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The district court granted in part and denied in part State Farm’s motions to dismiss a complaint alleging fraud on FEMA flood insurance programs. In a long-running dispute that arose after Hurricane Katrina, the relators alleged that State Farm shifted the cost of privately-covered property damage onto the federal government through the Standard Flood Insurance Policies. State Farm challenged the complaint under the public disclosure bar, statute of limitations, and various pleading standards. The court held that the claims were adequately pleaded at this stage, finding that the relators identified specific properties for which State Farm expressly and impliedly certified met the requirements for SFIP coverage and had asserted facts showing the certifications were material to the payment decision. The court also found the allegations and theories of liability in the amended complaint were not time-barred, because they were clearly connected to those in the original timely complaint. However, the court agreed that one count was barred by the public disclosure bar. The relators alleged that State Farm submitted claims for reimbursement for line item estimates, when in fact they had used expedited procedures for which they were due a flat fee. The court found that the relators’ original complaint did not touch on this issue, and that the allegation had been disclosed in a GAO report and news coverage that appeared after the complaint was filed. The court concluded that the facts in the GAO report and news articles were sufficient to put the government on notice that State Farm and other insurers may have submitted claims for reimbursements to which they were not entitled.

 

Defendant State Farm Fire and Casualty Company moved to dismiss a qui tam complaint for lack of subject matter jurisdiction and for failure to state a claim.

Relators Cori Rigsby and Kerri Rigsby alleged that following Hurricane Katrina, State Farm submitted false claims for payments for flood damage under Standard Flood Insurance Policies, which insured homes on the Mississippi Gulf Coast.

A jury found in the relators’ favor on two claims that went to trial, but on appeal, the Fifth Circuit affirmed in part, reversed in part, and remanded the case. The circuit panel reversed the part of the court’s decision that denied the relators’ request for additional discovery, but affirmed all other aspects of the court’s final judgment.

On remand, the court indicated that, as the Fifth Circuit had suggested, the initial scope of discovery for the relators’ FCA claims would be limited to the Hurricane Katrina insurance claims identified on a list of certain properties for which State Farm had issued both a homeowner’s policy covering wind damage and an SFIP covering flood damage. State Farm provided this information. The relators then filed a second amended complaint alleging that State Farm knowingly presented false claims for payment and made false records or statements material to those claims.

Following Hurricane Katrina, FEMA issued Directive W-5054, which permitted insurers to bypass the requirement for line-by-line estimates in favor of expedited procedures, when presented with claims when a home: (1) had standing water in it for an extended period of time (more than five days); or (2) was washed off its foundation by flood water. Any other homes were placed in a catchall Category 3, for which FEMA required insurers to use normal claim procedures, including line-by-line estimates.

The relators alleged that for Category 3 homes, State Farm submitted flood claims using the expedited procedures using its XacTotal software, without performing line-by-line estimates. According to the relators, in order to conceal its non-compliance, State Farm generated so-called “long-form” reports that closely resembled a line-by-line estimate.

The relators also explained that Directive W-5054 established a lower fee schedule for the adjustment of flood claims filed with the expedited procedures. They alleged that State Farm billed for line-by-line estimates for adjusting Category 1 and 2 homes, even though it had not performed such estimates.

State Farm filed two motions to dismiss, first challenging the court’s jurisdiction under the public disclosure bar. According to State Farm, the SAC brought two entirely new false certification theories that, at most, alleged regulatory non-compliance independent of any claim or finding that the underlying property damage was caused by wind instead of flood. State Farm argued the claims differed from the original allegations, had been publicly disclosed, and that the relators were not the original source of the information.

In response, the relators argued that the new allegations did not relate to a fundamentally different fraudulent scheme, but were a core part of their proof at the original trial. The relators noted they had pled State Farm’s improper use of XacTotal since the inception of the case, including that State Farm used the tool in violation of W-5054 and to cover up its fraud.

The relators also asserted that the Fifth Circuit had already held that they were original sources of the scheme proven at trial, particularly involving State Farm’s improper use of XacTotal. They also stated that they disclosed any new allegations to the government before filing the SAC. Finally, they argued that State Farm failed to identify any public documents that plausibly reveal the allegations.

State Farm argued that the status of being the original source for one claim did not automatically transfer to new claims. The defendants argued that the relators never alleged that the use of XacTotal violated W-5054 and created FCA liability independent of whether the damage was caused by wind or flood. According to State Farm, the prior allegations regarding the use of XacTotal went to the “how” of its alleged scheme, which was fundamentally different than the use of XacTotal being an independent, standalone FCA violation because its use was prohibited by FEMA.

State Farm argued the public disclosure bar applied to the claim that the defendant improperly used expedited procedures for certain claims and to the claim that it charged the regular adjustment fee, even though it did not perform a line-by-line estimate. In support, State Farm cited several public disclosures: (1) FEMA’s publicly-available administrative reports, including W-5054 and the NFIP Claims Manual; (2) a 2006 GAO report; (3) a 2007 article from The Times-Picayune newspaper; and (4) testimony and exhibits from the trial.

According to State Farm, the section of the NFIP Adjuster Claims Manual applicable at the time of Hurricane Katrina stated that payment of the adjuster’s service fee will be according to the NFIP fee schedule. However, FEMA issued W-5054 to address standards for handling flood claims and outlined three processes for adjusting claims based upon specific characteristics of the homes, as already described above. The directive modified the existing fee schedule for the expedited processes, but not for Category 3 processes. The directive also stated that FEMA would not seek reimbursement from the company when a subsequent review identifies overpayments resulting from the company’s proper use of the FEMA depth data and a reasonable method of developing square foot value in concluding claims.

The GAO report also noted the adjusted fee schedule, finding that FEMA had paid the same fee for square foot adjustments as it did for regular line-item-by-line-item adjustments that took longer to perform and required more extensive documentation. The Times-Picayune article also described scenarios in which insurers obtained full reimbursement for expedited adjustments.

While neither the GAO report nor the article identified State Farm by name, the defendant argued that it was the largest and most easily identifiable carrier on both Louisiana and Mississippi at the time of Hurricane Katrina.

The court examined each allegation in turn, beginning with whether the alleged improper use of XacTotal was publicly disclosed. In their original complaint, the relators alleged that State Farm instructed adjusters who initially found that a property had less damage under flood coverage than the flood policy limit to go back through the claim a second time to “hit limits,” and that adjusters used XacTotal as a shortcut to determine the amount of damage for a claim in order to make the determination that there had been a total flood loss even in homes that sustained moderate flood damage.

In the SAC, the relators alleged that State Farm represented to FEMA that properties incurred flood damage equal to or exceeding the limits of their flood policies when it did not perform the line-by-line estimates it was required to perform for all Category 3 homes. The relators also alleged that State Farm submitted an express false certification for each of these properties by placing the long-form XacTotal report in the flood file when it had not performed a line-by-line estimate.

The relators asserted that State Farm improperly used the expedited claims handling procedure under circumstances not permitted by FEMA and placed the long-form XacTotal report in the flood file in order to falsely certify that it had complied with W-5054, which was a prerequisite to payment.

Although W-5054 outlined the expedited claims handling procedure allowed by FEMA for two categories of properties and required that the normal claims handling procedure was required for other properties, the court found that W-5054 did not publicly disclose the conduct the relators alleged, i.e., that State Farm improperly used expedited procedures for the third, catchall category.

Similarly, although the GAO report revealed that two large companies were permitted to use an expedited claims handling procedure, it did not state that this procedure had been improperly used by State Farm or any other company. The court made a similar finding regarding the newspaper article. Because the court could not say that any of the defendant’s sources publicly disclosed the allegations, the court found the public disclosure bar did not apply to this claim.

Next, the court considered whether the allegation that State Farm charged incorrect adjusting fees was publicly disclosed. The court found that the NFIP document disclosed the fee scheme and that GAO had found that FEMA permitted this arrangement. GAO’s report also disclosed FEMA often paid the same fee for expedited procedures as for the line-by-line adjustments. The newspaper article made similar findings. While State Farm was not named in either source, the court agreed that there had been a public disclosure of the allegations regarding the charging of improper adjustment fees before the relators filed their SAC.

Next, the court considered whether this claim was based on those public disclosures, and agreed that it was. The court found that the defendant’s citations, taken as a whole, would have allowed a reasonable inference that State Farm requested overpayments for its adjusting of claims for which it had used the expedited process.

The court next considered whether the relators qualified as an original source of the information, and concluded they did not. The defendant noted that the earlier amended complaint implied that the percentage-based fee schedule applied to the adjustment of all of State Farm’s flood claims. The court found no evidence in the complaint that the relators were aware that State Farm was supposed to be paid a lesser amount for claims adjusted using the expedited process. In fact, the relators did not mention the issue until they filed their most recent pleading, some 14 years after the original. Accordingly, the court held that the public disclosure bar applied to this claim.

Next, the court considered State Farm’s motion to dismiss for failure to state a claim. State Farm argued that the relators’ new theories of liability were time-barred and that they failed the meet the Rule 9(b) particularity standard. Specifically, State Farm complained that the relator’s presented two never-before-pled sets of allegations (W-5054 procedures compliance and adjustment fee compliance) under two never-before-pled theories of FCA liability (express and implied false certification). The defendant also challenged the complaint as to scienter and argued that the SAC failed to state each claim in a separate count. Alternatively, State Farm asked the court to require a more definite statement.

In response, the relators argued that State Farm’s use of XacTotal when not permitted and its failure to perform required line-by-line damage estimates has been part of their theory for how State Farm shifted liability for wind damage to the NFIP since the inception of this case. According to the relators, because their false certification theories of liability are based upon the same schemes they pled in their original complaint, these relate back to the original pleading and are not barred by the statute of limitations.

In Count One, the relators alleged that State Farm (1) submitted an implied false certification when it represented to FEMA that each property incurred flood damage equal to or exceeding the SFIP flood limits because State Farm was required to perform line-by-line estimates for each, but did not do so; (2) submitted an express false certification by placing the long-form XacTotal report in the flood file when it did not perform a line-by-line estimate; and (3) submitted an express false certification by sending bills or statements of withdrawal seeking payment for conducting line-by-line estimates under FEMA’s normal adjusting fee schedule when it had used an expedited procedure.

As an initial matter, the court found the motion to dismiss the third matter was mooted by its decision holding that the claim was barred by the public disclosure bar. The court found the first two claims were related to the relators’ original complaint, which was timely filed. The court found it clear from the amended complaint and from the Fifth Circuit’s opinion in the parties’ appeals that the central theme of the relators’ claims had always been that State Farm improperly used an expedited procedure, namely XacTotal, rather than a line-by-line estimate for certain properties, and by doing so, improperly foisted the cost of privately-covered wind damage from Hurricane Katrina onto the federal government, in violation of the FCA. Therefore, the court found the claims were not barred by the statute of limitations.

Next, the court considered State Farm’s argument that the relators failed to adequately plead their claims. First, the court found the relators satisfied the particularity standard. The relators alleged facts showing an actual certification to the government that was a prerequisite to obtaining a government benefit. They also identified 501 properties for which State Farm purportedly expressly certified its compliance with federal requirements for line-by-line adjustments for SFIP claims. While the evidence might ultimately contradict the relators’ allegations about the express certification, the court found them sufficient at this stage.

The court also found the relators adequately pleaded that State Farm submitted an implied false certification when it represented to FEMA that each property incurred flood damage equal to or exceeding the limits of the applicable SFIP because State Farm was required to perform line-by-line estimates for each property, yet did not. According to the relators, anyone at FEMA who reviewed the NFIP flood payment would have wrongly concluded that State Farm had performed the line-by-line estimate, based on the defendant’s filing. The relators argued that the line-by-line estimates were required for payment. The court found this sufficient.

Because the court found that the relators adequately pleaded their express and implied false certification theories, it declined to grant the motion to dismiss Count Two, which alleged the use of false statements and records in support of a fraudulent claim.

Next, State Farm moved to dismiss the relator’s purported attempt to plead claims beyond the list of properties included in the complaint, arguing the relators engaged in impermissible speculative pleading. Specifically, the defendant noted that the complaint alleged that it was “possible” that State Farm failed to conduct line-by-line estimates for other as-yet unidentified properties.

In response, the relators argued that they have repeatedly stated that the identified claims do not encompass the full scope of State Farm’s fraud and that they provided additional, specific details of the list’s under-inclusiveness. The relators argued that State Farm’s desire to limit the scope of inquiry did not render their allegations speculative.

The court noted that it had repeatedly stated that the initial scope of discovery would be limited to the 501 properties identified in the complaint. As yet, the court had made no determination on whether this scope would be expanded. The court therefore denied the motion to dismiss as premature.

The court also denied State Farm’s motion to dismiss the SAC based on its alleged failure to state each claim in a separate count. The court held that the manner in which the relators presented their claims did not interfere with the parties’ ability to understand them, nor otherwise prejudice State Farm.

Finally, the court denied State Farm’s request for a more definite statement, finding that the SAC was not so vague or ambiguous that State Farm could not reasonably frame a response. Because the complaint sufficiently put State Farm on notice of the clams, the court denied the request.