Hurricane Sandy Judge in New York Blows Whistle on Insurance Industry Fraud

Damaged property on Long Island following Hurricane Sandy on Nov. 2, 2012 Photograph by Bruce Bennett/Getty Images

A recent dispatch on how CSX Transportation used the federal anti-racketeering law to go after plaintiffs’ attorneys bringing phony asbestos claims prompted a reader to point out some chicanery within the defense bar. Sure enough, there was a story worth telling about insurance claims related to Sandy, the superstorm that did such horrendous damage to the East Coast in 2012.

The hero of this little tale is U.S. Magistrate Judge Gary Brown, who holds court in Central Islip, Long Island, a suburban branch of the Eastern District of New York, which is based in Brooklyn. Brown, a former federal prosecutor who also has experience as an in-house corporate attorney, is overseeing a batch of lawsuits concerning insurance claims stemming from Sandy. In one otherwise unremarkable dispute over damage suffered by homeowners in Long Beach, N.Y., Brown discovered that an engineering firm working for Wright National Flood Insurance tried to cover up losses caused by the 2012 storm. When the judge tried to get to the bottom of the deception during a hearing in October, lawyers for the Florida-based insurance company attempted to thwart the inquiry, Brown wrote in an unusual opinion issued on Nov. 7.

“Worse yet,” Brown said, “evidence suggests that these unprincipled practices may be widespread.” He demanded that Wright and other carriers come clean or face court sanctions.

Here are the essentials of what Judge Brown found: U.S. Forensic, an engineering firm retained by Wright, sent an employee to examine the hurricane-battered house in Long Beach. The engineer wrote a report concluding that the home, worth in the neighborhood of $205,000, had been damaged beyond repair. A second engineer with U.S. Forensic “who did little more than review photographs taken by the inspecting engineer,” Brown said, “secretly rewrote the report, reversing its conclusion to indicate that the house had not been damaged by the storm.”

“This process, euphemistically dubbed a ‘peer review’ by U.S. Forensic, was concealed by design from the homeowners, remained uncovered during the court-assisted discovery process, and came to light through near happenstance,” the judge added. “In a misguided attempt to defend these flawed practices,” he continued, lawyers for Wright “elicited evidence that this ‘peer review’ process may have affected hundreds of Hurricane Sandy insurance claims—and possibly more.”

Apart from the possibility of systematic fraud, what really ticked off the judge was that counsel for Wright tried—unsuccessfully—to truncate the October court hearing to prevent revelation of what had transpired. “Even after the hearing,” the judge added, “Wright attempted to defend the indefensible practices exposed here.” He concluded that the insurance company’s lawyers violated their obligation to comply with court orders, prolonged the litigation, imposed unnecessary costs on the plaintiffs, and unfairly delayed the payment of a legitimate claim.

As punishment, Brown ordered that Wright could rely only on the initial engineer’s report in determining payment on the Long Beach claim. The judge further ordered that the company’s lawyers reimburse the plaintiffs for their legal expenses related to the concealment and court skirmishing. Most important, Brown instructed all defendant insurance companies in Hurricane Sandy cases to provide all plaintiffs with all drafts of damage reports, regardless of who possesses the drafts. That last bit indicates that Judge Brown isn’t done with this inquiry, which ought to worry anyone in the insurance business who’s engaged in dubious “peer review.”

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