homes damaged after Hurrican Sandy - liability questions still loom

Altered Damage Reports after Sandy lead to Questions on Liability

During federal court hearings related to Hurricane Sandy last month, an engineer at an insurance forensics firm disclosed that he had altered reports on structural damage to private homes under the auspices of “peer review” without discussing his changes with the original author of the reports, and without visiting the properties he was writing about. His updates altered the original contents of the reports to infer that damage to the structures was due to “house settling” and not the result of Hurricane Sandy, making it plausible for the insurance company to deny claims for structural damage. The issue will most likely come under further investigation as Sen. Menendez of New Jersey is asking the Federal Emergency Management Administration (FEMA) to take immediate action. (FEMA oversees the National Flood Insurance Program.)

During times of stress and crisis, maintaining the integrity of corporate processes can get dicey. Recent events like Sandy, and also the foreclosure crisis, showed us how institutions of all kinds can act badly when under a huge amount of stress. Enormous pressure from the senior leadership, increased workloads, and fear of a dark future can cause middle management to act irrationally – remember how banks were robo-signing foreclosures during the financial crisis?

When the dust settles

A rush to judgment in the middle of a crisis can have bad ramifications later on. Hundreds of homeowners are now involved in the Sandy forensics investigation, the insurance companies involved will have to consider their liability, and the forensics firm will suffer dearly if the practices are found to be intentional.

Suits like this remind us how important it is to keep cool in a crisis. From senior leadership and on down the line, it’s critical to develop crisis plans, review them carefully, and stick to them when the crisis hits. It’s also an important time to communicate effectively, and develop safety nets for employees who feel the burden of stress as they carry out their jobs. The best time to consult a crisis management firm is long before the crisis ever hits. Work with professionals who can help you prepare for dealing with a disaster so that when it comes your senior managers know what to do and middle managers do, too.

Suits like this also remind us how important it is to carry effective liability insurance. Even the most well-trained employees might succumb to pressure from a superior, or employees may simply not be ready to handle the sudden increase in volume and pressure that a crisis conjures, and as a result, they’ll make some bad mistakes that will cost you dearly later.

Lessons from Sandy

There are many lessons we’re learning from Hurricane Sandy. Builders are getting more realistic about the type of housing that should – and shouldn’t – be built near the shoreline, communities are reconsidering shoreline property and updating disaster plans, and agencies from FEMA, to the Red Cross, to major insurers in the region are re-evaluating how they do business. While this story may not be the end of bad news about bad practices during Sandy, let’s hope it’s the beginning of a smarter era for best practices as relates to hurricanes, flooding, and other weather-related disasters.

In the meantime, work with your teams to make sure they know how to act in a crisis, and check with your insurance provider to make sure you are covered if an employee acts badly at your company. If you feel you’re exposed to more risk that you can absorb, you may want to look at forming an enterprise risk captive insurance company. Contact us if we can help.