Unsealed lawsuit alleges insurer conspiracy to rip off flood program

You gotta love the chutzpah of the latest meme on Katrina flood damage: first the insurance companies were wrongly denying flood damage to policyholders, but as it turns out, at the very same time they were also wrongly paying too much flood damage from federal money.  That is a fairly creative Nixonizing of insurance companies, Nixonizing referring to Richard Nixon, and the ability to generate multiple story lines about a subject, not all of which make sense or are consistent with each other, because the subject is so hated a lot of people will believe anything about him.  Here’s a story from Rebecca Mowbray of the Times-Picayune about an unsealed whistleblower lawsuit alleging a widespread insurer conspiracy to steal federal dollars.  Here’s a pdf of the complaint, filed last year, that the story is talking about.  


Filed under Industry Developments

7 Responses to Unsealed lawsuit alleges insurer conspiracy to rip off flood program

  1. Brian Martin

    Nixonizing? Look in the mirror. You keep saying there is no evidence when the evidence is overwhelming and you say the arguments are contradictory when they all make the same consistent point. We have always said that WYO insurers defrauded taxpayers and homeowners by overbilling NFIP so they could underpay for wind damage. How can you still misrepresent the charge against insurers? Your friends at State Farm billed NFIP for roof damage to a home that had less than a foot of flood water. Your friends at Allstate added upstairs contents to a ground floor flood claim and manipulated per unit costs for materials to make NFIP pay for wind repairs. Your engineering and adjusting friends at Rimkus, FAEC, Haag, Renfroe, and others changed damage assessments from wind to flood at the demand of insurers. You are embarrassing yourself by continuing as an apologist when the people you are defending are all taking the Fifth.

  2. I’m glad to see you are now signing your last name to your comments. As far as them being my friends, I’m not sure I would agree. I don’t see myself as necessarily a friend of insurers or a friend of policyholders either, I don’t have an ideology that way, because I make a living off working both sides of the street. I find ideology is in large measure driven by financial self-interest in legal matters, someone builds up a practice in company side work or policyholder work, they rely on that and what are they going to do, go around finding reasons why the side they are on is no good and the other side is totally pure? No, it happens to be the other way around. Same thing in politics. I notice in one of our earlier exchanges when I asked about how many other times Congress has found insurers robbing the public fisc through the NFIP, you laid it off as Republican do-nothings and, I think, blamed Bush’s messed up FEMA program, indicating that nothing had ever been found before for these reasons. But wait a minute, wasn’t your boss in Congress before the Dems took back over? What was he doing about these repeated ripoffs of the taxpayer? Or weren’t there any? Does this stretch back to Clinton’s FEMA days, or was everything perfect when Bill was in town? It’s things like that, plus the inability to answer the question of whether, if insurers wrongfully paid out federal flood money, was it also wrongful for policyholders to accept it, that brands what you are pushing to the Times-Picayune and others as ideology. Doesn’t mean it’s not right, of course, but it seems to me there are holes in what you say, but you just pretend they are not there because it doesn’t fit the party line.
    Note that I don’t say there isn’t any evidence at all. That would be crazy, of course there is some evidence. I am a litigator, I deal in evidentiary issues. But just because there is some evidence doesn’t mean it is strong evidence or convincing evidence. You may be referring to the quote in the AP story, but what I said probably got mashed a little bit in the editing process or I didn’t say it very clearly or make perfect sense, which is entirely possible. What I meant to say is that I have seen no evidence of this type of alleged fraud happening before Katrina, so all I am doing is asking a simple question. Why didn’t it happen before? Because Bush is president now and it fits in a meme about Big Insurance/Incompetent FEMA? I’m not here to defend insurance companies or FEMA or Bush, they can defend themselves or not as the case may be, politicians and businesses pay their own people to defend them, advance talking points and flack for them. They don’t need me to do it. All I am really doing is asking questions, most of them pretty simple really, but I never get any answers, just the same kind of talking points. It seems implausible that there was a systematic, widespread conspiracy of the nature you argue for. I don’t say everything was perfect with Katrina claims adjustment, how would I know in each and every case? It would be shocking if there weren’t mistakes, wrong ideas and possibly even some examples of stupidity or avarice. We are talking about a process made up of human beings, who are prone to these characteristics. However, unlike some who are paid to say what they say, I have no motive to say what I am saying except it is the way I see it. I can be wrong, of course, and frequently am, but it is my own opinion and paid for by nobody.
    As for Nixonizing, this should not be taken as an endorsement of Nixon or that he didn’t have coming what he got. Certainly, whether we are on the left or the right, I think we can all agree the nation would have been better off had Nixon never become president. Let us not forget that this was the man that, in the lifetime of many now living, actually instituted wage and price controls. Unbelievable. That’s like believing in going to the witch doctor when you are sick. Your comment indicates that you feel I engage in Nixonization, I would have to say I don’t agree. I don’t make out any person or group to be the object of my vituperation. Sure, I might question the policies of Charlie Crist or his choice of speechwriters, but I don’t Nixonize him. I’m sure he has a great many fine qualities. I like his name. When I was a kid I had a neighbor called Grandpa Charlie, nice old guy.
    As far as taking the Fifth, if these folks are doing all this criminal stuff, where is AG Hood to indict them? Instead, he sent the grand jury home, or at least put them on a leash. That’s another question I’m going to have to start asking all the time, thanks for reminding me: why is Jim Hood shirking his job if there are criminals running free? Where in the world is Jim Hood???

  3. Brian Martin

    Katrina is different in many ways. While there has always been a conflict of interest in the WYO progam, it has generally been managable in a typical hurricane without this level of destruction over such a large area. The wind/water disputes are unavoidable after a major hurricane where the worst destruction is caused the combination of wind and surge. These disputes are absent or limited to a small area after a minor hurricane.
    Mississippi had Georges in 1998, which produced a slight amount of surge flooding, localized wind damage, and then river, creek, and bayou flooding after heavy rain. It was not very hard to distinguish the wind damage from the water damage and the disaster area was about one-tenth the size of Katrina’s. Homes were not obliterated. They had identifiable wind damage and identifiable flooding. No insurance company saw an opportunity to bill the flood program pay for roof damage. Despite Georges’ weaker winds, many coastal residents received more from their wind coverage then than after Katrina. It simply was not an option for State Farm and Allstate to blame all the damage on flooding.
    The situation also is very different than 10 years ago because of the appreciation of home values. NFIP is limited to $250K. Many homes did not have that much. Insurance agents are likely to urge homeowners to increase their homeowners coverage to keep up with values and replacement costs, but do not push flood increases. Homeowners expect the flood policy to pay for a few feet of water in their homes, not to cover 100% of destroyed homes. Most people had much more homeowners and wind coverage than flood coverage. So even after insurers paid flood policy limits, thousands of homeowners were left with large losses. They never imagined that any insurance company could find enough engineers and adjusters so dishonest that they would claim that there was no wind damage where a major hurricane made landfall.
    More than all that though, I think that insurance companies have been playing the hard market game for so long with no federal oversight and very weak state oversight that they thought they had a free pass. They did not even pretend to be fair to homeowners or taxpayers. They thought they could bill all the damage to flooding without offering any proof. They were confident that the Bush Administration and Republican Congress would look the other way. They also knew they could count on people like you to help justify their fraud and blame the victims.

  4. I’ll go in order of your points.
    Certainly Katrina is different in many ways, but not unique. You point to a hurricane 10 years ago in Mississippi, but there must have been others both before and since that involved substantial storm surge. If I were running an insurance company and had directed that Operation Ripoff the Treasury be readied, I would first try it out on one of the smaller storms to see if anyone noticed. Doesn’t matter if the damage was much smaller than Katrina — all the better for me to practice my scheme on. So the lack of comparative statistics and examination of past flood payouts in cases of storm surge, or high winds accompanied by later flooding in any context, is a strike against your argument. It does not prove anything one way or another, but if no fraud happened before some explanation is required as to why it began all of a sudden and among all insurers at once. One would expect one or two companies to try the strategy out — why would one company share trade secrets so a competitor can steal its market share? — and the others to learn only after the fact what had happened. So I am concerned by the lack of interest in historical data.
    The issue of the policy limits of flood policies is not a factor in whether one would or could steal Treasury money and pay out flood money that was improper. Say 15 years ago the value of a house was $100,000. If it had been damaged by flooding in the amount of $20,000, with $80,000 in wind damage, and a flood check was cut for $100,000, that is a transfer of wind damage to flood payments of $80,000. If the house in 2005 had appreciated to $500,000, with the same percentage of damage, the true flood damage would be $100,000, and the wind damage $400,000. If a flood check were cut for the max $250,000, that would represent a transfer of $150,000 improperly to flood damage from wind damage. So the scenario you envision could occur no matter what the home value is, and whether the home value is in excess of the $250,000 or less than that. So home values of 10 years ago cannot be the reason such transfers did not occur, if indeed they in fact did not occur.
    On another point, it would not be dishonest not to pay substantial wind damage under the following circumstances: a home is worth $400,000, the flood policy is worth $250,000 and the homeowners policy has a $400,000 limit. If flood damage occurred in the amount of $400,000 — say the home was swept away by storm surge — but it could also be shown that prior to the arrival of the storm surge, $10,000 in wind damage occurred. Let’s say the $250,000 in flood coverage was paid out, and $10,000 in wind damage. That still leaves $140,000 uninsured. Another word for uninsured is self-insured. I can understand wanting to put your life back on track by getting whatever money you can, but looking at it objectively, merely because there were winds does not mean that there is not going to be uninsured damage.
    Another point: you can blame agents or brokers, and some of that may be true, but people are very resistant to buying flood insurance in general, even when warned by the authorities to do so, for example, when a flood crest is forecast on a river. I have written about this phenomenon on my blog.
    Another point: Bush and the Republican Congress. I don’t care about either one of them, and have no more interest in defending them than I do in defending the current Democratic Congress, the Democratic House of Representatives between 1954 and 1994, the Democratic Senate of, what, the mid-1950s to 1980, 1986-1994 and 2000-2002, or President Clinton. Seeing as Bush and the Republicans were in power, except for that interlude in the Senate, for six years prior to this year, it would be interesting to see if any storm surge occurred in any of those years and if the insurers availed themselves of the sure protection of their elephant friends. I suspect there were instances of storm surge, but no proven fraudulent transfers, because if there had been, you would talk about these examples as part of a pattern and practice. I suspect another reason there is little interest in examining a pattern and practice is that President Clinton’s administration oversaw FEMA during some severe hurricanes, and as mentioned, the House of Representatives was Democratic before 1994 for 40 years, including 12 years of the WYO program. So they have had ample time to identify and fix problems.
    Another point: Congress has no more intention of regulating insurance than it has of taking the money out of politics. You think the states are going to let you take their cash machine? They make a lot of dough off regulating insurance. All this talk of abolishing McCarran-Ferguson is just hoopla, taking away a limited anti-trust exemption isn’t going to affect large insurers one iota. Also, insurance law is not federal law like patents or trademarks, it is common law made by courts in all 50 states, and there are significant variances in each state even on central insurance coverage tenets. The states are not going to stand for Congress coming in and upsetting state court precedent. All we need to do is look at the Savings and Loan debacle of the early 1990s to have proof that Congressional oversight is no guarantee of anything. Besides, the federal government already oversees its own insurance program, the NFIP, and its broke. If the feds can’t run that, why trust them with anything else?
    Final point: I do not blame the victims, I merely ask questions to which I get no direct answers, probably because the answers will destroy the thesis of the talking points. In legal analysis, I pick no sides in any case in which I am not representing one of the parties, it is not ideology for me.

  5. Brian Martin

    I am giving you facts and you are answering with nothing but illogical arguments (Companies do not do anything that they have not done previously?) and ridiculous hypotheticals (Wind blows off a few shingles and then surge washes home away.)
    You should take Hurricane 101 before commenting any further.
    No previous hurricane in the NFIP era had a surge over 20 feet. Those in the 15+ range – Hugo, Opal, Andrew, and Ivan – had peak surge and substantial surge damage only in a relatively small area in the right front quadrant near the eyewall. (This is 15 to 20 feet above sea level, not above ground level.) Whatever controversies existed were localized so you did not hear about them.
    Katrina was a massive storm. It caused much more damage from both wind and flooding than any previous storm. The damage in Mississippi alone was more than any previous disaster.
    There was motive and opportunity for insurers to shed their liabilities.
    Very little physical evidence remained at many properties, so all the insurers had to do was try to transfer the burden of proof to the homeowners. That opportunity is not there from a smaller storm or a lesser surge, because no one could get away with saying 3 feet of water caused roof damage. NFIP made the insurers fraud easier by waiving the flood certification requirement. So then they went all the way and flat out denied the existence of wind damage on the coastline even as they were paying for new roofs 150 miles inland. There was no house anywhere that had only a little shingle damage from winds but then was washed off its foundation by the surge. That is just a ridiculous example that shows either no knowledge of hurricanes or intentional deception. Any place where the surge was high was also a place with the highest winds for the longest duration. If insurers do not want to pay wind damage all they have to do is prove that all the damage was caused by flooding. They can’t do it.

  6. There are undeniably previous examples of flooding that also involved wind damage. There is no use in trying to evade this reality. As I’ve said, it has occurred before, albeit on a smaller scale. Could you just answer my question? Why didn’t insurers engage in the same alleged fraud before in the previous instances?
    Second question you have yet to answer: if payment of flood checks by an insurer was wrongful, was it also wrongful for the policyholders to accept those checks? Yes or no?

  7. JimmyTheGreek

    There is merit to this. Everybody including insurers know the federal government aka taxpayers will pick up the tab for damages and they can save billions.
    Insurers aint stupid! Even when its clearly a flood loss insurance companies will pay only for the upper floors and NEVER the 1st living level floor since they always contend the flood surge was 20′ easily covering the first floor and NFIP never questions that.
    Taxpayers get stuck with billions in claims that the insurers are conning off on flood claims.