The Scheme – first there were just word games (Chapter 2)

Water, water everywhere
nor any drop to drink.
Water, water everywhere
now insurance won’t sink.

The word game started with water – lots and lots of water – lifted by Katrina’s powerful winds, waves became walls of water – collapsing with such force water went further inland than shown on any flood map. New Orleans, the Big Easy, became the only bowl it never wanted and, those playing the word game began calling Katrina, the windstorm, the Great New Orleans Flood.

Immediately after Hurricane Katrina came ashore, and before anyone could possibly assess the damage, the insurance industry began pushing the message that the damage was caused by flooding, rather than wind.  “The fact that a government-run levee fails and creates a flood does not create a liability for private insurers,” said Robert Hartwig, chief economist with the Insurance Information Institute in New York.  “I would say on dollar terms, at least among homes, the majority is related to floods.”

The distinction was important because wind damage is covered under homeowner policies – flooding is not.  Industry representatives took the message one step further when they tried to spin the story as “The Great New Orleans Flood”.

The phrase first appeared in a press release issued by insurance industry Risk Management Solutions (RMS), just three days after Katrina made landfall.  RMS claimed that the following would account for at least 50% of the anticipated total economic losses, and that, “The 2005 Great New Orleans Flood has developed into the most damaging flood in U.S. history.

Winning this round of the word game was a natural for RMS, the world’s leading provider of products, services, and expertise for the quantification and management of catastrophe risk.  Little more than 60 days earlier, the company had announced its Climetrix® weather derivative pricing and portfolio management system passed a significant milestone of one million licensed analyses. Five days after the storm, RMS rebranded the geospatial information products and [GIS]services [it provides] to the defense, intelligence, resource management, weather and mapping markets.

Stepping up in the next round, the first for word games beginning with “p” – policy language – was the company known as ISO.

The property insurance industry uses standardized policy language to provide uniformity in coverage and consistency in legal outcomes. The basic forms are developed and written by the Insurance Services Office Inc. (ISO).

In 1983, as a result of adverse court decisions in which insurers were forced to pay flood-related claims that insurers did not believe they were responsible to pay, the property and casualty insurance industry revised its policy language in the exclusions in homeowners’ policies.

Today, almost all homeowners’ policies have a water damage exclusion with anti-concurrent causation language which, according to insurers, should have eliminated coverage for flooding including from storm surge and levee breaches. Not all water is excluded, just the water damage described in the exclusion.

There are still several instances in which water damage is covered, such as when the pipes in a home freeze and burst, when a roof is ripped off the home and rain water comes in, or the fire department hoses down the house…

In response to the successful use of the concurrent causation arguments and the courts’ reinterpretation of the flood exclusion language that has led to unanticipated exposures, insurers have sought to draft, file, and get state approval of policy language to make it as clear and unambiguous as possible that no damage due to flood is covered…

The “anti-concurrent causation” doctrine was designed to prevent the theory of concurrent causation from providing coverage for losses never intended to be covered by standard property insurance policies…

Generally speaking, and notwithstanding some federal court decisions to the contrary, the efficient proximate cause doctrine has been adopted by the highest courts of Mississippi, Louisiana, and Alabama…To attempt to defend against the claim, insurers must counter the insured’s evidence with evidence tending to prove that the proximate and efficient cause was one that falls outside of the coverage of the insurance policy.

Nothing in anything I read while researching this series of posts has even suggested RMS or OIS are anything other than the reputable providers of innovative services they claim to be – but reputable companies and innovative business practices form the haystack of needles that make it easy for some to miss the needle discovered by the Rigsby sisters, the scheme.

The scheme was fed by the biggest word game of all, the report from Haag Engineering’s Tim Marshall.

One of the same Haag employees who testified for State Farm during the Oklahoma trial, damage and failure consultant Timothy P. Marshall, completed a Hurricane Katrina Damage Survey about a month after the storm…

In the survey, Marshall estimated Katrina’s peak wind gusts at 115 mph in Bay St. Louis, the hardest-hit area. He concluded the storm surge arrived before peak winds and that there was no tornado damage along the Coast. Reports from other sources measured wind gusts of 140 miles per hour, found evidence of tornados or tornadic winds and of wind damage well in advance of Katrina’s unprecedented surge.

State Farm, Nationwide, Allstate and USAA relied on site-specific Haag reports, along with those of other engineering firms, to assess damage, Marshall has said in sworn testimony.

This is not the first time a Haag report commissioned by State Farm has been subject to question. Sop, in fact, recently posted a comment quoting an unfavorable verdict delivered by a jury in Oklahama.

We do find by clear and convincing evidence that the defendant, State Farm, recklessly disregarded its duty to deal fairly and act in good faith with class members in its use of Haag Engineering Company.

We do find by clear and convincing evidence that the defendant, State Farm, intentionally and with malice breached its duty to deal fairly and act in good faith with class members in its use of Haag Engineering Company.

After an appealing the decision, State Farm, Chairman and CEO Edward B Rust, Jr., admitted his company would not have used Haag to assess Hurricane Katrina damage…if State Farm had it to do over again.

The nation’s largest insurer, State Farm, has ordered an independent investigation of one of its vendors and suspended work with the firm, Texas-based Haag Engineering Co., based on an Oklahoma jury’s finding that State Farm used Haag reports to maliciously deny policyholder claims.

Plaintiff’s attorney Jeff Marr say Rust’s admission as a word game.

“I don’t think there is an internal investigation,” said Marr, who has been battling State Farm for the past six years on behalf of 71 policyholders whose homes were hit by a 1999 tornado. “I think it’s just the latest in a series of tactics to try to put some spin on what they’re doing.”

Anita Lee reported the Haag suspension in the Sun Herald and also had the story on Marshall and Haag’s report on Hurricane Katrina.

[Coast] attorneys who oppose State Farm believe the initial Haag survey played into the policy language the company used to deny hundreds of claims for homes and businesses Katrina swept away.

Marshall might want to consider seeking shelter somewhere other than a hospital parking garage on the west side of the eyewall if he does another hurricane report – somewhere that he can watch CNN like the rest of us and see the wind come in before the water. However, anyone who carefully reads both the MID report of State Farm’s Market Conduct Exam and Haag’s report of Marshall’s survey will see exactly how the survey plays to policy language; and, when they’ve seen that they’ve seen the scheme unfolding.

An earlier decision in Texas, however, is also telling of the word game the Rigsby sisters picked up on.  State Farm Lloyds v Nicolau game ended at the State Supreme Court with the word describing State Farm’s relationship with Haag – pretextual.

Nicolaus presented evidence from which a fact-finder could logically infer that Haag’s reports were not objectively prepared, that State Farm was aware of Haag’s lack of objectivity, and that State Farm’s reliance on the reports was merely pretextual,

David Teasdale, a Haag engineer since his graduation from college in 1985, provided evidence that a substantial amount of Haag’s work is done for insurance companies; Teasdale estimated that eighty to ninety percent of his work consisted of investigations for insurance companies. He also testified that he was aware that an insurance company would be required to pay if a policyholder’s home were damaged by a leak.

Furthermore, the evidence supports a logical inference that State Farm obtained the reports from Haag Engineering because of Haag’s general view that plumbing leaks are unlikely to cause foundation damage. State Farm’s claim superintendent, Ralph Cooper, testified that he was aware of Haag’s view when he requested the first report: (emphasis added)

Q: Okay. Did you know that Haag had a general opinion about leaks underneath houses?

A: I knew that they were of the general opinion that a localized leak beneath the house would not cause foundation damage as a general rule. Sometimes they felt it would, sometimes they felt it wouldn’t.

Q: And you knew that before you hired Haag?

A: Yes, I did.

In a February 2007 report, Congressional Research Service identified two broad sets of post-Katraina claims-adjustment issues that might be relevant to Congress.  I hope that proves to be the case; but, they’re definitely relevant in the Southern District Federal Court, particularly when the case is ex rel Rigsby v State Farm, E.A.Renfroe, Haag Engineering and others. One set of these relevant issues is centered on the previously discussed policy language on causation; and, the other, on an issue you’ll be reading more about.

First is the alleged adverse impact on insureds of computerized claims settlement systems and products. Public interest advocacy groups have alleged that the insurance industry uses computer programs, such as “Colossus” sold by Computer Sciences Corporation (CSC) or “Claims Outcome Advisor” sold by the Insurance Services Office (ISO), to systematically underpay homeowners claims. Their argument is that these systems allow insurers to calibrate the amount of savings they want to generate to the detriment of their insureds.

XACT-ly what the Rigsby sisters said in their qui tam claim.

One last word game – this one mine – If technology does the crime, does technology do the time? Is the answer the key to the scheme or just part of the mind game?

Save that thought for the next chapter.

The Scheme – the best place to hide a needle is in a haystack of needles.
Introduction
Chapter 1