By Rebecca Mowbray
A newly unsealed whistleblower lawsuit claims that at least eight major insurance companies in Louisiana and their adjusters are ripping off the federal government by over-billing the National Flood Insurance Program for Hurricane Katrina flood damage while stiffing homeowners on wind damage payments under their homeowners insurance policies.
In the suit, a group of former insurance adjusters, identified only as the Georgia company Branch Consultants LLC, say they have reinspected 150 properties with flood and wind damage. In all cases, private insurance companies overcharged the federal flood program for storm damage while they underestimated wind damage.
"Every single one of them," said Allan Kanner, a New Orleans attorney representing the insurance and construction experts as they pursue what they say is a violation of the False Claims Act on behalf of the federal government. "There's a pattern here."
In one striking example, the suit claims that a group of four-plex apartments in eastern New Orleans were compensated for flood damage with taxpayer money even though they experienced no flooding. Each building in same complex was paid only a pittance for severe wind damage on its regular property insurance policies.
American National Property & Casualty Insurance Co., or ANPAC Louisiana Insurance Co., paid the owner of several buildings in the Versailles Gardens subdivision on Alsace Street about $95,000 in flood damages, or about half the value of each property's individual $200,000 flood policy, even though no flood waters got inside the buildings.
In each unit, roof shingles and sheathing were badly damaged by wind, most of the windows were blown out, and enough driving rain got inside to ruin both the floors of the apartments and their mechanical systems, according to the suit.
But American National paid $40,000 or less per building from its own coffers for wind damage that Branch estimates should have been more than $250,000 at each location, resulting in the property owner being under-compensated for hurricane repairs.
American National did not return several phone messages seeking comment.
Other insurance companies named in the suit are Northbrook, Ill.-based Allstate Insurance Co.; Bloomington, Ill.-based State Farm Fire and Casualty Co.; Boston-based Liberty Mutual Fire Insurance Co.; Jacksonville, Fla.-based Fidelity National Insurance Co. and Fidelity National Property and Casualty Insurance Co.; St. Louis-based American National Property and Casualty Co.; Arizona-based Scottsdale Insurance Co.; and Saint Paul, Minn.-based St. Paul Travelers Cos., which changed its name since the suit was filed to the Travelers Cos. Inc.
The suit also names five subcontractors that provided adjusters to the insurance companies after Katrina: Mobile, Ala.-based Pilot Catastrophe Services Inc.; Atlanta-based Crawford & Co.; Indianapolis, Ind.-based NCA Group Inc.; and Orlando-based Simsol Insurance Services Inc.
Kanner says other companies could be added as defendants as the suit develops.
Although companies were scheduled to be served copies of the suit last week, defendants said they had not yet seen copies of the suit, which has been under seal in U.S. District Court in New Orleans since it was filed in August 2006.
State Farm and Allstate, Louisiana's largest residential insurers, each expressed confidence in their claims-handling practices.
"We feel that we've appropriately handled claims arising out of Katrina and that we followed NFIP and FEMA guidelines with regards to expediting flood claims," State Farm spokesman Fraser Engerman said.
"We have not yet received a copy of the suit. Nonetheless, Allstate remains confident in its claim settlement practices following Hurricane Katrina and is committed to resolving all claims fairly and appropriately," said Allstate spokesman Michael Trevino.
Pilot Catastrophe Services and Crawford & Co. adjusters each said they were unable to comment because they hadn't seen the suit. The rest of the companies did not respond to queries for comment.
The lawsuit, unsealed by Judge Peter Beer, alleges that the defendants "defrauded" the U.S. government and violated the False Claims Act by knowingly submitting fake Katrina damage bills to the government for payment. While insurance companies "maxed out or nearly maxed out" flood policies from the Federal Emergency Management Agency, they "substantially underpaid" payments for wind damage at the same properties.
"Rather than follow in good faith the streamlined procedures that FEMA had set up, defendants instead systematically adjusted, paid and submitted reimbursement claims to NFIP regarding losses that obviously should not be covered by flood policies. They did so in massive quantities," the complaint reads. "Defendants defrauded NFIP by misattributing wind damage and other non-flood losses to the flood policies underwritten by the Government rather than correctly attributing such losses to causes that are covered by their homeowners policies."
The whistleblower suit is the strongest and broadest compilation of evidence to date that insurance companies may be shifting the burden of claims that they should be paying onto taxpayers through the flood program.
Two weeks ago, Slidell public adjuster Chris Karpells of YourAdjuster.com LLC, disclosed that Allstate Insurance Co. charged inflated prices to the U.S. government for common rebuilding jobs while charging itself reduced prices for the same work at the same house.
The scope of the suit is potentially huge. The whistleblowers, who remain anonymous while they try to document insurance pay-outs and actual damage on more properties, say they have found an average overpayment of 66 percent on flood policies.
If the Branch Consultants' 66 percent overpayment statistic holds true across the $14 billion that the National Flood Insurance Program paid in Louisiana from Katrina and Rita flood damage, it would mean that insurance companies bilked the flood program for as much as $9.24 billion, or more than the total cost of the Road Home grant program.
Flood insurance is provided by the federal government and is subsidized by taxpayers, but 96 percent of all flood policies are sold and administered by the private insurance companies that often sell people their homeowners insurance coverage.
Faced with 240,000 claims after Katrina, the flood program removed hurdles to adjusting claims in an effort to get money into disaster victims' hands quickly. Many people now question whether that well-intentioned move unlocked the federal treasury's vault for the insurance industry, which could freely charge the federal government for storm damage simply by attributing it to rising water with little documentation. While insurance companies pacified homeowners with flood money, the theory goes, they held the line on paying for damage from wind or wind-driven rain that comes out of their own bank accounts.
Ed Pasterick, senior adviser to the National Flood Insurance program, said he's skeptical about the potential scope of any wind/water allocation problem.
After Tropical Storm Isabel flooded parts of Maryland and Virginia in 2003, Pasterick said, people complained that they didn't receive adequate compensation from their flood policies. In response, the flood program re-opened 24,000 claims, Pasterick said, but the massive effort to readjust the claims turned up no systemic evidence of problems.
Still, Pasterick said the Federal Emergency Management Agency, which oversees the flood program, takes the concerns of the Branch whistleblowers seriously, and will look into their allegations.
"If those figures are accurate, we've obviously got a problem," Pasterick said.
Federal officials from the Department of Homeland Security, FEMA, the Federal Bureau of Investigation and the U.S. Attorney's Office in Baton Rouge were briefed on the suit in November while it was under seal and before insurance companies knew it existed.
David Dugas, U.S. Attorney for the Middle District of Louisiana in Baton Rouge, said his office fielded the complaint with the Civil Division of the Department of Justice in Washington.
When a "qui tam action", or a whistleblower suit, is filed by a private individual on behalf of the government, it is automatically placed under seal for a period of time so that public officials have a chance to investigate the evidence and decide whether they want to take it over.
So far, the answer is no, which is why the complaint was made public, but Dugas said he retains the right to step in at any time.
"We have at this point declined to intervene, but we will continue to closely monitor the litigation," Dugas said.
Jim Letten, U.S. Attorney for the Eastern District of Louisiana in New Orleans, said he could not say why Dugas' office in Baton Rouge, and not the New Orleans office,handled the complaint.
For now, Kanner and the Branch consultants will press the case on FEMA's behalf.
"I don't believe the federal government has decided to ignore it," Kanner said. "They can always jump back in. We thought on a public interest view that it ought to be pursued."
If whistleblowers are successful in pursuing the suit without the U.S. Attorney's intervention, they could be awarded as much as 30 percent of the proceeds if the suit is victorious. If the U.S. Attorney's Office decides later to take over the investigation and the effort is successful, the whistleblowers' take is reduced to 15 percent to 25 percent of the proceeds, Dugas said, because the government is the one doing the heavy lifting on the case.
Under the False Claims Act, anyone who knowingly submits fake bills to the government is liable for three times the amount of damages sustained by the government, according to the Branch suit. There is also a civil penalty.
Although many people in the New Orleans area may have been overpaid for flood damage while being shorted on wind payments, FEMA says homeowners do not have to worry about losing what they've gotten if they speak up.
"If the situation is being paid too much on the flood claim and not enough on the wind claim, the homeowner is not going to get penalized," Pasterick said. "We would simply readjust it and require that the company pay the appropriate amount under the wind policy."
Under normal circumstances, Pasterick said, FEMA would ask anyone who was overpaid by the flood program to return the money. But in this case, homeowners would not risk losing their flood money, because they're not the beneficiaries of an accidental windfall; they're pawns in a possible flood-wind allocation scam. "They should make it clear that they have both wind and flood coverage and they felt they were overpaid. They should make it clear that, 'I had more wind damage than was actually accounted for, and I was paid for it under flood.'¤"
FEMA would go after the companies for not adjusting claims properly, not the individual homeowner, Pasterick said.
Under the law that governs the flood program, private companies have a clear duty adjust claims properly. Insurance companies have a fiduciary responsibility to the federal government "to assure that any taxpayer funds are accounted for an appropriately expended" under the National Flood Insurance Program. They are also required to handle flood claims according to their "customary business practices," and adjust claims according to "general company standards and NFIP claims manuals," implying that they're required to handle flood claims in the same way they would handle wind claims.
The law also says that if there are any inadvertent delays, errors or omissions under a transaction relating to the flood program, "the responsible party must attempt to rectify that error as soon as possible after the discovery of the error and act to mitigate any costs incurred due to that error." If steps are not taken to rectify the situation, the law states, "the responsible party shall bear all liability attached to that delay, error or omission to the extent permissible by law."
Kanner, head of the insurance section at the Louisiana Association for Justice, formerly known as the trial lawyers association, said he hopes that people will look at their flood and homeowners adjustments and come forward if they think they may have been overpaid on flood and underpaid on wind.
"I think at some point people will stand up and say, 'Something's got to be done about this,'¤" Kanner said.
The Branch Consultants have been collecting flood and homeowners insurance adjustments on houses around the area and then going to the properties and re-adjust the claims themselves using Xactimate, a standard adjusting software used by State Farm and many other companies.
They say their estimates err on the side of generosity to the homeowner, and they do not analyze contents payments.
After calculating what the adjustment should have been, they analyze how the insurance company adjustments deviated from reality. Across the board, they have found overpayment on flood and underpayment on wind.
State Farm, for example, paid one Metairie homeowner $88,280 even though there was no flooding inside the home. Meanwhile, the company paid $5,379 on the homeowners policy for what Branch says is actually $110,918 of wind damage.
State Farm also paid a home on the West Bank in Jefferson Parish $51,205 for eight inches of water inside the home. The flood estimate cost breakdown includes damages unlikely to have been caused by flooding, such as $7,086 for a roof, $18,418 for exterior finish, and $20,145 for rough framing.
Meanwhile, the policyholder was paid $5,768 for wind damage, but suffered $95,030 of actual wind losses, the Branch re-inspection found.
Allstate paid the flood policy limits of $250,000 on a home in the Eden Isles area of Slidell that took on two feet of water, and paid the flood policy limits of $91,600 on a home in eastern New Orleans that took on three and a half feet of water. Neither estimate provides any measure of square footage or documentation of damage that would allow an auditor to know whether paying the policy limits was justified; they simply list a total loss figure. The eastern New Orleans home suffered $71,685 of wind damage, but was paid $12,266.
Another Allstate adjustment of a property in eastern New Orleans that took on eight inches of water double-counted the flood damage.
At the beginning of the estimate, Allstate lists estimates to repair everything in the kitchen, bathroom and rest of the house below four feet, and calls the home's fixtures "better" grade even though Branch says they were only standard grade. The adjustment then goes back in and bills the flood program to remove and replace the floor in each room, even though flooring should have already been included in the tally.
While that eastern New Orleans homeowner was paid $69,000 for flood damage that should have totaled $43,847, the homeowner was paid $11,894 for wind damage that should have cost $75,529, according to the suit.
A flood policy written by Fidelity on an eastern New Orleans home insured by Louisiana Citizens Property Insurance Corp. paid the policy limits of $75,000. Although the house took on four feet of water, the Fidelity flood estimate billed the government for parts of the house that didn't need to be replaced such as the roof, brick veneer exterior finish, framing of the house, foundation and the tile floor, which simply needed to be mopped clean, the suit alleges.
Meanwhile, the homeowner was paid $21,098 for $58,022 of wind damage.
The overpayments on the flood and mistakes in the adjustments are particularly striking, Branch says, because flood adjusters are among the best-trained in the business. To become a certified flood adjuster, according to a 2005 Government Accountability Office report, a candidate must have at least four consecutive years of full-time adjusting experience, have attended an adjuster workshop, and re-certify each year.
Flood adjusters are also required to submit detailed reports and photographs to support their findings. The Branch evaluators say in most cases, those rules still should have been in force, because FEMA's expedited flood procedures should have only applied to homes that disappeared in the storm or sat in standing water for an extended period of time.
"These kind of abuses are just unconscionable," Kanner said.
Rebecca Mowbray can be reached at [email protected] or at (504) 826-3417.