Representing people who have lost homes and businesses following Sandy has been gut-wrenching. And, I have to say, many of the carriers haven’t made it any easier. I could catalog some of the problems we’ve seen, but that would make this a very long post. Instead, I’d like to focus on one aspect: The use of engineering “experts” who derive substantial income from representing insurance companies.
In his book, “Delay, Deny, Defend,” Rutgers professor Jay Feinman writes: “An insurance company’s greatest expense is what it pays out in claims. If it pays out less in claims, it keeps more in profits. Therefore, the claims department became a profit center rather than the place that kept the company’s promise.” Professor Feinman goes on to discuss the unholy alliance between State Farm and an engineering company known as Haag Engineering, and specifically the allegations that State Farm hired Haag to help “investigate” claims, “knowing that the firm would produce reports favorable to the insurer about the cause and extent of the damage, giving State Farm an excuse to deny or reduce payments.”
In a recent Sandy case, Raimey v. Wright National, a Federal Magistrate in New York confronted a similar issue, and imposed evidentiary sanctions on the carrier. Raimey involved a flood insurance claim, and the carrier hired an outfit called U.S. Forensic to examine a storm-battered house, which was situated about one block from the beach. U.S. Forensic produced a report confirming structural damage to the house associated with flooding from Sandy, and stating that “repair of the building is not economically viable.” But the carrier never sent this report to the policyholder. Instead, U.S. Forensic mysteriously produced a second report about a month later, this one reversing course 180 degrees and stating that there was no structural damage associated with flooding, and that any damage to the house was caused by “long-term differential movement of the supporting soils at the site,” and therefore not covered.
Guess which report the carrier relied upon?
Coverage litigation followed, and Wright National’s counsel withheld the first report from discovery. But through what the Court described as “happenstance,” policyholders’ counsel obtained access to the first report. At a hearing to address Wright National’s failure to produce the earlier contradictory report, and the circumstances surrounding the preparation of the earlier contradictory report, the Court unflatteringly described the issues as follows: “The evidence adduced in this matter demonstrates that U.S. Forensic, an engineering firm retained by defendant Wright National Flood Insurance Company to examine a storm-battered house in Long Beach, New York, unfairly thwarted reasoned consideration of plaintiffs’ claim through the issuance of a baseless report. The engineer sent by U.S. Forensic opined in a written report that the home at issue had been damaged beyond repair by Hurricane Sandy. A second engineer, who did little more than review the photographs taken by the inspecting engineer, secretly rewrote the report, reversing its conclusion to indicate that the house had not been damaged by the storm, and attributing — without sufficient evidence — defects in the home to long-term deterioration. This process, euphemistically dubbed a ‘peer review’ by U.S. Forensic, was concealed by design from the homeowners, and remained uncovered during the Court-assisted discovery process…In a misguided attempt to defend these flawed practices, defendant has elicited evidence that this ‘peer review’ process may have affected hundreds of Hurricane Sandy flood insurance claims — and possibly more.” (Emphasis added.)
The Court then entered an order prohibiting Wright from obtaining a new expert for trial, and restricting Wright’s expert testimony to that of Henemar, the U.S. Forensic engineer who prepared the original report (the one subsequently doctored through “peer review”). Given these restrictions, I imagine that any trial will not go well for the carrier. (In other words, it’s probably time to make a phone call for authority to settle.)
The Court also allowed sanctions directly against the carrier’s counsel, writing: “Given discovery failures by defendant’s counsel, the unreasonable response by defendant to the allegations, and counsel’s shocking attempt to curtail inquiry during the hearing [with respect to the two contradictory reports], it is reasonable to charge the costs associated with the hearing to defendant’s counsel. Plaintiffs’ counsel, therefore, may make application for reimbursement from defendant’s counsel for all reasonable costs associated with the motion, the hearing and all related briefing, including attorneys’ fees, travel costs and transcription costs.”
On appeal, the District Judge affirmed the Magistrate’s rulings.
All in all, not a very good day for Wright National – and the part about sanctions being issued directly against counsel is unpleasant to think about for all lawyers.