An outside look at the False Claims Act cases: Holding State Farm Accountable (Why McIntosh is Evidence of Fraud)

Occasional slabbed commenter James Barbieri was kind enough to share his May 2009 law school thesis which thoroughly analyzes the 2 False Claims Act cases against Team Insurance Inc and concludes, as this post title indicates, that the McIntosh adjustment is evidence of fraud against the US Government. For anyone interested in this topic it is an excellent read. Given the recent GAO report on continued financial management problems in the National Flood Insurance Program that Nowdy recently profiled and its implications for the previously completed MID State Fram Market Conduct Study and the Department of Homeland Security OIG’s report I was immediately attracted to this passage which shows that people do get it:

……..OIG and the Mississippi Insurance Department (“MID”) have already conducted sufficient post-Katrina claims analysis to warrant reopening all Katrina files.

OIG published results of an audit of 131 combined wind and flood claims. In the Executive Summary, OIG “concluded that the NFIP did not pay for wind damage for structures included in our sample.” But on page six of the same report, OIG provides evidence of NFIP paying for wind damage:

“Based on the review of files in our sample, we did not find material evidence that the NFIP paid for wind damage. Although 44 out of 131 cases (34%) included errors that related to cause of damage resulting in some degree of duplication, e.g. flood and homeowners policies paying for the same type of damage…, only two (1.5%) of these cases clearly identified wind as the preponderant cause of damage, thus resulting in an improper payment by NFIP in the amount of $432,600.”

It is contradictory for OIG to conclude: “we did not find material evidence that the NFIP paid for wind damage” and then reveal “an improper payment by NFIP in the amount of $432,600” in a sample of 131 cases. Extrapolation to the total population of 209,404 Katrina flood claims (on which the Federal Government paid $15,850,563,024) would yield in excess of $600 million in improper NFIP overcharges.

Working independently but in parallel, the Mississippi Insurance Department (“MID”) has produced the most extensive post-Katrina audit of State Farm insurance claims. MID became involved after the Rigsbys‟ alleged that State Farm had systematically shifted damage caused by wind to damage caused by flooding. MID‟s investigators quickly discovered that 64% of homeowners receiving no dwelling payment from their private carriers “were denied despite indications of some wind damage.” This was particularly evident in “slab case” which, were subsequently all re-opened under mediation. Based on the evidence MID gathered, State Farm agreed to “re-evaluate hundreds of claims, at which point over $88 million was paid to policyholders…”

This kind of blanket denial where storm surge flooding had been evident, was precisely the allegation that the Rigsbys referred to as the Wind/Water Protocol (“WWP”) in their Amended Complaint; which was a State Farm policy, never implemented before, to ascribe all damage to flooding wherever flooding could have been implicated as the cause of damage.

Fortunately for the Rigsbys, the MID investigation supports many of the Rigsbys‟ allegations. The MID investigation “revealed a few instances where claims representatives advised policyholders that „State Farm had informed him that …. if water touched it, we were told not to pay wind.‟” Thanks to MID, the Rigsbys‟ primary fraud scheme, the implications of implementing the illegitimate Wind/Water Protocol, has been documented. The MID concluded:

“The Company failed to recognize, for whatever reason, that wind caused at least some damage to most of the claims whether the damage was “discernable” or not. It should be noted once again that the Company paid millions of dollars for wind damage to the north of the surge line, only to deny some wind damage inside the surge area.”

The MID addressed the Rigsbys‟ allegations over six pages of their forty-two page report. “[T]he absence of any corroborating evidence …lead the examiner‟s to opine that State Farm … did not develop and carry out a plan to mistreat policyholders to the extent claimed by the “whistleblowers.”” The MID has questioned the Rigsbys‟ honesty: “The veracity of their specific allegations….deteriorated throughout the course of the investigation. Many of the specific allegations were investigated and simply could not be substantiated.”

I make these references to the MID and OIG reports because the combination of documenting evidence supportive of the whistleblower‟s claims, while at the same time condemning the whistleblower, is standard treatment for whistleblowers. (The “Shoot the Messenger” Theory) The “authorities” who are required to vet whistleblower allegations are invariably embarrassed if they prove the allegations accurate because (as in this case) they had oversight and enforcement responsibilities related to the claim‟s allegations.

The entire piece, which I’ve embedded courtesy of Scribd can also be found here. James tosses Alan Lange a hat tip towards the end of the treatise for a post he wrote that is worth re-visiting. One man’s squealer is anothers whistleblower.

Besides being a newly trained lawyer, James is a retired World Bank financial analyst. We thank him for this tremendous contribution to the body of knowledge that is the Katrina insurance experience.

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