Potentially Fraudulent Insurance Company Practices Are Exposed In Superstorm Sandy Litigation

This post was written by Jay Levin and Jennifer Katz.

[This article was first published on IRMI.com and is reproduced with permission. Copryright 2014, International Risk Management Institute, Inc.]

We recently marked the two 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 is the opinion in Raimey v. Wright National Flood Insurance Company, Case No. 1:14-MC-00041-CKP-GRB-RER (E.D.N.Y. Nov. 7, 2014). There United States 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 re-written 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 insurance carrier 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” Hurricane 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, adjustor 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.” This Order was resisted by the insurance companies in motions for reconsideration, which motions 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.

A similar practice was alleged in two other cases, Dweck v. Hartford Insurance Company of The Midwest, No.: 1:14-cv-06920-ERK-JMA (E.D.N.Y.) (filed on Dec. 3, 2014), and Shlyonsky v. HiRise Engineering, P.C., No.: 1:14-cv-07136-RJD-MDG (E.D.N.Y.) (filed on Dec. 5, 2014). In both cases the policyholders allege that a New York licensed engineer inspected their homes after Sandy and found substantial flood damage.

The Raimey case, in particular, has enraged a community still struggling to re-build after Sandy. It has generated intense interest from New Jersey Senators Robert Menendez and Cory Booker who, on November 14, 2014, jointly wrote to 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 seek 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 seek 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 carriers are penalized equally for under-payment and over-payment on flood claims. FEMA further agreed to appoint an advocate to help policyholders through the Sandy claims and appeals process.

Policyholder counsel in Sandy cases need to recognize what may be going on and conduct thorough expert discovery 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.

Insurers Denied De Facto Win After Losing Daubert Motion

This post was written by John B. Berringer and Michael N. DiCanio.

In a recent decision Magistrate Judge David A. Baker rejected insurance company Daubert motion to exclude the expert testimony of an architect, a structural engineer, and an accountant designated in an insurance coverage case. Bray & Gillespie v. Hartford et al, Case No. 6:07-cv-00326 –DAB (M.D. Fla. April 20, 2009).

The defendants’ had moved to exclude the testimony of B&G’s accountant and his conclusions regarding the amount of business interruption loss suffered. They did not challenge the methodology of his calculations, but rather took issue with the fact that he allegedly used the wrong numbers and did not provide a period of restoration. Denying the motion, Judge Baker held that this was not a proper ground for excluding the testimony under Daubert, see Quiet Technology, 326 F.3d at 1345-46 (using incorrect numbers in a reliable formula is not grounds for exclusion), and held that the particular issue of limiting the damage calculation with respect to a period of restoration is a matter of factual and legal dispute in this case.

The defendants’ also attacked the proposed testimony of B&G’s architect as unreliable, alleging that he misapplied the pertinent development codes. The court denied the motion, holding:

Interpreting code requirements and estimating building damage and repair or rebuild costs is exactly the sort of thing architects do, well within an architect’s expertise for Daubert purposes. To the extent Defendants disagree with his analysis or find it factually unsupportable, they can challenge these conclusions by cross examination or offer the testimony of their own expert witness, and the jury can decide the matter by weighing the testimony of the competing experts. 

Finally, the defendants argued that B&G’s engineering expert could not testify as to the existence of mold and asbestos in a building, could not rely upon second-hand knowledge to make conclusions and should have performed all testing personally. Denying these arguments, Judge Baker found that a professional engineer is qualified to testify as to a generally accepted proposition such as the existence of mold and asbestos in a building. In addition, the court held that defendants’ remaining arguments regarding the expert’s first hand knowledge were not a proper Daubert challenge:

There is no requirement that an expert has to have first hand information as to all relevant facts and verify same; nor is there a requirement that the expert must perform all testing personally. Just as a physician may reliably interpret an X-ray taken by a technician, a Professional Engineer is qualified, by training and experience, to review the work of others and opine to matters within his expertise. To the extent Defendants find fault with the assumptions underlying the opinions, that is not an attack on the methodology, but on the application of an established methodology to a disputed set of facts.

Trial is scheduled for September 14, 2009. 

2003 Blackout Held to Involve 'Property Damage' Sufficient to Support Claim Under Property Policy

This post was written by Douglas R. Widin.

On April 22 , 2009, the Appellate Division of the New Jersey Superior Court published its March 9, 2009 opinion holding that the massive Aug. 13, 2003 electrical blackout of the eastern United States and portions of Canada inflicted “property damage” sufficient to support a property insurance claim. The court held that the loss of functionality that resulted when protective safety equipment shut down the power grid and caused the blackout of August 2003 qualified as “physical damage” for property insurance purposes. See Wakefern Food Corporation v. Liberty Mutual Fire Insurance Company, No. A-2010-07T3 slip op (March 9, 2009). As a result, insurers were not entitled to summary judgment in their favor on Wakefern’s claims for food spoilage and business interruption at their supermarkets resulting from the blackout.

On Aug. 14, 2003, three sagging power lines contacted trees in northern Ohio and, ultimately, caused a cascading power outage in the Eastern Interconnection of North American power grid. The Eastern Interconnection encompasses the eastern two-thirds of the United States and much of Canada. The cascading outage was caused by successive overloading of portions of the grid as other portions were taken off-line by protective devices within the grid designed to prevent dangerous overloading and damage to equipment. The protective devices in the system performed their functions well and prevented destruction of the expensive transformers and other transmission equipment interconnected into the power grid, but those same protective devices also locked up this equipment and prevented it from being restarted for as long as four days after the outage began. This deprived customers of electricity for extended periods. “The event contributed to at least 11 deaths and cost an estimated $6 billion.” 

Many businesses, including the supermarkets that were plaintiffs in Wakefern Food, suffered property and business interruption losses from the outage. The Wakefern Food plaintiffs claimed the cost of food spoilage and loss of business as a result of the power outage under their all-risk policies, which provided coverage for off-premises electrical power interruptions. That coverage applied “only if the interruption results: … [f]rom physical damage by a peril insured against.” The insurers denied the claims, stating that there had been no physical damage to the power grid apparatus, only a lack of operation. In the ensuing litigation, the Appellate Division overturned the trial court ruling in favor of the insurers, and held that the loss of functionality of the power grid equipment constituted “physical damage” for purposes of insurance coverage.

Undoubtedly, many policyholders faced similar denials of their property insurance claims arising out of the blackout. The general New Jersey contract statute of limitations is six years, so there is still a small window of time in which to challenge denials of coverage subject to that limitation period. Even in situations where there is a shorter suit-limitation period applicable to the insurance, there may still be a chance to challenge a denial, because New Jersey, as well as some other states, follows a practice whereby the statutorily mandated one-year suit limitation period in fire insurance policies is tolled from the time of reporting the claim to the insurer, until there is a definitive denial of the claim. If there was never any definitive denial, there may still be time remaining in which to resurrect the claim.

If you had a claim for damage to your property as a result of the 2003 blackout that was denied, it may be time to take another look. 

Recent Storms and Flooding in Midwest and Great Plains Threaten Property Damage, Loss of Business and Extra Expenses

This post was written by Jim Davis, Paul Walker-Bright and Thomas Marrinson

Recent severe storms in the Midwest and Great Plains have caused extensive flooding in several states, with levees and dams breached, roads and interstates washed out or impassible, and cities and towns under water. Corn and other crops have been damaged and destroyed, pushing prices to record highs on commodities exchanges. Power has been lost in many areas. Indiana has asked the United States to declare farm disasters in 44 counties because of crop and livestock losses blamed on the storms, and what is being described as flooding worse than the previous record set back in 1913. Flood concerns exist for the Mississippi River as well, which is expected to crest at 10 feet above flood stage over the next two weeks. See Levees break as Midwest floods worsen.”

Many farms and businesses undoubtedly have been affected by the flooding. Fortunately, insurance policies may provide coverage for policyholders’ damaged property, loss of business and extra expenses incurred to recover from the floods. First-party property insurance may respond to repair or replace property directly damaged by storms and floods. Business interruption insurance protects earnings that businesses would have obtained had there been no interruption of business caused by covered perils, and contingent business interruption insurance covers losses to policyholders’ business caused by damage to suppliers’ or customers’ property from covered perils. Similarly, extra-expense insurance covers additional expenses incurred to allow policyholders to continue to operate during the period of interruption. In the aftermath of widespread and devastating flooding from the Mississippi River in 1993, courts held that increases in transportation and raw materials costs caused by the flooding, and other losses, were covered under extraexpense and contingent business interruption insurance. See, e.g., Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 936 F. Supp. 534 (S.D. Ill. 1997).

If policyholders have experienced damage or loss to their property, or interruptions to their businesses and extra expenses caused either directly by the storms and floods or because the property of their customers and suppliers has been lost or damaged, they should be encouraged to review their first-party property and business interruption insurance to determine whether they should submit claims to their insurers. Reed Smith’s 60+ insurance recovery lawyers have extensive experience in assisting policyholders to maximize their property and business interruption claims, including in large-scale disasters such as hurricanes, tornadoes, floods and fires