Fifth Circuit Opens The Floodgates

Case:  Rigsby v. State Farm Fire and Casualty Co.
            United States Fifth Circuit Court of Appeals (Louisiana law)
            No. 14 – 60160, 794 F.3d 457 (5th Cir. 2015)

In a qui tam case stemming from Hurricane Katrina, the Fifth Circuit upheld a jury verdict against State Farm under the False Claims Act, 31 USC § 3729, et. seq (“FCA”). Essentially, the court found that the jury’s verdict in this bellwether case was not only warranted, but seemed to indicate the likelihood of additional meritorious fraud claims against State Farm arising out of its handling of property damage claims in the wake of Hurricane Katrina.

After Katrina, Gulf Coast residents whose homes were damaged or destroyed looked to their insurance companies for compensation. Many of these homeowners were covered by at least two policies, often provided by the same insurance company: a flood policy excluding wind damage, and a wind policy excluding flood damage. A private insurance company would frequently administer both policies, but wind policy claims were paid out of the company's own pocket while flood policy claims were paid with government funds.

On August 29, 2005, Hurricane Katrina struck the Gulf Coast. Shortly thereafter, State Farm set up an office in Gulfport, Mississippi, to address claims involving its policies. According to Rigsby's trial testimony, a meeting was convened soon after Katrina during which State Farm trainers told its adjusters, including the Rigsbys, who worked as subcontractor adjusters for State Farm to assess Katrina claims, that “[w]hat you will see is, you will see water damage. The wind wasn't that strong. You are not going to see a lot of wind damage. If you see substantial damage, it will be from water.” Apparently, it was determined that these statements made by a local supervisor were essentially instructions to the contract adjusters to find flood rather than wind damage, as the flood damage would be covered by FEMA’s National Flood Insurance Program, while the wind claims would have to be covered under State Farm property policies.

The Rigsbys alleged, and were apparently successful in convincing the jury, that wind damage caused the total loss of the particular property at issue - before the floodwaters arrived. They claimed that State Farm used Xactotal software which estimates the value of a home based on square footage and construction quality, rather than the Xactimate software with which many of us are familiar and which provides a line by line assessment of damages. The Rigsbys claimed that the use of the software for properties that sustained only moderate flood damage resulted in a full payout of the flood policy limits. Further, they claimed they were told to manipulate the information in Xactotal if the initial analysis did not result in a full payout. To add to State Farm’s difficulties, the Rigsbys claimed that engineers were used in most of these claims and that the original engineer assigned to the property claim at issue had indicated the damage was caused by wind, rather than flooding. The adjusters claimed, State Farm buried the report and instead obtained a second engineering report which indicated the damage was due to flooding. Moreover, the original engineer was purportedly terminated and his report was not included in the file sent to FEMA.

The Court stated the “Rigsbys are the paradigmatic whistleblowing insiders, and that their knowledge and contributions put the government ‘on the trail of fraud that might otherwise have gone unnoticed.’” In the end, while the Court stated that a reasonable jury could have concluded that the home at issue was a total loss before the floodwaters arrived, it seemed to believe much more: stating that there was evidence that adjusters were effectively told to presume flood damage instead of wind damage. The Court also found evidence that State Farm knowingly violated FEMA Directive 5054 which authorized insurers to use an expedited procedure to pay claims when a home had standing water in it for an extended period of time or where the home was washed off its foundation by flood water. These were the claims for which Xactotal could apparently be used. However, for other types of claims, insurers were to follow the normal claim procedures which would have entailed the use of a program such as Xactimate which would have required more time consuming line by line damage estimates. The Court appeared to agree that the evidence showed that State Farm “concealed evidence of wind damage and strong-armed and engineering firm to change its reports.” Thus, the jury could reasonably have concluded that State Farm caused a false claim to be presented to FEMA for payment.

The court upheld the jury’s verdict awarding the Rigsbys the maximum possible share under the FCA for relators pursuing claims without the government as a party—30 percent of $758,250 (the court trebled damages on the $250,000 false claim and added a civil penalty of $8,250), or $227,475. The court also awarded the Rigsbys $2,913,228.69 in attorney's fees and expenses.

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