Insurance Transparency Project

I-Fans,

I’ve been out of touch for while as I get adjusted to my new job, or actually any job, after living an insurance-only lifestyle thanks to the Open Society Institute and the Great Billionaire of Budapest. ITP goes on, however. There will never not be an ITP. The War Eagle is well, for those who have asked, and just needed some time to get in touch with his inner-eagle. Buck is still in rehab but is getting stronger. We expect him any day. Candy has a new haircut and is good to go.
I’ll blog occasionally, but not as often, I suspect, as I would want. The news, if anything, gets more interesting every day. Even the Economist is getting the picture. The Sun Herald continue to do great work, with star Anita Lee all over it. Mowbray, meanwhile, is unstoppable.
I will keep loyal I-Pods posted on developments. Meanwhile, I will keep track of insurance and Katrina-related topics through the lens of a business-press critic.

Please, Ida and others: keep sending stuff. You may notice ITP postings straying from strictly Katrina related topics, but, as regular readers know, I believe Katrina is the tip of a very large insurance iceberg. As usual, if you’d like off this list, please just ask and don’t feel bad. Leave that to me.

–Dean

I-Fans,

In our last installment, State Farm, headed by cat manager Alexis “Lecky” King, had hired Forensic Analysis & Engineering Corp. to inspect an estimated 10,000 post-Katrina homes for a “proportionate share” of $2,500 each; Forensic’s principal, Robert Kochan, had ramped up by, among other things, hiring two outside engineers, Brian Ford and Emanuel Manon, to perform inspections.

Both submit several reports attributing some damage to wind, causing King to hit the roof and fire Forensic. Kochan rushes to Biloxi to meet with King, fires Ford and Manon, and begins installing a new system to avoid repeating the mistake of angering King. Forensic engineer Randy Down objects, but soon is found participating in the new system.

The full complaint and exhibits are on the Scruggs Katrina Group site.
The new system is at first ad-hoc and involves retrieving and destroying Ford and Manon reports, substituting “swap outs” that blame water; or, if a report had been distributed up through State Farm processing system (and retrievable, one supposes, in discovery) to mark those as “draft,” removing the conclusions and allowing State Farm to write in its own. Photos implicating wind are to be removed.

As Kochan wrote to a subordinate:

Consider submitting the work we have done … with a copy of the report marked DRAFT and Manny’s conclusions REMOVED. Just mark that section INCOMPLETED. We don’t need to give them any ammunition that is not necessary and we can still bill for the investigation.

The substitute reports are written by two Forensic engineers, William Forbes and John Kelly.

On Oct. 28, two months after Katrina and after the Kochan-Lecky King meeting, State Farm executive Mark Wilcox sends Kochan a sample report, which includes, among other things, the false conclusion that storm surge preceded the wind. No one believes that. The sample report’s false conclusions are attributed to Weather Data Inc., a private contractor to State Farm. The sample report includes a conclusion that the property was destroyed by surge. No wind damage was included in the sample.

In a January 2006 email, Forensic’s Kelly, commenting on a government site, admits he knows wind preceded water, even though Forensic reports are going out saying the opposite:

The thing I found interesting was the lead time of the wind ahead of the water, because this is what we experienced. I can not say what speeds the winds were, but they definitely were ahead of the water by our observation.

By everyone’s observation. That’s not even a debatable point, except among these “engineers.” By November, a month after the Kochan/King meeting, Adam Sammis, the administrative assistant working in the specially equipped Forensic RV on the coast, is emailing Nellie Williams, Forensic’s director of operations, working from her home in Nevada, that reports have been altered.

Case 56 has been changed…

Case 74 has been changed.

Case 23 has been changed…

Case 27 has been changed significantly….

In one case, the Simpson family’s, Lecky King emailed Kochan at Forensic and asks why wind was listed a primary case. Kochan then emails engineer Down, saying “I suggest that the client (State Farm) be advised that we will amend the report.” Engineer Kelly then emails Williams in Reno, copying Down, with the following warning:

I think this may be one of those jobs that one must be careful in handling. If the report has gone to some kind of distribution within SF, it may be better to write a letter of clarification addressing the question vs. amending the report. If the report has not been distributed and we can retrieve the original as a swap out we could re-do the report.

This is what the paper trail looks like of “wind” conclusion changing to “water.” It’s King to Kochan to Down to Kelly to Williams.
Soon, according to the exhibits in the Scruggs complaint, the task for Forensic becomes finding a pretext for subbing out the original reports that attributed wind with new reports that blamed water. Engineer Kelly writes to engineer Down how he will do just that on a report on the Pepperman family home:

I spoke with David Haddock of SF to tell him that we would like to submit a revised report on this job based on additional information that we now have that we did not have at the time the report was written. This included the Weather Data Inc. report supplied to us by State Farm. Since the report he is now holding has not been outside of SF, he is mailing that original back to me and the new report will replace it.

Now, Kelly wants to know if they can bill State Farm twice, once for the honest report, and once for the fraudulent one. On Jan. 10, 2006, he writes:

This is a report we redid. SF mailed me back the original that was submitted by Manny and Brian, which was signed by them as a final report. The issue was that they had concluded wind and I concluded predominantly water. While I did not specifically address any additional compensation from SF, in the other two reports of similar problem, we just corrected the report without any additional fees. I don’t know if you want to consider this or not, just let me know. I’d like to bring the reports over to State Farm this morning.

Listen, I’m just summarizing the allegations in the complaint. All the real work has been done by the Scruggs firm. And, yes, I know these are allegations. The exhibits could be taken out of context or could, for all I know, be complete forgeries. But I doubt it.

I’ll include one more case because it shows what happened when an “original” report made it — quite by luck — into the hands of a policyholder. Keep in mind while you read this an insurer’s obligation under the law to deal fairly with policyholders. Those obligations exist because the law recognizes the insurers and insureds are not two equal parties to a contract. Insurers, having already been paid, control the information and the ultimate decision on whether a policyholder will recover. This is, in the end, a trust-based system. Think about that when you think about insurance generally.
The Mullins, of Hancock County, rented a modular home that was lifted from its moorings and carried to the middle of the street, turned 180-degrees around. No water marks were found. Eventually, Forensic’s Manon (the fired one) wrote a report and told the Mullins it would be forthcoming soon.

State Farm denied the claim.

The Mullins, however, wanted to see the report. In the fall of 2005, Terri Mullins, an inspector with the New Orleans P.D., called Forensic HQ in Raleigh, N.C., and speaks to “Wendy” (Wendy Nichols, a receptionist), who tells her the report is done but can’t be sent without State Farm’s permission. Mullins goes to her SF agent’s office, asks “Kimberly,” another receptionist, to call Wendy and tell her its OK to send the Manon report. The two clerks are not in on the plan; Wendy faxes the Manon report to Kimberly, who gives it to Mullins.

Mullins doesn’t know this, but Kochan had already sent engineer Kelly to “re-inspect” the house.
SF emails and call logs show that agents are telling Mullins that “the” report isn’t done yet, even though the Manon report was logged filed on Dec. 6.

On Dec. 9, Mullins, fed up, drives to the SF cat office in Biloxi and asks for the report again, confronting an SF supervisor, Kevin Young, who says no report has yet arrived. Mullins then shows him the faxed Manon report, concluding that the “primary and predominant cause of damage to the Mullins property was due to hurricane force winds.”

Young replies: “Where did you get this?”

All of a sudden, having just denied it existed, Young goes in back and finds the “official” Forensic report, signed by John Kelly, that says “rising water produced and caused the loss.”

But there’s more. Scruggs found emails that showed how this report had been massaged. First, on Oct. 24, Kochan emails Williams in Reno and Sammis in the RV, suggesting that water be included, at least in part:

I suggest that the conclusion be altered to indicate that it was a combination of both and not primarily the wind.

In deposition, Kochan later admits writing the word “DRAFT” over Manon’s report, even though he had already co-signed it as final as Forensic’s “peer reviewer.”

Finally, any mention of wind is removed altogether.

Eventually, Kelly will be recruited to “alter and rewrite” dozens of reports, then go on to write original reports attributing damage to water.

The complaint goes on. The examples are laid out in systematic and numbing detail. There are names, dates and places.

People read this blog, I assume, because they are curious about how insurers responded on the Gulf after Hurricane Katrina.

Two years later, we’re beginning to get the picture.

Thanks to Ida.

I-Tunes,

The ball is now squarely in the court of U.S. Attorney Dunn Lampton with the bombshell dropped by Richard Scruggs and crew in the U.S. District Court for the Southern District of Mississippi, in Gulfport, on June 20. Read the indispensable Anita Lee’s summary of the case, but better still, if you can clear aside some time, click through to the actual complaint accompanying her story. (It’s too big to upload onto ITP.)

I wish I could say it’s a Grisham novel, but the case is a little too baroque for that. It’s a little Faulkner, a little Robert Penn Warren, and a little, yes, Rainmaker. It starts with a $150,000 recreational vehicle and ends with the alleged corruption of an engineering company at the behest of State Farm.
I think my insurer pals will be troubled reading this complaint. Yes, it is unproved; these are only allegations, albeit extremely well-documented ones.But we’d be wise to look at the evidence now; I am fairly comfortable predicting this case will never go to trial and that the settlement will be sealed.

This record, for me, serves as an indictment of Commissioner George Dale for inaction in the face of mounting evidence of bad-faith dealing. It is another blow to state regulation itself, one in a series of illustrations of how state regulators have abdicated their roles as enforcers of insurance law and proper insurer conduct.

The complaint could not be clearer, the exhibits more compelling. If anyone wondered whether something was amiss on the coast; why, on a wholesale basis, $200,000 and $300,000 claims received cents on the dollar from some carriers and full payment from others; why evidence you could see with your own eyes didn’t seem to count; why engineers wrote reports and were never heard from again; why their reports appeared, disappeared and reappeared with radically different conclusions; why eyewitness accounts from third parties were ignored; why people who have never sued anyone are suing insurers in droves — Scruggs et al. have provided a blow-by-blow account, complete with insider testimony, damning emails, and more.

I-Fans, names are named here, starting with State Farm’s catastrophe manager, Alexis “Lecky” King, 30-year employee Stephen Hinckle, David Haddock, Mark Wilcox, as well as Robert Kochan, head of Forensic Analysis & Engineeing Corp., of Raleigh, N.C., and others.
Here’s what happened in southern Mississippi after Katrina, according to the complaint:

Shortly before landfall in Bloomington, Ill., and Duluth, Miss., and on Sept. 6, in Bloomington, State Farm convened a “Fire Claims Council” of consultants, lawyers and executives, including Hinckle. At the meetings, SF executives draft the “Wind Water Claim Handling Protocol,” which would become known as the “Hinckle Protocol,” which says:

Where wind acts concurrently with flooding to cause damage to the insured property, coverage only exists under flood coverage, if available.

And remember, under State Farm interpretations, concurrent means “within a few days.” Under this protocol, Mississippi policyholders will be denied thousands of slab claims, no matter what the evidence.

On Sept. 26 or thereabouts, State Farm’s Mark Wilcox calls Forensic’s Kochan, hires the firm to handle what is anticipated to be 10,000 inspections at $2,500 each, a “proportionate share” of which goes to Forensic. That’s a proportionate share of $25 million.

Based on the new job, Kochan buys the RV on credit to serve as a mobile administration center, with the understanding that SF will make the $6,500 monthly payments in addition to the proportionate share. Kochan assigns non-engineer Adam Sammis, an administrative assistant, to actually live in the RV. Sammis will assume a major role in the operation, from writing weather related data into engineering reports to hand-delivering the reports to State Farm’s Lecky King, who will keep them under lock and key in the company’s main cat office in Biloxi. Kochran names another non-engineer, Nellie Williams, director of operations. She will work from her home computer in Reno, Nevada.

On Oct. 10, State Farm’s Wilcox called Forensic’s Sammis in the RV and tells him to “call all water damage ‘flood water,’ ” according to emails later recovered. Remember, at this point, it was still an open legal question that wind-driven “surge” was a “flood.” On a conference call, Sammis relays the message to Kochan and Williams, who follows up with an email saying the wording “could mean a world of difference in the final payout.”

Likewise, State Farm’s David Haddock instructs a Forensic engineer, Randy Down, not to use percentages to describe damage and stick to the word “predominant.” This, too, becomes important.
Policyholders, of course, don’t know any of this.

Soon, however, outside engineers get involved as Forensic ramps up to deal with the crush of work. One is Brian Ford, a 35-year engineer formerly in charge of disaster preparation for Mississippi Power, is hired by Forensic as a “senior principal engineer.” Another is Emanuel “Manny” Manon, who normally works in Florida.

Ford and Manon start submitting engineering reports attribute some, most or all damage to wind. The reports filter up to King, who, according to testimony and emails, begins to express “severe criticism.”

Oct. 17, Sammis in the RV gets a blistering phone call from King, who is angry at Ford, according to follow-up emails.

King called Sammis at Forensic’s RV and informed Sammis that the she “was pulling all engineering work” from Forensic. King was angry that several inspection reports had included wind findings and failed to attribute the losses to excluded water damage. One of the reports prompting King’s outrage was the inspection of Thomas and Pamela McIntosh (who later filed a case that’s pending) by Brian Ford. In the telephone conversation Lecky King angrily told Sammis she would now have to send another firm to “get it right.”

She demands to speak to Ford, who comes on the line. When King asks why he included wind in a certain report, Ford explains that an eyewitness says the house next door had blown apart and the debris took out the insured’s windows and doors.

“You weren’t there and didn’t see it,” King tells Ford, according to an email summary by Ford.

For good measure, King calls Williams in Reno, and in a manner Williams later described as “obnoxious” and “offensive,” tells her the contract is terminated.
Stuck with the note on the RV, Kochan is in full scramble. He has Ford reconstruct the conversation in writing “as close to a I-said-she-said dialogue as you can recall,” then drives to
Biloxi for a meeting with King. According to email reconstructions, Kochan asks for “an opportunity to earn their respect back” and later advises his staff “as a company practice, I am suggesting that eyewitness statements are no longer to be relied upon in the development of our opinions.” He also tells the staff that King gave them permission to omit any mention of “the specific initial causation of the loss”

This is an engineering firm, remember.

Crisis averted, but Kochan isn’t going through that again.

“I managed to get us back on the roles (sic) but we need to have a frank conversation with the boys down south to be sure we don’t fall into the same trap.”

The “boys down south” are Ford and Manon, who will be fired.

Within Forensic, however, there is dissent.

Engineer Down (who is not a new hire) emails Kochan and Williams on Oct. 18:

a. Down questioned “the ethics of someone who wants to fire us simply because our conclusions don’t match hers.

b. Down suggested that Forensic “find a more rational and ethical client to be dealing with.”

c. Down cited State Farm’s directive to eliminate apportioned wind findings because if included State Farm “would then have to settle for the portion that was reportedly caused by wind.

d. Down questioned Lecky King’s demand that Forensic ignore eyewitness accounts stating: “eye witness accounts are standardly (sic) included” and ignoring them would seem to be “ignoring potential facts in the investigation that could hurt our credibility later.”

In conclusion Down points to the elephant in the room:

What about the obvious fact that SF wold love to see every report come through as water damage so that they can make the minimum settlement. I see why the Attorney General’s office is already involved down there. She needs to be careful about what she is doing and saying.

More later.

Thanks to Ida and the Indomitable Anita Lee.