Insurance: State Farm

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One week after Katrina hit, the administrator of the National Flood Insurance Program (NFIP) met with private insurance companies to explain how they could expedite the processing of what would become more than 162,000 flood claims. The government-run NFIP enlisted the insurance companies to estimate damages, and allowed them to take shortcuts - such as basing estimates on satellite photos - in hopes of speeding payments to policyholders.

But insurance companies allegedly used this system to reduce their own costs and increase profits, by getting the federal government to pay as many of the claims as possible. The companies specifically took advantage of the fact that the federal government has provided flood insurance for homeowners in flood plains since 1968, after private insurers stopped issuing such risky policies. On the other hand, they sought to minimize their payouts for wind damage which is not covered by the government. According to whistleblowers, the private insurance companies simultaneously inflated payments to homeowners on the flood program (which they knew would be repaid by the government) while skimping on payments for wind damage that would have to come out of their own coffers.

"FEMA gave private insurance companies a free pass to write checks from the government's bank account with no responsibility for their errors," said Bennie Thompson, a U.S. Congressman from Mississippi, speaking after an inconclusive hearing on Capitol Hill in Washington DC in June.(16)  

The Department of Homeland Security's inspector general is continuing to investigate the allegations. But in Louisiana, a group of former claims adjusters has beat the government to the punch. The whistleblowers, identified only as the Georgia company Branch Consultants LLC, say they re-examined 150 homes that submitted insurance claims after Katrina. In every case, the former adjusters say that flood damage was overpaid, and wind damage was underpaid. Using these allegations, a New Orleans attorney, Allan Kanner, filed a "whistleblower lawsuit" on behalf of the federal government.

Under the rules of whistleblower suits, the plaintiffs from Branch Consultants can be awarded up to 30 percent of the damages won against the insurance companies. Kanner said the plaintiffs would be happy if the federal government decided to take over the prosecution, but that they didn't want to wait to see if that happened. "We thought, on a public interest view, that it ought to be pursued," Kanner told the New Orleans Times-Picayune.(17)  

The former adjusters allege that for the properties they inspected, the National Flood Insurance Program overpaid 66 percent on average. If that statistic proves true and extends to all of Louisiana's flood claims, the insurance companies could have overcharged the federal government by as much as $9.24 billion.(18)

In one example, the suit claims that State Farm had the national flood insurance program pay a homeowner $88,280 for flood damages - even though the floodwaters never reached the house. Adjusters from Branch Consultants say that the home actually had $110,918 in wind damage, but because the company shifted blame from wind to water damage, State Farm had to pay only $5,379 on its homeowner's policy. "These kinds of abuses are just unconscionable," Kanner told the Times-Picayune.(19)  

In another case, the suit says State Farm calculated $45,000 in flood damage to a home in Jefferson Parish, and stated that the flood had damaged the roof - despite the fact that the house got only eight inches of water.(20)  

A spokesman for State Farm declined to comment on the pending litigation. In earlier comments to the Times-Picayune, a State Farm spokesman denied the allegations. "We feel that we've appropriately handled claims arising out of Katrina, and that we followed NFIP and FEMA guidelines with regards to expediting flood claims," said Fraser Engerman.(21)

In a rare move this June, the federal judge who is handling the case ordered Attorney General Alberto Gonzales to either join the case or appear in court to explain the federal government's lack of involvement. "The United States should be right in there, and not just monitoring it, given as far-reaching and serious as this case is," said the judge.(22)  But Gonzales took the latter option, and had his deputies file a response saying that the Department of Justice has not had time to investigate the allegations of fraud.(23)   


In the cases included in the Louisiana whistleblower lawsuit, the insurance companies allegedly reduced their payments to homeowners, knowing that the federal flood insurance program would pick up most of the tab for damages. Many homeowners in Louisiana did have federal flood insurance, because flooding is known as a routine hazard. In Mississippi, however, fewer people have the federal insurance. Many homeowners in Biloxi, for example, didn't believe that they were at risk, and were stunned when Katrina's 25-foot storm surge washed over their houses.  

For example, Norman and Genevieve Broussard returned to their Biloxi home after Katrina to find there was nothing left except a concrete slab. When the initial shock wore off, they thought gratefully of their homeowner's insurance, believing that their policy with State Farm would allow them to rebuild. State Farm thought differently. The company told the Broussards that their policy covered damage from hurricane's winds, but not "wind-driven water" or storm surge. The company denied the couple's claim entirely, saying that the loss of their house was due only to flooding.

The Broussards sued, arguing that their house was ripped apart by Katrina's winds before the storm surge washed away the remnants, and in January 2007 they won not only the $223,292 they claimed under their insurance policy with State Farm, but also $2.5 million in punitive damages.(24)  Although the judge later reduced the damages to $1 million, the jury's decision to punish State Farm reflects the anger many Gulf Coast residents feel toward insurance companies. The Broussards were not the only ones who thought they had been cheated.

Class & Race Discrimination?

While many homeowners in Louisiana have joined lawsuits against their insurance companies, others avoided the court system, and instead approached the Louisiana Department of Insurance for help. If a policy holder files an official complaint about a low insurance award, and the complaint is found to be valid by the government investigators, state regulators would negotiate a higher settlement with the insurance company.

However, an investigation by the Associated Press (AP) found that low income people and people of color were much less likely to approach the state for help, and therefore more often accepted low offers from their insurers. AP analyzed 3,000 claims settled by the state, and found that 75 percent of those claims were filed by residents from predominantly white neighborhoods.


Louisiana's insurance commissioner, Jim Donelon, said that although the department made a strong effort to spread the word about the state's complaint program, many low-income residents who evacuated to distant cities may not have heard about it. "The message doesn't get to everyone," Donelon told AP.(28)

A white couple from Slidell, Louisiana explained that they received a low offer from their insurance company, but were able to live on their savings while they brought their complaint to the state. Meanwhile, an African-American woman said she accepted a low offer because she didn't know where to appeal for help. "The blacks didn't complain 'cause they got tired," the woman told AP.(29)

State Farm, as the largest insurer in Mississippi, has been the target of most of the anger and the subsequent lawsuits. "Katrina was devastating, but so was State Farm," whistleblower Cori Rigsby told ABC News.(25)

Most of the Mississippi lawsuits have been handled by Oxford lawyer Richard Scruggs, who made a name for himself successfully suing tobacco companies in the 1990s. He took on more than 1,500 clients with storm-damaged homes - including his brother-in-law, U.S, Senator Trent Lott (a Republican from Mississippi) - and sued State Farm, Allstate and several other insurance companies. In early 2007, Scruggs agreed to settled 640 cases against State Farm, on condition that the company pay $80 million to the policyholders. As a result of the settlement, civil and criminal lawsuits against State Farm brought by Mississippi's attorney general were also dropped.

Scruggs' cases have been aided by Cori and Kerri Rigsby, two sisters from Ocean Springs, Mississippi, who worked for E.A. Renfroe, a contractor that State Farm hired to manage claims. The sisters secretly copied thousands of pages of internal State Farm claims records and turned the documents over to Scruggs, as well as to state and federal authorities. The Rigby sisters say the documents show that State Farm defrauded policyholders, manipulating engineering reports to conclude that damage was caused by rising water and therefore allowing the company to deny the claims.

"They instructed the adjusters to max out the flood," Scruggs said in a May speech to attorneys with the Louisiana Association for Justice. "It's literally a license to steal."(26)

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AMP Section Name:War & Disaster Profiteering