In an opinion primarily concerned with the intricacies of pleading under the False Claims Act, the Louisiana federal district court addressed allegations that insurers shifted Katrina claims from homeowners' to flood policies. See United States ex rel. Branch Consultants, L.L.C. v. Allstate Ins. Co., No. 06-4091, 2009 U.S. Dist. LEXIS 101155 (E.D. La. Oct. 19, 2009).
The case centered on "Write Your Own" ("WYO") flood policies, which allow private insurers to issue standard, government-guaranteed flood insurance policies in their own names. Private insurers then act as fiscal agents of the United States and are responsible for adjustment, settlement, payment and defense of claims under the policies. Payments under the policies, however, are ultimately made by the United States. The government paid approximately 162,000 Katrina-related flood damage claims by May 2006. Given the strain of processing so many claims, standards for submitting proofs of loss were relaxed. When policyholders did not dispute the insurer's adjustment, the proof of loss requirement was waived and the claim was paid on the basis of the adjuster's report.
Plaintiff Branch Consultants sued on behalf of the United States under the False Claims Act the WYO insurers and adjusters who were involved in the adjustment of flood claims after Katrina. Branch alleged that defendants moved the costs of paying for wind damage to the government by fraudulently claiming that the damage was caused by flood. Defendants moved to dismiss because the suit was based upon a public disclosure of the fraud and Branch was not the original source of its allegations, as required by the False Claims Act.
To resolve the motion to dismiss, the court canvassed the specific allegations and the extent to which the public had previously been made aware of the alleged fraud. For example, a FEMA administrator had testified before a Senate committee about the conflict of interest arising from the structure of the WYO program because the insurers had the opportunity and incentive to overstate flood damage to covered properties at the expenses of taxpayers. Louisiana Representative Gene Taylor had testified before a House committee about the same conflict of interest issues. This led to passage of legislation authorizing an investigation into whether the WYO insurers improperly attributed damage from Katrina to flooding covered under flood policies rather than to windstorms covered by policies issued by the insurers. SeeDepartment of Homeland Security Appropriations Act, Pub. L. No. 190-295 (2006). The defendants also noted news reports covering the alleged fraud. Given the congressional and administrative testimony and media coverage that preceded Branch's complaint, the allegations had been publicly disclosed for purposes of the FCA.
Nevertheless, a suit based upon a public disclosure was not barred under the FCA if the realtor was the original source of the information in its complaint. Here, the complaint established direct knowledge of the fraud because of the realtor's own efforts. The complaint described in detail the results of Branch's examination of 57 properties, listing each address, the insurer, a description of the damage, the amount of flood insurance paid, and Branch's determination of the actual amount of flood damage. Consequently, Branch had both direct and independent knowledge of the information upon which its allegations were based. It therefore qualified as an original source for purposes of the FCA and the Court was not deprived of jurisdiction.
Because claims against three adjusters failed to sufficiently allege fraud, however, they were dismissed without prejudice. Branch was given the opportunity to amend its complaint to allege an adequate factual basis for its allegations against these adjusters. As to the other defendants, Branch had pleaded the existence of a broad scheme to defraud the government and provided numerous individual examples that were allegedly part of the scheme. Therefore, the remainder of the motion to dismiss was denied.
This promises to be an interesting case which will be worth keeping an eye on it as it develops.
