Ten years later, the courts are still handling cases related to Hurricane Katrina. The United State Fifth Circuit Court of Appeals recently issued a decision arising from fraudulent classification of claims submitted by insurers. This decision issued by the Fifth Circuit on July 13, 2015 did not directly address insurance coverage questions, but involved other notable issues for the insurance industry.
The litigation leading up to the Fifth’s Circuit’s decision in United States ex rel. Rigsby v. State Farm Fire & Casualty Co., No. 14-60160 (July 13, 2015), was filed by two “whistle blowers,” Cori and Kerri Rigsby, who were certified, experienced claims adjusters working for a State Farm contractor after Katrina. They alleged that State Farm, and other defendants who were dismissed or settled, had unlawfully attempted to shift their responsibility for paying hurricane wind claims under homeowner’s policies to the federal government’s National Flood Insurance Program (“NFIP”). The Rigsbys alleged the insurers accomplished this scheme by classifying damage to properties covered by both a homeowner’s and flood policy as flood damage instead of wind damage.
Because the NFIP is backed by the federal government, the Rigsbys, two sisters, filed a lawsuit against several insurers under the federal False Claims Act (“FCA”). The FCA allows plaintiffs to sue for fraudulent activity “on behalf of” the government, and to obtain a percentage of any recovery. At the beginning of its opinion, the Fifth Circuit explained the background of this long-running lawsuit:
“Many of these homeowners [who sustained property damage in Katrina] were covered by at least two policies, often provided by the same insurance company: a flood policy excluding wind damage, and a wind policy excluding flood damage. A private insurance company would frequently administer both policies, but wind policy claims were paid out of the company’s own pocket while flood policy claims were paid with government funds. This arrangement generates the conflict of interest that drives this case: the private insurer has an incentive to classify hurricane damage as flood-related to limit its economic exposure.”
The Rigsbys alleged that State Farm encouraged them to find flood damage instead of wind damage when completing property inspections following Katrina, and also pressured other contractors into classifying wind damage as flood damage. The case proceeded to trial over a claim on a single property, and a jury found that the government suffered damage because State Farm submitted a false claim on the property to the NFIP. The jury found the damage was $250,000, a portion of the flood payment made to the homeowner. The court awarded treble damages as allowed by the FCA, of which the Rigsbys received a third, and almost $3 million in attorneys’ fees and expenses. Both parties appealed the judgment.
Most significantly, the Fifth Circuit affirmed the jury verdict against State Farm that State Farm had submitted fraudulent flood insurance claims. The court found the record reasonably supported the jury’s conclusion. The court also ruled on several other legal issues. One important issue involved the Rigsbys’ request for discovery into other Katrina claims handled by State Farm. The district court refused the Rigbsys the opportunity to conduct discovery into other potentially mishandled claims, concerned that “expanded discovery would lead to an inappropriate fishing expedition for new claims.” However, the Fifth Circuit was impressed that the jury verdict proved that State Farm submitted a false claim to the NFIP, and believed that the verdict made it probable that State Farm submitted other false claims. As a result, the court of appeal ordered that the district court allow the Rigsbys further discovery.
The court of appeal also addressed an issue under the FCA that had not yet been decided in the Fifth Circuit. An FCA case must be filed in camera and under seal until the district court orders it served on the defendant. State Farm alleged that the Rigsbys and their counsel notified the media of their allegations before the district court lifted the seal. State Farm argued that this action merited dismissal of the lawsuit. The court reviewed conflicting decisions from other circuits, and determined that the FCA does not require automatic dismissal of a complaint if the existence of the lawsuit is disclosed while under seal. Instead, the court adopted a test focusing on the harm to the government by the early disclosure and the nature and intent of the disclosures. While the court decided that the Rigsbys technically violated the seal requirement, the court found dismissal unwarranted because the government suffered little harm and the Rigsbys were not in bad faith.