Excerpt: Eyewitness Statements Are No Longer to Be Relied Upon' - Shows v. State Farm

In this July 1, 2007, entry - the first of a two-part series posted on his blog, InsuranceTransparencyProject.com - Dean Starkman discusses a lawsuit filed against State Farm in the Southern District of Mississippi.

I-Tunes,

The ball is now squarely in the court of U.S. Attorney Dunn Lampton with the bombshell dropped by Richard Scruggs and crew in the U.S. District Court for the Southern District of Mississippi, in Gulfport, on June 20. Read the indispensable Anita Lee's summary of the case, but better still, if you can clear aside some time, click through to the actual complaint accompanying her story. (It's too big to upload onto ITP.)

I wish I could say it's a Grisham novel, but the case is a little too baroque for that. It's a little Faulkner, a little Robert Penn Warren, and a little, yes, Rainmaker. It starts with a $150,000 recreational vehicle and ends with the alleged corruption of an engineering company at the behest of State Farm.

I think my insurer pals will be troubled reading this complaint. Yes, it is unproved; these are only allegations, albeit extremely well-documented ones. But we'd be wise to look at the evidence now; I am fairly comfortable predicting this case will never go to trial and that the settlement will be sealed.

This record, for me, serves as an indictment of Commissioner George Dale for inaction in the face of mounting evidence of bad-faith dealing. It is another blow to state regulation itself, one in a series of illustrations of how state regulators have abdicated their roles as enforcers of insurance law and proper insurer conduct.

The complaint could not be clearer, the exhibits more compelling. If anyone wondered whether something was amiss on the coast; why, on a wholesale basis, $200,000 and $300,000 claims received cents on the dollar from some carriers and full payment from others; why evidence you could see with your own eyes didn't seem to count; why engineers wrote reports and were never heard from again; why their reports appeared, disappeared and reappeared with radically different conclusions; why eyewitness accounts from third parties were ignored; why people who have never sued anyone are suing insurers in droves—Scruggs et al. have provided a blow-by-blow account, complete with insider testimony, damning emails, and more.

I-Fans, names are named here, starting with State Farm's catastrophe manager, Alexis "Lecky" King, 30-year employee Stephen Hinckle, David Haddock, Mark Wilcox, as well as Robert Kochan, head of Forensic Analysis & Engineeing Corp., of Raleigh, N.C., and others. Here's what happened in southern Mississippi after Katrina, according to the complaint:

Shortly before landfall in Bloomington, Ill., and Duluth, Miss., and on Sept. 6, in Bloomington, State Farm convened a "Fire Claims Council" of consultants, lawyers and executives, including Hinckle. At the meetings, SF executives draft the "Wind Water Claim Handling Protocol," which would become known as the "Hinckle Protocol," which says: "Where wind acts concurrently with flooding to cause damage to the insured property, coverage only exists under flood coverage, if available."

And remember, under State Farm interpretations, concurrent means "within a few days." Under this protocol, Mississippi policyholders will be denied thousands of slab claims, no matter what the evidence.

On Sept. 26 or thereabouts, State Farm's Mark Wilcox calls Forensic's Kochan, hires the firm to handle what is anticipated to be 10,000 inspections at $2,500 each, a "proportionate share" of which goes to Forensic. That's a proportionate share of $25 million.

Based on the new job, Kochan buys the RV on credit to serve as a mobile administration center, with the understanding that SF will make the $6,500 monthly payments in addition to the proportionate share. Kochan assigns non-engineer Adam Sammis, an administrative assistant, to actually live in the RV. Sammis will assume a major role in the operation, from writing weather related data into engineering reports to hand-delivering the reports to State Farm's Lecky King, who will keep them under lock and key in the company's main cat office in Biloxi. Kochran names another non-engineer, Nellie Williams, director of operations. She will work from her home computer in Reno, Nevada.

On Oct. 10, State Farm's Wilcox called Forensic's Sammis in the RV and tells him to "call all water damage 'flood water,' " according to emails later recovered. Remember, at this point, it was still an open legal question that wind-driven "surge" was a "flood." On a conference call, Sammis relays the message to Kochan and Williams, who follows up with an email saying the wording "could mean a world of difference in the final payout."

Likewise, State Farm's David Haddock instructs a Forensic engineer, Randy Down, not to use percentages to describe damage and stick to the word "predominant." This, too, becomes important.

Policyholders, of course, don't know any of this.

Soon, however, outside engineers get involved as Forensic ramps up to deal with the crush of work. One is Brian Ford, a 35-year engineer formerly in charge of disaster preparation for Mississippi Power, is hired by Forensic as a "senior principal engineer." Another is Emanuel "Manny" Manon, who normally works in Florida.

Ford and Manon start submitting engineering reports attribute some, most or all damage to wind. The reports filter up to King, who, according to testimony and emails, begins to express "severe criticism."

Oct. 17, Sammis in the RV gets a blistering phone call from King, who is angry at Ford, according to follow-up emails.

King called Sammis at Forensic's RV and informed Sammis that the she "was pulling all engineering work" from Forensic. King was angry that several inspection reports had included wind findings and failed to attribute the losses to excluded water damage. One of the reports prompting King's outrage was the inspection of Thomas and Pamela McIntosh (who later filed a case that's pending) by Brian Ford. In the telephone conversation Lecky King angrily told Sammis she would now have to send another firm to "get it right."

She demands to speak to Ford, who comes on the line. When King asks why he included wind in a certain report, Ford explains that an eyewitness says the house next door had blown apart and the debris took out the insured's windows and doors.

"You weren't there and didn't see it," King tells Ford, according to an email summary by Ford.

For good measure, King calls Williams in Reno, and in a manner Williams later described as "obnoxious" and "offensive," tells her the contract is terminated.

Stuck with the note on the RV, Kochan is in full scramble. He has Ford reconstruct the conversation in writing "as close to a I-said-she-said dialogue as you can recall," then drives to Biloxi for a meeting with King. According to email reconstructions, Kochan asks for "an opportunity to earn their respect back" and later advises his staff "as a company practice, I am suggesting that eyewitness statements are no longer to be relied upon in the development of our opinions." He also tells the staff that King gave them permission to omit any mention of "the specific initial causation of the loss."

This is an engineering firm, remember.

Crisis averted, but Kochan isn't going through that again.

"I managed to get us back on the roles [sic] but we need to have a frank conversation with the boys down south to be sure we don't fall into the same trap."

The "boys down south" are Ford and Manon, who will be fired.

Within Forensic, however, there is dissent.

Engineer Down (who is not a new hire) emails Kochan and Williams on Oct. 18:

a. Down questioned "the ethics of someone who wants to fire us simply because our conclusions don't match hers.

b. Down suggested that Forensic "find a more rational and ethical client to be dealing with."

c. Down cited State Farm's directive to eliminate apportioned wind findings because if included State Farm "would then have to settle for the portion that was reportedly caused by wind.

d. Down questioned Lecky King's demand that Forensic ignore eyewitness accounts stating: "eye witness accounts are standardly [sic] included" and ignoring them would seem to be "ignoring potential facts in the investigation that could hurt our credibility later."

In conclusion Down points to the elephant in the room:

What about the obvious fact that SF would love to see every report come through as water damage so that they can make the minimum settlement. I see why the Attorney General's office is already involved down there. She needs to be careful about what she is doing and saying.

More later.

Thanks to Ida and the Indomitable Anita Lee.

Originally posted on July 1, 2007 on InsuranceTransparencyProject.com Copyright © 2007 by Dean Starkman. Reprinted with permission.