U.S. Supreme Court Upholds Katrina Fraud Verdict Against State Farm

The Supreme Court on Tuesday handed a victory to two whistleblower sisters by upholding a jury verdict that found State Farm defrauded the U.S. government when the insurance company assessed damage caused by Hurricane Katrina along the Gulf of Mexico coast in 2005.

The court ruled 8-0 to reject State Farm’s challenge to a 2015 lower court decision upholding the verdict in a 2006 lawsuit brought by sisters Cori and Kerri Rigsby under the False Claims Act, which lets people sue on behalf of the government over allegations it has been defrauded.

The suit accused the Bloomington, Illinois-based company of improperly seeking to foist the costs of covering Katrina-related damage to a Biloxi, Mississippi home onto the government rather than covering the costs itself.

State Farm argued that the claims brought by the sisters, former claims adjusters who worked for the company after the hurricane, should be voided because their lawyer violated a court order requiring that details of the case to be kept under seal.

The women’s former lawyer, Dickie Scruggs, had distributed information about the lawsuit to members of the news media. False Claims Act lawsuits are required to be filed under seal and remain private for 60 days. In 2008, Scruggs was convicted of conspiring to bribe a judge in a different case. He was sentenced to five years in prison.

But the Supreme Court concluded that Scruggs’ disclosures to the media did not merit throwing out the 2013 jury verdict. None of the media organizations disclosed the lawsuit’s existence to the public.

Justice Anthony Kennedy, writing for the court, said the seal requirement is intended to benefit the government because it prevents those suspected of defrauding it from being alerted about a potential case alleging that fraud took place.

As a result, “it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the government by depriving it of needed assistance from private parties,” Kennedy wrote.

The Obama administration had backed the sisters in the case.

The jury found that the federal government had been defrauded of $250,000, and State Farm was ordered to pay $758,000 in damages. The sisters were awarded $227,000 for disclosing the fraud under the False Claims Act and almost $3 million in attorney’s fees and expenses.

The Rigsbys said the damage was caused by wind, which would be covered by the owners’ insurance policy with State Farm. But State Farm concluded the damage was flood-related, which instead was covered by the federal government’s flood insurance program.

In 2015, the New Orleans-based 5th U.S. Circuit Court of Appeals upheld the jury verdict.

(Reporting by Lawrence Hurley; Editing by Will Dunham)