Hurricane Irma has ripped through Florida and is expected to have caused about $50 billion of damage, with Harvey and Maria causing billions more. Most private insurance policies limit coverage to damage from fire, wind, and a variety of other catastrophic causes. However, almost no private insurers in the United States cover any damage caused to homes by flood waters. Flood policies are sometimes administered through private insurance companies, but are generally underwritten by the Federal Emergency Management Agency (FEMA), an agency of the federal government tasked with supporting citizens and first responders during and after natural disasters such as the recent Hurricans. In Florida, it’s estimated that 86% of the population’s homeowners insurance policies do not cover flood damage. This public-private “partnership” leaves FEMA open to fraud.
FEMA’s flood insurance program is vulnerable to unique and targeted frauds. First, claims adjusters paid by private insurers can defraud FEMA by ascribing damage caused by rain, fire, wind, or any other reason, to damage caused by floodwaters. Second, private insurance companies administering the FEMA flood insurance program can bilk the government by overcharging for such administration. Both schemes may violate the False Claims Act (FCA), the federal law that helps the U.S. government bring contractors to justices who defraud governmental programs.
Past natural disasters have spawned massive frauds against FEMA. The aftermath of Hurricane Katrina led one of the nation’s largest property insurers, State Farm, to eleven years of fraud litigation. Prior to the storm, State Farm issued both FEMA-backed flood insurance and general homeowners policies. After the storm, the company ordered its claims adjusters to misclassify wind damage (covered by the general policies) as flood damage (covered only by FEMA, shifting costs away from the company). Two State Farm claims adjusters, sisters Cori and Kerri Rigsby, then became whistleblowers and reported the fraud to the government. In 2013, a jury awarded $750,000 in damages to the federal government, in a case that involved a single home in Biloxi, Mississippi. The Rigsby sisters received 30% of the government’s recovery. State Farm appealed and was unanimously rebuked by the U.S. Supreme Court last year.
Superstorm Sandy, the second-costliest hurricane in U.S. history (after Katrina), also likely resulted in significant frauds against FEMA. A 2016 Report by the New York Attorney General published in the wake of Sandy found that, generally, private insurers administering the FEMA program tend to profit in the wake of flood disasters. Between 2011 and 2014, these companies averaged a 30% profit rate, with suspicious spikes in profit following Sandy and other natural disasters.
If you suspect fraudulent activity or are aware of isolated incidents of fraud, you may call the FEMA Disaster Fraud Hotline toll free at (866) 720-5721. Additionally, the Federal False Claims Act (FCA) contains provisions allowing private citizens to report fraud perpetrated against the government, and to collect a portion of the recovered funds, ranging from 10% to 30%. Homeowners or insurance company employees who are aware of widespread misconduct could be eligible for such awards.
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