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Insurance

U.S.: State Farm seeks High Court review of FCA’s seal requirement in Hurricane Katrina case

State Farm Fire and Casualty Co. has asked the U.S. Supreme Court to resolve a three-way circuit split regarding the standard for determining whether a violation of the False Claims Act’s (FCA) seal requirement warrants dismissal of a relator’s FCA claim. State Farm’s request followed the Fifth Circuit’s refusal to dismiss an FCA suit alleging that the insurance company submitted false flood claims to the federal government in the wake of Hurricane Katrina. State Farm also asked the High Court to clarify the standard under which a corporation may be deemed to have “knowingly” presented a false claim or made a false record in violation of the FCA (State Farm Fire and Casualty Co. v. U.S. ex rel. Rigsby, Docket No. 15-513, cert. filed October 20, 2015).

Background. Cori and Kerri Rigsby were certified, experienced claims adjusters employed by a State Farm contractor that provided disaster claims management services and claims representatives. A few weeks after Hurricane Katrina hit the Gulf Coast, the Rigsbys inspected the home of Thomas and Pamela McIntosh in Biloxi, Mississippi. The McIntoshes had two insurance policies with State Farm: (1) a Standard Flood Insurance Policy (SFIP) excluding wind damage and (2) a homeowners policy excluding flood damage. In September 2005, a State Farm supervisor approved a maximum payout of $350,000 ($250,000 for the home and $100,000 for personal property) under the SFIP. State Farm subsequently sent checks to the McIntoshes.

In April 2006, the Rigsbys filed suit under the FCA alleging that State Farm wrongfully sought to maximize its policyholders’ flood claims (which are paid with government funds) in order to minimize wind claims (which are paid by the insurer). The jury concluded that the McIntosh residence sustained no compensable flood damage and that the government therefore suffered damages of $250,000 under the FCA as a result of State Farm’s submission of false flood claims for payment on the McIntosh property. The jury also found that State Farm submitted a false record. The district court denied State Farm’s motions for a new trial and judgment notwithstanding the verdict.

Fifth Circuit ruling. The Fifth Circuit found that the Rigsbys had violated the FCA’s seal requirement, which provides that a relator’s complaint “shall be filed in camera, shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders.” However, none of the disclosures appeared to have resulted in the publication of the existence of this suit before the seal was partially lifted. Thus, the government likely was not harmed, the court reasoned. The court also concluded that the violations did not involve a complete failure to file under seal or serve the government. Accordingly, the court held that the Rigsbys’ breaches did not merit dismissal.

The court also upheld the jury verdict against State Farm, finding that a reasonable jury could have concluded that the McIntoshes’ house was a total loss before the flood water arrived. In addition, there was evidence that adjusters were effectively told to presume flood damage instead of wind damage, and that State Farm knowingly violated FEMA directive W5054 (which required line-by-line estimates), concealed evidence of wind damage, and strong-armed an engineering firm to change its reports. In the court’s view, therefore, a reasonable jury could believe that scienter was satisfied. Finally, the evidence adduced at trial could lead a reasonable jury to believe that State Farm deliberately or recklessly did not comply with the FEMA directive at issue.

Questions presented. State Farm asked the High Court the following questions:

  1. What standard governs the decision whether to dismiss a relator’s claim for violation of the FCA’s seal requirement, 31 U.S.C. §3730(b)(2)?
  2. Whether and under what standard a corporation or other organization may be deemed to have “knowingly” presented a false claim, or used or made a false record, in violation of section 3729(a) of the FCA based on the purported collective knowledge or imputed ill intent of employees other than the employee who made the decision to present the claim or record found to be false, where (i) the employee submitting the claim or record independently made the decision to present the claim or record in good faith after reviewing the available information and (ii) there was no causal nexus between the submission of the false claim or record and the purported collective knowledge or imputed ill intent of those other employees?

The case is Docket No. 15-513.

Attorneys: Sheila L. Birnbaum (Quinn Emanuel Urquhart & Sullivan, LLP) for State Farm Fire and Casualty Co.

Companies: State Farm Fire and Casualty Co.