(Bloomberg) — Some homeowners hit by Hurricane Sandy say they’ve been victimized twice: first by the storm and later by insurers.
John Clancy says his insurer, an Allstate Corp. unit, paid just $46,000 of the more than $200,000 in repairs needed on his 86-year-old house in Keansburg, N.J. The inspector surveyed the damage and concluded it was all storm related, Clancy said, but the final engineer’s report blamed the devastation mostly on long-term rot instead of the storm surge from Sandy Hook Bay, just four blocks away.
“Water came up right through the floor,” Clancy said in an interview, adding he believes someone may have doctored the report to keep from paying out in full on his $250,000 policy.
Clancy is among a growing number of New York and New Jersey homeowners who accuse insurers of rejecting or underpaying flood-insurance claims based on engineering reports falsified after the 2012 hurricane that washed away boardwalks and submerged seaside communities stretching from Atlantic City to the tip of Long Island. Some have sued.
Now, after a judge said the scheme may have been widespread, a criminal probe is under way and lawmakers are demanding answers. One insurance company executive cited his constitutional right against self-incrimination rather than answer questions under oath.
An official with the Federal Emergency Management Agency said last week the U.S. is working with insurers to pay more on flood claims, possibly even to homeowners who didn’t sue. FEMA, which foots the bill for the claims processed by the insurers, is accused by some homeowners of helping to create the problem by trying to scrimp on payments.
Denis Kelly, a Long Beach, N.Y. lawyer who represents more than 240 Sandy victims, said FEMA officials told him on Feb. 20 they may propose a preliminary plan for legal settlements by the end of this week.
“I am cautiously optimistic” about settlement talks, Kelly said in an interview. Getting his clients “fully paid for the damage they suffered would be a huge relief.”
Susan Hendrick, a FEMA spokeswoman, declined to comment on a potential settlement.
April Eaton, a spokeswoman for Northbrook, Illinois-based Allstate, declined to comment on Clancy’s lawsuit over an underpayment. The company is among several insurers sued by homeowners who maintain that falsified reports were used to minimize payouts on flood claims.
Wright National Flood Insurance Co. and affiliates of Travelers Cos. and Hartford Financial Services Group Inc. are defending cases that specifically allege doctored reports.
According to the complaints, initial engineering reviews that correctly linked home damage to the surging waters were revised to cast blame on long-standing structural flaws.
“I’ve had a number of clients that have come to me and told me, ‘Well, the engineer came to my house and pointed out the damage and showed me what happened, and then when I got the report it said something completely different,’” Robert Trautmann, a lawyer for Clancy and other Sandy victims in New Jersey, said in an interview.
The alleged scheme came to light after a Long Beach homeowner discovered that conclusions originally voiced by an engineer were reflected nowhere in his firm’s final report.
Deborah Ramey’s property, one block from the ocean, suffered badly sloping walls and hints of a collapsed foundation from Sandy’s pounding. The engineer’s report later blamed structural shifts over time rather than three-foot floodwaters that inundated the house. She had $250,000 in flood coverage; her insurer, Wright Flood, paid $80,000. She sued.
Their report said “our house was not damaged due to the flood,” Ramey, a sixth-grade teacher, said at a hearing last week in federal court in Brooklyn, N.Y. “I was shocked.”
Insurers deny allegations of wrongdoing, saying they have no reason to cheat homeowners because FEMA pays the claims. The insurance companies merely process them. And engineering firms say there’s nothing suspicious about peer-reviewed revisions to their first-draft damage reports.
Last week, after New York Attorney General Eric Schneiderman executed a search warrant at the Uniondale, N.Y. office of HiRise Engineering PC, the firm said it had a “15-year history of ethical business practices.”
“We are cooperating to the fullest extent possible with all parties in an effort to address and resolve the issues that have been raised,” HiRise Engineering said in a statement.
Another engineering firm that’s been sued, U.S. Forensic LLC, defends its work. In many cases, the damage homeowners noticed after floodwaters subsided is due to decay that developed over time and not from the storm, said Larry Demmons, a lawyer for the Metairie, Louisiana-based firm.
Homeowners offer strikingly similar accounts.
John Cardona, who owns a home on Long Island’s North Fork, said the storm left “shocking” ruin that included a jagged crack so wide he could stretch his hand from his home’s interior to its exterior.
An engineer told Cardona, “You have unbelievable damage. It’s clearly from the flood,” he recalled.
“Sure enough I get a report back saying” otherwise, he said. He got $17,000 for $230,000 in damage. He’s now suing.
Kathryn FitzGerald says her 80-year-old home in Long Beach had to be torn down after it was swamped by sewage and surging waves. She said Travelers paid only $80,000 on her $250,000 flood-insurance policy after an engineer blamed much of the devastation on long-term deterioration.
“They just kind of low-balled me,” FitzGerald, a single mother, said. “The house was fine before the storm.”
Travelers spokesman Matt Bordonaro declined to comment.
Hartford has denied allegations in homeowner suits and said it arranged for a new engineering review following claims that a report was improperly altered, Thomas Hambrick, a spokesman for the insurer, said in a statement. Hartford suspended use of the engineering firm at issue, he added.
Steve Mostyn, a Houston-based plaintiffs’ lawyer who represents several storm victims, said engineering firms have altered damage reports to satisfy insurance firms that hire them. And insurers want payouts to be lower because FEMA, $24 billion in debt after 2005’s Hurricane Katrina and other storms, pressured them to hold the line on Sandy payments, he said. Hendrick, the FEMA spokeswoman, denies the accusation.
Mostyn said he’s found evidence that insurers are relying on falsified engineering reports: two dozen reports with “nearly verbatim” findings about Sandy-related damage.
Pressure on the industry has been mounting at least since U.S. Magistrate Judge Gary Brown, who’s overseeing pretrial legal issues in Ramey’s case, said in November there may be “widespread” wrongdoing, with conflicting reports in many cases. Congress held hearings on the issue earlier last year.
In court last week, as Brown was weighing whether to sanction the insurer and its defense lawyers, a Wright Flood official refused to answer questions posed by Ramey’s lawyers, citing his Fifth Amendment right under the U.S. Constitution not to incriminate himself.
Many flood claims are not “clear cut” and may involve a house “on a substandard foundation which has been subject to many years of erosion and settling,” Dolores Glass, a spokeswoman for St. Petersburg, Florida-based Wright Flood, said in a statement. She declined to comment on the testimony from the company official and said only a few lawsuits have claims of manipulated engineering reports.
Brad Kieserman, FEMA’s deputy associate administrator for insurance, said in a Feb. 13 letter to Brown that he’s initiating “a thorough and multidisciplinary assessment” of the agency’s “delivery and oversight” of the flood-insurance program.
Homeowners like FitzGerald are hoping FEMA’s intervention leads to additional insurance payouts.
“We’re kind of in limbo,” she said, pointing to a partially rebuilt house that she may have to sell because of a lack of cash. “I could lose my house because they won’t pay.”