That question may soon be teed up in the Fifth Circuit. A federal court in Louisiana recently unsealed a qui tam complaint filed by New Orleans lawyer Johnny Denenea, Jr. against Allstate Insurance Company. The complaint alleges that Allstate Insurance Company systematically overbilled the National Flood Insurance Program in violation of the federal False Claims Act. To date, the United States has not intervened in the action, which is captioned United States of America ex rel. Denenea v. Allstate Insurance Company, 2:07-cv-02795 (E.D. La.).

In 2007, Denenea represented homeowner Robert Weiss in a breach of contract action against Allstate Insurance Company. In that action, Weiss alleged that Allstate did not pay enough to cover the damage his home sustained during Hurricane Katrina. Prior to trial, Weiss received $350,000 in federal flood insurance and an additional $50,000 from Allstate for wind damage to his home. At trial, the question of liability hinged on whether the damage to Weiss’s home was due to wind damage (an event which was covered by Weiss’s homeowners insurance policy) or a storm surge (which was not covered). On April 16, 2007, the jury issued a verdict finding that Allstate did not pay Weiss enough to cover the wind damage to his home and awarded him $2.8 million in damages, including a $1.5 million penalty for Allstate’s failure to pay the claim quickly enough.

Two weeks later, on May 4, 2007, Denenea filed a federal whistleblower complaint under seal against Allstate, naming himself as the relator. According to Denenea’s 9-page complaint (which is pretty short by qui tam standards), Allstate entered into an agreement with the federal government pursuant to which Allstate agreed to sell and administer federal flood insurance policies on the federal government’s behalf.  Claims under the federal flood insurance policies sold by Allstate were paid with federal funds whereas claims under homeowners insurance policies sold by Allstate were paid with Allstate’s own funds. The complaint goes on to allege that Hurricane Katrina caused catastrophic wind and flood damage to thousands of properties situated along the Gulf Coast insured by both federal flood insurance policies and homeowners insurance policies sold by Allstate, including insured properties owned by Weiss and several other of Denenea’s clients. The crux of Denenea’s FCA claim is his allegation that Allstate fabricated and falsified documents associated with claims for property damage arising from Katrina in an effort to inflate the amount of damage attributable to flooding and deflate the amount attributable to winds, thereby increasing the federal government’s liability on the claims while minimizing Allstate’s. (Complaint, ¶ 14.)

On September 17, 2010, the United States filed a consent motion to lift the seal and notified the Court that it did not intend to intervene at this time. On September 21, 2010, the Court granted the motion and unsealed the complaint. Allstate was served with the complaint on September 24, 2010 and currently has until October 14, 2010 to move to dismiss or answer the complaint. Given the lack of specificity in Denenea’s complaint, including the failure to provide any detail about the allegedly falsified documents or identify any specific false claims submitted to the government, we are curious to see whether the complaint can withstand dismissal under Rule 9(b). Another interesting question that may be addressed during the motion to dismiss stage is whether Denenea is a proper relator. Unlike the typical qui tam relator who is a company insider with first-hand knowledge of the fraudulent activity, Denenea’s complaint alleges that his knowledge comes from his representation of Weiss and other homeowners in civil claims against Allstate. (Complaint ¶ 18.) Although the Fifth Circuit has not yet addressed the issue, the Second and Third Circuits have both held that information produced in discovery in a lawsuit is “publicly disclosed” for the purposes of the FCA’s public disclosure/original source bar, and that an attorney who learns of the information through his participation in the lawsuit cannot be an “original source.”  We will report back once Allstate’s motion to dismiss is filed.