Mightier Than the Storm
How a peer-reviewed report nearly dammed up Sandy’s claims process, and what it means for future disasters.
In October 2012, Superstorm Sandy damaged hundreds of thousands of homes, forced tens of thousands of survivors into shelters, and caused billions of dollars in damage to vital infrastructure systems, including power transmission, transportation, and water and sewage treatment facilities. As a direct result of the storm, 73 people lost their lives. According to the Insurance Information Institute, 1.58 million claims were filed with private insurers and the National Flood Insurance Program (NFIP), resulting in payouts of nearly $19 billion by private insurers and $7.1 billion by the NFIP for those properties that were also insured for flood damage.
The documentation and scoping of damages of these claims was carried out primarily by staff and independent claims professionals, with various engineers becoming involved when structural, electrical, or mechanical damages were claimed that exceeded a claims professional’s training or experience when it came to the determination of cause, extent of damages, and repair methodology.
The magnitude of the damage caused by Superstorm Sandy required the services of additional, newly hired independent claims professionals (“independents”) and forensic engineers. Due to the amount of claims filed in a single day, many of these newly minted independents and forensic engineers had little, if any, experience assessing damage caused by flood. However, the inexperienced personnel were overseen and managed by more experienced claims professionals and engineers, using the preexisting NFIP mentor program or the engineering profession’s decades-old designation of Engineers of Record to supervise less experienced engineers.
As is usually the case after these catastrophes, a small percentage of homeowners (estimated at one percent) filed lawsuits claiming that they were not made whole by their insurance proceeds. As a part of the litigation process, documents are produced and the claims professionals and engineers who visited the properties are sometimes used as expert witnesses by the attorneys defending the claims.
Recent media stories have focused on an opinion issued following an evidentiary hearing in the U.S. District Court for the Eastern District of New York in a case involving Deborah Ramey and Larry Raisfeld. At issue in that hearing was an allegation by the plaintiffs that the engineering peer-review process was somehow improper due to the extent of changes between the initial draft version of a report submitted by the inspecting contract engineer to his full-time technical reviewer and the ultimate version, a final report, that was agreed to, approved, hand signed, and sealed by the contract inspecting engineer.
To understand the case requires information not previously reported in the mainstream media. According to courtroom testimony, a newly employed New York-licensed engineer, contracted to a national forensic engineering firm used by the Federal Emergency Management Agency (FEMA) and other government agencies in the past, inspected an investment property owned by Ramey and Raisfeld. The inspecting engineer drafted his first flood evaluation report and sent it to the firm for its customary internal peer review. In the draft report submitted to his technical manager, who also was a New York-licensed professional engineer, the inspecting engineer admittedly incorrectly opined that the foundation of the home had collapsed, a conclusion based primarily on his interview with Ramey and Raisfeld (at the time of inspection, a majority of the property’s foundation was still covered in sand).
Once received, the peer reviewer expressed concerns that the conclusions reached in the draft report were not supported by the observations of the exposed foundation, and, specifically, that there was no evidence shown in the submitted photographs of the interior and exterior that the foundation had collapsed or that the building had moved substantially as documented in other Superstorm Sandy flood cases.
Using Microsoft Office’s “track changes” editing feature, the peer reviewer made comments, suggestions, and wording changes, then sent it back to the original inspecting engineer for his consideration. As always, the licensed engineer who ultimately signed and sealed the final version of the report was free to accept or reject the suggested changes and to discuss the issues with the reviewer at any time.
The licensed inspecting engineer reviewed the suggested edits, acknowledged the shortcoming of the initial draft, accepted the suggestions, and finalized the report, which now stated that the foundation had not collapsed as a result of Superstorm Sandy. When the changes were made known to Ramey and Raisfeld, they moved for an evidentiary hearing in front of the magistrate judge who was handling the pretrial motions in Superstorm Sandy cases, asking for policy limits of $250,000 on the 86-year-old structure.
Even after listening to the above facts in the hearing, the magistrate judge opined that the extent of changes suggested by the peer reviewer was improper because he did not visit the property. The judge’s opinion could have been the result of a lack of understanding of the peer-review process and engineering industry operating procedures.
This misunderstanding was further expanded when the judge immediately ordered all defendants in any Superstorm Sandy-related case to provide plaintiffs with copies of “all reports” previously described in the court’s case management orders, plus any drafts, redlines, markups, notes, measurements, photographs, and written communications prepared or collected by an engineer or other agent affiliated with any defendant, whether the defendant or a third party possesses the documents.”
The term “peer review” is best known in the context of writing and submitting articles or papers for publication in various scholarly or academic journals. Webster’s dictionary defines it as “a process by which a scholarly work (such as a paper or a research proposal) is checked by a group of experts in the same field to make sure it meets the necessary standards before it is published or accepted.” Importantly, peer review is specifically addressed in the ASTM Standard E2713-11, “Standard Guide to Forensic Engineering,” an industry standard on how forensic engineering should be conducted.
The court records reflect that the report process, including a submission of a draft by a new contract employee for technical review by a more experienced forensic engineer, ultimately generated a final report that was based on site observations and sound engineering principles. In fact, both New York-licensed professional engineers who testified (the plaintiffs did not present an engineer rebuttal) indicated that the technical progression of the draft report through peer review was proper, and that the initial internal draft report was incorrect because the foundation certainly was not collapsed.
As a result of the Ramey ruling, as it has become known, all flood-related Superstorm Sandy trials have been stayed in New York, and the claims process for the flood program as we know it has been derailed. The misunderstanding at the lower court level failed to reconcile whether the engineering report that had significantly changed opinions from draft to final was initially wrong and corrected, or initially correct and changed to be wrong. The answer to this question would have been monumental to resolving the issues.
Were there “bad” engineering firms? Or were there litigation strategies at play by plaintiff’s attorneys? It has been suggested that the proper way to review this issue would have been to investigate the merits of the engineering report and to determine if the conclusions were factually correct. If the report is correct as finally issued, then the claim was paid as it should have been. If the final report was found to be incorrect, during a process of cross examination and opposing expert witness testimony, the court has a duty to discover why the report was wrong and if any impropriety was involved during its production. It is unfortunate that the truth likely will never be adjudicated, as the salacious allegations were all that the plaintiffs, the magistrate, and the media needed to move the case out of the courthouse.
This strategy by plaintiffs is not a new one. In Hurricane Katrina, plaintiff’s attorneys alleged that a Houston-based forensic engineering firm was colluding with insurance companies to change damage causations from wind to storm surge. The same type of allegations of “altering reports” by various engineering firms was accompanied with threats of state and federal criminal investigations and lawsuits naming the engineers and the engineering companies as defendants.
In the end, no engineering firm or engineer was ever found to have committed fraud in a civil or criminal proceeding, and none were charged with a crime. However, the allegations received considerable media coverage and tended to give an appearance of validity to the accusation that the process of an estimate or report evolving through an internal peer-review process is somehow improper. This litigation strategy is a red herring designed to try the case in the court of public opinion rather than on the merits of the case.
However, what makes the allegations of fraud and collusion difficult for the plaintiffs in Superstorm Sandy flood litigation is the lack of motive to commit such fraud. The NFIP pays its independent claims professionals on a fee schedule that is based on the amount of the claim. The more damage included in the claims professional’s estimate, the more that person makes. The FEMA fiduciaries that manage the claims and make the ultimate decisions (called “write your own” or WYO) also are paid a percentage of the claim. In other words, the more they pay out, the more money they get.
The engineers, however, are paid a set fee for their evaluations. Since they make the same amount whether the report indicates damage or not, there is no apparent financial motive to commit such fraud.
Allegations have been made that suggest that fiduciaries are not paying full policy limits in order to avoid FEMA audits when, in fact, the audits are not based on payout amounts, but rather on time intervals regardless of amount of claims and individual claims payments.
According to the Code of Federal Regulations, Section 44 CFR 62.23: “To facilitate establishment of financial controls under the WYO program, the WYO company will: (1) Have a biennial audit of the flood insurance financial statements conducted by an independent certified public accountant firm at the company’s expense to ensure that the financial data reported to us accurately represents the flood insurance activities of the company,” and (2) “Participate in a WYO company/federal insurance administrator (FIA) operation review. We will conduct a review of the WYO company’s flood insurance claims, underwriting, customer service, marketing, and litigation activities at least once every three years.” The audits are required based on time periods, not claims payment amounts. Clearly, a WYO cannot avoid the FEMA triennial audits or WYO/FIA operations review by adjusting a claims payout.
In summation, this litigation strategy in the wake of a catastrophic storm event is likely to become a part of the plaintiff’s attack in future catastrophe claims. The possibility of a contingency-based plaintiff’s attorney finding one claim in which the payout was reduced during a technical review at a third party administrator or engineering firm out of 1.6 million claims was inevitable, especially when inexperienced contractors were brought in due to the number and extent of claims caused in a single day. So, too, was the probability that the local news media would find the story interesting enough to their post-storm readership to carry it repeatedly over weeks or months while claims are being resolved. The repeated story, when told enough times by different media sources, becomes believable to the general public who have no other source of information, due in part to FEMA’s instruction to fiduciaries not to respond to media requests.
What is unclear is what should be done differently in the future. Should the peer-review process be eliminated and all draft engineering reports—regardless of experience or training—be issued and paid without review? Should claims professionals submit their estimates directly to FEMA or insurance carriers without management oversight? The answer to both questions is, of course, “no.” The defense of these claims should be exactly as it has been in past major storm events: to handle claims fairly; to challenge unfair, unconsidered, or ill-intentioned court rulings through the appeals process as far as necessary; to resist biased media pressures; and, if necessary, to ultimately avoid issuing policies in legal jurisdictions that do not present a level playing field for all parties.