Supreme Court upholds Hurricane Katrina fraud ruling against State Farm News
Supreme Court upholds Hurricane Katrina fraud ruling against State Farm

The US Supreme Court [official website] ruled [opinion, PDF] unanimously Tuesday that violation of a seal under which a relator’s complaint has been filed does not require dismissal of the entire complaint, upholding a fraud verdict against State Farm Fire & Casualty Company [corporate website] stemming from Hurricane Katrina. The case arose out of a complaint filed by two insurance claim adjusters, Cori and Kerri Rigsby, which alleged that State Farm instructed the Rigsbys and other adjusters to “misclassify [Hurricane Katrina] wind damage as flood damage in order to shift [State Farm’s] insurance liability to the Government.” At some point during the litigation, the Rigsbys’ then-attorney, Dickie Scruggs, inappropriately disclosed the existence of fraud allegations to ABC News, the Associated Press, and the New York Times, which subsequently issued stories discussing the fraud allegations, but none revealed the existence of the specific FCA complaint. State Farm then filed a motion to dismiss the complaint on the grounds that the seal over the complaint had been violated under False Claims Act (FCA) [text, PDF] § 3730(b)(2), which stated that: “The 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.” All three levels of the federal court system disagreed with State Farm that a dismissal is appropriate. The Supreme Court stated: “The FCA does not enact so harsh a rule. … True, this language creates a mandatory rule the relator must follow. The statute says nothing, however, about the remedy for a violation of that rule.” Noting that the seal requirement was enacted to protect the federal government’s interests by enabling private parties to bring suits where the federal agencies lack resources to effectively enforce the FCA provisions, the Court concluded that adoption of such a harsh rule of dismissal in this case “prejudices the Government by depriving it of needed assistance from private parties.”

The Supreme Court heard arguments for this case [JURIST report] in November. The Rigsbys’ case implicated the FCA, which enables a “relator” with knowledge of fraud in government contracts to file a suit against the contractor. When a relator’s suit is filed under the FCA, the federal government may elect to take control of the litigation, but will generally want to without the contractor becoming aware of the investigation. For that reason, the FCA contains a requirement that all complaints be made under seal. The Rigsbys, classified as relators in this case, were former claims adjusters for E. A. Renfroe & Co, a State Farm contractor, which became aware of the investigation after Scruggs’ disclosure.