5th Circuit Revives Katrina Insurance Case

Michael Kunzelman

The Associated Press

February 20, 2009

A judge incorrectly dismissed several insurance companies from a lawsuit accusing insurers of overbilling the federal government for Hurricane Katrina's flood damage in Louisiana, a federal appeals court has ruled.

Wednesday's ruling by the 5th U.S. Circuit Court of Appeals in New Orleans only revives part of the case that lawyers for a group of purported "whistleblowers" filed against eight insurers and six adjusting firms after the August 2005 storm.

A three-judge panel from the appeals court upheld a lower court's ruling that Allstate Insurance Co. and State Farm Fire and Casualty Co. must be dismissed from the Louisiana lawsuit because they already were defendants in a similar suit in Mississippi.

However, the 5th Circuit said U.S. District Judge Peter Beer erred in dismissing the other insurers and adjusting firms that aren't named in the Mississippi case.

Other defendants in the Louisiana case include Liberty Mutual Fire Insurance Co., Fidelity National Insurance Co., American National Property & Casualty Co., American Reliable Insurance Co. and Standard Fire Insurance Co.

New Orleans attorney Allan Kanner, who filed the Louisiana suit on behalf of a group of former adjusters, said the court's "huge decision" doesn't necessarily let State Farm and Allstate "off the hook."

In May 2007, U.S. Attorney David Dugas said his office wouldn't intervene in Kanner's case but would continue to monitor its progress. Kanner said Allstate and State Farm wouldn't be immune from a government investigation of fraudulent claims handling by insurance companies.

"I think the government is going to be forced to investigate other insurance companies using the model we developed in this case," Kanner said. "As long as a big chunk of it is alive, the opportunity exists for the government to do the right thing."

Spokesmen for State Farm and Allstate said the companies are pleased with Wednesday's ruling.

The appeals court judges disagreed with Beer's conclusion that the False Claims Act's "first-to-file" provision deprived him of jurisdiction over the Louisiana case because it alleged the same "general conduct and theory of fraud" as the Mississippi case.

"Here, nothing in the (Mississippi) complaint provided the government with facts from which it could discern a widespread fraud involving all (insurers) or the identities of other specific fraudfeasors," 5th Circuit Judge Catharina Haynes wrote.

Both cases accuse insurers of inflating flood damage estimates so the National Flood Insurance Program would cover a greater share of the damage to Gulf Coast homes. Insurers' homeowner policies cover damage from a hurricane's wind but not rising water. They sell separate flood policies that are subsidized by the federal government.

In April 2006, a legal team led by once-powerful tort lawyer Richard "Dickie" Scruggs filed the Mississippi case on behalf of Cori and Kerri Rigsby, sisters who had helped State Farm adjust Katrina claims. Scruggs called the sisters "whistleblowers," and said they had proof State Farm pressured engineers to change damage reports.

Kanner filed his suit in August 2006.

Scruggs has since pleaded guilty to charges stemming from a high-profile judicial bribery investigation and has been sentenced to seven years in prison. While other lawyers have taken over Scruggs' "whistleblower" case, a judge has barred the Rigsbys from testifying against State Farm.

The 5th Circuit said False Claims Act provisions are designed to encourage whistleblowers "with genuinely valuable information" to bring suits "for the common good."

"On the other hand, the provisions seek to discourage opportunistic plaintiffs from filing parasitic lawsuits that merely feed off previous disclosures of fraud," Haynes wrote.

The 5th Circuit didn't take a position on whether the plaintiffs in the Louisiana case are original sources of information about alleged fraud.

Jim Sykes, a spokesman for the parent company of American Reliable Insurance, said the 5th Circuit ruled on procedural grounds and didn't pass judgment on the merits of the suit's allegations or the company's other defenses.

"Right now, there remains every reason to believe these defenses will justify a dismissal in due course," Sykes said.