Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The post quoted from a legal filing that indicates State Farm made up its own flood adjustment rules:

The NFIP Claims Manual requires that “repair estimates should be prepared room-by-room,on a unit-cost basis, clearly indicating dimensions and unit costs, except when the building has been completely destroyed.” NFIP Director David Maurstad testified that prior to Hurricane Katrina, flood claims had to be adjusted using a line-by-line stick build estimate. Maurstad also testified that following Hurricane Katrina, he tasked the NFIP Director of claims to come up with a method that “I could ultimately approve that could guide the Write Your Own Companies to handle claims in an expedited process specific to this . . . disaster, to Katrina.”

Maurstad testified that FEMA Directive W-5054 embodied the only expedited claims procedures that he authorized. That directive allowed adjusters to use a square foot value estimator instead of a line-by line estimate in two very narrow circumstances: (1) when a home “had standing water in it for an extended period of time”; or (2) when a home was “washed off its foundation by flood water.”

Discovery revealed that State Farm ignored the NFIP and Memorandum W-5054. Rather than follow the NFIP’s rules, State Farm expressly applied their own rules, which directly conflicted with Memorandum W-5054. David Maurstad testified that that in developing W-5054, he solicited ideas from various insurance companies for FEMA to consider. As part of that process, State Farm submitted a proposal to the NFIP on September 13, 2005, just one week before David Maurstad issued the actual directive. Remarkably, Juan Guevara, State Farm’s principle contact with the NFIP, testified that unlike all the other insurers, State Farm did not have to follow Memorandum 5054, but rather could play by its own rules, as stated in State Farm’s September 13th proposal.

Specifically, Guevara asserted that “5054 is different than the document we received approval to use,” and in fact, that State Farm’s claims handling practices did not change as a result of W-5054 being issued because it continued to adjust claims based on the September 13th proposal. Guevara’s admission is an enormous and dispositive indictment because there is a very important difference between State Farm’s September 13 proposal and the actual directive that was issued by FEMA.

Under the September 13 proposal, State Farm sought permission to use Xact Total “where a site visit was completed and [the damage] appeared to exceed policy limits.” But that part of State Farm’s proposal was not adopted in Maurstad’s final Memorandum. Rather, under FEMA Directive W-5054, Xact Total could be used only if the home had been in standing water for at least five days, or if the home had been washed off its foundations. In addition to his testimony, Juan Guevara’s emails reveal State Farm’s intent to ignore FEMA Directive W-5054. On September 22, 2005, the day after W-5054 was issued, Juan Guevara emailed Jim Shortley because he wondered why State Farm’s proposal regarding the use of Xact Total for policy limit losses was rejected. Mr. Guevara quoted the language in W-5054 requiring all claims (other than those related to slabs or homes in standing water) to be adjusted using the company’s “normal claims handling procedures,” and he stated, “I read this as having to write a complete line by line estimate even if the repairs will exceed the policy limits.”

The Windstorm Insurance Network has national flood adjusters classes regarding flood adjustment methodologies. Indeed, adjusters normally have to be certified as flood adjusters. I, and probably many adjusters from other firms, find it amazing that State Farm would unilaterally set its own standards for the adjustment of flood claims.

Today is the five-year anniversary of Hurricane Katrina. My experience from most hurricane disasters is that it is pretty difficult to find evidence of a storm five years afterwards. It may be difficult for many to see signs of the Katrina disaster. But when you get along the Gulf Coast, there are still many slabbed structures and obvious indications that a catastrophe occurred. Since we have not solved the wind versus water coverage issue, we can expect this to repeat in the future. 

The civil litigation in the Rigsby qui tam litigation seems to move as slow as my sailboat on a calm day. The McIntosh's claim is a focal point, as the very able qui tam team representing the Rigsby sisters tries to prove that State Farm conspired to overpay national flood claims to reduce its own exposure for amounts owed on State Farm all risk policies. Since State Farm adjusted flood claims, it was an obvious temptation to overpay the non-covered flood peril through Write Your Own National Flood coverage and pay a smaller remainder under State Farm’s own all risk policy. The Rigsby sisters, acting as Relators for the general benefit of the federal government to recoup these overpayments in a qui tam litigation, are attempting to prove this occurred in the Katrina claims handling.

Slabbed has done a masterful job keeping abreast of these developments. The discovery has obtained emails and other State Farm documents not previously made available in the prior individual State Farm Katrina litigation. Policyholder attorneys and those with actions against State Farm should be studying this case as it progresses. As indicated, the litigation has taken quite a bit of time, but the qui tam counsel are doing a masterful job in a very complex matter.

My father is somewhere in Louisiana working on the oil spill mess as a consultant for the state. When we last spoke, he indicated that the oil spill sheen may grow quickly and make the dense and more dangerous part of the spilled oil appear to be coming to shore much quicker than it is really moving. We may have a little more time to prepare for the oil slicks than previously indicated.

Unfortunately, once the slick starts appearing on beaches, it is not just going to stop. Oil is patchy and will deposit on our beaches in various forms, including tar balls. Some marine engineers have sent us private emails suggesting that we will get daily doses of tar balls along the northern Gulf Coast later in the fall and continuing for years.

I will try to get more information on the speed of the oil slick spread. The point is that the water and fishing from Gulfport to Panama City Beach is fantastic right now. People were on water jet skies in Biloxi and there was no scent of petroleum in the air as some previously reported. There is even a contingent of Florida fishermen meeting with officials today in an attempt to open the Snapper season early.

Preparation and steps to mitigate potential damage are always important. Do not panic. Sometimes, things move a little slower than first anticipated--like my sailboat on those calm sunny days.

A current problem regarding the disclosure of such activities is that catastrophe firms and insurers usually make the individual catastrophe adjusters sign confidentiality and non-disclosure agreements preventing whistle blowing from ever taking place. These agreements should be illegal. Can you imagine any reason society should tolerate contracts that prevent employees from disclosing improper claims conduct? What if the mafia could enforce such agreements? Yet, that is largely why Renfroe sued the Rigsby sisters--to shut them up about State Farm’s multiple engineering reports indicating excluded flood rather than covered wind caused damage to State Farm's customers.

Last night, a former Liberty Mutual adjuster, who is now a public adjuster, told me that while he was reviewing estimates from Pilot Catastrophe Services regarding damage to structures in Texas following Hurricane Ike, he noticed the amounts always seemed low. He took a Pilot adjuster to estimate a structure using the same Means software and the same measurements. He said the estimates were made on computers next to each other. He used the Means database and the other adjuster used the Pilot Means database provided by Pilot. The Pilot estimates were 30 percent lower than the unchanged Means database. I do not know why, but I will call Rodney Pilot to see if he knows. I will report on what I find. Maybe there is a good reason for this and the experienced, insurance industry trained public adjuster is mistaken.

Until then, the lesson policyholders should learn from this:

Get your own estimates and professional help anytime you have a significant loss.

The parties bringing the action, Kerrie and Cori Rigsby, are two former independent adjusters that worked catastrophe claims for Sate Farm,. The hearing is being covered extensively by Slabbed and Anita Lee of the Sun Herald. I wrote a comment a couple days ago in response to SLABBED Daily – May 20 (qui tam Hearing), which sets out how I feel about the Rigsby sisters:

“The Rigsby sisters deserve a big “thank you” from many along the Mississippi Coast. It is a very courageous action to go against one of the largest and most powerful corporations in the world.

As with any that leave a culture complaining of unethical conduct, the first attack is from the company they leave. It is an awful position to be in as a whistleblower.

The information that the Rigsby sisters suggested existed is what lead us to follow up with clients and then engineers that claimed that second reports were far different and limiting than the first reports which indicated different opinions supporting more coverage. In an early lawsuit, we attached both the first and then second report to quiet insurance industry spokesman, Bill Bailey, who challenged and disclaimed the existence of two reports.

Whatever the outcome of this action, the Rigsby sisters decision to leave State Farm and bring this action have significantly helped many of their friends and neighbors. My hat is off to them and to their new counsel.”

I met and spent considerable time with Kerrie Rigsby. She is a very nice and polite person. She is not the rumble and tumble stereotypical catastrophe adjuster that I so often deal with. She looks and acts like a soft spoken third grade teacher. I am certain that the State Farm attorneys will try to show her in a different light. However, if you are a nice person, Kerrie is the type you want to call your friend.

As indicated in Judge Senter’s Order the current hearing concerns the following issues:

“My reading of the Amended Complaint and the documents submitted in
connection with the pending motions leads me to the following conclusions:

1. The merits of this action depend on evidence that the defendants, acting
in concert, systematically submitted false flood insurance claims to the
United States, claims that were not valid under the terms of the Standard
Flood Insurance Policy (SFIP) used in the National Flood Insurance
Program (NFIP).

2. It is the amount of the flood insurance claims that the Relators allege to
be false, i.e. the allegation is that the defendants acted in concert to
submit flood insurance claims in an amount greater than the flood
damage that actually occurred.

3. The Relators allege that the motive for the submission of these false
claims was the defendants’ desire to reduce the exposure under State
Farm homeowners policies, which covered wind damage, by exaggerating
the extent of the flood damage where both types of policies were in force
on the same property.

4. The Relators allege that the defendants had the opportunity to submit
these false claims because the insurers are authorized to evaluate and
settle claims for both wind damage and flood damage, and the adjustors
and engineers the insurers hired were in a position to inflate the amount
of flood damage they observed.

5. There is no allegation that the defendants ever submitted claims to the
United States that were fabricated, only that the defendants acted in
concert to inflate or exaggerate the amount of the legitimate flood insurance claims that they submitted.”

I would strongly suggest that those with an interest of how State Farm operates its catastrophe operations read the Lecky King deposition.

Slabbed has a number of articles on this case including a recent one suggesting that State Farm has invited me to sue it for “settlement fraud.”

To the extent I can, I will comment more on this topic of flood adjustment later.

One of the central figures in many of the State Farm cases is Lecky King, a State Farm adjuster. For a period of time, she invoked her Fifth Amendment privilege and said nothing at depositions relating to her role in adjustments. There were criminal investigations underway after dozens of altered engineering reports surfaced; each initial report was changed to reflect greater flood damage and less damage that would be covered under State Farm policies. Lecky King was allegedly at the center of this controversy, in part, because she reviewed a stack of engineering reports that were subsequently modified.

State Farm did not voluntarily reveal the original engineering reports showing greater wind related damage to its policyholders or the federal government. A State Farm claims executive has rightly indicated that those reports should have been disclosed to the policyholders, along with the "modifications." While Slabbed has a tendency to poke and demonize insurers, there are many in the claims function that understand honesty and good faith mean a complete explanation of the truth, not just a disclosure of information supporting denial or less payment.

In a recent post, Slabbed noted an email from the Rigsby’s counsel that the deposition of Lecky King had been taken. It should be interesting, and we will attempt to get a copy of it. This is a coverage related case worth following because it provides some glimpse at the pressures that claims supervisors demonstrate when faced with a claims organization that never wants to "overpay" a claim. If you never "overpay," there is only one way to go.

We get told similar stories by other adjusters so long as it is "off the record."

A person with significant experience in the insurance industry, Deborah Moroy of Dimechimes,  wrote in response to Playing the Float and the Wisdom of Warren Buffett:

"I am fiercely committed to improve claims handling in the insurance industry while maintaining positive networking environments. I do not allow any negative posts or adjusting firm or carrier specific "blasting" among our members. I promote the discussion of claim handling in general but regularly post links to great blogs and articles found on the Internet. It has been 3 years of extremely hard work since I cannot post carrier information or ask adjusters to upload file samples so they don't violate carrier code of conduct requirements. So, my sole source of info is through training info I find on the web. The info found on the majority is worthless except in generic format........"

It should be against public policy for insurance companies to have any trade secrets regarding claims practices and there should be even a stronger public policy regarding any codes of conduct which prevent any adjuster or employee from disclosing improper methods or activities of claims adjustment. If we allow insurers to hide behind these shields, all we do is silence the otherwise courageous adjusters because the attorneys for the insurers will threaten them with civil action.

The classic example is the civil prosecution of the Rigsby sisters. They told a story of a State Farm adjuster holding numerous reports which were not being sent to policyholders but were "revised." The revised reports were always worse for the policyholders because they allowed for State Farm to deny claims. Had their story stopped there, they would have been terminated. But their actions went further with Dickie Scruggs, and the rest has been fodder for demeaning posts by the insurance industry.

Still, the message is clear from the insurance industry: We have a Code of Silence that you violate at your own risk.

We have initiated discussions with legislators at the state and federal level regarding these concerns. I could probably use the experience of Congressman Gene Taylor as an example. I took one of the Rimkus engineers to Washington to explain and show how his report was changed and signed without his permission. He did this in front of Taylor. In the civil action, the engineer called just before his deposition to tell us that Rimkus was getting him an attorney. At the deposition, he could barely recall the meeting with Taylor.

While there are legitimate reasons for adjusters and insurance company vendors to remain silent regarding the private information of customers and claimants, laws and contracts which further goals or activities of claims misconduct should never be allowed and there should always be exceptions to any arguments of privacy. The insurance industry should never be allowed to take any retribution against those that publicly make others aware of wrongful claims conduct. Otherwise, the insurance industry is acting like another illegal industry with a code of silence. 

If the insurance industry were really trying to stop bad claims practices, they would be up with me in Washington and in Tallahassee trying to help. I will write and call them to let you know where they stand. Stay tuned.