Excerpt: Where Did You Get This?—Shows vs. State Farm

In this July 9, 2007, entry—the second of two parts posted on his blog, InsuranceTransparencyProject.com—Dean Starkman discusses a Mississippi lawsuit that sheds unflattering light on how insurers responded after Hurricane Katrina.

I-Fans,

In our last installment, State Farm, headed by cat manager Alexis "Lecky" King, had hired Forensic Analysis & Engineering Corp. to inspect an estimated 10,000 post-Katrina homes for a "proportionate share" of $2,500 each; Forensic's principal, Robert Kochan, had ramped up by, among other things, hiring two outside engineers, Brian Ford and Emanuel Manon, to perform inspections.

Both submit several reports attributing some damage to wind, causing King to hit the roof and fire Forensic. Kochan rushes to Biloxi to meet with King, fires Ford and Manon, and begins installing a new system to avoid repeating the mistake of angering King. Forensic engineer Randy Down objects, but soon is found participating in the new system.

The full complaint and exhibits are on the Scruggs Katrina Group site.

The new system is at first ad-hoc and involves retrieving and destroying Ford and Manon reports, substituting "swap outs" that blame water; or, if a report had been distributed up through State Farm processing system (and retrievable, one supposes, in discovery) to mark those as "draft," removing the conclusions and allowing State Farm to write in its own. Photos implicating wind are to be removed.

As Kochan wrote to a subordinate:

"Consider submitting the work we have done ... with a copy of the report marked DRAFT and Manny's conclusions REMOVED. Just mark that section INCOMPLETED. We don't need to give them any ammunition that is not necessary and we can still bill for the investigation."

The substitute reports are written by two Forensic engineers, William Forbes and John Kelly.

On Oct. 28, two months after Katrina and after the Kochan-Lecky King meeting, State Farm executive Mark Wilcox sends Kochan a sample report, which includes, among other things, the false conclusion that storm surge preceded the wind. No one believes that. The sample report's false conclusions are attributed to Weather Data Inc., a private contractor to State Farm. The sample report includes a conclusion that the property was destroyed by surge. No wind damage was included in the sample.

In a January 2006 email, Forensic's Kelly, commenting on a government site, admits he knows wind preceded water, even though Forensic reports are going out saying the opposite:

The thing I found interesting was the lead time of the wind ahead of the water, because this is what we experienced. I can not say what speeds the winds were, but they definitely were ahead of the water by our observation.

By everyone's observation. That's not even a debatable point, except among these "engineers." By November, a month after the Kochan/King meeting, Adam Sammis, the administrative assistant working in the specially equipped Forensic RV on the coast, is emailing Nellie Williams, Forensic's director of operations, working from her home in Nevada, that reports have been altered.

Case 56 has been changed...

Case 74 has been changed.

Case 23 has been changed...

Case 27 has been changed significantly....

In one case, the Simpson family's, Lecky King emailed Kochan at Forensic and asks why wind was listed a primary case. Kochan then emails engineer Down, saying "I suggest that the client (State Farm) be advised that we will amend the report." Engineer Kelly then emails Williams in Reno, copying Down, with the following warning:

I think this may be one of those jobs that one must be careful in handling. If the report has gone to some kind of distribution within SF, it may be better to write a letter of clarification addressing the question vs. amending the report. If the report has not been distributed and we can retrieve the original as a swap out we could re-do the report.

This is what the paper trail looks like of "wind" conclusion changing to "water." It's King to Kochan to Down to Kelly to Williams.

Soon, according to the exhibits in the Scruggs complaint, the task for Forensic becomes finding a pretext for subbing out the original reports that attributed wind with new reports that blamed water. Engineer Kelly writes to engineer Down how he will do just that on a report on the Pepperman family home:

I spoke with David Haddock of SF to tell him that we would like to submit a revised report on this job based on additional information that we now have that we did not have at the time the report was written. This included the Weather Data Inc. report supplied to us by State Farm. Since the report he is now holding has not been outside of SF, he is mailing that original back to me and the new report will replace it.

Now, Kelly wants to know if they can bill State Farm twice, once for the honest report, and once for the fraudulent one. On Jan. 10, 2006, he writes:

This is a report we redid. SF mailed me back the original that was submitted by Manny and Brian, which was signed by them as a final report. The issue was that they had concluded wind and I concluded predominantly water. While I did not specifically address any additional compensation from SF, in the other two reports of similar problem, we just corrected the report without any additional fees. I don't know if you want to consider this or not, just let me know. I'd like to bring the reports over to State Farm this morning.

Listen, I'm just summarizing the allegations in the complaint. All the real work has been done by the Scruggs firm. And, yes, I know these are allegations. The exhibits could be taken out of context or could, for all I know, be complete forgeries. But I doubt it.

I'll include one more case because it shows what happened when an "original" report made it—quite by luck—into the hands of a policyholder. Keep in mind while you read this an insurer's obligation under the law to deal fairly with policyholders. Those obligations exist because the law recognizes the insurers and insureds are not two equal parties to a contract. Insurers, having already been paid, control the information and the ultimate decision on whether a policyholder will recover. This is, in the end, a trust-based system. Think about that when you think about insurance generally.

The Mullins, of Hancock County, rented a modular home that was lifted from its moorings and carried to the middle of the street, turned 180-degrees around. No water marks were found. Eventually, Forensic's Manon (the fired one) wrote a report and told the Mullins it would be forthcoming soon.

State Farm denied the claim.

The Mullins, however, wanted to see the report. In the fall of 2005, Terri Mullins, an inspector with the New Orleans P.D., called Forensic HQ in Raleigh, N.C., and speaks to "Wendy" (Wendy Nichols, a receptionist), who tells her the report is done but can't be sent without State Farm's permission. Mullins goes to her SF agent's office, asks "Kimberly," another receptionist, to call Wendy and tell her its OK to send the Manon report. The two clerks are not in on the plan; Wendy faxes the Manon report to Kimberly, who gives it to Mullins.

Mullins doesn't know this, but Kochan had already sent engineer Kelly to "re-inspect" the house. SF emails and call logs show that agents are telling Mullins that "the" report isn't done yet, even though the Manon report was logged filed on Dec. 6.

On Dec. 9, Mullins, fed up, drives to the SF cat office in Biloxi and asks for the report again, confronting an SF supervisor, Kevin Young, who says no report has yet arrived. Mullins then shows him the faxed Manon report, concluding that the "primary and predominant cause of damage to the Mullins property was due to hurricane force winds."

Young replies: "Where did you get this?"

All of a sudden, having just denied it existed, Young goes in back and finds the "official" Forensic report, signed by John Kelly, that says "rising water produced and caused the loss."

But there's more. Scruggs found emails that showed how this report had been massaged. First, on Oct. 24, Kochan emails Williams in Reno and Sammis in the RV, suggesting that water be included, at least in part:

I suggest that the conclusion be altered to indicate that it was a combination of both and not primarily the wind.

In deposition, Kochan later admits writing the word "DRAFT" over Manon's report, even though he had already co-signed it as final as Forensic's "peer reviewer."

Finally, any mention of wind is removed altogether.

Eventually, Kelly will be recruited to "alter and rewrite" dozens of reports, then go on to write original reports attributing damage to water.

The complaint goes on. The examples are laid out in systematic and numbing detail. There are names, dates and places.

People read this blog, I assume, because they are curious about how insurers responded on the Gulf after Hurricane Katrina.

Two years later, we're beginning to get the picture.

Thanks to Ida.

Originally posted on July 9, 2007 on InsuranceTransparencyProject.com Copyright © 2007 by Dean Starkman. Reprinted with permission.