A Katrina-related whistleblower lawsuit originally filed under seal on August 2, 2006, was recently unsealed and made public.  The suit, captioned United States of America, Ex Rel. Branch Consultants, Inc. v. Allstate Insurance Company, et al., Case No. 06-4091, filed in the United States District Court, Eastern District of Louisiana, names eight insurance companies and five insurance adjusting companies as defendants.  The allegations include claims that defendants defrauded the United States government by overstating flood damages resulting from Hurricane Katrina, and seeking reimbursement from the National Flood Insurance Program (“NFIP”) for overstated claims paid by those insurers.  It is also alleged that defendants underpaid damages that should have been attributed to wind damage and covered under homeowners’ policies they issued to the same insureds.

The lawsuit was filed by Branch Consultants, Inc. (“Branch”), a group of former insurance adjusters, identified in the lawsuit as an insurance and construction-consulting firm retained by many insureds to re-examine their property damage adjustments performed by the defendants.  Branch filed the suit on behalf of the United States government.  As this is a whistleblower suit, the suit was filed under seal.  The complaint was unsealed on or about May 22, 2007.  The complaint was unsealed after public officials had the opportunity to investigate the evidence and decide whether they wanted to take over prosecution of the lawsuit.  While at the time of this writing, the government had not decided to take over prosecution of the suit, Judge Beer of the United States District Court filed a motion requesting that the United States Department of Justice enter the case by July 9, 2007, or show cause on July 11, 2007 as to why they are not intervening in the civil action.  Branch asserts a cause of action for fraud in violation of the False Claims Act, 31 U.S.C. §§3729-33 (“FCA”).  The FCA allows any person with information regarding a false or fraudulent claim against the government to bring a qui tam action on behalf of the government and to share in any recovery.

In the complaint, Branch explains that the Federal Emergency Management Agency (“FEMA”) created the Write-Your-Own (“WYO”) Program in 1983, which allows participating property/casualty insurance companies to write and service NFIP’s Standard Flood Insurance Policies on their own paper.  WYO insurers are required to adjust flood claims and to settle, pay and defend the claims arising from the flood policies they write.  The WYO insurers then submit requests for reimbursement to the NFIP for the flood claims they have paid.  In addition, the WYO insurers receive a fee from the NFIP for writing and administering the policies as well as for adjusting the claims.  All of the defendants named in the suit are WYO insurers.

Branch claims that after the 2005 hurricane season, FEMA waived the requirements under the NFIP’s Standard Flood Insurance Policy that insureds need to file a proof of loss in connection with Katrina-related claims, effectively placing the defendants in a position of total control over the Standard Flood Insurance Policy claims they handled.  Branch alleges that defendants defrauded the NFIP by misattributing wind damage and other non-flood losses to the flood policies underwritten by the government instead of accurately attributing the losses to causes covered by the homeowners’ policies they issued.  It is further alleged that as a result of the fraud, NFIP’s average flood claim payment increased from $32,000 per claim in 2004 to $100,000 per claim on Katrina flood claims, with a total estimate of $10 to $30 billion in claims for the 2005 year.

It is alleged that defendants nearly “maxed out” the insureds’ flood claims regardless of the actual flood damage, while substantially underpaying the losses that should have been attributed to wind damage payable on homeowners’ policies underwritten by defendants on the same claims.

A local Louisiana newspaper reported that 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 this suit in November, while it was still under seal, and before the defendants knew about it.  There has been a recent flurry of activity relating to the allegations asserted in this lawsuit.  For example, in response to reports issued by the Department of Homeland Security and the Government Accountability Office suggesting that insurers may have incorrectly attributed a portion of storm-related damage to the government, subcommittees of the U.S. House of Representatives financial services committee will be holding hearings in the coming weeks to explore how private insurers allocated wind and water claims after the hurricanes.