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Property Insurance

Potential Insurance Company Fraud in Superstorm Sandy Litigation

Jay Levin | December 1, 2014

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Hurricane damage to homes

We recently marked the 2-year anniversary of Superstorm Sandy. With that anniversary came an influx of litigation in response to insurance companies denying or overly limiting coverage. That litigation recently revealed highly questionable practices within the industry.

Most striking was the opinion in Raimey v. Wright Nat'l Flood Ins. Co. (In re Hurricane Sandy Cases), 2014 U.S. Dist. LEXIS 158660 (E.D.N.Y. Nov. 7, 2014). There, US Magistrate Judge Gary R. Brown exposed "reprehensible [and possibly widespread] gamesmanship" by a professional engineering firm, U.S. Forensic, retained by Wright National Flood Insurance to investigate damage to the Raimey home following Superstorm Sandy. A U.S. Forensic engineer visited and photographed the Raimey home following Sandy and prepared a report detailing his conclusion that the home had been damaged beyond repair. The report specifically noted that the structural damage was the result of "hydrodynamic forces associated with the flood event of October 29, 2012," and that repair was "not economically viable."

That report, however, was subsequently rewritten under the guise of "peer review" by another U.S. Forensic engineer who relied solely on photographs. The new report reached the opposite conclusion—that the home was not structurally damaged by hydrodynamic forces from the flood, and the damages were the result of "long-term" deterioration. The insurer denied coverage based on the latter report and never produced the earlier report.

The court found that the insurer's failure to reveal the existence of the earlier report, let alone the report itself or any drafts and communications concerning the preparation of the reports, was particularly "reprehensible" because the insurer had been "under unequivocal and repeated court direction to produce all expert reports, photographs, and written communications that contain any description or analysis of the scope of loss or any defenses under the policy." As a result of this conduct, the court ordered all defendants in "any" Superstorm Sandy case to provide plaintiffs with copies of "all reports … plus any drafts, redlines, markups, reports, notes, measurements, photographs and written communications related thereto—prepared, collected, or taken by any engineer, adjuster, or other agent or contractor affiliated with any defendant, relating to the properties and damage at issue in each and every case, whether such documents are in the possession of defendant or any third party."

The insurers resisted this order in motions for reconsideration, which were denied in a strongly worded order on December 8, 2014. The court will hold another evidentiary hearing to address the fact that the misconduct does not appear to be limited to the Raimey claim.

Preexisting Damage

A similar practice was alleged in a case involving a different insurance company, Hartford Insurance Company of the Midwest. The complaint in Dweck v. Hartford Ins. Co. of the Midwest, No.: 1:14-cv-06920-ERK-JMA (E.D.N.Y.) (filed on Dec. 3, 2014), alleged that HiRise Engineering inspected Dweck's home after Superstorm Sandy, and an engineer licensed in New York wrote a report opining that there was extreme damage from the flood. Another engineer at HiRise, who was not licensed in New York, altered the report so it read that the damage was preexisting and caused by soil consolidation and then affixed the first engineer's seal without showing him the report. The first engineer, when confronted with the altered report, disavowed its conclusions and stuck by his original findings. The complaint goes on to allege breach of contract and mail and wire fraud as predicates for a Racketeer Influenced and Corrupt Organizations Act claim, allege bad faith, and seek class certification.

An almost identical complaint was filed in Shlyonsky v. HiRise Eng'g, P.C., No.: 1:14-cv-07136-RJD-MDG (E.D.N.Y.) (filed on Dec. 5, 2014), by three firms, including one of the firms that filed Dweck. The allegations in this case identified Travelers Insurance Company, d/b/a Standard Fire Insurance Company, as the offending insurer. The Shlyonskys alleged that HiRise again altered an engineering report to change the conclusions from flood damage to preexisting damage without the original engineer's knowledge or approval. It also sought class certification and asserted the same claims as in Dweck.

The Raimey case, in particular, has enraged a community still struggling to rebuild after Sandy. It has generated intense interest from New Jersey Senators Robert Menendez and Cory Booker who, on November 14, 2014, jointly wrote to the Federal Emergency Management Agency (FEMA) as the party "ultimately responsible for [the Write Your Own (WYO) insurance companies'] behavior." The senators highlighted FEMA's "unbalanced penalty structure" that punishes WYOs for overpaying on claims, which results in "aggressive[]" practices to reduce the payments to policyholders. The senators characterized the Raimey opinion as the "smoking gun of a pervasive and intentional effort to lowball disaster victims …" and, based on "FEMA's lack of oversight or tacit encouragement of these procedures, WYO insurance providers continue to engage in these highly questionable practices."

The senators sought to have FEMA conduct a full investigation into the "pervasiveness" of the concealed report alterations and report to Congress on its findings with a plan for increased "transparency" and consumer protections. They further sought to have WYOs "comply with the New York Court order [Raimey] for New Jersey cases and fully disclose to policyholders each variation of adjuster and engineering reports on the assessment of the policyholder's damage with relation to the policyholder's coverage, including an explanation of why an additional report was ordered" as well as sanctions and penalties imposed against wrongdoers.

FEMA responded by committing to reform the claims process and called on the WYO insurers to comply with Judge Brown's order. FEMA will now reopen and reconsider some 270 appeals of claim denials and take administrative action to ensure that WYO insurers are penalized equally for underpayment and overpayment on flood claims. FEMA further agreed to appoint an advocate to help policyholders through the Sandy claims and appeals process.

Lessons Learned

Lawyers should be aware of these cases. First, lawyers have a duty to conduct a "reasonable inquiry" to ensure that their clients' discovery disclosure is "complete and correct as of the time it is made." Fed. R. Civ. Pro. 26(g). Judge Brown concluded that defense counsel violated their obligations by limiting their discovery inquiry to the insurance company's claim file. They had an obligation to inquire with the engineering firm retained to investigate the loss.

Second, policyholder counsel should always demand copies of all inspection reports and damage estimates with respect to the loss prepared for the insurance company and never assume that the final report actually represents the opinions of the engineers or other professionals who actually inspected the property. Policyholder counsel should conduct thorough discovery of all experts to make certain that there has been no misconduct similar to that in Raimey and, allegedly, in Dweck and Shlyonsky.  Expert reports are the cornerstone of all property insurance claims, not just flood claims. As a result, the contents and supporting documentation should be carefully examined.

Federal flood insurance is designed to provide protection not available in the ordinary insurance market. To the extent the cost is not covered by policy premiums, it is funded by the public fisc. For insurers and their agents to commit fraud against policyholders under these policies, for whatever reason, multiplies the economic and emotional damages policyholders suffer from a disaster like Sandy. Given that the insurers have no financial liability for these claims, they should adjust and pay them honestly and promptly. In fact, many insurers do. If, however, any insurers fail to do so and instead participate in or condone fraud, they should be barred from the program and sanctioned by the appropriate regulatory authorities.

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