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By Alexander W. Cogbill
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In 2009, the U.S. Court of Appeals for the Fifth Circuit definitively foreclosed awards of attorney fees in coverage litigation against insurance companies arising out of flood claims under policies written under the National Flood Insurance Program with its decision in Dwyer v. Fidelity National Property & Casualty Insurance Co.[1]

This appeared to be the final word on the subject until 2019, when, in a series of three opinions, the United States District Court for the Middle District of Florida held otherwise. These recent decisions have revived a decade-old argument about whether public-private partnerships — in this case, the NFIP — trigger a distinct federal civil rights statute: the Equal Access to Justice Act.

The National Flood Insurance Program: On the Radar

The NFIP was signed into law in 1968 as a response to endemic underinsurance which had been laid bare by a series of disastrous river floods and hurricanes in prior years.[2] The NFIP has enabled more than 5,000,000 homeowners and small businesses within 18,000 communities to purchase insurance for flooding annually at discounted premiums.[3]

Although the federal government subsidizes all of the policies underwritten within this program,[4] the Federal Emergency Management Agency, which runs the program, does not administer most NFIP policies. Instead, FEMA engages the expertise and resources of private insurance companies[5] as “fiscal agent[s]."[6] By this arrangement, the federal government accepts the insureds’ risk but delegates underwriting and claim administration.[7]

Although the program has been a success in terms of enrolling policy holders, resultant expenses and risk accepted by the NFIP has grown unwieldy.[8] Presently, the program owes more than $25 billion dollars and continues to underwrite trillions of dollars of additional risk.[9] Accordingly, the future of the program is uncertain.[10]

For purposes of the following discussion, understanding several key features of NFIP policies is useful. First, FEMA receives most of the premiums (after a fee from the participating insurers) and pays the costs of claims, investigation and litigation, albeit indirectly.[11] Second, because NFIP policies are governed by federal common law, suits regarding these policies are properly asserted in federal court,[12] without consequential damages.[13]

Equal Access to Justice Act: All Hands on Deck

The American Rule dictates that litigants pay their own attorney fees unless fee-shifting is prescribed by contract or statute. The EAJA is a substantial statutory exception to this default rule. Under the EAJA, a party that prevails in litigation against “the United States or any agency or official of the United States” may recover attorney fees except when a court finds that the position of the United States was “substantially justified or [] special circumstances make an award unjust."[14] Notably, there is no fee-shifting provision when a plaintiff is unsuccessful.

The EAJA was enacted in 1980 to assist litigants, particularly civil rights litigants, in accessing the court systems so that they would be on equal footing with the government and would be able to pursue their rights without being deterred by the cost of legal representation.[15] The legislative history specifically states that the EAJA is not to burden private parties with attorney fees,[16] but is silent about the application to the NFIP.

FEMA is an agency of the United States, and suits against them allow for attorney fees unless defenses are “substantially justified."[17] However, whether a private insurer is an agent of the United States for the purpose of this section is more nuanced. Hurricane Katrina litigation in the Eastern District of Louisiana highlighted this confusion, with decisions repeatedly flip-flopping on the issue over three years.[18]

Dwyer v. Fidelity: The Eye of the Storm

The Katrina decision on this topic to filter to a higher court was Dwyer v. Fidelity National Property and Casualty Insurance Co. At the trial court level, the Federal District Court for the Eastern District of Louisiana held that insurers participating in the NFIP were acting as “an instrumentality of the United States” and, as such, qualified for the EAJA fee shifting. In its opinion, the Dwyer trial court observed that the organizing statute of the NFIP utilizes the term “agent” to describe participating insurers qualifying them as “agencies” as contemplated by the EAJA for the purposes of fee shifting.

On appeal, the Fifth Circuit Court of Appeals reversed. The Dwyer appellate court began its discussion by observing that Title 28 defines “agency” for the purpose of the EAJA as “any department, independent establishment, commission, administration, authority, board or bureau of the United States or any corporation in which the United States has a proprietary interest…”[19] The court further noted that none of these categories describe a private insurer subsidized by FEMA.

The court next looked to the NFIP regulations which describe the role of a private insurer as a "fiscal agent"[20] rather than an "agent" for the purposes of the EAJA. The court found support for this conclusion in Supreme Court of the United States precedent which similarly cautions that mere contractual relationships do not transform all federal contractors into governmental “agen[cies].”[21] Summarizing their opinion, the court stated, “[t]he District Court might be correct in concluding that allowing suit against private insurers is a mere formality imposed by regulation, but regardless, the EAJA must be applied according to its terms.”[22]

Since Dwyer, no appellate court has revisited this issue, and when trial courts — with the notable exception of the Middle District of Florida — have confronted the issue with NFIP participating insurers, they have adopted Dwyer’s reasoning.

Middle District of Florida’s Storm Surge

Initially, the Middle District of Florida capitulated to Dwyer. In 2017, citing Dwyer, the court decided Chatman v. Wright National Flood Insurance Co. in favor of the private NFIP-insurer dismissing claims for attorney fees.[23]

However, this year, courts in this one federal district have latched onto a novel argument and are going against the current. In these cases, the courts determined that although the insurer was not an agency of the United States, the payment made under a FEMA policy is functionally remitted by the United States government. Under this reasoning, this connection with U.S. Department of the Treasury funds is sufficient to survive an initial motion to dismiss.

These decisions rely on the U.S. Court of Appeals for the Eleventh Circuit opinion Newton v. Capital Assurance Co.,[24] which assessed whether prejudgment interest is appropriate under the NFIP. In reaching its decision, the Newton court reasoned that the United States retained a financial stake in litigation against NFIP insurers. Therefore, its sovereign protection from prejudgment interest extends to suits against its insurer partners as any interest charges are, in reality, “direct charges against FEMA”.[25] Newton holds “the line between a [NFIP insurer] and FEMA is too thin to matter for the purposes of federal immunities such as the no-interest rule.” As is evident, Newton’s reasoning diverges from Dwyer’s even if they address slightly different issues.

In January of 2019, the Middle District of Florida first began its swim against the current by declining to dismiss attorney fees entirely and only eliminating state claims of attorney fees in Lovers Lane LLC v. Wright National Flood Insurance Co.[26] This decision cited but did not explicitly rely upon Newton in permitting a claim for attorney fees under the EAJA to survive an initial pre-answer motion. In fact, the Lovers Lane court failed to discuss its reasoning except to acknowledge pre-Dwyer decisions ruling in favor of insurers on the same issue.

In April, the court issued a second decision departing from Dwyer. In Collier v. Wright National Flood Insurance Co. the court again declined to dismiss a claim of attorney fees, citing Lovers Lane LLC without further discussion.[27]

On June 13, the court committed to this interpretation in Arevalo v. American Bankers Insurance Co. of Florida. The court held:

Based on the principles and regulations discussed by the Eleventh Circuit in Newton, the determining factor is not so much whether [the insurer] is an “agency” of the United States under the Act. Rather, it seems to matter more whether the government is the source of the funds or who would pay an award of attorney’s fees. Here, payment of attorney’s fees may be a direct charge on federal funds if FEMA approves [the insurer’s] request for reimbursement of the attorney’s fees incurred defending this NFIP litigation.

This is of course assuming that [the insurer] seeks reimbursement for its defense costs from FEMA and otherwise has an arrangement with FEMA whereby it is entitled to reimbursement. Either way, it is at least plausible at this point in the litigation that attorney’s fees may be paid from federal funds by FEMA.[28]

Notably, however, the Middle District’s reasoning has already been rejected by the Southern District of Florida in its Aug. 12 decision in Hampson v. Wright National Flood Insurance Co.[29] Hampson dismissed Arevalo in a footnote, holding without further discussion, “this Court disagrees [with Arevalo’s conclusion that the source of the funds plausibly relates to fee shifting] and declines to depart from case law in this circuit and other courts finding that a WYO carrier is not an agency of the United States as required by the EAJA.”[30]

Next Steps: Batten Down the Hatches

At this point, it is unclear whether other districts will join the Middle District of Florida in applying Newton to the EAJA. Even if the trend were isolated to this single court — which is by no means guaranteed — it represents a district split on this critical issue. Moreover, this conflict may portend a circuit split between the U.S. Court of Appeals for the Fifth Circuit (Dwyer) and the Eleventh Circuit (Newton).

The consequences of this nascent split are not purely academic. One-way fee shifting agreements — where only the defendant is potentially liable for their adversary’s attorney fees — such as the EAJA, are understood to raise settlement values in favor of defendants (and their attorneys) and increase the likelihood of settlements on otherwise questionable claims.[31] Accordingly, the practical effect of this line of cases in the Middle District of Florida may be increased payments to NFIP insureds throughout the United States. For all the legitimate policy calculations undergirding the EAJA, this effect on the financially strapped NFIP was not clearly intended.

Given the existing financial vulnerabilities of the NFIP, the sheer number of policy holders (greater than 5,000,000), and the predictions of increasing intensity of hurricanes and flooding because of climate change,[32] this trend merits close monitoring. NFIP insurers and United States taxpayers alike have a vested interest in its outcome. These cases from the Middle District of Florida may be a drop in the ocean or could foreshadow a change in the weather.

Alexander Cogbill is an associate at Zelle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 565 F.3d 284 (5th Cir. 2009).

[2] https://www.dhs.gov/xlibrary/assets/privacy/privacy_pia_mip_apnd_h.pdf

[3] https://www.propublica.org/datastore/dataset/national-flood-insurance-program-policies-premiums; https://www.fema.gov/wyo_company (listing the various insurers who participate in the program).

[4] https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53028-nfipreport.pdf

[5] https://www.iii.org/fact-statistic/facts-statistics-flood-insurance

[6] 44 C.F.R. § 62.23(f).

[7] https://www.fema.gov/media-library-data/1539705929612-1b09b5c8bc0c8773a6941a1df0c573f2/FY2019_WYO_Financial_Assistance_Subsidy_Arrangement.pdf

[8] https://www.cato.org/publications/policy-analysis/reforming-national-flood-insurance-program-toward-private-flood

[9] https://fas.org/sgp/crs/homesec/R45242.pdf.

[10] Recent proposals in both the House of Representatives and the U.S. Senate has proposed significant reform to the NFIP, https://www.congress.gov/bill/116th-congress/house-bill/2578/text, including some which would codify fee-shifting.  https://www.warren.senate.gov/imo/media/doc/7.15.19%20NFIP%20Re%20Section-by-Section.pdf. In lieu of these proposals, the NFIP was extended on September 30, 2019 until November 21, 2019 by continuing resolution without modification. https://dsnews.com/daily-dose/09-30-2019/nfip-extended-through-november.

[11] McGair v. Am. Bankers Ins. of Fla., 693 F.3d 94 (1st Cir. 2012).

[12] E.g. Smith-Pierre v. Fidelity Nat’l Indemnity Ins. Co., 2011 WL 3924178 (S.D. Fla. 2011); Wright v. Allstate Ins. Co., 415 F.3d 384 (5th Cir. 2005).

[13] Atlas Pallet, Inc. v. Gallagher, 725 F.2d 131, 139 (1st Cir. 1984).

[14] 28 U.S.C. § 2412.

[15] https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=5202&context=uclrev

[16] Premachandra v. Mitts, 727 F.2d 717 (8th Cir. 1984).

[17] Qader v. Fed. Emergency Mgmt. Agency, 543 F. Supp.2d 558 (E.D. La. 2008).

[18] Compare Dickerson v. State Farm Fire & Cas. Co., 2007 WL 1537631 (E.D. La. 2007) (holding insurer was not subject to EAJA) with Baker v. Allstate Ins. Co., 2007 WL 2407311 (E.D. La. 2007) (holding that an insurer may be subject to EAJA).

[19] Scott v. Fed. Reserve Bank of Kansas City, 406 F.3d 532 (8th Cir. 2005) citing 28 U.S.C. § 451.

[20] 44 C.F.R. § 62.23(g).

[21] Citing to U.S. v. Orleans, 425 U.S. 807 (1976).

[22] Dwyer v. Fidelity Nat’l Prop. & Cas. Ins. Co., 565 F.3d at 289-90.

[23] 2017 WL 3730558 (M.D. Fla. 2017). Also followed by Jones v. Wright Nat’l Flood Ins. Co., 2019 WL 957729 (M.D. Fla. Feb. 6, 2019).

[24] 245 F.3d 1306 (11th Cir. 2001).

[25] Id.

[26] 2019 WL 130362 (M.D. Fla. Jan. 9, 2019).

[27] 2019 WL 1531895 (M.D. Fla. April 9, 2019).

[28] Arevalo v. Am. Bankers Ins. Co. of Fla., 2019 WL 2476644 (M.D. Fla. 2019).

[29] 4:19-cv-10093-KMM, Doc. 17 (S.D. Fla. August 12, 2019).

[30] Id. at FN3.

[31] E.g. Jeffrey Bright, Unilateral Attorney’s Fees Clauses: A Proposal to Shift to the Golden Rule, 61 Drake L. Rev. 85 (2012) (https://lawreviewdrake.files.wordpress.com/2015/06/lrvol61-1-bright.pdf); Cameron Norris, One-Way Fee Shifting After Summary Judgment, 71 Vanderbilt L. Rev. 5117 (2018) (https://cdn.vanderbilt.edu/vu-wp0/wp-content/uploads/sites/89/2018/11/30120828/One-Way-Fee-Shifting-After-Summary-Judgment.pdf).

[32] https://www.c2es.org/content/hurricanes-and-climate-change/.