Insurance Transparency Project

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.

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.

Insureds,

Due to an annoying technical error yesterday, I linked to and commented on an A.P. summary of David Hammer’s original piece on the Louisiana Recovery Authority’s finding that it is being asked to make up for a $3 billion shortfall in private insurers’ wind payments. Here’s David’s story:

Times-Picayune/Hammer $3b shortfall, 5/26/07.

It raises the issues that War Eagle was so frustrated about, namely, why the government isn’t asking insurers to meet their obligations. It’s a strong story. Check this out:

Federal and state documents obtained by The Times-Picayune pin the largest chunk of a multibillion-dollar shortfall on hurricane wind damage that Road Home is paying because insurance companies did not. The two sides are in dispute about who is responsible, a debate that will figure strongly in whether Congress steps in with more money to cover an estimated $3 billion gap.

The state documents contend that a significant part of the Road Home shortfall emerged either because homeowners had insufficient insurance coverage or because insurance companies failed to meet their obligations.

The Bush administration, stunningly, despite everything, gets it wrong, blaming the state for paying wind claims, instead of blaming insurers for NOT paying wind claims.

But the Bush administration foresees the Road Home coming up short by anywhere from $2 billion to $6 billion simply because Louisiana decided — against the federal government’s wishes — to pay for homeowners’ uninsured wind damage instead of limiting grants to flood damage.

According to an analysis by the Bush administration, if the Road Home had paid only for flooded homes and administrative costs, the program would have cost $7.6 billion. As it stands, paying for wind and flood damage will cost the Road Home at least $10.2 billion, by the state’s own analysis.

A source close to Federal Recovery Czar Donald Powell is quoted as saying he’s concerned the state is wasting federal money.

“We see it as our continued role to work with the state, but serious concerns have been raised. That’s why we need to sit down with the governor, and we will ask the governor if she has a backup plan,” the official said Wednesday.

War Eagle says: How about making wind insurers pay for wind damage as a backup plan? Is this complicated?

The story includes data (our favorite thing) from an LRA study, which is posted on ITP’s key documents page and here: Louisiana Recover Authority Insurance Analysis, May 2007, which can also be found on ITP’s key documents page. The report is excellent and is only a couple of pages long.
Among the reports findings:

1. Insurers paid only 61% of total damages, including the flood program, while the state expected 76%.

2. Only 23% of policyholders got 100 cents on the dollar.

3. 37% of policyholders received less than 50 cents on the dollar, including flood.

4. About 8% received less than 10 cents on the dollar.

And here’s the key analysis paragraph; emphasis is mine:

Clearly low insurance levels will have a negative impact on the budget. The big question behind these numbers is “Are Louisiana citizens generally underinsured or do we have insurers who are not fully honoring their obligations?” With further analysis, we could look for trends in terms of which insurers have low payout ratios, but this is dangerous territory especially as we are still relying on the cooperation of insurance companies to continue the program. However, this might be good information to have in our back pockets. If it is the case that we are subsidizing insurance companies at the expense of taxpayers, it is coming at a hefty price. Unfortunately, Road Home applicants have little incentive to pursue insurance claims if Road Home is going to pick up the balance.

It is “dangerous territory” to ask insurers to make good on their contracts.

Hammer includes a couple good anecdotes that illustrate exactly how insurers’ wind denials led directly to the shortfall.

Margaret Badger, a Road Home applicant living in a FEMA trailer in Harvey, said that was apparent to her from the start. In August, with an initial one-year deadline for filing court claims looming, she filed a claim against her insurance company, which she said paid her $9,000 for $128,000 in estimated damage. But she didn’t pursue it vigorously because the Road Home, which was slowly getting under way at that point, promised to make her whole.

“Why pursue the lawsuit if the Road Home is just going to subtract the insurance off of it, especially when I have a limited tolerance for stress and can only deal with the most important crises of each day?” said Badger, 66, who is still waiting for her Road Home grant and says she feels as if the walls of her trailer are closing in on her every day.

The idea of turning to insurers to pay is fully articulated the next day, when Hammer again steps up with a fine piece that says LRA Housing Chairman Walter Leger a tort lawyer made famous in tobacco litigation, says the state should step into the shoes of policyholders whose wind claims the state is paying and pursue the claims against insurers.

With federal officials hinting it is unlikely Washington will bail out Louisiana’s Road Home program from a projected $3 billion shortfall, Gov. Kathleen Blanco and a top Louisiana Recovery Authority member are recommending the state seek more money from the group they claim caused about half the deficit — insurers who underpaid homeowners for wind damage….

But, of course!

Governor Blanco, to her credit, says she will ask A.G. Charles Foti to get on it. I know some people are skeptical of Foti, but War Eagle says: Y’all give the feller a chayence.

If the state is paying those claims, that means either people didn’t have enough homeowners’ insurance or the private carriers just didn’t pay. To be sure, as the Lovely Big Easy Stats Mistress reminds us, it is true that many Louisianans owned their homes outright, and didn’t bother with homeowners’ coverage. ITP has less sympathy for this crew.

If you’re wondering, the Insurance Information Institute says insurers paid $10.3 billion in Louisiana Katrina claims, with about 95% of claims closed. Louisiana says they came up $2.7 billion short, about 26%. But think about this: the III figure includes commercial, auto, business interruption and other claims, while the Louisiana number is pure homeowners. I think insurers’ shortfall is going to wind up in the 40 to 50% range.

Remember, this is like a bank giving you 50 cents on the savings you deposited. There is no difference.
I’m going to note a couple things and then move on to my other job, saving the business press from itself.

First, I pass along remarks by Greg LaCost, the bright, young legislative chief for the Louisiana wing of the Property Casualty Insurance Association of America. Greg, whom I met, repeats what I regard as a serious industry miscalculation: in effect threatening to withdraw from the market if the State of Louisiana seeks to enforce its own insurance laws.

“If the insurance companies see the government is stepping in in a negative way against the industry, they’re going to have to look at if this market is good for their business plans,” he said.

Greg, insurer pals: You have a very strong hand, but ITP believes it is possible to overplay it. Providing an essential financial service does not put you above the law. Make good on contracts. You have for decades enjoyed extraordinary tax benefits, captive regulation, government subsidies in the form of backstops, wind pools, the flood program and more, as well as a unique exemption from U.S. anti-trust laws. Don’t push it. Sow the wind and reap the coming political whirlwind. ITP is trying to help you here. Don’t listen to those enablers at Tillinghast. This is for your own good.

Bob Hunter, the head of the Consumer Federation’s insurance section and well-known man about the nation’s capitol, offers some historical perspective:

Hunter said Louisiana is proceeding like Florida did after Hurricane Andrew in 1992, trying to placate insurers to keep them in the market, rather than following Florida’s current policy, hewn from its own 2005 hurricane losses. This year, Florida beefed up its insurance regulations and the ability of its own Citizens Property Insurance program to offer competitive rates. Such reforms already have reduced some private carriers’ rates by more than 10 percent, although studies by the insurance industry predict premiums will shoot up again if another disaster hits.

But leave it to ITP to look at the big picture. I’m an idea guy, is what I am. The preceding paragraph quotes an insurance spokesman cautioning that Florida because of its size has a lot more leverage than Louisiana:

Understanding that, Dean Starkman, who started the Insurance Transparency Project to track how the insurance industry is handling Katrina, said he empathizes with the state’s conundrum.

“To me, Katrina shows it’s almost impossible for a single state, let alone a small state like Louisiana, to regulate insurance carriers and at the same time maintain a market for insurance carriers; you can’t punish and cajole insurance carriers at the same time,” he said.

All that wisdom, and he cooks, too. ITP, the total package. One at a time, ladies. No need to push.

Thanks to the Boulevardier.

ITP Fans, Fellow Mowbraites,
Listen, we are getting pretty close to nut cutting time here, thanks to the indomitable Mowbray, who is bucking for an ITP Silver Eagle Award for excellence with her recent spate of blockbusters, including this one, which ran May 20.

Between her, fellow Times-Pic reporter David “Hammer” Hammer and the indispensable Anita Lee of the Sun Herald, the Gulf really lucked out, newspaper-wise.

This one, however, is enough to show to a grand jury.

The story says Allstate’s is allowing costs 300% higher and more for the same construction materials if damage was attributable to flood versus wind. At a house on Marina Drive, for instance, Allstate paid radically different prices for the same sheetrock:

If Allstate attributed the damage to wind or rain, for example — putting it on the hook for payment under the customer’s homeowner policy — the company priced the cost of removing and replacing the drywall at 76 cents per square foot. But if the damage was blamed on storm surge or flooding, the estimated cost of removing and replacing the drywall more than quadrupled, to $3.31 per square foot.

Mowbray spells out the issue. Allstate makes the government flood program pay three times the price it pays itself for the same thing. Becky, break it down for us:

If Allstate attributed the damage to wind or rain, for example — putting it on the hook for payment under the customer’s homeowner policy — the company priced the cost of removing and replacing the drywall at 76 cents per square foot. But if the damage was blamed on storm surge or flooding, the estimated cost of removing and replacing the drywall more than quadrupled, to $3.31 per square foot.

The tip seems to have come public adjusters, who negotiate on behalf of policyholders. In theory, public adjusters shouldn’t be necessary, as insurers are supposed to pay promptly and fairly. One such adjuster is Chris Karpells:

Karpells said that, in his work as a public adjuster, he has seen the dual pricing on almost every Allstate adjustment that lists the damage line by line. And from his experience, Allstate is the only company that’s doing it, said Karpells, a third-generation carpenter from Massachusetts who moved to Slidell several years before Katrina hit. Karpells said he believes that “someone is saying, ‘On a flood policy, we use this database. On a wind policy, we use this database.’ They’re front-loading all the money on the flood policy.”

Allstate denies it:

“Our firm position is that there are not any discrepancies in the rates charged,” said Mike Trevino, a spokesman for Allstate. “The component prices reflect current market conditions. And they are the same for wind and flood.”

He make a point that can at least be seen a plausible: Repairing flooding costs more. But is that really true, all you home-repair types?

“The cost to repair wet drywall versus dry drywall is different. The cost to repair carpet from one room to carpet of another room may be different because you may have different quality carpet from room to room,” Trevino said. “You can have different methods and approaches regarding paint. In one room, you may have one coat of paint, but in another room, you may need more than one coat of paint depending on the color.”

I tend to agree with Karpells: “It’s apples to apples. The facts speak for themselves.”

It gets worse for our friends from Northbrook. The homebuilders are saying Allstate’s wind price is too low and its water price too high. Implication: underpaying policyholders, gouging the government.

Craig Berthelot, vice president of the Home Builders Association of Greater New Orleans and owner of Berthelot Construction Services, which renovates and repairs storm-damaged homes in the New Orleans area, said that the real price for replacing drywall is between the prices that Allstate calculated.

Without the tear-out portion of the job, it costs about $2 to $2.50 per square foot to replace drywall, he said. The $3.31 billed to the flood program for tearing out and replacing drywall is high but more realistic than Allstate’s 76 cents on the homeowners policy, Berthelot said.

Mowbray provides the context: a Sept. 21, 2005 memo from NFIP head David Maurstad, the former Nebraska insurance agent and lieutenant governor, expediting flood claims:

The memo waived the requirements that customers prove their losses and instructed the insurance companies to pay the flood policy limits if the home was washed off of its foundation or if the home was in “standing water” for “an extended period of time.”

Rep. Gene Taylor, D-Miss., suspects the idea came from the insurance industry, and his policy chief, Brian Martin, says the memo opened the way for abuse:

“They get to go right out there and give them a check. It’s from the federal government,” Martin said. “It gives the homeowner something so that there’s not huge pressure on the insurance company to pay something now.

“The flood insurance program made it easy for a few of the insurance companies to manipulate those claims to put it all on flooding,” Martin said. “The taxpayers pick it all up.

Now even FEMA can’t ignore this:

FEMA also expressed bewilderment over the idea of charging government and private insurers different prices, when told about practices in the New Orleans area.

“I don’t have an explanation for that,” said Tim Johnson, senior insurance examiner on the claims section at FEMA. “If that’s what they say is happening, I would love to see it. The overpayment surely does affect me.”

I-Fans, Katrina and insurance is a big puzzle, but I think the pieces are starting to come together. Stay tuned.

Ida, keep them coming. There’s no ITP without you.

Calling All Perils,

This story has a happy ending, which I’ll get to tomorrow.  But I want to highlight this A.P. stunner, which needs a little decoding but ultimately shows a strange disconnect in the insurance debate, particularly on the part of Donald Powell, president Bush’s Katrina recovery czar, but not him alone.  It is becoming clear the insurance industry has failed to pay at least $2.7 billion in Louisiana wind claims — claims for which it collected premiums.  Not mentioned here at this hearing before a Senate subcommittee:  enforcing insurance law.

In the story, Powell criticizes Louisiana officials for allowing the LRA to pay policyholders’ wind claims, thereby running up a shortfall.Powell testified that the federal funds, from the Department of Housing and Urban Development, were intended only for people who didn’t have flood insurance, and should only pay for flood damage. The theory being that the New Orleans levee breach was the government’s fault, making flood claims, and only flood claims, the government’s responsibility.  But as the story says:

However, unlike other states affected by the 2005 storms, Louisiana’s “Road Home” grant program is projected to award about $2.7 billion to more than 43,000 applicants whose homes were damaged by the hurricanes’ wind and didn’t have any flood damage.

As Powell says:

“We were always very clear that the federal government would not fund state housing programs to cover wind damage,” Powell testified before the Disaster Recovery Subcommittee of the Senate Homeland Security and Governmental Affairs Committee.

Of course, he’s right. Why should taxpayers pay for wind damage? That’s what homeowners’ policies are for.

For exercise in frustration, read the whole story because no where does anyone ask:
1. Did the 43,000 have homeowners insurance?
2. What are insurers doing about it?

The answers are:
1. Of course they all did; everyone does.
2. Not paying wind claims.

But Sen. Landrieu, at the hearing, and other officials get into a finger-pointing argument over whether or not the LRA did or did agree to pay wind claims and whether the federal government did or didn’t agree to it.

Even the very effective LRA executive director, Andy Kopplin, completely misses the point:

Kopplin said the Road Home program was designed to aid any resident whose home sustained major damage, whether wind or water was to blame.

“When the president said he would do what it takes and stay as long as it takes, he didn’t say except if you had wind damage,” Kopplin said.

And more:

Kopplin blamed the program’s projected budget shortfall on inaccurate data provided by the Federal Emergency Management Agency. He said FEMA underestimated both the number of homeowners who could be eligible for grants as well as the severity of damage to homes.

War Eagle says: Um, esqueeze me, but what about the insurance compa...

But then Powell says, no, it was for flood only.

In February 2006, he said, federal and state officials “mutually agreed” to fund grants for about 106,000 homeowners who had flood damage. With those homeowners getting an average grant of $72,000, the program was expected to cost a total of $7.6 billion, he added.

War Eagle: Yes, but, the insur…

Then Senator David Vitter, R. La., adds that he’s “stunned” because it seemed clear that the Road Home was only for flood:

“But the state designed the program to cover wind as well as water damage anyway. Did no one in Baton Rouge realize this would result in a huge shortfall?” Vitter asked in a written statement.

War Eagle: Buh, buh….

Then Gov. Blanco said Vitter is making “serious, unfounded charges.”

“Chairman Powell was personally present for all LRA meetings when the program was designed to include wind damage. He heaped praise on our work, not criticism. The White House and Sen. Vitter are now using the same kind of calloused logic that insurance companies used to dodge paying what is necessary to get our people back home. Our people do not deserve the suffering inflicted by sick political games.

War Eagle: Herrow?…

Then, Sen. Landrieu says:

Road Home “has not lived up to its billing,” and Louisiana residents “have moved beyond frustration to cynicism and hopelessness” amid delays in the processing of the grant applications.

War Eagle: AFLAAAAAAAC!!!!!!!!!!!

ITP says: There, there, little buddy. I’m sure some day, someone will ask the sellers of wind policies, issuers of wind contracts and collectors of wind premiums why the state of Louisiana and the U.S. Government have to pay $2.8 billion in wind claims.

I don’t mean to be sarcastic, but GEEZ!

Hey, Non-Profit Prophet: What have I been telling you?

Ida rules. Tomorrow, I’ll get to the happy ending.

Eye Fans:

First, Allstate filed a Form 8-K last week with the Securities Exchange Commission, required to tell shareholders of any significant event affecting a public company, including bankruptcy, merger, or the like.

Allstate says it is the subject of a criminal investigation by U.S. Attorney Dunn Lampton, in the Southern District of Mississippi.
Allstate is the “registrant”:

“The Registrant has received a subpoena from a U.S. Grand Jury sitting in the Southern District of Mississippi. The subpoena is part of an ongoing investigation into the insurance industry’s handling of Hurricane Katrina claims in Mississippi. The Registrant is working with the U.S. Attorney’s office regarding Registrant’s efforts to comply with the subpoena. The Registrant remains confident in its claim settlement practices following Hurricane Katrina and is committed to resolving all claims fairly and appropriately.”

Nationwide made a similar announcement.

The significance is hard to overstate. This shows that the federal criminal investigation into post-Katrina claims handling has spread from Lampton’s subpoena of records from a bad-faith finding against State Farm following a 1999 Oklahoma tornado, to target Allstate and Nationwide specifically. We don’t know if State Farm, which is not a public company, has gotten a subpoena.
The reason this is more important than Attorney General Jim Hood’s criminal probe is that, unlike a state official, a federal prosecutor isn’t required to worry about the state of Mississippi’s insurance markets, whether insurers will write new policies, and has no incentive to accept a civil settlement of criminal charges.

Much as insurers would like to close the books on 2005, I really don’t see this going away.

Ok, this excellent story from NBC’s Mobile outlet provides more support, if any were needed, that wind indeed did damage to houses on the Gulf Coast. The story reports that a University of South Alabama associate meteorology professor who cames up with an answer to a puzzling question: If Hurricane Katrina was basically a Category 3 hurricane on a scale of 5, how could it do some much damage?

The answer, according to some new data presented by Prof. Keith Blackwell, is that the storm had two eyewalls, an outer one and an inner one, a fairly rare event apparently for hurricanes hitting land.

“Dr. Blackwell says the double eye wall explains the size, destruction, and power of Hurricane Katrina. From Louisiana to the Mississippi-Alabama state line, residents in those three states were hit twice by the storm’s powerful winds and waves.

“By the time the storm was making landfall in Louisiana and the eye was near the mouth of the Mississippi River, the outer eye wall was well developed and already affecting the coast of Mississippi.”

Actually, this doesn’t strike me as exactly new. The two-wall theory has been bouncing around the coast for some time. Anyone out there with data on this, please forward to ITP.

Prof. Blackwell says, however, that most meteorologists missed the outer wall because they used “older technology,” according to the story.
“It couldn’t penetrate the outer cloudy layer, but microwave satellite imagery can. This newer technology allows you to see into the storm, and it was this technology that revealed Hurricane Katrina had a double eye wall. “

Thanks again to Ida.

Eye-Fans,

Mowbray, at it again, reports that the Weiss family of Slidell, who won the recent $2.8 million bad-faith verdict against Allstate, turned up paperwork during their trial showing the insurer took the Weiss’s contents claim of $38,848 and somehow managed to add $100,000 to it before submitting it to the National Flood Insurance Program.

Oops. That means, Allstate, which denied the Weiss’s wind claim, improperly, a federal New Orleans jury has found, was able to give the Weiss’s the maximum $100,000 available under their flood policy.

The “claim,” which the Weisses say they never saw, includes items the Weisses never owned, including “jewelry, furs, memorabilia, DVDs,” etc.

As Merryl Weiss said in a deposition:

” ‘I never even claimed that we had any of this stuff. I did not write this, and I did not write this,’ she said, pointing to items on the list”

They mostly made claims for some expensive fishing equipment made by Robert Weiss, a retired doctor.

No one at Allstate knows how the furs and jewels made their way onto the flood claim.

“Not Mike Wells, the outside adjuster employed by Allstate to handle the claim. He testified that he had given the Weisses’ handwritten list of fishing equipment to Allstate. Not Mung Hatter, who worked for four months processing Allstate claims before landing her current job at Beau Rivage casino on the Mississippi coast. Hatter testified that she simply put the finishing touches on the claim using the numbers the company gave her before supervisors signed off on the settlement and it was mailed to the flood program for payment.”

Then came testimony at the Weiss’s trial:

“On the fourth day of the trial at the federal courthouse on Camp Street, Paul Tracey, field operation’s manager for Allstate’s catastrophe unit, was asked point blank by Weiss attorney Richard Trahant how the contents figures grew.

‘Do you have any idea how those numbers increased from $38,000 to $139,000?’ Trahant asked.”

Good question; here’s the answer:

” ‘We . . . have quality control measures under our policy, under our process, to ensure that the evaluations are being done correctly and accurately. The federal government also reinspects our work for the National Flood Insurance Program,’ Tracey said.”

But as Mowbray points out:

…That didn’t explain the inflated and imaginative contents list.”

Allstate’s lawyer Judy Barrasso tries to help out her witness on cross, but it doesn’t go very well: