Floods are unfortunate recurring events in Texas, and more so in recent years with Hurricane Harvey highlighting just how destructive Mother Nature can be. Little wonder that flood insurance and flood claims have been the subject of plenty of litigation and a recent opinion from the Fifth Circuit underscores how tricky it can be to navigate these waters (pun intended).

Flood is generally not covered under a standard homeowner’s policy. In order to allow homeowners to obtain such coverage the federal government enacted legislation, at 42 U.S.C. §§ 4071–72, which allows private insurance companies (as Write-Your-Own carrier or WYO carriers) to issue and administer flood-insurance policies underwritten by the Government. Of note, the standard flood insurance policy contains a mandatory one-year statute of limitations. 44 C.F.R. Pt. 61, App. A(1) states that “If you do sue, you must start the suit within one year after the date of the written denial of all or part of the claim, and you must file the suit in the United States District Court of the district in which the covered property was located at the time of the loss. Also, 42 U.S.C.A. § 4072 confers “original exclusive jurisdiction” on the United States district court for the district in which the covered property was situated.

Ekhlassi v. National Lloyds Insurance Company, 926 F.3d 130 (5th Cir. 2019), concerned a claim by Ali Ekhlassi, who  insured his Houston home with a National Flood Insurance Program policy issued by National Lloyds Insurance Company. A storm on May 25, 2015 caused flooding that damaged his home and he reported the loss to Lloyds the following day. Ekhlassi presented Lloyds with a repair estimate totaling over $200,000. However, after its own inspection, Lloyds concluded flooding from the 25 May storm did not cause much of the claimed damage. As a result, Lloyds’ wrote to Ekhlassi on 6 October 2015 stating it would process a claim for $ 3,768.25 upon receipt of a “signed, dated and sworn to proof of loss” and denying “payment for any building and contents items not subject to direct physical loss by or from flood.”

Ekhlassi submitted his proof of loss, for well over $200,000, in December 2015. On January 11, 2016, Lloyds again rejected many of the losses claimed, referring to its October 6, 2015 letter for the reasons behind the denial. Ekhlassi filed suit in Texas state court exactly one year from the January 11, 2016 denial. The action was removed to federal court on April 24, 2017. Lloyds filed a summary judgment motion that was granted. The trial court ruled that Ekhlassi’s action was time-barred as it was not filed in federal court within the one-year limitations period as required by the statute.

On appeal, Ekhlassi argued, among other things, that 42 U.S.C.A. § 4072 did not apply to his suit against Lloyds because § 4072 only applied to the FEMA administrator, not a WYO carrier like Lloyds. As Judge Haynes pointed out in her concurrence, there is a split in the circuits, with the Seventh Circuit agreeing with Ekhlassi’s interpretation of the statute. The Fifth Circuit however, reasoned that the flood policies are underwritten by the federal government and WYO carriers administer the NFIP by strictly enforcing the provisions set out by FEMA and cannot vary the terms of the Standard Flood Insurance Policy without express written consent from the Government.  The Fifth Circuit held that 42 U.S.C.A. § 4072 applied to actions against WYO carriers and as such Ekhlassi’s action was time-barred because it was not filed in federal court within one year from the date of denial. The court declined to reach the question of which of Lloyds’s two letters triggered the limitations period because the suit was time-barred either way.

Takeaway – Flood insurance is a highly regulated area of insurance law. Practitioners should know and understand the statutory language AND the controlling legal authority.