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In disputes over insurance coverage, the outcome often depends on the details in the paper trail. If the record is not complete, truth can be the victim. Now, what started as a routine denial of a Long Beach, New York, Hurricane Sandy claim has turned into a high-profile case of alleged legal evasion — a case which could end up uncovering widespread withholding of evidence in similar Sandy flood insurance cases.

Last month, Federal Magistrate Judge Gary Brown, presiding in a case pitting homeowners Debra Raimey and Larry Raisfeld against Wright National Flood Insurance, slapped Wright's attorneys with sanctions for what he described as an apparent effort to conceal important facts from the homeowners' attorneys — and from the court.

In a scathing commentary (see: "Memorandum and Order"), Brown dismissed the insurance company lawyers' excuses as a transparent song-and-dance and a waste of the court's time and the homeowners' money. To drive the point home, Brown authorized the homeowner's attorneys in the case to charge their expenses to the insurance company's lawyers. More importantly, the judge issued a broad order to insurance company attorneys in other cases to come clean while they still can — or else.

Bloomberg BusinessWeek has coverage here (see: "Hurricane Sandy Judge in New York Blows Whistle on Insurance Industry Fraud," by Paul M. Barrett). "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," reports BusinessWeek. "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."

The story begins two years ago, with Hurricane Sandy's landfall south of Long Island, New York. Homeowners Deborah Raimey and Larry Raisfeld were flooded out of their house in Long Beach, and filed an insurance claim with Wright.

The insurance adjuster who first looked at the house suspected structural damage, termed the house unsafe to live in, and asked the insurance company to send an engineer. In response, Wright sent engineer George Hernemar. Hernemar's report said, "The physical evidence observed at the property indicated that the subject building was structural [sic] damaged by hydrodynamic forces associated with the flood event of October 29, 2012. The hydrodynamic forces appear to have caused the foundation walls around the south-west corner of the building to collapse. The extent of the overall damages of the building, its needed scope of repair combined with the age of the building and its simple structure, leads us to conclude that a repair of the building is not economically viable."

But the homeowners never saw Hernemar's report. Instead, they got a report generated by the insurance company's "peer review" engineer, who never visited the site — but who looked at photos and came to totally opposite conclusions. The "peer review" conclusion? "The physical evidence observed at the property indicated that the subject building was not structurally damaged by hydrodynamic forces, hydrostatic forces, scour or erosion of the supporting soils, or buoyancy forces of the floodwaters associated with the subject flood event. The physical evidence observed at the subject property indicated that the uneven roof slopes, leaning exterior walls and the uneven floor surfaces within the interior of the building, were the result of long term differential movement of the building and foundation that was caused by long-term differential movement of the supporting soils at the site and long-term deflection of the building framing."

But before the homeowners saw either engineering report, the house was inspected by the City of Long Beach, which issued a letter to Raimey and Raifeld certifying that the house "received damages of 63.4% of the value of the pre-damaged structure as a result of the flooding." In effect, the city told the owners, their house was totaled (just as Hernemar, the insurance company's contract engineer, had originally concluded).

When the owners finally got the second, amended, insurance company report along with a rejection of their claim (having never seen Hernemar's original work), it conflicted with the city's conclusions. So Raimey and Raifeld asked the insurance company for a new inspection by a different engineer. Instead, Wright sent Hernemar back to the site. And it was then that the homeowners, by chance, looked at papers Hernemar carried and got wind of the existence of two conflicting engineers' opinions. This led, eventually, to the discovery process in court — and to the court's discovering, over what the judge called the "shocking" resistance of the insurance company lawyers, the existence and nature of the whole "peer review" process.

In the morning, Hernemar assured the court that he had consulted on the phone with a peer review engineer, and, taking the other expert's views under advisement, had rewritten his report. At that point, the insurance company's counsel tried hard to call a halt, telling the judge that Hernemar's testimony cleared up the whole matter. But the homeowners' attorney, as well as the judge, insisted on hearing from engineer Michael Garove, the so-called peer reviewer.

And Garove's testimony — just like his engineering report — contradicted Hernemar. Garove didn't recall speaking with Hernemar at all; instead, he described a process where he simply annotated and re-wrote Hernemar's document and sent the whole package back. "Thus, rather than the 'open discussion' described by Hernemar, Garove described a process by which the report authored by the inspecting engineer was rewritten by an engineer who had not inspected the property and whose identity remained concealed from the homeowner, the insurer and, ultimately, the Court," writes Judge Brown. "Moreover," the Judge went on, "the changes wrought by Garove on Hernemar's work journeyed beyond misleading into the realm of misrepresentation… Garove introduced specific observations about the crawlspace into the report that appear entirely unsupported by Hernemar's report and the accompanying photographs."

The concealment part crossed a line for Judge Brown, and Brown hit the ceiling. "The major effect of the reprehensible practices uncovered here – as well as counsel's failure to disclose these practices at an earlier juncture – was to unnecessarily complicate and delay this action," the Judge wrote. And the Judge chose to hold Wright's attorneys — not the insurance company itself — accountable. "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, 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, within thirty days of the date of this Order."

As far as the substance of the case itself, Judge Brown threw out Garove's "peer review" engineering report as evidence, and ordered Wright to rely on Hernemar's original report, which declared the home damaged beyond repair by the flood. (In the event, the owners had the home demolished and sold out for the cost of the lot.)

Naturally enough, the Judge appears to wonder whether there is more of this kind of thing going on — and he appears to suspect that there is. His parting words were a broad order to all attorneys in Hurricane Sandy cases to produce any and all documentation relating to every case. "Within thirty days of this Order, defendants in all Hurricane Sandy cases shall provide plaintiffs with copies of all reports not previously produced – plus any drafts, redlines, markups, reports, notes, measurements, photographs and written communications related thereto – prepared, collected or taken by any engineer, adjustor or other agent or contractor affiliated with any defendant, relating to the properties and damage at issue in each and every case, whether such documents are in the possession of defendant or any third party." And after viewing all such material, said the Judge, homeowner attorneys could still make application for even further discovery.

And with Brown's final order came this understated word to the wise: "Obviously," wrote Judge Brown, 'it would behoove defendants in all cases to be as forthcoming as possible at this juncture."