Judge awards $12.3 million to Chubb in insurance fraud scheme
By Bill Heltzel September 15, 2016
When fires devastated luxury homes in Fairfield and Westchester counties, a Chubb Corp. insurance adjuster was there to assess damages and start the restoration process.
But Chubb did not know that its own adjuster was colluding with a contractor he hired to estimate repair costs. The contractor inflated the estimates and the adjuster steered the repair work back to the contractor.
A federal jury in White Plains recently ruled unanimously, in a 40-day trial, that the adjuster, Dennis Sorge, and the contractor, Paul H. Mertz Jr. and the Mertz Co., are liable for fraud and breach of fiduciary duty.
U.S. District Court Judge Nelson S. Roman entered a judgment of nearly $12.3 million against Mertz and his company on Aug. 23. He suspended judgment against Sorge while a bankruptcy court sorts through his finances and did not specify the amount of damages against Sorge.
The Mertz Co., based in Greenwich, has been operating in Fairfield and Westchester counties since 1972. For many years it built homes. In the late 1970s, according to its website, Mertz began specializing as a damage restoration consultant. From 2004 to 2010, Chubb paid Mertz nearly $1.1 million in consulting fees.
Sorge, formerly of Croton-on-Hudson, was a Chubb employee for 30 years and worked out of the White Plains office. From 2004 to 2010, Chubb paid him more than $1 million. He has since moved to Wake Forest, N.C.
Sorge’s job was to investigate the extent of losses when an insured home was damaged. He hired experts to provide repair estimates and he determined how much Chubb would pay to settle homeowners’ losses.
Chubb expected consultants such as Mertz to act independently. A contractor could not consult for Chubb and also work at the same time as a contractor on the insured property. Consultants may not seek or even discuss the possibility of a contract until their work for Chubb is done, and even then the contract must be disclosed to Chubb.
Mertz assessed hundreds of property claims for Chubb. The lawsuit, filed in 2012, singles out eight claims on homes damaged by fires — in Darien and Lakeville in Connecticut and in Armonk, Mount Vernon, New Rochelle, North Salem and South Salem in Westchester County.
Sorge hired Mertz to provide repair estimates. Typically, according to the lawsuit, Sorge would introduce Mertz to a homeowner shortly after a fire and recommend him as an experienced, high-end builder. Mertz also would solicit the repair job while working for Chubb.
Mertz submitted inflated estimates, Chubb contended. Some work was not covered under the insurance policies. Some repairs were never done. Mertz pocketed millions of dollars and shared payments with Sorge.
“We vigorously contested the charges,” attorney Jonathan A. Murphy, of Bleakley Platt & Schmidt LLP in White Plains, said on behalf of Mertz.
He said Mertz did complicated, high-end work and charged accordingly. Some of the work was approved by a structural engineer. No attempt was made to conceal contracts, Murphy said in a pretrial statement, and Mertz did not conspire with Sorge to inflate estimates or enrich one another.
“Unfortunately,” Murphy said, “the jury sided with Chubb.”
The lawsuit describes several schemes.
Chubb claimed that Mertz submitted estimates that inflated the fair market value of the work, quoted for high-end materials but used cheaper substitutes, did not do work for which he was paid and charged sales tax on items that were not taxable. Mertz repeatedly submitted estimates for extra work after he got the jobs, the lawsuit says, and Sorge approved payments and failed to disclose the conflicts to Chubb.
One lucrative scheme involved building code upgrades. Chubb’s policy was to pay whatever was necessary, beyond a homeowner’s insurance coverage, to bring a damaged property into compliance with building codes. Mertz submitted estimates for code work that was not required, Chubb said.
Sorge and another Chubb consultant, who was not sued, approved the estimates. When Mertz got the contracts, Chubb said, he did not always do the work and pocketed the extra money.
Federal Insurance Co., a Chubb subsidiary, insured Geoffrey Iddison’s 18th century house in Lakeville for $1.1 million. The house was damaged by fire in 2006 and Federal paid nearly $1.7 million to settle the losses. More than $1.4 million went to Mertz as general contractor.
Mertz paid a subcontractor $840,000 to do the work, the lawsuit says, and pocketed more than $500,000.
Mertz’s quote included the cost of replacing vanities, armoires, bookshelves and cabinetry that were cleaned instead of replaced, Chubb contended. Mertz was paid $100,229 for demolition and debris removal but hired a subcontractor to do the work for $21,000.
Mertz quoted $239,411 for code work that was not required by the town. He also was paid $15,675 as Chubb’s consultant.
Pacific Indemnity Co., a Chubb subsidiary, insured Kenneth and Donna McAlley’s house in New Rochelle for $1.4 million.
The house was damaged in a 2005 fire and Pacific paid more than $3 million to settle the claim. More than $2.1 million went to Mertz, according to the lawsuit.
Mertz estimated repair costs at $410,000 on an application for a building permit. The town charged $2,684 for the permit but Mertz charged Chubb $13,470.
Great Northern Insurance Co., a Chubb subsidiary, insured David Palaia’s and Dawn DiDomenico’s 18th century farmhouse in North Salem for $1.6 million. The farmhouse was damaged in a 2007 fire and Great Northern paid nearly $2.6 million to settle the claim.
About $1.8 million went to Mertz, the lawsuit says. Chubb also paid Mertz a $23,287 consulting fee.
Mertz accompanied Sorge on the first visit to the site and Serge recommended that the homeowners hire Mertz as their contractor.
Sorge approved $578,866 in payments for code work, the lawsuit says, without confirming that the work was required, the estimates were reasonable or the work was done.
Judge Roman entered a $6.4 million judgment against Paul Mertz Jr. and his company for fraud and breach of fiduciary duty. He tacked on $5.9 million in interest that is accruing at 9 percent a year, or $1,576 a day, and he ordered Mertz to pay Chubb’s costs and attorney fees.
Chubb was represented by attorneys William Pollard and David McTaggart, of Duane Morris LLP in Manhattan.
Sorge was represented by attorney James Randazzo, of Gaines, Novick, Ponzini, Cossu & Venditti LLP in White Plains.
Mertz has been winding down his company’s operations for the past two years.
“This lawsuit took the wind out of his sails,” Murphy said. “He was getting ready to retire anyway.”
Murphy said no decision had been made yet on whether to appeal the jury’s decision. He called it a difficult and hotly contested case.
“It could have gone either way,” he said. “That’s the way trials are.”