Chaudhary, et al v. Gallagher & Co, et al

United States Court of Appeals
for the Fifth Circuit

No. 19-20039

Younas Chaudhary; Bushra Chaudhary,

Plaintiffs—Appellants,

versus

Arthur J. Gallagher & Company; Chris Bettina,

Defendants—Appellees.

Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:18-CV-2179

Before Clement,
Higginson, and Engelhardt, Circuit Judges.
Per Curiam:*
Plaintiffs—Appellants, Younas and Bushra Chaudhary, appeal the
district court’s dismissal of their claims as preempted by federal law
governing federal flood insurance. As stated herein, WE AFFIRM IN
PART AND VACATE AND REMAND IN PART.

*
Pursuant to 5th Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5th Circuit Rule 47.5.4.
United States Court of Appeals
Fifth Circuit
FILED
October 16, 2020

Lyle W. Cayce
Clerk
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I.
Because their home in Spring, Texas, suffered extensive damage as a
result of Hurricane Harvey, Plaintiffs—Appellants Younas and Bushra
Chaudhary sought to recover insurance proceeds from a standard NFIP flood
insurance policy and a private excess flood insurance policy. The NFIP claim
was paid in full—$250,000 for the structure and $100,000 for contents.
However, having determined that the Chaudharys did not have an excess
flood insurance policy, Chubb & Son, Inc., d/b/a Chubb Group of Insurance
Companies (“Chubb”), denied the claim for excess flood insurance
benefits.
1
Thereafter, the Chaudharys sued the insurer, Chubb, as well as the
Chaudharys’ insurance broker, Arthur J. Gallagher & Co. (“AJG”), and its
agent, Chris Bettina (“Bettina”), in Texas state court. The Chaudharys
allege claims under the Texas Deceptive Trade Practices Act, Tex. Bus. &
Com. Code § 17.01 et seq., and the Texas Insurance Code, Tex. Ins.
Code § 541.001, et seq., a s well as claims for common-law breach of fiduciary
duty (against Bettina), misrepresentation, fraud, and negligence. After the
suit was removed to federal court, the district court denied the Chaudharys’
motion to remand and dismissed their claims with prejudice.
2

The district court found the Chaudharys’ claim against Chubb to be
precluded by Texas’s statute of limitations. Tex. Civ. Prac. & Rem.

1
In its motion to dismiss, Defendant Bankers Standard Insurance Company
indicated that the Chaudharys’ complaints incorrectly identifies it as Chubb & Son, Inc.,
d/b/a Chubb Group of Insurance Companies. Because Bankers Standard Insurance
Company nevertheless continued to refer to itself as “Chubb,” the district court did the
same. Because we have not been notified of a reason to change course, we likewise will
continue to refer to the insurer as “Chubb.”
2
The district court’s dismissal orders addressed the motion to dismiss filed by
Chubb pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and the motion
for judgment on the pleadings filed by AJG and Bettina pursuant to Rule 12(c) of the
Federal Rules of Civil Procedure.
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§ 16.003(a). Even if not time barred, the district court concluded, the
Chaudharys had not pleaded sufficient facts to state a viable claim against
Chubb for failing to procure excess flood insurance coverage. The
Chaudharys’ claims against AJG and Bettina were determined to be
preempted by federal law.
On appeal, the Chaudharys no longer contest the district court’s
dismissal of their claims against Chubb. They maintain their challenge,
however, to the district court’s dismissal of their claims against AJG and
Bettina.
3
On the instant record, we affirm in part and vacate and remand in
part. Specifically, we affirm the district court’s dismissal of the Chaudharys’
claims premised upon “claims handling” under the standard NFIP flood
insurance policy. On the other hand, we vacate the district court’s federal
preemption ruling relative to AJG’s and Bettina’s alleged failure to maintain
and procure sufficient excess flood insurance to provide $20 million of
coverage and remand for further proceedings consistent with this opinion.
II.
The Chaudharys argue that that their claims do not relate to the NFIP
policy that was paid, but instead deal with only “(1) an excess flood policy
that had already lapsed at the time of Hurricane Harvey due to the negligence
of [AJG] and Bettina;” as well as a hypothetical additional excess policy that
AJG and Bettina should have procured, given the value of the Chaudharys’
home, but did not; and “(2) the failure [of AJG and Bettina] to procure or
inform [the Chaudharys] that even the [lapsed] excess policy . . . was woefully
inadequate to insure [their] home.” Although their complaint alleges details

3
The instant appeal initially included the district court’s dismissal of Chubb.
During briefing, however, the Chaudharys advised that they no longer challenge that aspect
of the district court’s rulings. See Appellants’ Brief at 6-7 n.3. Accordingly, that component
of the Chaudharys’ appeal is deemed abandoned.

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about their NFIP policy (i.e., limits of “$250,000 for structure, and
$100,000 for contents,” and that it was written in 2015 and renewed in 2016),
it does not include any specifics regarding either the lapsed excess policy or
additional excess policy that AJG and Bettina allegedly were meant to
procure. Rather, the Chaudharys’ assertions simply focus on the alleged
nature of the relationship between them, AJG, and Bettina; the Chaudharys’
reported reliance upon representations made by AJG and Bettina regarding
the extent of the Chaudharys’ flood insurance coverage; and AJG’s and
Bettina’s alleged awareness of the $20 million value of their home and
contents.
The Chaudharys contend that they did not worry about the financial
impact of flood damage when they were evacuating for Hurricane Harvey,
because of the “full” and “excess” coverage assurances reportedly received
from AJG and Bettina. The Chaudharys allege that they had “formed a
special trust in Bettina and [AJG] based on their expertise, their services over
the years, and their representations about their ability to provide thorough
and comprehensive insurance to protect [the Chaudharys] from hazards such
as floods, hurricanes, and the like.” The Chaudharys explain that they had
asked AJG and Bettina to “provid[e] appropriate insurance coverage for
[their] home, which including contents, is valued at nearly $20 million.” And
because of the “level of trust” between AJG, Bettina, and the Chaudharys,
AJG and Bettina “would customarily take care of the [Chaudharys’]
insurance needs without consulting [them] about all of the specific details.”
The Chaudharys state that AJG and Bettina “never disclosed any limitations
or exclusions to [their] insurance policy [or policies].”
The Chaudharys maintain that AJG and Bettina “continuously and
expressly assured [them] that they would be fully covered in the event of
damage and that there were sufficient insurance policies in place to cover
both [their] home and its contents.” AJG and Bettina allegedly had visited
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the Chaudharys “many times in person, talked to them regularly on the
phone, and visited their house to assess its contents and value in order to
place insurance for it.” The Chaudharys also say that when Hurricane
Harvey was approaching, their son, who lives at the house, contacted Bettina
to confirm that the family would be fully covered by insurance in the event
that their home sustained damage during the storm, to which Bettina
“expressly stated that [the Chaudharys] would be fully covered in the event
that their home sustained any type of damage from the storm, including
flooding.”
In granting the dismissal motion filed by AJG and Bettina, the district
court referenced the distinction that this court has made between state-law
claims involving claims handling and those concerning policy procurement..
That is, state-law “handling” claims related to FEMA-backed NFIP policies
are preempted by federal law, but “procurement” claims are not. Citing our
jurisprudence, the district court concluded the Chaudharys had failed to
plead facts sufficient to demonstrate that their claims were not preempted
“handling” claims related to the NFIP policy. In particular, the district court
emphasized that the Chaudharys’ amended complaint was especially
deficient in its timeline and description of coverage and coverage events,
which, the district court reasoned, is “the key factor” in distinguishing
between “handling” and “procurement” claims.
III.
Rule 12(c) states that “a party may move for judgment on the
pleadings” after “the pleadings are closed—but early enough not to delay
trial.” Fed. R. Civ. P. 12(c). “A motion brought pursuant to [Federal Rule of
Civil Procedure] 12(c) is designed to dispose of cases where the material facts
are not in dispute and a judgment on the merits can be rendered by looking
to the substance of the pleadings and any judicially noticed facts.” Great
Plains Tr. Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 312 (5th
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Cir. 2002). “Pleadings should be construed liberally, and judgment on the
pleadings is appropriate only if there are no disputed issues of fact and only
questions of law remain.” Id. The Rule 12(c) standard for judgment on the
pleadings is the same as the standard for a motion to dismiss for failure to
state a claim under Rule 12(b)(6). Doe v. MySpace, Inc., 528 F.3d 413, 418
(5th Cir. 2008).
“To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see Fed. R.
Civ. P. 12(b)(6) (stating that claims will be dismissed pursuant to Rule
12(b)(6) if a plaintiff fails “to state a claim upon which relief can be
granted”). “A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. The
court must view the well-pleaded facts in the light most favorable to the
plaintiff. Walker v. Beaumont Indep. Sch. Dist., 938 F.3d 724, 735 (5th Cir.
2019); see also Iqbal, 556 U.S. at 678. Further, a “complaint must allege
‘more than labels and conclusions,’” Norris v. Hearst Tr., 500 F.3d 454, 464
(5th Cir. 2007) (quoting Twombly, 550 U.S. at 555), and will not “suffice if it
tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Iqbal,
556 U.S. at 678 (alteration in original) (quoting Twombly, 550 U.S. at 557).
And though “we must take all of the factual allegations in the complaint as
true, we ‘are not bound to accept as true a legal conclusion couched as a
factual allegation.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at
555).
IV.
We begin our analysis with a word regarding jurisdiction. In the
district court, the Chaudharys filed a motion to remand, contending neither
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diversity of citizenship nor federal question jurisdiction was present. See 28
U.S.C. §§ 1331, 1332, 1441. Specifically, the Chaudharys argued that their
claims arise under state law, involve procurement rather than claims
handling, and, thus, are not preempted by federal law. They additionally
maintain that Bettina was properly joined as a defendant such that his Texas
citizenship precludes federal diversity jurisdiction. The district court denied
the motion, concluding federal question jurisdiction exists.
On appeal, the Chaudharys agree that certain of their allegations
involve “handling” and “settlement” (of their insurance claim asserted
against an insurer), are preempted by federal law, and were properly
dismissed. See Appellants’ Brief at 9, 20 nn. 4–5 (citing Am. Compl. ¶¶ 38–
41, 48). They likewise confirm that they “do not question [the] aspect of the
[district court’s] ruling” determining that “it possessed federal question
jurisdiction over the handling claims.” Id. at 24. Rather, the Chaudharys
simply ask that jurisdiction be revisited by the district court if we reverse the
preemption rulings that remain in dispute. Id.
On this record, we find no reason to question the district court’s
denial of the Chaudharys’ motion seeking remand to state court on
jurisdictional grounds. Of course, should the district court determine, on
remand from this court, that the remainder of the Chaudharys’ claims are not
preempted by federal law and diversity jurisdiction is lacking, it may likewise
consider whether the discretionary supplemental jurisdiction provided by 28
U.S.C. § 1367 should be exercised.
V.
We now turn to the Chaudharys’ claims against AJG and Bettina. The
possibility of federal preemption stems from the National Flood Insurance
Act of 1968 (“NFIA”), 42 U.S.C. § 4001 et seq., which established the
National Flood Insurance Program (“NFIP”). As discussed in many of our
prior opinions, the NFIP, administered by the Federal Emergency
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Management Agency (“FEMA”), was created by Congress “to make flood
insurance available on reasonable terms and to reduce fiscal pressure on
federal flood relief efforts.” Campo v. Allstate Ins. Co., 562 F.3d 751, 754 (5th
Cir. 2009). The NFIP includes “Write-Your-Own” (“WYO”) policies that
allow private insurers to sell flood insurance policies that the federal
government underwrites. Id. These private insurers are tasked with
“arrang[ing] for the adjustment, settlement, payment and defense of all
claims” arising from such policies. Id. (alteration in original) (quoting Gallup
v. Omaha Prop. & Cas. Ins. Co., 434 F.3d 341, 342 (5th Cir. 2005)).
The WYO policies must adhere exactly to the terms and conditions
set forth in FEMA regulations. Id. (citing 44 C.F.R. §§ 61.4(b), 62.23(c)–(d)
(2008); 44 C.F.R. pt. 61, app. A(1)) (setting forth the Standard Flood
Insurance Policy (“SFIP”) terms). FEMA regulations also govern WYO
private insurers’ payment and adjustment of claims. Id. And while the
insurers selling WYO policies play “a large role,” the federal government
ultimately pays the claims. Id. The government also reimburses most private
insurers’ costs incurred defending themselves in WYO suits. See id. (citing
44 C.F.R. pt. 62, app. A, art. III(D)(3)(a) (defense costs are not reimbursable
in “litigation [that] is grounded in actions by the [WYO] Company that are
significantly outside the scope of this [a]rrangement, and/or involves issues
of agent negligence”)).
As emphasized by the district court, our preemption jurisprudence
relating to the NFIP has distinguished between state-law claims involving
“claims handling” and those involving “insurance procurement.” See, e.g.,
Spong v. Fid. Nat’l Prop. & Cas. Ins. Co., 787 F.3d 296, 299, 306 (5th Cir.
2015); Grissom v. Liberty Mut. Fire Ins. Co., 678 F.3d 397, 400–01 (5th Cir.
2012); Campo, 562 F.3d at 754. One of the FEMA regulations governing the
NFIP states that “all disputes arising from the handling of any claim under the
policy are governed exclusively by the flood insurance regulations issued by
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FEMA, the National Flood Insurance Act of 1968, and Federal common
law.” 44 C.F.R. Pt. 61, app. A(1), art. IX (emphasis added). Thus, federal law
preempts state law claims concerning “claims handling” by a private WYO
insurer.
4
See Wright v. Allstate Ins. Co., 415 F.3d 384, 390 (5th Cir. 2005)
(holding that “state law tort claims arising from claims handling by a WYO
are preempted by federal law”); Campo, 562 F.3d at 754 (same).
However, our precedent dictates that claims concerning “policy
procurement” are not preempted. See Campo, 562 F.3d at 758 (Congress
“chose to confine the plain language of its preemption to handling” and
“unlike in handling-based cases, permitting prosecution of procurement-
related state-law [] suits does not impede the full purposes and objectives of
Congress”). According to Campo, the rationale for this disparity in treatment
is explained, at least in part, in the differing impact on federal funds. See id.,
562 F.3d at 758 (“Suits relating to handling, or claims adjustment, generally
seek money . . . ultimately . . . disbursed from federal funds thereby directly
conflicting with Congress’s objective to reduce pressure on the federal fisc.
In contrast, FEMA does not reimburse carriers for procurement-related
judgments.”) (citing 44 C.F.R. § 62.23(i)(6) (2008) (WYO defense costs will
be part of claim expense allowance); 42 U.S.C. § 4017(d)(1) (providing for
payment of costs for adjustment and payment of claims); 44 C.F.R. pt. 62,
app. A, art. IX (2008) (FEMA will not reimburse costs incurred due to agent
negligence); 42 U.S.C. § 4081(c) (FEMA “may not hold harmless or
indemnify an agent or broker for his or her error or omission”)).
“Additionally, FEMA extensively regulates the management of existing
coverage while demonstrating no such interest in procurement.” Campo, 562
F.3d at 758.

4
“Federal regulations have no less pre-emptive effect than federal statutes.” In re
Cajun Elec. Power Coop., Inc., 109 F.3d 248, 254 (5th Cir. 1997).
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In Grissom, this court undertook to clarify the distinction that our
jurisprudence has drawn between state-law “handling” claims and those
involving “procurement,” explaining:
The key factor to determine if an interaction with an insurer is
“claims handling” is the status of the insured at the time of the
interaction between the parties. If the individual is already
covered and in the midst of a non-lapsed insurance policy, the
interactions between the insurer and insured, including
renewals of insurance, are “claims handling” subject to
preemption.
Grissom, 678 F.3d at 401.
The record reveals that, over the course of this action, the Chaudharys
arguably have sought to distance themselves from certain aspects of their
original and amended complaints. Nevertheless, on appeal, they admit that
their pleadings include allegations of inadequate claims handling, relative to
the standard NFIP flood insurance policy, and, as referenced above, do not
challenge the district court’s dismissal of at least some of them. Indeed, the
Chaudharys concede that the district court properly dismissed the portions
of their state-law claims related to “claims handling.” See Appellants’ Brief
at 20 n.4 (conceding that the portions of Appellants’ Deceptive Trade
Practices Act claims alleging “handling claims, such as allegations related to
investigation and resolution of [their] claim . . . are preempted and were
properly dismissed”); id. at 20 n.5 (same concerning the portions of their
Texas Insurance Code claims alleging “settlement”); id. at 24 (“Now that
the handling claims have been dismissed, only the state law claims against the
agents remain.”). The district court correctly determined that the
Chaudharys’ Deceptive Trade Practices Act and Texas Insurance Code
claims included allegations of “claims handling” preempted by federal law.
See Grissom, 678 F.3d at 401.
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Without parsing the entirety of the Chaudharys’ pleadings against
their appellate concessions, we are satisfied that the district court’s
determination that certain of the Chaudharys’ assertions allege improper
“handling” of claims, under the standard NFIP flood insurance policy, does
not warrant reversal. See September 28, 2018 Mem. Op. at 9 (citing Orig.
Pet. at ¶¶ 16(e)–(f), 17–19; December 20, 2018 Mem. Op. at 23–24, 26–27
(citing Am. Compl. at ¶¶ 38-39, 48). Accordingly, we affirm that aspect of
the district court’s preemption determination.
On the other hand, proper resolution of the Chaudharys’ allegations
that, unbeknownst to them, AJG and Bettina allowed a previous private
excess flood insurance policy to lapse and failed to procure additional private
excess flood insurance coverage sufficient to fully insure the $20 million
home and contents, is not as straightforward. Specifically, in characterizing
these allegations as preempted “handling” claims related to the NFIP policy,
the district court seemingly applied Grissom’s “interaction timeline”
analysis without accounting for the fact that the regulatory language
interpreted in Grissom expressly refers to the “handling of any claim under
the [NFIP] policy,” but makes no mention of private excess flood policies.
Furthermore, the policy at issue in Grissom was, in fact, a federal preferred
risk flood insurance policy, as opposed to the private excess policy not
procured here. Indeed, it is our understanding (as discussed with counsel at
oral argument) that the NFIP does not even offer federal flood insurance
coverage in an amount exceeding the $250,000/$100,000 limits of the
standard NFIP policy that the Chaudharys had here. Additionally, the
defendant in Grissom was the NFIP WYO insurer, not an independent broker
or agent.
5

5
On appeal, the Chaudharys argue that AJG’s and Bettina’s statuses as broker and
agent, respectively, rather than WYO insurers—particularly given the differing risk to
federal funds—is alone a sufficient basis to preclude federal preemption. This assertion,
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Lastly, although the district court found the Chaudharys’ allegations
regarding the timeline, coverage, and coverage events insufficient to state
unpreempted claims regarding excess flood insurance coverage, it is not
apparent whether the district court did not allow the Chaudharys an
opportunity to amend their pleadings, in hopes of stating viable claims,
because the Chaudharys had not sought leave to do so, because they already
had had an opportunity to amend, or because of some other reason on the
record before it.
Given the foregoing, we find it appropriate to vacate and remand the
district court’s judgment relative to the private excess policies for further
consideration in the first instance. To do otherwise would risk overstepping
our role as an appellate court.
AFFIRMED IN PART. VACATED AND REMANDED IN
PART.

however, was not presented to the district court. Considering that the Chaudharys
characterize this issue, which dominates their appellate briefs, as a matter of first
impression, but offer no explanation or justification for not raising it before the district
court, we will not undertake to assess it further at this juncture. Rather, in this context,
that argument is best presented, in the first instance, to the district court. We mention it
only to note it as a factor for possible consideration by the district court, on remand, in
reassessing the proper application of Grissom’s principles here.
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