Heritage Insurance Under Scrutiny: Analyzing the CBS 60 Minutes Exposé and Questions of Internal Controls

Heritage Insurance (HRTG) lost 20% of its publicly traded value yesterday following the recent CBS 60 Minutes investigation into alleged insurance fraud in Florida, which has sent shockwaves through the insurance industry. You can read about the story from my post, CBS 60 Minutes Exposes Alleged Insurance Company Fraud: Adjusters Reveal Altered Hurricane Damage Estimates by Claims Management.

With Heritage Insurance Holdings finding itself at the center of the controversy, it is no wonder that the stock price plummeted as a result of the report, which was never warned about in any financial disclosures by the company despite active litigation that should have been reported. As an attorney specializing in insurance coverage cases and advocating for policyholder rights, I find it crucial to examine the role of Heritage executives and claims managers in this exposé and question whether the company has adequate controls in place to alert investors to the types of problems and systemic issues raised in the report.

The CBS 60 Minutes report also calls into question whether Florida’s insurance regulators have the expertise to uncover wrongful claims processes. I noted this more than a year ago in The Heritage Insurance Company Hurricane Ian Quality Assurance Field Update—Why Don’t Insurance Departments and Market Conduct Examiners Ask For These Documents. I will provide some more tips to help because what I do for a living and what Merlin Law Group attorney Steven Bush has done by exposing this corruption leads to the conclusion that our insurance regulators need more education and help to catch insurance company wrongdoers.

Heritage’s Role in the 60 Minutes Investigation

The 60 Minutes segment featured whistleblowers who claimed that several insurance carriers, including Heritage, altered damage reports to significantly reduce payouts to policyholders after Hurricane Ian. One of the key figures in the report was Jordan Lee, an adjuster who worked on claims for Heritage.

Lee’s testimony was particularly damning. He stated that 44 out of 46 of his Hurricane Ian reports for Heritage were adjusted to give policyholders less money. In one striking example, an estimate he wrote for about $488,000 was changed to approximately $13,005. This drastic reduction raises serious questions about Heritage’s claims handling practices and the integrity of its internal processes.

The report also highlighted the case of Jeff and Ginny Rapkin, who filed a lawsuit against Heritage, accusing the company of breach of contract and fraud. Their story is a stark illustration of the human cost of these alleged practices. The Rapkins found themselves with a payout of just $15,000 (minus their deductible) for damage that the initial adjuster, Jordan Lee, had estimated at over $231,0005.

Heritage’s Response and Internal Controls

In response to the 60 Minutes report, Heritage Insurance’s CEO, Ernie Garateix, issued a statement claiming that the segment ignored key facts. Garateix asserted that Heritage had made “many reforms and improvements” following Hurricane Ian, including overhauling their claims software. He also stated that the accusation of using “altered damage reports to deceive customers” was “flat wrong.”

However, the CEO’s response raises more questions than it answers. If significant reforms were indeed necessary after Hurricane Ian, it suggests that there were serious issues with the company’s processes prior to and during the handling of Ian claims. This begs the question: Why weren’t these problems identified and addressed earlier through internal controls and audits?

The Role of Internal Controls and Audits

As a publicly regulated and traded company, Heritage Insurance is expected to have robust compliance and internal audit functions. These departments, and especially the Board of Directors overseeing them, are crucial for investigating and preventing systemic issues like those alleged in the 60 Minutes report. The Sarbanes-Oxley Act of 2002 requires public companies to implement adequate internal controls, engage independent auditors, and extensively document all regulated corporate financial activities. All insurance companies should make certain that their Board of Directors are actively investigating and ferreting out the type of behavior described in the CBS 60 Minutes reports.

Internal audits play a critical role in a company’s operations and corporate governance. They help ensure compliance with laws and regulations, provide risk management, and safeguard against potential fraud, waste, or abuse. Given the severity of the allegations against Heritage, one must question the effectiveness of Heritage’s internal audit processes. No wonder the company lost 20% of its value yesterday. What were the Board of Directors doing regarding these issues? Were the Heritage executives and lobbyists courting Florida politicians and regulators to keep this silent?

Questions About Heritage’s Internal Controls

Adequacy of Existing Controls: Did Heritage’s internal controls fail to detect the alleged widespread alteration of damage reports? If not, why?
Oversight and Accountability: Who was responsible for overseeing the claims adjustment process and goals, and how were they held accountable?
Whistleblower Mechanisms: Were there adequate channels for claims personnel to report concerns internally before going public? From my experience, most insurance companies penalize claims personnel for being truthful and transparent. These non-disclosure and secrecy agreements in independent adjuster contracts are a testament and proof of how wrongful companies keep wrongful actions from ever seeing the light of day.
Risk Assessment: How did Heritage’s risk management team assess the potential for fraud or misconduct by its claims staff and managers trying to meet profit and severity goals in the claims process?
Audit Frequency and Scope: How often were internal audits conducted on the claims adjustment process, and did they include a review of altered reports?
Technology Controls: What controls were in place to track changes made to adjuster reports, and why didn’t they prevent or flag significant alterations? Did they do a simple ESX analysis to determine who was making changes and then ask why?
Training and Ethics: What kind of ethics training and guidelines were in place for employees involved in the claims process? What review of internal claims goals and initiatives was done by those overseeing governance? Did those in governance look the other way and put profits over people?

The crazy part about Heritage is that I gave an ethics class to their claims department. Maybe I am the worst bad faith claims instructor of all time. They get an F- and I was one of their instructors. What I said but what they were told to do by claims management must have been in two different universes.

Investor Implications

The allegations raised in the 60 Minutes report have significant implications for Heritage Insurance’s investors. The company’s stock price and reputation could be severely impacted if these claims are substantiated. Moreover, the potential for regulatory investigations and legal actions could lead to financial penalties and increased operational costs.

Investors, just like investors of all insurance companies, should be concerned about whether Heritage’s internal controls were adequate to detect and prevent the alleged misconduct. If the company’s systems failed to alert management and the Board to these issues, it raises questions about the overall governance and risk management practices at Heritage. Every Board of every insurer should be carefully monitoring whether the claims department is acting in a fully ethical manner and demanding to see claims department goals and initiatives that prove they are not putting profits over promises to policyholders.

Regulatory Considerations

The Florida Office of Insurance Regulation has a crucial role to play in this situation. According to Heritage’s CEO, the company signed an order with the regulator in March 2024, acknowledging failures after Hurricane Ian and committing to improvements. This raises several questions:

Why did it take regulatory intervention to address these issues?
Were the problems systemic or isolated incidents?
How comprehensive was the regulator’s investigation?
What ongoing monitoring is in place to ensure compliance with the order?

The other question is, what has Florida’s new Insurance Commissioner, Michael Yaworsky, been doing to monitor Heritage since this “slap on the wrist” order happened? I previously made my points about this “deal” in Understanding the Implications of the Heritage Market Conduct Study and $1 Million Consent Order Penalty.  It is a “put up or shut up time” for Yaworsky. Is he for fair claims practices, or is he a puppet of Jimmy Patronis and other politicians already in bed with the insurance industry and their lobbyists?

The Need for Transparency and Reform

The 60 Minutes report highlights the need for greater transparency in the insurance claims process. As Doug Quinn, executive director of the American Policyholders Association, stated in the report, there’s “almost no transparency in the claims process.” This lack of transparency makes it difficult for policyholders to know if their claims have been fairly assessed and settled.

Heritage’s CEO mentioned several improvements the company has made since Hurricane Ian, including:

Creating a Governance and Compliance Director position
Expanding the claims quality assurance process
Adding resources to internal audit functions
Implementing new claims management software
Expanding the Claims Quality Assurance function to include ten employees

While these steps are commendable, they also indicate that there were significant gaps in Heritage’s processes that needed addressing. The question remains: why weren’t these measures in place before Hurricane Ian? Further, what did Heritage do to re-open claims, become transparent, and then invite those already harmed to request full payment? Did Heritage seek honest answers from field adjuster about their view of how their work may have been altered or wrongfully changed?

The Role of Technology

Heritage’s CEO mentioned that the company has implemented a new claims system that tracks all names of those who work on claims. This change was reportedly part of coming into compliance with Florida’s new insurance reform laws after Hurricane Ian (SB 7052). However, this raises questions about why such a basic tracking system wasn’t already in place and how the lack of such a system might have contributed to the alleged alterations of claims reports. From my knowledge and experience, this is easy information to determine and is a made-up excuse. Maybe the CEO does not understand how his computerized claims systems work. I will volunteer for free and pay experts to help him! Fat chance they will want to take me up on that offer because he and I know that the evidence of the wrongfulness of this systemic underpayment scheme is easily found in the internal data of the claims department.

The more significant question is why our DFS regulators and the OIR will not hire experts whom I would hire and have motivated people to comb through these records? Why are our government regulators not doing what any good policyholder attorney would do in discovery or ask a judge to allow us to do? We need laws to allow private individual policyholders to protect themselves because the government will not do so.

Statistical Analysis and Transparency

In his statement, Garateix provided some statistics from Heritage’s own review of Hurricane Ian claims. Out of a random sample of 10,000 claims, 4,162 were revised downward, 2,583 were revised upward, and about 3,311 had no change. While this information is helpful, it doesn’t address the severity of the revisions or explain why such a high percentage of claims (over 40%) were revised downward.

Why doesn’t the Heritage Board demand a third party do an independent survey? Is Garateix’ survey a cover-up of crazy statistics? Do you trust this CEO, and why?  Honest people are not afraid of independent investigations. Why is Heritage not having an outside auditor critically examine the ethics of its claims department after recently paying a fine?

Legal and Ethical Implications

The allegations raised in the 60 Minutes report go beyond mere clerical errors or differences of opinion in damage assessment. They suggest a potential pattern of deliberate underpayment of claims, which could have serious legal and ethical implications. If proven, such practices could constitute bad faith insurance practices, potentially exposing Heritage to significant legal liabilities.

The CBS 60 Minutes report has brought to light serious allegations against Heritage Insurance and other carriers in Florida. While Heritage has responded with claims of reforms and improvements, the gravity of the situation demands a more thorough investigation and greater transparency.

As an advocate for policyholders and being a part of the firm that has represented these whistleblowers, I believe this situation calls for, at a minimum:

A comprehensive, independent audit of Heritage’s claims handling practices, particularly for Hurricane Ian claims.
Greater transparency in the claims adjustment process, including clear documentation of any changes made to initial assessments.
Strengthened internal controls and whistleblower protections to prevent and detect potential fraud or misconduct.
Enhanced regulatory oversight to ensure compliance with insurance laws and protect policyholders’ rights.
A review of the company’s corporate governance structures to ensure adequate oversight of claims handling practices.

The allegations raised in the CBS News 60 Minutes report are deeply troubling and, if true, represent a significant breach of trust between insurers and policyholders. It’s crucial that Heritage Insurance, regulators, and the insurance industry take these claims seriously and work towards creating a more transparent, fair, and accountable system for handling insurance claims.

Our law firm must remain vigilant in advocating for the rights of policyholders and pushing for necessary reforms in the insurance industry. The integrity of our insurance system depends on it. I believe in the insurance product. It must produce honestly so that property insurance claims are paid fully and as swiftly as possible when claims are presented. The entire basis of the insurance product and the industry fails when this does not happen.

We need better laws that allow the victims to advocate for themselves so we do not have to rely upon the media or the government to point out when the insurance claims system is entirely out of whack like it now is in Florida.

Thought For The Day

Integrity is doing the right thing, even when no one is watching.
—C.S. Lewis