Insurance Transparency Project

Insurance Fans,I have to question the federal government today.
This story, by the Times-Picayune’s Washington bureau, says the inspector general of the Department of Homeland Security can’t tell whether insurers adminstering the flood program on behalf of the federal government blamed flood where no flood occured, shifting the costs from themselves to taxpayers.

WASHINGTON — The federal flood insurance program lacks a system to coordinate benefits with private policies, and too often relies on insurance companies to determine the breakdown of damages between wind and water, leading to potential conflicts of interest, two federal officials testified Tuesday.

But neither Matt Jadacki, deputy inspector general for the Department of Homeland Security, or Orice Williams, director of financial markets and community investment for the U.S. Government Accountability Office, could say whether insurance companies improperly shifted Katrina claims to the federal flood insurance program, in part, because they said federal administrators don’t keep wind damage data in their files.

And look here: the IG can’t get documents from FEMA, the NFIP’s parent.

Jadacki said his agency has had trouble getting information from the Federal Emergency Management Agency, which oversees the flood insurance program, and from private insurers, and is now subpoenaing the documents.

The federal government is subpoenaing itself? What?

This no joke. What the IG is looking at is allegations of financial fraud. That’s a crime, I-Fans. We don’t know if the allegations are true, but that’s what’s on the table here.

And listen, I say we don’t know if the allegations are true, but that may be a case of excessive generosity on my part. In fact, we do know that:

In Broussard, a federal judge and jury in Gulfport found State Farm did exactly the kind of illegal cost shifting, while a federal judge and jury in Weiss found the same thing about Allstate. Eight whistleblowers from a third-party adjusting firm allege that a unit of American National Property & Casualty Insurance Co. assigned $95,000 in flood damage to property that never flooded at all. And public adjusters are saying that insurers are charging the flood program 300% more for sheetrock and other materials in the same house, depending on whether wind or water caused the damage.

If the IG wanted to find evidence of, he might, in seriousness, go to nola.com and search under “Mowbray.” Another source is documentary evidence posted on Rep. Gene Taylor’s site, which includes:

1. Emails from Forensic Analysis & Engineering engineers saying that State Farm fired their firm for assigning wind damage to wind.

2. An affidavit by Cori Rigsby & Kerri Rigsby in McFarland v. State Farm in which the Rigsby sisters described the actions of State Farm officials to manipulate Katrina claims in Mississippi.

3. Engineering reports in cases known as McIntosh, Mullin, Nguyen, Beckham, Gaspard, Kuntzman and others showing engineering reports citing wind damage being scrapped and others citing water damage shown to homeowners.

Point is, this data is publicly available. It is not clear why the IG doesn’t read it. Here’s another example of the IG’s strange passivity:

Jadacki said he asked FEMA officials to respond to the “newspaper stories,” and is awaiting a response. He expressed hope that a subpoena of wind damage data for properties damaged or destroyed by Hurricanes Katrina or Rita will help his office determine if costs were improperly shifted to the federal flood insurance program.

As Taylor himself said, if the newspaper can find it, the IG can. Just go to the courthouse, and look up the case. Make copies. Go back to the office. Write your report. I know you can afford the copying costs. The federal government is paying $3 million for this study.
Is ITP missing something? Get the data. Otherwise, there is nothing but the usual insurance muddle and nothing gets done.

Rep. Gary Miller, R-Calif., said it’s very important that the public and members of Congress understand that the allegations are serious but not yet proven.

“If the National Flood Insurance (Program) paid more than it should have after the 2005 hurricanes because insurance companies pushed wind losses to the flood program rather than paying for them under homeowners’ policies, then we must hold those companies accountable,” Miller said. “But let me just say that there is a difference between the potential for wrongdoing and a finding of actual wrongdoing.”

He’s right. Go find actual wrongdoing. It’s lying right there on the street.

I-Fans,

Troubling news from Mississippi: In a deposition in a case called McIntosh v. State Farm (1:06-cv-1080-LTS-RHW) in Gulfport federal court, the deputy state insurance commissioner testified that State Farm was paying his legal bills. That’s here:

The questioner is Zach Scruggs, son of Richard Scruggs, the Oxford tort maven. The “A” is David Lee Harrell, deputy to Commissioner George Dale. “Mr. Streetman” is James P. Streetman III, of Jackson, representing Mississippi DOI.

Q: Who is, to your knowledge, paying the legal bills of Mr. Streetman to represent you here today?

A: Department of Insurance is approving those at the request of the approval of the attorney general pursuant to the statutes of the state of Mississippi. The Commissioner of Insurance is entitled to obtain outside attorneys, outside experts, any outside person they need. And the attorney general’s office approved the retention of Mr. Streetman, and they approved that pursuant to that statute that State Farm as a result of this litigation and result of our examination should have to pay for the outside legal counsel since we could not use the attorney general’s office because they were conflicted.

Q: I’m sorry, if I understood the last part, that State Farm is paying for your counsel?

A: Yes, sir, pursuant to agreement from the attorney general’s office.

Q: How long did you meet with –- I’m sorry. Come on in….

At that point, a second lawyer representing State Farm entered. The whole Deposition of MS. Deputy Insurance Commissioner Harrell
can also be found on the Scruggs site, and on ITP’s key document’s page under “legal documents.”

ITP understands why the attorney general’s office is conflicted, I suppose. It is suing State Farm and investigating it criminally.
But I have no idea how State Farm comes to pay the deputy commissioner’s legal bills. It is not at all clear what “statute” he is referring that says “State Farm as a result of this litigation and result of our examination should have to pay for the outside legal counsel.”

Even if there is statute, how is that a good idea?

Keep in mind, I-Pods, that state DOIs are not funded by the general fund in most states. Their budgets comes from insurance industry assessments. George Dale often remarks with some pride – I heard it myself – that his office is a net contributor to the general fund. Frankly, in ITP’s view, turning a profit from revenue that comes via state law is no particular accomplishment. Frankly, I’d rather they kept the surplus and funded another market-conduct investigator.

Not to make too much of this, but the financial connection between regulator and regulated is part of what I see as a terribly insular culture aggravated by the notorious revolving door between the sides. Often overlooked, I think, is a cultural affinity. Both insurance executive and insurance regulator believe they are in the “insurance business” and as such “understand insurance” in ways that outsiders do not.

Trust me, this is real. I’ve heard even members of the trade press – professional insider-media courtesy forbids from naming names (unless asked) – denigrate the insurance literacy of policyholders. It is a commonplace assumption that unhappy policyholders, if they aren’t venal, don’t understand insurance. M.R .”Hank” Greenberg, to me, the architect of modern insurance, routinely parried analysts and news reporters’ questions with remarks such as, “how long have you worked in insurance?” or “how many insurance companies have you run?” or the like. Again, that attitude is common among insurers, I find.
More later on the 300-page Harrell deposition.

Thanks to Ida.

I-Fans,

Mowbray, again, on a suit by former adjusters accusing eight insurers, including the big ones, of defrauding the National Flood Insurance Insurance Program by filing reports that said damage actually caused by wind was caused by flood, which the government pays. Under the NFIP’s system, known as Write Your Own, 90% of flood policies are administered by insurers, usually the same company that underwrites the homeowner’s policy.  Obviously, there’s a conflict; the only question is, how is it managed?
The story speaks for itself:

In one striking example, the suit claims that owners of a group of fourplex apartments in eastern New Orleans were compensated for flood damage with taxpayer money even though they experienced no flooding. Each building in the complex was paid only a pittance for severe wind damage on its regular property insurance policies.

American National Property & Casualty Insurance Co., or ANPAC Louisiana Insurance Co., paid the owner of several buildings in the Versailles Gardens subdivision on Alsace Street about $95,000 in flood damages, or about half the value of each property’s individual $200,000 flood policy, even though no floodwaters got inside the buildings.

In each unit, roof shingles and sheathing were badly damaged by wind, most of the windows were blown out, and enough driving rain got inside to ruin both the floors of the apartments and their mechanical systems, according to the suit.

But American National paid $40,000 or less per building from its own coffers for wind damage that Branch estimates should have been more than $250,000 at each location, resulting in the property owner being undercompensated for hurricane repairs.

ANPAC is a unit of American National Insurance Co., based in Galveston, Texas (NASDAQ: ANAT).

This, of course, follows the Mowbray blockbuster that showed Allstate charged up to 300% and higher for the same sheetrock and other materials while adjusting the same houses and how Allstate added $100,000 to a flood contents claim in the Weiss case, including jewelry, furs, etc. that the Weiss family itself had never heard of or filed for.

Remember, the NFIP, swamped with bills filed in WYO carriers for water damage, required a bailout of some $20 billion from Congress.
And this should make readers think twice about blaming homeowners for building in flood zones, etc. This isn’t about that.

And also remember, any fraud on the Flood program would be in addition to $2.7 billion underpayment on wind claims, which the Louisiana Recovery Authority has been making up. That’s money from the Department of Housing and Urban Development and in many (not all) cases should be fully covered by homeowners’ premiums paid over many years.

Keep this data (!) in mind because because the Katrina puzzle is starting to come into view.

And while I’m giving advice to ITP followers, keep your eye on the federal government here. Under the False Claims Act, the claims accusing contractors of defrauding the government are filed under seal for, essentially, 120 days, while the local U.S. attorney or the Department of Justice decides whether to intervene, take over the case on the government’s behalf. So far, Justice has passed but reserves the right to step in later.

The decision was made by David Dugas, U.S. Attorney in Baton Rouge, the Middle District of Louisiana, not Jim Letten, who heads the Eastern District office in New Orleans, where the whistleblower suit was filed. I find this odd:

Jim Letten, U.S. attorney for the Eastern District of Louisiana in New Orleans, said he could not say why Dugas’ office in Baton Rouge, and not the New Orleans office, handled the complaint.

I just note this in passing. (Also note how Mowbray is right on the issue; not many reporters would have caught that detail, maybe War Eagle and a few others.) But the fully documented breaches of trust by the Gonzales Justice Department makes necessary a degree of skepticism.
Meanwhile, FEMA, which runs the Flood Program, is not sending out the most reassuring signals that it is on the case. Again, Mowbray knows which questions to ask and of whom:

Ed Pasterick, senior adviser to the National Flood Insurance program, said he’s skeptical about the potential scope of any wind/water allocation problem.

Thanks to Person Familiar.