A Travelers Cos. unit and other flood insurers accused by Hurricane Sandy victims in New York of using falsified engineering reports must turn over the drafts to policyholders, a three-judge panel ruled amid allegations that manipulation may have been widespread.

The group of federal magistrate judges in Brooklyn and Central Islip rejected arguments from insurers that disclosure was unfair or burdensome and ordered the materials turned over to the storm victims by Dec. 12. The panel also set a hearing for Jan. 28 over allegations that insurers used doctored reports to avoid paying damage claims.

The companies’ argument that they need more time to comply with the order “rings hollow in light of the fact that these materials should have been produced many months ago,” the panel said in its ruling yesterday.

The “burdens faced by plaintiffs — storm victims who may have been unjustly denied recovery for damage to or destruction of their homes” outweigh the hassle of producing the documents, the judges said.

Claims Conspiracy

Homeowners have sued a unit of New York-based Travelers and other insurers including Wright National Flood Insurance Co. and a unit of Hartford Financial Services Group Inc. over claims they illegally conspired with engineering firms and others to deny or underpay claims from Sandy. The October 2012 storm was the largest Atlantic hurricane on record and caused about $60 billion in damage in New Jersey, New York and Connecticut.

The insurers participated in a program through which they provided flood insurance underwritten by the federal government. Homeowners said the insurers took part in the scheme to avoid federal audits and possible financial penalties for making too generous payouts. The companies also sought to inflate claims- handling expenses that would be borne by the government, according to the complaints.

In a Nov. 7 ruling, U.S. Magistrate Judge Gary R. Brown ordered the insurers to turn over all drafts of engineering reports to potentially hundreds of policyholders after he discovered evidence of possible manipulation of a report for a home in Long Beach, New York.

In response to pressure from New York and New Jersey lawmakers, Federal Emergency Management Agency Administrator W. Craig Fugate on Dec. 5 urged private companies participating in the flood insurance program to turn over the draft reports for Sandy claims in litigation in New York and other states.

Unjust Allegations

The agency had earlier asked Brown to reconsider his order, saying it unjustly suggested systemic misconduct by all engineering firms.

Patrick Linehan, a Travelers spokesman, said in an e-mail today that the insurer takes the allegations against its unit “very seriously.” He declined to comment further citing the pending litigation.

Dolores Glass, a spokeswoman for Wright, had no immediate comment.

Thomas Hambrick, a spokesman for Connecticut-based Hartford, declined to comment. He said last week that the company denies the charges and would seek dismissal of the claims.

In his letter Dec. 5, Fugate said the agency will undertake a “careful joint examination” of the reports and the private companies’ claims adjustment processes to “restore the public’s faith” in the flood insurance program.

“Concerns that there may be systemic incentives to undervalue claims warrant considered and deliberate discussion” among the agency, the insurers and lawmakers, Fugate said.

“In particular, we must ensure that claims adjustment practices designed to prevent over-payments are not also incentivizing under payments,” he said.

About 1,500 flood claims from Sandy remain in litigation, according to Fugate. The program has paid more than $8.1 billion to policyholders for damages from the storm, he said.

The case is In Re Hurricane Sandy Cases, 1:14-mc-00041, U.S. District Court, Eastern District of New York (Brooklyn).