence in the light most favorable to the nonmoving party who enjoys "the benefit of all reasonable inferences to be drawn from the facts." Vacca v. Viacom Broadcasting of Missouri, Inc. et al., 875 F.2d 1337, 1339 (8th Cir. 1989) (citation omitted).
Summary judgment is improper if the court finds a genuine issue of material fact; however, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. . . ." Commercial Union Insurance Co. v. Schmidt, 967 F.2d 270, 271-72 (8th Cir. 1992) (citation omitted). The issue is whether "the evidence is sufficient to allow a reasonable jury to return a verdict for the non-moving party." Landon v. Northwest Airlines, Inc., 72 F.3d 620, 624 (8th Cir. 1995). As evidenced by the parties cross-motions, most of the facts involved in this action are not disputed.
III. Discussion
Plaintiff claims that it is entitled to an additional $50,000 in contents coverage because under the terms of its standard flood insurance policy, it was entitled to 30 days after receiving written notice of the premium underpayment to decide whether to pay the additional premium necessary to provide $75,000 in contents coverage. It is undisputed that plaintiff did not receive written notice of the premium underpayment and was not informed that it had 30 days within which to pay the additional premium. Plaintiff argues that if it had received written notice on April 1 that it had 30 days to pay the additional premium, with the advantage of hindsight, it surely would have paid the additional $678 in premium prior to April 30, 1997 in order to obtain $75,000 in contents coverage. Plaintiff asserts that defendants breached their obligation under the policy to provide 30 days written notice, and/or were negligent in failing to provide proper notice.
Auto Owners counters by arguing that plaintiff was not entitled to 30 days written notice because the policy was not yet in force at the time plaintiff claims it was entitled to the notice, and thus the policy language relied on by plaintiff is inapplicable. Auto Owners argues that the policy language relied on by plaintiff applies in situations where a premium underpayment is discovered after the policy is issued with the coverage limits requested in the application. Auto Owners contends that in this case, plaintiff's initial application was not accepted and plaintiff essentially revised its application to request only $24,000 in contents coverage, which was accepted by Auto Owners. Thus, since the policy issued by Auto Owners provided $24,000 in contents coverage, which is exactly what plaintiff paid for, there was no underpayment and plaintiff was not entitled to 30 days written notice as provided in the policy.
FPM joins Auto Owners' argument and also asserts that even if plaintiff was entitled to written notice, it was Auto Owners' obligation to provide such notice under the terms of the policy, not FPM's. Therefore, FPM asserts that it cannot be held liable for failing to provide such notice.
Plaintiff relies on a section in its standard flood insurance policy that provides:
2. Reduction of Coverage Limits or Reformation: In the event that the premium payment is not sufficient (whether evident or not) to purchase the amount of coverage requested by an application, renewal, endorsement, or other form and paragraph E.1.d. does not apply, then the policy shall be deemed to provide only such coverage as can be purchased for the entire term of the policy, for the amount of premium received, subject to increasing the amount of coverage pursuant to 44 C.F.R. § 61.11; provided, however:
a. If the insufficient premium is discovered by the Insurer prior to a loss and the Insurer can determine the amount of insufficient premium from information in its possession at the time of its discovery of the insufficient premium, the Insurer shall give a notice of additional premium due, and if the Insured remits and the Insured receives the additional premium required to purchase the limits of coverage for each kind of coverage as was initially requested by the insured within 30 days from the date the Insured gives the Insured written notice of additional premium due, the policy shall be reformed, from its inception date, or, in the case of an endorsement, from the effective date of the endorsement, to provide flood insurance coverage in the amount of coverage initially requested.
(Doc. #17, Ex. O.) However, in relying on this policy provision, plaintiff "puts the cart before the horse." In order for this language to be applicable, the policy must have already been issued by Auto Owners. The court agrees with defendants that at the time the insufficient premium was discovered and plaintiff claims it was entitled to written notice, the policy had not been issued and was not in force. Thus, plaintiff was not entitled to 30 days written notice.
Flood insurance policies issued under the National Flood Insurance Act are interpreted according to the specific provisions of the Act and FEMA regulations, and federal common law. Nelson v. Becton, 929 F.2d 1287, 1292 (8th Cir. 1991) (Heaney, J., dissenting). However, "`in enacting the NFIP, Congress did not intend to abrogate standard insurance law principles.' Instead, Congress intended courts to utilize the traditional common law approach and draw upon standard insurance law principles to inform the judiciary's resolution of NFIP cases." Id. Furthermore, as all parties correctly assert, since insurance policies are contracts, they are governed by basic contract principles. Thus, in order to have a enforceable insurance policy, there must first be an offer and an acceptance.
As plaintiff admits, an application for insurance is considered an offer by the proposed insured. See Couch on Insurance 3d, § 11:1 (1995). A contract for insurance is not created until the insurer accepts the application. Id. § 11:4. The insurer's acceptance is usually established by the issuance and delivery of the policy.Id. However, an insurer's acceptance need not be this formal; the acts and/or conduct of the insurer may establish an acceptance.Id. Additionally, the insurer's acceptance must be communicated to the proposed insured to be effective. Id. An insurer's delay in responding to an application does not indicate that the insured has accepted it. Id. Furthermore, "[g]enerally, . . . the mere depositing of a premium check does not constitute acceptance of an insurance application." Id. However, as stated above, these general rules are subject to the specific provisions of the Act and its regulations.
Applying these general rules to the undisputed facts, the court concludes that no contract existed between plaintiff and Auto Owners until Auto Owners actually issued and delivered plaintiff's standard flood insurance policy on April 10, 1997. Auto Owners never communicated to plaintiff or otherwise indicated that it had accepted plaintiff's initial application. Contrary to plaintiff's argument, Auto Owners' deposit of plaintiff's premium check did not constitute an acceptance of that application. This general rule is consistent with NFIP regulations which state: "No oral binder or contract shall be effective. No written binder shall be effective unless issued with the express authorization of the Administrator." 44 C.F.R. § 61.13(e). This provision indicates that under the NFIP, prepayment of the premium is irrelevant to determining whether a flood insurance policy is effective; rather, unless otherwise authorized, flood insurance is not effective until the written, standard flood insurance policy is issued.
Under general insurance law, the earliest a flood insurance contract could have existed between plaintiff and Auto Owners was April 1, 1997. Auto Owners' communication to plaintiff, through FPM, that it had underpaid the premium and could either pay the additional premium or accept lower coverage limits constituted a counteroffer. See Couch on Insurance 3d, § 11:7. Under general insurance law, when plaintiff communicated its intent to accept the lower coverage limits and not pay any additional premium, it accepted Auto Owners' counteroffer and an insurance contract was created. However, as stated above, § 61.13(e) prohibits oral contracts, which is what existed on April 1, 1997. Thus, under § 61.13(e), the insurance contract between plaintiff and Auto Owners was not effective until it was actually issued, in writing, on April 10, 1997.
Since no insurance contract was effective until April 10, 1997, the 30 day notice provision relied on by plaintiff also was not effective until that date. Furthermore, since the contract that plaintiff agreed to provided for contents coverage of $24,000, and since that is the amount of coverage plaintiff's premium provided, there was no premium underpayment and the 30 day notice provision in plaintiff's policy was not applicable. Thus, the only way plaintiff would be entitled to written notice of the premium underpayment on April 1, 1997 would be to retroactively apply that provision of the policy, which would be an illogical result. The court agrees with defendants' argument that the 30 day written notice provision relied on by plaintiff is intended to allow reformation of a policy in cases of mutual mistake, that is, in situations where the policy is issued for the limits requested in the application, and it is later discovered that the premium paid is inadequate for the requested coverage.
In conclusion, since plaintiff was not entitled to written notice that it had 30 days within which to pay the additional premium necessary for the coverage requested in its application, plaintiff's claims against defendants for failing to provide such notice, whether for breach of contract or negligence, fail. The court therefore grants defendants' motions for summary judgment.
IT IS ORDERED:
1. Plaintiff's motion for summary judgment is denied. (Doc. #14.)
2. Defendants' motions for summary judgment are granted. (Doc. #21, 24.)
Judgment shall be entered dismissing plaintiff's complaint and cause of action with prejudice.
JUDGMENT
It is hereby adjudged and decreed that plaintiff's complaint and cause of action be dismissed with prejudice.
KAREN K. KLEIN U.S. Magistrate Judge