Federal Judge Upholds Penalty on Sandy Flood Insurance Company Lawyers

Coastal Contractor recently reported on U.S. Magistrate Gary Brown's unusual decision to penalize the attorneys for Wright National Flood Insurance in a case pitting two Long Island homeowners against the insurance company in a dispute over flood insurance coverage for damage suffered during Hurricane Sandy (see: "Judge Slaps Insurance Company Lawyers in Sandy Flood Case," 11/25/14).

Wright appealed the sanctions immediately — and lost. New York Law Journal has a report here (see: "District Judge Upholds Sandy Sanctions Order," by Christine Simmons). "After Wright National appealed, Eastern District Judge Joseph Bianco on Dec. 31 affirmed the order in its entirety," reports the law journal.

Judge Bianco's opinion is available here (see: "Memorandum and Order"). In the opinion, Bianco makes it clear that he is not just letting Brown's sanction stand based on the trial court's discretion — after reviewing the case, says Bianco, he also agrees with Brown that the insurance company's attorneys crossed a line, and further, that the revising of the report in the insurance claim case was itself highly questionable.

Writes Judge Bianco: "Having carefully reviewed the record, it is absolutely clear to this Court that the process that led to the modification of the initial engineering report (including the removal of observations that were inconsistent with the new conclusions) was flawed, and the concealment of that initial report and the process that led to the new report (including conduct at the evidentiary hearing) has prejudiced plaintiffs in terms of delay and costs in this litigation, such that the sanctions were warranted."

The original case, based on Sandy flood damage to a home in the barrier island community of Long Beach, New York, pits property owners Deborah Raimey and Larry Raisfeld against their flood insurance carrier, and involves engineering reports created by U.S. Forensic (www.usforensic.com), a national engineering firm with roots in Metairie, Louisiana, that specializes in insurance investigations. In pursuing their lawsuit, owners Raimey and Raisfeld learned that the report created by the contract engineer who first investigated their flood claim was later rewritten by another engineer in U.S. Forensic's back office, resulting in a denial of much of their claim based on the reviewer's conclusion that the damage to their house was either pre-existing or unrelated to the Sandy flood. The second engineer did not visit the site, but reversed the conclusions formed by the first engineer.

Insurance company executives say this "peer review" process is routine, legitimate, and unremarkable. But the revelations in the Raimey and Raisfeld case — along with the attempts by Wright's attorneys to cut short the court's review of the multiple revised engineering reports — have sparked a public outcry, with New York and New Jersey senators pressing to have flood insurance investigation reports made public, including both the field reports and the back-office revisions (see: Senators demand transparency on flood insurance reports," by Nicole Gaudiano).

In New York alone, more than a thousand property owners have gone to court over flood insurance claim denials. A mediation process has been established for those cases, but progress has been minimal, reports Long Island Newsday (see: "U.S. court panel: Why are Sandy flood claims still unpaid 2 years later?" by Carol Polsky).

Insurance company executives have argued that they have no strong motivation for denying claims, because payouts in the FEMA-run National Flood Insurance Program are ultimately underwritten by the Federal government. But New York attorney Jonathan J. Wilkovsky, who represents homeowners in claim disputes, told Newsday that's not the whole story. Reports Newsday: "Because private insurance carriers who administer the policies can be audited by FEMA, which has the right to demand reimbursements for what it considers overpayments, 'the end result is that the carriers will never come close to overpaying a claim because they'll be held responsible for repaying it,' [Wilkovsky] said. 'So they default in the opposite direction and wind up underpaying the claim.'"

Now, the public will get a look at not just the reports in Raimey and Raisfeld's flood case, but in hundreds more. The Asbury Park Press has a report (see: "Secret Sandy engineering reports set to be released," by Russ Zimmer). Reports the Press: "A letter from the U.S. Department of Justice, dated Dec. 23, to the U.S. District Court of New Jersey says FEMA has directed its contracted engineering firms to provide FEMA with any draft engineering reports connected to the approximately 1,500 pending civil cases in the region within 21 days. Those drafts will be forwarded to the U.S. Attorney's offices where they can be turned over to homeowners for use in their lawsuits. The justice department expects insurers that sell FEMA-backed flood policies to follow their lead."