Nelson v. Becton

FRIEDMAN, Senior Circuit Judge. This is an appeal from the judgment of the United States District Court for the District of Minnesota (Judge James M. Rosenbaum) granting summary judgment dismissing the appellants’ complaint seeking recovery under insurance policies issued pursuant to the National Flood Insurance Program. The district court denied recovery because the areas of the appellants’ homes that had suffered damage from flooding were within a limitation on the coverage of the policies for “basement” areas. Nelson v. Becton, 732 F.Supp. 996 (D.Minn.1990). We affirm. I. Under the National Flood Insurance Program, 42 U.S.C. §§ 4011-4128 (1988), the Federal Emergency Management Agency (Management Agency) issues flood insurance policies to, among others, homeowners. The Standard Flood Insurance Policy (Standard Policy) is a detailed printed form, the language of which is prescribed by the Management Agency’s regulations. See 42 U.S.C. § 4013; 44 C.F.R. § 61.4(a)(2), 61.13 (1989). The appellants are three couples who own homes that were insured under the federal program. Two of them obtained their insurance prior to 1983, and the third thereafter. In 1983, the Management Agency amended the Standard Policy to limit the coverage of basements. This limitation, known as the “basement exclusion,” was added to reduce the Federal Government’s cost of providing flood insurance. See National Flood Insurance Program, Coverage, Sales and Eligibility Provisions, 48 Fed.Reg. 39,066-68 (1983). The first page of the policy, as subsequently amended, stated in Article II, captioned “DEFINITIONS”, “Basement” means any area of the building having its floor subgrade (below ground level) on all sides. Article Y of the policy, captioned “PROPERTY NOT COVERED”, stated: We do not cover and will not pay for damage to or loss of any of the following: •F. ... finished basement walls, floors, ceilings and other improvements to a basement having its floor subgrade on all sides, and contents, machinery, building equipment and fixtures in such basement areas; except that, as to this subparagraph (F), coverage is provided in basement areas ... [for certain equipment]. In the policy renewal declarations attached to the policies, which, under the definition of “Policy”, were part of the policies and specified the details of the insurance provided and the property covered, the “BUILDING” being insured was described, in one instance as “THREE OR MORE FLOORS INCLUDING FINISHED BASEMENT” and in the two other instances as “TWO FLOORS INCLUDING FINISHED BASEMENT”. The “CONTENTS” to be insured were described as “HOUSEHOLD CONTENTS LOCATED IN BASEMENT AND ABOVE”. The declarations stated: “LIMITED COVERAGE IN BASE — 1289 — MENT. SEE ‘PROPERTY NOT COVERED’ SECTION OF POLICY FOR SPECIFIC ITEMS.” Following a flooding of the appellants’ homes that caused substantial damage in their lower floors, the appellants filed claims under their policies for their losses. Each of the appellants’ homes had what they call a “walkout” basement, namely, one which had a direct exit from the rear of the lower level to the yard behind the house. To go from the exit into the yard, however, it was necessary to go up at least one step. The Management Agency denied coverage for the damage to the appellants’ lower levels. It ruled that because of the step ascending from the basement exit to the rear yard, the lower levels were “sub-grade” on all sides and therefore were within the basement exclusion. The appellants then filed the present action in the district court, pursuant to 42 U.S.C. section 4072 (1988), against, among others, the director of the Management Agency (the appellee Becton), the Management Agency itself, and the National Flood Insurance Program. The court granted those defendants’ motion for summary judgment. The court held that the policy unambiguously excludes from coverage certain losses to a home’s lowest level when its floor is subgrade on all sides.... The plaintiffs acknowledge and their own photographs indicate that their homes can only be exited by stepping up to reach ground level. Each plaintiff’s home’s lowest level is sub-grade on all sides. The court concluded: This Court therefore holds the lower levels of plaintiffs’ homes were “basements” as that term is defined by the [Standard Policy]. While this Court is sympathetic to plaintiffs’ plight, sub-grade means below ground level and the definition is not vague or ambiguous. The [Standard Policyjs definition of basement must control. The policy exclusion clearly applies to plaintiffs’ homes. Nelson v. Becton, 732 F.Supp. 996, 999 (D.Minn.1990). II. A. We agree with the district court that the basement exclusion provision is unambiguous and that that provision applies to the lower levels of the appellants’ homes. The definition of “Basement” in the policy is straightforward and clear — an area of the building, the floor of which is “subgrade (below ground level) on all sides.” Similarly, the “PROPERTY NOT COVERED” provision of the policy unambiguously states that, with exceptions not here relevant, the insurance does not “cover and will not pay for damage to ... a basement having its floor subgrade on all sides.... ” The floors of the lower levels of the appellants’ homes were subgrade on all sides. In order to go from that level out to the yard, it was necessary to go up at least one step. The floor levels therefore were subgrade on the rear of the house because their grade was below the ground level at the point of exit. The extent to which they were subgrade, whether 6, 8, or 40 inches, is immaterial under the policy. The only question is whether they were subgrade or at ground level. Indeed, the appellants do not contend that the floors of the lower levels of their houses were not subgrade in the rear or attempt to explain why a floor that is 6 to 8 inches below ground on one side is not “subgrade” on that side. Instead, they argue that the basement exclusion of the policy was not intended to cover so-called “walkout” basements, which have a direct exit to the yard. Nothing in the policy language, however, even refers to or uses the word “walkout,” which appears to be a term used in the real estate business to describe a home of that type. Although the appellants argue that walkouts generally are not considered basements, the question is whether the appellants’ walkouts contain basements under the policy definition of the term. “[W]here a term is defined in the policy, the court is — 1290 — bound by the policy definition.” Enterprise Tools, Inc. v. Export-Import Bank, 799 F.2d 437, 439 (8th Cir.1986), cert. denied, 480 U.S. 931, 107 S.Ct. 1569, 94 L.Ed.2d 761 (1987) (citing Pearce v. General American Life Ins. Co., 637 F.2d 536, 539 (8th Cir.1980)). If the walkout side of the basement is subground, it is a basement under the policy. The appellants refer to a footnote in a lengthy report from the General Accounting Office to two members of Congress which stated: “The flood insurance program’s definition of a basement is an area of a building having its floor below ground on all sides. FIA [Federal Insurance Administration] does not consider ‘walk out’ basements as basements for insurance purposes.” Neither this statement nor anything else upon which the appellants rely warrants interpreting the unambiguous policy language defining and limiting the coverage of “basements” to except walkout basements. The unambiguous language of the basement exclusion is consistent with the principle that insurance policies should be as clear as possible, so that insureds will know the precise scope of their coverage and insurers will know the precise extent of their liability. See generally 44 C.J.S. Insurance § 255 (1945). Under the basement exclusion, only limited coverage is provided for the lower level of a house that is subgrade on all sides. Although the appellants stress that only one step upward is required to get from their basements to the yard, on what reasonable basis should coverage be made to depend upon the number of steps that separated the basement level from the yard? Under the appellants’ theory, would a walkout basement that was 6 steps below ground still not be a basement? The Management agency was justified in drafting the exception for flood damage to “basements” in terms of whether the area involved was subgrade on all sides. B. The appellants contend that, as construed by the district court and the Management Agency, the basement exclusion is unconscionable and therefore should not be enforced. Even assuming arguendo that the doctrine of unconscionability properly may be applied to a federal insurance policy, the language of which is mandated by a federal regulation, the appellants have not shown that application of the basement exclusion to their houses would be unconscionable. As we have held, the language of the policy is unambiguous and clear. If the appellants had read their policies — two of them admitted in depositions that they had not — the scope of coverage should have been apparent. Moreover, the policy renewal declarations attached to the policy described the insured premises as “INCLUDING FINISHED BASEMENT”, stated that the insurance covered “HOUSEHOLD CONTENTS LOCATED IN BASEMENT AND ABOVE”, and noted that there was “LIMITED COVERAGE IN BASEMENT”, as specified in the “PROPERTY NOT COVERED” section of the policy. The limited extent of the coverage for basements thus was fully and clearly disclosed to the appellants. Although the appellants contend that they obtained the insurance to protect their homes, including the basements, from flooding, there is evidence in the record that mortgage lenders required the insurance. Indeed, had it not been for the federal program, the appellants might have had no flood insurance at all since “many factors have made it uneconomic for the private insurance industry alone to make flood insurance available to those in need of such protection on reasonable terms and conditions_” 42 U.S.C. § 4001(b)(1) (congressional findings and declaration of purpose). We cannot conclude that it would be unconscionable to apply the basement exclusion as written to limit the policy’s coverage of the appellants’ basements. III. The appellants recognize, as the Standard Policy provides, that federal common law governs the interpretation of the policy. Sodowski v. National Flood In — 1291 — surance Program, 834 F.2d 653, 655 (7th Cir.1987), cert. denied, 486 U.S. 1043, 108 S.Ct. 2035, 100 L.Ed.2d 619 (1988); Atlas Pallet, Inc. v. Gallagher, 725 F.2d 131, 135 (1st Cir.1984). They urge us to adopt, as federal common law, the doctrine of reasonable expectations, which they say 12 states, including Minnesota, have adopted. As the Supreme Court of Minnesota explained the doctrine in Atwater Creamery Co. v. Western Nat’l Mut. Ins. Co., 366 N.W.2d 271, 277 (Minn.1985), upon which the appellants rely, even an unambiguous policy may be “interpreted according to the reasonable expectations of the insured.” The appellants urge that under this principle the district court improperly granted summary judgment against them, since there were disputed issues of material fact regarding the nature of their expectations and the reasonableness thereof. In their reply brief, the appellants seem to urge us to adopt, as federal common law, the Minnesota rule of reasonable expectations. Under that approach the applicability and scope of the doctrine of reasonable expectations for federal flood insurance policies would depend upon the particular state law to be applied. The appellants state that 12 states have applied the doctrine to insurance policies. Under the appellants’ theory, presumably federal common law would not apply the doctrine in a situation where governing state law does not recognize it. What would the rule be for states that have not considered the question? The Standard Policies issued by the Management Agency under the National Flood Insurance Program are by regulation uniform throughout the country. See 42 U.S.C. § 4013; 44 C.F.R. § 61.4(a)(2), 61.13. Their coverage should not vary from state to state depending upon the vagaries of state law. “[Fjederal programs that ‘by their nature are and must be uniform in character throughout the Nation’ necessitate formulation of controlling federal rules” rather than “incorporating]” “state law ... as the federal rule of decision.” United States v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 1458, 59 L.Ed.2d 711 (1979) (quoting Clearfield Trust Co. v. United States, 318 U.S. 363, 367, 63 S.Ct. 573, 575, 87 L.Ed. 838 (1943)) (footnote omitted). The purpose of the National Flood Insurance Program is to provide flood insurance, which otherwise would not be available, on a uniform nationwide basis. To apply the varying reasonable expectations doctrines of the insurance laws of individual states would “frustrate [these] specific objectives of the Federal program[ ].” Kimbell Foods, 440 U.S. at 728, 99 S.Ct. at 1458. Perhaps the appellants are more broadly arguing that we should adopt as the federal common law governing the interpretation and application of the Standard Policy the general principle of the doctrine of reasonable expectations, and are referring to the Minnesota law only as illustrative of what the federal common law should be. The considerations that warrant applying the doctrine in a suit against a private insurer, however, may be quite different from those involved in determining the coverage of a federal insurance policy, the language of which is mandated by a federal regulation. To apply the doctrine of reasonable expectations to permit the appellants to recover for flood damage to their “basements” under the Standard Policy, which expressly excludes such damage, would be tantamount to our modifying the underlying federal regulation that prescribes the language of the basement exclusion clause. We decline to take such a far-reaching step, the outer reaches of which cannot be perceived at this time. The judgment of the district court is affirmed.