Insurance carriers that administer the Federal Emergency Management Agency’s National Flood Insurance Program are asking Hurricane Sandy victims to keep quiet about allegations of fraudulently altered engineering reports. In exchange for settling claims with FEMA, the private insurers want homeowners to give up their right to cooperate in any state or federal investigations.

Steve Mostyn, an attorney negotiating on behalf of some 1,500 New York and New Jersey homeowners, says settlement negotiations were progressing Tuesday -- that is, until insurance companies demanded silence from policyholders on allegations that FEMA contractors fraudulently altered engineering reports to minimize damage assessments and reduce insurance payouts.

Mostyn is requesting a hearing Wednesday with federal magistrate judges in light of the "troubling events" -- namely, that an agreement presented by insurance carriers would "release them from any and all criminal liability for their fraudulent acts and impede any investigation related thereto," Mostyn wrote in a letter to the judges overseeing more than 1,000 Sandy cases in the Eastern District of New York.

The proposed agreement -- a copy of which Mostyn included in his request to the court -- would specifically prohibit homeowners from initiating or cooperating with any investigation of the insurance carriers that administer policies for FEMA's National Flood Insurance Program. 

Allegations that insurance companies relied on fraudulently manipulated engineering reports to lower their insurance payments to homeowners have roiled court proceedings and attracted the scrutiny of law enforcement, members of Congress and FEMA itself. The agency pays the legal bills for insurers --known as "write your own" (or WYO) partners in the federal flood insurance program -- if homeowners sue the companies over a claim.  

"In essence, the WYO carriers want FEMA -- a federal agency investigating the WYO carriers -- to pay the plaintiffs money to keep them from cooperating with FEMA’s own investigation into the WYO carriers, not to mention any other investigations," Mostyn wrote in the missive.

Representatives for FEMA did not respond to a request for comment Tuesday evening. Also, an attorney representing flood insurance carriers did not respond to a request for comment.

Last Wednesday, Feb. 18, amid an ongoing criminal investigation, New York Attorney General Eric Schneiderman executed a search warrant at the Uniondale, New York-based offices of HiRise Engineering, a firm that wrote engineering reports for Travelers Insurance and Hartford Insurance Company of the Midwest. And U.S. Sens. Robert Menendez, D-N.J., and Cory Booker, D-N.J., have called for a criminal probe in New Jersey.   

Matt Bordonaro, a spokesperon for Travelers, said the company does not typically discuss pending litigation. A spokesperson for Hartford did not respond to a request for comment on Mostyn's letter after business hours Tuesday.

Mostyn has filed three separate class-action racketeering suits against Travelers, Hartford and Wright National Flood Insurance, the largest flood insurance carrier in the federal program that serves 5.3 million policyholders. In a searing decision last November involving Wright Flood, Judge Gary Brown said the engineering firm U.S. Forensic "secretly rewrote" a damage report on a home and that concealing the changes from the homeowners amounted to "reprehensible gamesmanship."

Judge Brown and fellow magistrates were set to hear evidence on similar allegations involving other homeowners last Thursday. But in the lead-up to that hearing, FEMA's newly appointed negotiator, Brad Kieserman, now deputy assistant administrator for federal insurance, intervened.

Kieserman initiated settlement talks with lawyers for homeowners, telling judges that agency leadership was "deeply troubled" by allegations that FEMA and private insurance companies “may have relied on questionable and subpar engineering reports when adjusting claims.”

"I am committed to ensuring [National Flood Insurance Program] business practices going forward are fair and transparent," Kieserman said in a federal court filing.

Mostyn, who took the lead for negotiations on the policyholder side, spoke positively of Kieserman in an interview with International Business Times and said a settlement agreement would include both monetary packages for homeowners and reforms to the flood insurance program at FEMA. “I think they’re committed to doing the right thing,” Mostyn said.

Yet even as negotiations got underway, the New York state criminal inquiry heated up. On the same day the AG's office raided HiRise Engineering out on Long Island, an executive from Wright Flood invoked his Fifth Amendment privilege during examination by Mostyn and declined to answer any questions.

After business hours Tuesday, a spokesperson for Wright Flood did not respond to a request for comment regarding the proposed release agreement that Mostyn cited.

In his court filing Tuesday, Mostyn said the insurance companies' "continued desire to exonerate themselves -- at all costs -- has significantly interfered with our ability to efficiently proceed with this process."