In the Eye of the Storm: Recovering from Wind, Rain, and False Claims Act Liability After a Natural Disaster
With hurricane and tropical storm season in full force, large parts of America face, or anticipate, the prospect of recovering from a natural disaster. Images of destruction wrought by Hurricanes Katrina, Rita, Irene, and Sandy have etched themselves into America’s collective consciousness. In addition to the human toll, these events posed an incredible financial cost. The four hurricanes mentioned above caused approximately $208.4 billion in destruction, requiring states to compensate quickly by rebuilding infrastructure such as roads, bridges, homes, public utilities, and to provide services to those displaced by the damage.
Federal funding is often disbursed to assist in these efforts through FEMA’s Disaster Relief Fund or the National Flood Insurance Program. But the use of federal funds, combined with the urgency with which money is spent and claims are submitted in an emergency situation, makes this a target-rich environment for whistleblowers and the government alike looking to bring FCA lawsuits premised on noncompliance with the multitudes of regulations associated with emergency funding. For example, in U.S. ex rel. Sonnier v. Standard Fire Ins. Co., a relator accused the defendant insurance companies and adjusters of fraudulently inflating estimates of water damage caused by Hurricane Katrina. See 84 F. Supp. 3d 575 (S.D. Tex. 2015). The relator argued that defendants routinely inflated flood-insurance claims to decrease wind-insurance claims because claims for flood damage are paid by the federal government, while wind-based claims are paid by private insurers. The relator’s lawsuit was dismissed for failure to comply with the FCA’s jurisdictional requirements (under the public disclosure bar), but not before fourteen defendants had settled for an undisclosed sum of money. In a similar post-Katrina insurance case, the FCA defendant lost a jury trial and at the Fifth Circuit, and the case is about to be argued before the Supreme Court on a procedural issue. State Farm Fire & Cas. Co. v. U.S. ex rel. Rigsby, No. 15-513. These cases provide cautionary tales about the types of FEMA- or NFIP-based FCA claims that could come in the wake of a natural disaster. See also Alcatec, LLC v. United States, 100 Fed. Cl. 502 (2011), aff'd, 471 F. App'x 899 (Fed. Cir. 2012) (ordering forfeiture of contractor’s $3.8 million claim to FEMA and assessing penalties based on the government’s FCA counterclaim for submission of inaccurate and duplicative maintenance inspection information for temporary housing for residents displaced by Hurricane Katrina).
The hurry-up to rebuild, a lack of specifics regarding cost or effort needed, and a lack of regulatory know-how could spell out a second disaster just waiting to happen. Any company providing disaster relief services should be aware that Congress and the DOJ are taking a critical look at disaster recovery. In 1953, only 13 disaster declarations were issued, compared to an all-time-high of 242 declarations in 2011. Observers have commented that this increase reflects a political desire to have the federal government play a robust role in funding recovery efforts. In other words, politicians always support, and take an interest in, funding to rebuild their communities. Nevertheless, with greater funding comes greater scrutiny. In 2008, Congress passed the Disaster Fraud Act, which creates a new criminal offense for engaging in fraud connected to major disaster or emergency benefits. See 18 U.S.C. § 1040. The law also directed the U.S. Sentencing Commission to increase penalties for violators of the law. Combined with the September 2015 “Yates Memo,” which underscored DOJ’s commitment to increased cross-pollination between criminal and civil investigations, this heightened interest ratchets up the danger for those who seek reimbursement through federal disaster relief programs.