Back in 2015, CBS News’ 60 Minutes ran an episode entitled, “The Storm After the Storm,” which looked at why, in the wake of Superstorm Sandy, engineers, claims professionals, and insurers were sued and accused of “colluding” and preparing fraudulent reports. Although no such evidence was found, this type of publicity was a black eye to the industry. Now, as Florida and the East Coast continue to deal with Hurricane Matthew’s aftermath, questions like “Why did it happen?” and “What practices can be put in place to minimize the possibility of this happening again?” are again relevant more than ever.
Many of the cases profiled involved Write Your Own flood policies that were backed by the Federal Emergency Management Agency (FEMA). Insurers hired engineering firms to inspect properties damaged by Supertstorm Sandy to assist them in assessing the damage. Typically, insurers asked the engineers to separate damage caused by wind and rain from damage caused by flood and to separate new damage from preexisting conditions. Based on the findings in the engineering reports, the insurance company determined whether there was coverage.
In most of the litigated cases, an early version of an engineering report came to light that contained findings that were different from the version issued to the insurer. The issued report typically resulted in less compensation to the insured when compared to the earlier version, giving the appearance of impropriety.
By reviewing key documents involved in several litigated cases and reviewing similar documents following Hurricane Katrina, we can come to several conclusions regarding the causes of these cases and develop some ideas on how to minimize similar problems in the future, especially in the wake of Hurricane Matthew.
Conclusion #1: Engineers Were Unprepared
One conclusion is that it’s clear that some investigations were performed by unprepared engineers. In many cases, the original report, which was not provided to the insured, was of obvious poor quality. Either the reports did not properly separate wind damage from flood damage, or they speculated on the cause or extent of damage, or they recommended repairs that did not make sense. As a result, the reports underwent extensive changes during the review process before being issued to the insurer.
Why were these engineers unprepared? One reason is that there is a shortage of engineers who are experienced with this type of investigation. A catastrophe such as Superstorm Sandy or Hurricane Matthew creates a spike in the demand for engineers. Insurers need thousands of buildings inspected, and they need it done quickly. In Sandy’s case, local engineering firms tried to meet the demand but had difficulty. This was particularly true in the Northeast, where it had been many years since a major storm had struck.
To meet the demand, local engineering firms used various approaches, such as deploying multiple inspection teams, bringing in staff from other offices, using younger staff to perform field inspections, or hiring subconsultants. Each approach has its own quality control challenges.
Another reason why engineers were unprepared is that there are few resources available to them about how to perform this type of investigation. This is not a subject that is taught in college, and it requires an understanding of diverse specialized topics, such as structural engineering, the science of ocean wave behavior, wind effects on structures, meteorology, and forensic skills. Most civil engineers are knowledgeable about some of these topics, but they may have no formal training or experience in others.
How can we improve the quality of these engineering investigations? One way is by education. This can take the form of seminars, webinars, independent study, or reading publications that are geared toward this type of investigation. The American Society of Civil Engineers recently published a resource titled, “Engineering Investigations of Hurricane Damage: Wind Versus Water.” It provides engineers with the background and guidance necessary to provide high-quality services based on sound technical principles.
Another way to improve quality is to have proper peer reviews performed by competent reviewers trained in the subject area. The comments must be provided to the preparer, and there must be a mechanism for resolving the comments. A proper peer review will always improve the quality of the report and sometimes may result in significant changes to the report.
Due to the number of Superstorm Sandy cases in which it appeared that there was impropriety, the U.S. Senate Committee on Banking, Housing, and Urban Affairs created a report titled, “Assessing and Improving Flood Insurance Management and Accountability in the Wake of Superstorm Sandy.” It came to similar conclusions:
- “After a major flood event, the demand for such experts can exceed their supply…bringing in a surge of less qualified adjusters or engineers who are more likely to make mistakes in the field.”
- “We also found no evidence to support the hypothesis that engineers…have an incentive systematically to downplay flood damage.”
- “Training for adjusters and engineers needs to be systematized and improved.…”
Conclusion #2: There Were Contractual and Organizational Issues
There also are problems in how engineering investigations are contracted for. In some cases, there were three or four “middlemen” between the insurer and the engineer who performed the investigation. This results in the insurer having little or no control over the screening or selection of qualified engineers.
Proper screening of the engineering firms and of key individuals within those firms is an important and crucial first step. In many of the cases at issue, engineering firms subcontracted the work to hundreds of sole practitioners with little screening. At least one engineering firm advertised for engineers on Craigslist. Hiring outside consultants who are not experienced with this type of work is fraught with potential problems. The hiring engineering firm needs to consider providing training, close guidance, and additional quality control measures.
When considering hiring an engineering firm to perform these investigations, it is prudent to perform a rudimentary screening:
- Ask about their experience doing similar investigations.
- Ask about the qualifications of key staff, which should include the professional engineers who will be signing the reports, inspection staff, and peer reviewers.
- Ask about current workload and how they plan on absorbing additional work that requires tight deadlines.
- Ask if they will perform the work in-house or subcontract it out.
Subcontracted arrangements require more rigorous quality control measures. So if an engineering firm plans on subcontracting, ask a few more questions:
- What percentage of the work will be subcontracted? The higher the percentage, the more difficult quality control will be. If all of the work is being subcontracted, it is an indicator that the firm probably does not have the skills in-house and, therefore, probably will not be able to provide effective quality control.
- How will the subconsultants be selected? Hopefully, it will be based on their qualifications and not just on the fact that they are willing to accept the assignment. Obviously, the qualifications should have relevance to the type of service that is sought. An engineer who has many years of experience may not be the best choice if the experience is unrelated.
- Have they worked with these subconsultants before? If they have had a close working relationship, a good quality investigation is more likely.
- Are they going to provide any training to the subconsultants? Good training will include not only technical issues, but also procedural issues. For example, how should the inspector interact with the insured? If the inspector provides preliminary opinions during the inspection, it may create problems if the issued report contains different conclusions.
- How much guidance will they give the subconsultants during the investigation? It is valuable for there to be discussion about each case prior to the engineer issuing a report. This will minimize the possibility of an initial report having incorrect conclusions.
- Is there a peer review process? Ask who will perform the peer review and how comments will be resolved. In some of the litigated cases for Sandy, the peer review process was performed inadequately.
Consider screening engineering firms before there is an emergency; it will allow for the necessary time needed for a proper selection. The two parties can exchange information about their expectations, capabilities, best approaches, and can build a relationship. This approach allows the insurer to find and hire the best qualified firms, and it minimizes the last-minute scrambling that otherwise might occur.
Some insurers require that the investigation be performed entirely by the professional engineer who will be signing the report. This policy contributes to a shortage of engineers. Consider allowing the inspections to be done by those working under the supervision of the professional engineer. It will allow highly qualified engineers to leverage themselves and, therefore, handle more projects. This approach is consistent with the general practice in other engineering assignments and with the International Building Code (IBC). For example, the IBC allows inspections of new construction to be performed by persons working under the supervision of the professional engineer who has the legal obligation.
We don’t need to have legal storms follow in the wake of meteorological storms. By working together to improve the quality of investigations, the insurance and engineering industries can effectively navigate post-storm issues.