State Farm: The Insurer Wanted the Case Thrown Out

The State Farm False Claims Act seal violation decision rejected automatic dismissal of a case alleging that the insurer shifted Hurricane Katrina wind losses onto federal flood coverage. Claims adjusters alleged that State Farm instructed them to classify wind damage as flood damage, moving the bill from the insurer to the federal government. For someone who knows how insurance claims get classified, that is a decision about whose money pays for the same damaged home. The dismissal dispute arose from a disclosure in a case filed under seal.

The Court’s December 6, 2016 opinion was unanimous. It held that the trial court could decide the appropriate response to the disclosure and upheld its refusal to throw out the case.

Wind Damage Put State Farm’s Money at Stake

State Farm issued both its own general homeowner policies and federal government-backed flood policies before Hurricane Katrina. For homeowners with both policies, State Farm paid for wind damage and the government paid for flood damage. The same company handled policies whose losses fell on different payers.

That arrangement put an economic incentive inside the damage assessment. As the Supreme Court explained, classifying a loss as flood damage could limit State Farm’s own exposure. The question of what damaged a house also determined who bore the cost.

The whistleblowers alleged that State Farm turned that incentive into instructions to adjusters. Their account was that wind damage should be misclassified as flood damage so the government would bear liability that belonged to the insurer. The alleged benefit was straightforward: State Farm could move a bill off its own account and onto taxpayers.

The Adjusters Knew How the Damage Was Assessed

The case came from former claims adjusters working for a State Farm contractor. They visited damaged homes to determine how much the homeowner was entitled to receive. Their work placed them where the physical damage became an insurance assessment.

For an insurance insider, the evidence behind a claim begins with that connection. We look at what the damage assessment supported, what instructions the adjuster received and how the resulting classification assigned the bill. The employee or contractor who understands those decisions knows where the assessment and the classification parted company.

State Farm Asked to End the Case Over a Disclosure

State Farm’s dismissal request concerned a disclosure by the whistleblowers’ former attorney. The Supreme Court’s account says the attorney emailed journalists at ABC, the Associated Press and the New York Times a sealed evidentiary filing that revealed the complaint’s existence. The outlets reported the fraud allegations, but none revealed the lawsuit’s existence. State Farm asked the court to dismiss the qui tam case over the seal violations.

State Farm wanted one fixed rule: a seal violation would require the case to be thrown out. The Court noted that the company had asked for no response short of dismissal.

That would have ended the case over how information was disclosed. It would not have answered the underlying question of whether State Farm had shifted wind losses onto the government. We find it absurd that an insurer accused of shifting its hurricane bill to taxpayers asked to walk away because someone else talked to reporters.

Why the Government’s Interests Mattered

The Supreme Court treated protection of the government’s interests as central to the seal requirement. Its explanation linked the rule to the government’s concern that a public civil complaint could alert a defendant to a pending federal criminal investigation. The government itself opposed State Farm’s automatic-dismissal argument.

The Court also recalled why Congress had encouraged private enforcement: federal enforcement agencies lacked resources. In that account, the whistleblower brought assistance the government needed. Throwing out the case would take that assistance away from the very government the seal was intended to protect.

The Congressional Research Service’s 2009 report, Qui Tam: The False Claims Act and Related Federal Statutes, describes the investigative work behind a whistleblower case. The government receives the whistleblower’s material evidence and information and can demand more documents and testimony. The insider’s account gives investigators a starting point for examining records and decisions beyond what that person already knows.

Why the Supreme Court Rejected Automatic Dismissal

The Court distinguished the obligation to keep a complaint sealed from the consequence of a violation. The seal requirement was mandatory. The law did not say that violating it automatically ended the case.

Congress wrote dismissal into other parts of the law and left it out here.

The trial court had considered harm to the government, the seriousness of the violations and evidence of bad faith. The Supreme Court said those considerations appeared appropriate but left the response to the trial court’s judgment.

A Trial Victory on One Damaged Home

The Supreme Court’s account also describes a trial victory for the whistleblowers on a claim involving one damaged home. The broader allegation concerned instructions to misclassify hurricane losses, while the trial tested a particular claim.

The federal government had declined to join the case. State Farm sought dismissal before trial. The trial court refused to throw out the case, and the adjusters continued to their victory on that claim.

A particular claim gives an allegation something concrete to test: a damaged property, an assessment, a classification and a payment responsibility. That is where knowledge of the claims operation becomes useful to the government’s recovery effort.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know How the Claim Was Classified

If you saw wind losses assigned to flood coverage or instructions that shifted an insurer’s bill to the government, speak to one of our whistleblower experts about how the bill was shifted. We build your strongest insurance whistleblower case with you, bring in False Claims Act whistleblower lawyers who understand insurance payment disputes, and stay beside you through the pursuit of a recovery. Questions about confidentiality and handling information are matters we work through with you and that team.