SUPERSTORM SANDY LITIGATION: Fraudulent Superstorm Sandy Flood Expert Reports?
We received the following announcement from Plaintiff’s counsel regarding allegedly fraudulent expert reports being prepared by an expert of one of the insurers.
“An engineering firm has produced an alleged fraudulent report of an engineer’s opinion in a Superstorm Sandy flood lawsuit. Outcome oriented vendor firms providing outcome oriented reports is a big problem for consumers of insurance after a loss occurs. Reports can be altered and language changed which can be disastrous for insurance customers and save millions for insurers. This recent filing demonstrates that this may be ongoing with Superstorm Sandy flood lawsuits:
[T]he Nielsen firm has failed to provide us with an original report of its New York Licensed Professional Engineer George Hernemar. This engineer told our client that he issued a report that determined that the damage to the foundation was caused by the hydrostatic pressures from Sandy flood water. This finding compels coverage. We asked that the Nielsen firm contact Mr. Hernemar to obtain his original report because we believed we were not provided a correct copy of the original report. The Nielsen firm refused, indicating that they sent us all reports, are currently "not in possession" of any other report, and have "no knowledge" of any other reports and they are under no further obligation to comply. Instead, the Nielsen stood by the firm position that they sent us a true copy of the original report... This copy of U.S. Forensic Report . . . .sent to us indicates that the home foundation was NOT damaged by hydrostatic forces from Sandy. . . .
But the engineer indicated he authored a different report:
Mr. Hernemar personally told our client that he did not author a report that disclaimed causation from Sandy. He told our clients he had in fact authored U.S. Forensic Report No. 12.22.1304, but the conclusion of U.S. Forensic Report No. 12.22.1304 confirmed the foundation was broken by hydrostatic forces from Sandy. He indicated he was not authorized to provide a copy of the report, but he allowed our client to read the report on his computer screen. While reading the report, our client took a cell phone image of the computer screen showing the cover page of U.S. Forensic Report No. 12.22.1304 and the causation paragraph of the report. While the copy of the actual report has been denied, and we have been unable to get a copy, we have attached the image from our client's cell phone. The image shows the cover page of U.S. Forensic Report No. 12.22.1304 and the causation paragraph which is the exact opposite of the Metairie office copy:
(1) The physical evidence observed at the property indicated that the subject building was structural [sic] damaged by hydrodynamic forces associated with the flood event of October 29, 2012. The hydrodynamic forces appear to have caused the foundation walls around the south-west corner of the building to collapse.
Obviously, the original report and opinion was altered. It impacts how much is owed. The question is “who did it and why?””
Metropolitan’s Perspective on these Allegations
These accusations during insurance claim disputes are nothing new. If one side (either the insurer or the insured) does not like the other parties’ expert’s opinion, then they always accuse each other of fraud, bad faith, and so on. It has been going on for as long as the insurance industry has been in business. Certainly the insurers are really akin at finding individuals or firms who would say exactly what the insurers want to hear. Basically they shop around for favorable opinions, the same way the insureds do. If you pay somebody money, they are willing to say whatever you want them to say. Oftentimes they issue opinions favorable to you not and ignore facts favorable to the other party not because you asked them to, but because they felt it was necessary to hide unfavorable facts to continue doing business with you. That is unfortunately the name of the game and both sides act similarly, with one side underestimating the losses, with the other party over-inflating the losses.. The expert who tells the best story before the court is the one who wins.
Perhaps you have heard about the stories with Haag Engineering or Donan Engineering regarding their insurer-favorable opinions on damage to hail-impacted shingles. They are considered the darling of the insurers, just because of these opinions. They basically require asphalt shingle damage so that the matt is actually exposed. It ignores the fact that bruising will accelerate this damage they are looking for. Asphalt granular shingle loss is generally calculated at 3% a year. Big bruises to shingles from hail may not crack the shingle or produce exposure all the way to the matt- at least not now. However, there is no doubt such damage can accelerate this process by 15-40%. Many insurers are masters at using the opinions of Haag Engineering and subsequently denying that hail damage was caused to an insured’s roof. See for example all the litigation going on in Indiana, where State Farm, in their attempt not to pay hail damage to roofs, accused a roofing contractor for fraud and run him out of business; the contractor filed counterclaims, he was exonerated of all fraud charges and he won a $14.5 million verdict against Sate Farm. The Court of Appeals of Indiana affirmed the jury verdict against State Farm. See State Farm Fire & Cas. Co. v. Radcliff, 29A04-1111-CT-571 (Ind. Ct App. April 11, 2013).
Here is what an Indiana lawyer wrote regarding the court of appeals decision to uphold the verdict:
The court’s decision is a monumental one because it upheld the findings of a jury who was in the proper place to determine the harm and malice of the defamation perpetrated upon Mr. Radcliff. The entirety of the case paints an unbelievably disturbing image of an insurance investigation team and a business run amok with no concern for the harm perpetrated in the name of profit. The verdict is one of the largest in American history due to the heinousness of the actions at issue. Thankfully, the Indiana Court of Appeals saw fit to properly apply the law and to protect this great victory for justice.
There are many individual and class action lawsuits against State Farm for their efforts not to pay the insureds. But they have won most battles, including battles where the insureds wanted full roof replacement, instead of repair of a portion of the roof. See Pellegrino v State Farm, 13-3571, Third Circuit Court of Appeals, June 2, 2014. These battles continue to rage as we write this blog: insurers accusing claimants of fraud and claimants accusing the insurers of bad faith or fraud. Really nasty business and the inspectors are in the middle of these epic battles.
The “Truth” Lies somewhere in between
Based on so many litigated cases, we believe the truth is somewhere in between. See for example the recent $19.1 million bad faith verdict against Allstate in the case Hennessy v. Allstate Insurance. After the judge refused to set aside the verdict, a settlement was reached Monday, for $22 million dollars. It is the largest reported bad-faith settlement in Pennsylvania history. The verdict stemmed from Allstate's failing to pay the $250,000 in automobile accident coverage.
In another recent case, the Missouri Court of Appeals recently affirmed an award of $3 million compensatory damages against an insurer based upon bad faith in Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas. Co., 2014 Mo. App. LEXIS 975 (Missouri Court of Appeals 2014). The declaratory judgment coverage action arose out of an underlying construction defect action in which claims were asserted against Advantage Buildings & Exteriors, Inc.(“Advantage”) in connection with allegedly defective exterior wall panels supplied by Advantage which sought coverage from its insurer, Mid-Continent Casualty Company. The exposure of Mid-Continent was limited to only $53,000, yet they did not follow the correct procedures. They will also pay several million in punitive damages to be determined by the jury.
Based on these significant bad-faith cases, the insurers are fully aware of the consequences of using fraudulent reports to justify non-coverage. The insurance business is a good business and a very conservative business. That is why we believe the issues with U.S. Forensic reporting lie somewhere else.
The U.S. Forensic Report Issue
We are quite familiar with these reports issued by U.S. Forensic and other firms. They use local engineers to do the inspections who would prepare draft reports; then a New Orleans-based officer of the firm would write that no damage was caused by floodwaters and send the report to the insurer. This is pretty common. We have seen these reports and have heard the complaints of the insureds countless times. Quite a few insureds have been denied coverage based on these reports. Considering the number of the insureds that were denied coverage, we certainly see the potential here for state and federal involvement into the truthfulness of these inspections and reports. But we doubt that U.S. Forensic prepared fraudulent reports and we certainly do not believe that the insurers colluded with these inspectors to fabricate the reports.
Pretty Ingenious Business
Insurers simply shop around for either judicial opinions or experts who would issue legal or technical opinions, respectfully, that are favoring the insurers. Most of the time, the insurers are asking the courts to narrowly construe a policy language so that the insurers can then provide additional coverage to the insured by means of endorsements. In other words, they are collecting additional premiums from the insureds to provide coverage for excluded items, such mold, flood, anti-concurrent causes, and so on. This is some pretty ingenious business strategy and it has been going on for as long as we can remember. And it is a very lawful way of doing business. The insureds do not understand the contract law governing the insurance business, the way the insurers operate and this is why the battles start.
In case judicial opinions are against the insurers, then they would re-write the insurance policies so that they do not have to pay claims the next time there is a loss. This is how the insurers started inserting the so called anti-concurrent causation (ACC) clause in the insurance policies: The courts used to rely on the concurrent causation or the efficient proximate cause doctrines as the rules in insurance coverage litigation; the insurers then inserted these ACC clauses in the policies in the 1980s and 1990s to prevent the courts to require coverage where the damage to the property was caused by both a covered (e.g., wind damage) and an excluded peril (e.g. flood). This has created some pretty severe public reaction in New York, New Jersey, Maryland, and elsewhere where people lost their homes to Superstorm Sandy, only to find out that because of the ACC, they are not covered. In addition, the home and business owners are upset where they failed (or were not told) to get an endorsement for: mold (and there was some pretty serous mold damage in the Sandi-impacted homes), flood, etc. It was quite disbelief for homeowners who had no idea such a provision existed in their policy. Maryland passed a post-Sandy law requiring insurers to notify and describe their ACC clause to policyholders annually.
We believe that the insurers and the state regulators must make every effort possible to educate the home and business owners on how to insure for every possible peril. This would be good business for the insurers and it will eliminate much of the battles that are currently going on regarding coverage issues and whether the insured was aware that he was not covered.
All Evidence must be Gathered during the Forensic Investigation to Enable Cost Allocation
Property insurance policies insure against direct physical damage to property. “All-risk” property policies provide coverage to all risk of physical loss but contain exclusions that limit loss coverage. An “all-risk” policy creates a “special type of insurance”, extending to risks not usually contemplated, and recovery under the policy will generally be allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured, unless the policy contains a specific provision expressly excluding the loss from coverage.” 43 Am Jur. 2d Insurance Section 505 (1982). If a loss follows multiple causes, such as hurricane and wind, rain and flood, a determination must be made whether the perils worked independently of or in sequence with one another and precisely where possible what damage each peril caused. A “named peril” policy of insurance insures against a specifically identified cause. 1-1 Appleman, Insurance Law and Practice, §1-06 (2012).
In addition to the ACC, there are several rules that apply in New York, New Jersey and other states to property damage claims. If only one peril caused a specific loss, then if the loss is a covered loss, then coverage should be provided. This is even if there were other, multiple perils working at the same time to cause property damage in the same vicinity. Application of the multiple cause theory is necessary only when multiple perils work to cause the same loss (concurrent cause).
· “Efficient proximate cause” rule- the proximate cause of the loss must be a covered cause. Proximate cause means the risk that set the others in motion- it looks to the quality of the links in the chain of causation. The efficient proximate cause is the predominating cause of the loss. When the perils act in a sequence to cause the same loss, then the “efficient proximate cause” test is used. For example, if a flood breaks a gas main that starts a fire, and the flood is an excluded cause of loss, then the loss would not be covered.
· “Concurrent cause” rule- concurrent cause means that the perils acted independently of one another to simultaneously cause the same loss. The concurrent cause doctrine permits coverage when a loss results from multiple causes, as long as one of the causes is an insured risk. If any one of multiple non-remote causes of the same loss is a non-excluded peril (or a specific peril under a named peril policy) then the loss is covered. In this instance, prove that the loss would not have occurred but for the operation of a covered cause.
It is crucial to collect all required evidence to allocate the total loss based on the direct physical damage caused by covered and non-covered causes. If the insurers’ experts do not perform a thorough investigation, then this could cause problems.
Our Suggestions
We believe that the best course of action for the insureds is to hire their own experts and prepare their own damage reports. The burden of proving causation differs in first-party property insurance cases depending on whether the policy is a specified peril policy or an "all risk" policy. Under a specified peril policy, the insured has the burden of proving that the loss was caused by a specifically enumerated peril. Alternatively, under an "all risk" policy, by contrast, "the insurer has the burden of proving that the cause of the loss is an excepted cause.
Filing bad faith lawsuits and accusing the other parties for fraud, etc. is not the way to do it. See for example the recent case Trout Brook South Condominium Association v. Harleysville Worcester Insurance Company, Civ. 12-2888, where Harleysville hired Haag Engineering to inspect the hail-damaged roofs. As expected, Haag Engineering found some, but not “significant” damage to the roof shingles, and as result, the insurer paid $270K to the insured, of which $21K was allocated for roof repairs. Trout Brook did not agree with Haag’s assessment and hired its own expert, First Rate Construction. This contractor noted “large hail impacts” that had substantially damaged the roof’s vents, flashings, and shingles and proposed to replace the entire roof for $800K. Eventually they went to an appraiser to solve their differences.
Unfortunately, very-very few insureds understand the insurance claim procedure, because most of them file a claim once every ten years or so, if ever. They do not understand that the expert or engineer hired by the insurance company work for the insurer and they prepare a report that is favorable to the insurer. In the 30+ years of our insurance claim work, we have yet to see an insurance expert’s report that presents facts that are against the insurer. If any facts were favorable to the insured, they would omit them from the “expert” report. Dah!
The most common course of action of the insurers’ experts is to do a very brief and cursory inspection, without performing any testing or other detailed investigation. They would then conclude that the damage is caused by wear & tear, lack of maintenance, natural settlement, that there is no foundation shifting caused by the floodwater, etc. Remember that the job of the insurance expert is not to find damage; the same way the job of the insured’s expert is to find damage, and lots of it. We all have heard the stories of the allegedly inflated property damage assessments of the roofing contractors. This is another battle ground between the insurers and the roofing companies.
METROPOLITAN CLAIM MANAGEMENT & INVESTIGATION (MCMI) (A DIVISION OF METROPOLITAN FORENSICS)
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