U.S. May Join Lawsuit Claiming Insurers Defrauded Government Over Katrina Claims

August 8, 2007

The U.S. Department of Justice is weighing whether to intervene in a lawsuit that accuses insurance companies of overbilling the federal government for flood damage from Hurricane Katrina, a judge who unsealed the case on Monday said.

A team of lawyers filed the so-called “whistleblower” suit in April 2006 on behalf of two sisters who worked for a company that helped Bloomington, Ill.-based State Farm Insurance Co. adjust policyholder claims on the Mississippi Gulf Coast after the August 2005 storm.

But the suit was legally required to remain under seal so the Justice Department could investigate and consider intervening in the case.

U.S. Magistrate Judge Robert Walker in Gulfport, Miss., ordered the case unsealed Monday, even though the federal government had argued that its disclosure would “compromise (its) ability to conduct an adequate civil investigation of this case.”

“The government gives no explanation for how the investigation would be compromised by unsealing the case,” Walker wrote in a one-page order.

Justice Department spokesman Charles Miller said he would not comment on the suit or the judge’s ruling.

A legal team led by high-profile litigator Richard “Dickie” Scruggs filed the lawsuit on behalf of Cori and Kerri Rigsby, sisters from Ocean Springs, Miss., who worked for a company that contracted with State Farm.

State Farm, Nationwide Insurance Co., Allstate Insurance Co., USAA Insurance Co., and several engineering firms that contracted with the companies are named as defendants in the suit.

The suit, which represents only one side of a legal argument, accuses insurance companies of pressuring engineers to falsify reports so storm damage could be blamed on flood water instead of wind, which would shift the financial burden to the National Flood Insurance Program.

The companies say their homeowner policies cover damage from wind but not rising water, including storm surge. Insurers sell separate flood insurance policies that are subsidized by the federal government.

“By employing engineering reports that reallocated losses to ‘flood’ instead of homeowners, State Farm, Nationwide, and other insurers essentially pushed off their responsibility to pay claims onto the federal government,” the 35-page lawsuit alleges.

Zach Scruggs, Richard Scruggs’ son and law partner, said that Justice Department intervention could make it a stronger case.

“I think it’s going to be a strong case, either way,” Zach Scruggs said. “It’s their right to (intervene), but we are more than prepared and willing to litigate this on our own, on behalf of the government.”

State Farm spokesman Phil Supple said: “Given that the Rigsbys have been self-proclaimed whistleblowers for more than a year, it was not surprising to see the existence of this lawsuit, which gives them a potential monetary incentive for filing it.”

E.A. Renfroe & Co., a Birmingham, Ala.-based insurance adjusting firm, assigned the Rigsbys to help State Farm adjust Katrina claims. The sisters quit the firm after they provided Scruggs — and state and federal authorities — with reams of internal State Farm claims records.

The sisters claim the documents show that State Farm manipulated engineering reports so claims could be denied, a charge that the insurer denies.

Renfroe sued the Rigsbys for distributing the documents. Last month, a federal judge presiding over that case in Alabama appointed two veteran attorneys to prosecute Richard Scruggs and his law firm for criminal contempt.

U.S. District Judge William Acker ruled in June that Scruggs “willfully violated” a court order requiring him to return all of the documents that the Rigsby secretly copied.

Meanwhile, the Rigsbys’ suit isn’t the first of its kind since Katrina hit on Aug. 29, 2005. In Louisiana, U.S. Attorney David Dugas decided against intervening in a whistleblowers’ lawsuit that also accuses insurers of overbilling the NFIP for Katrina’s flood damage.

An attorney for a group of former insurance adjusters filed that suit last year in federal court. A federal judge in New Orleans unsealed it in May.

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