Are Insurance Restoration Contractors Ripping Off Insurers and Policyholders?
Why has there been an explosion of contractors specializing in insurance disasters and losses over the past fifteen years? Most would probably say that the motivation to enter that trade is very profitable. My experience from depositions and discussions of those in the business has been that it is. Often, profits range from forty to fifty percent of the total billed. I have been legal counsel to numerous policyholders caught in the middle where the retained insurance contractor is in a dispute with the insurer over the scope and amount of billing for work allegedly performed. I am concerned about situations where an insurance restoration company is hired without competing bids from other contractors; it is often nothing other than a losing proposition for the insurer and the policyholder.
A recent comment to If Insurers Fail to Timely Pay Actual Cash Value Benefits, Policyholders Should Demand Full Replacement Cost Benefits Even if Replacement Has Not Occurred, asked the following:
My contractor has submitted a certificate of completion for my interior work done. My claim stems from Hurricane Ike.
In this certificate, he requested that the recoverable depreciation be released. I have given written consent to my contractor which is on file at my insurance company
The adjuster is giving my contractor a hard time about releasing it. He has stated that he will not release the recoverable depreciation unless I ask for it.
Does my adjuster have the right to not honor the document of consent?
My response was the following:
Your insurance adjuster should deal with you--not a contractor. It is illegal for a contractor to represent you on an insurance claim. You can assign benefits to him. But only attorneys and public adjusters can legally be retained by you to adjust or settle a claim with an insurance company adjuster and only with your permission.
Having said that, it is very appropriate for contractors to discuss what they are doing, why, and the cost with the insurance adjusters. This goes on all the time and is expected.
However, there is a distinction between explaining these issues and representing the policyholder. Indeed, many states limit public adjusters from “negotiating” or “representing” policyholders and limit the public adjuster to claim valuation and presentation. Contractors are specifically prohibited from “representing” policyholders in some states. Virtually all states prohibit contractors from this practice because it is either the unauthorized practice of law, public adjusting, or both.
In a previous post, Former Restoration Insider Comes Out Swinging Against Florida's Limitation of Public Adjuster Solicitation, I highlighted a number of conflicts of interest contractors have acting in the role as the entity doing the work and having relationships of claims settlement with the insurer. One comment indicated what often happens when contractors are hired by an otherwise ignorant policyholder to do the insurance restoration work for the “amount paid” by the insurance company:
Thank you for writing on this hot topic, and for sharing some great information. Secondly, I appreciated reading Laura James' testimony on this customary practice by various insurance restoration contractors in our daily business. In fact, I just sent you a copy of the L.A. Times front page article from July 5th, 2009 which mentions restoration contractors interpreting insurance policy and acting as PA's. With the efforts of FAPIA and NAPIA, I strongly believe we will get this 48 hour solicitation law overturned. I will share the LA Times article on the FAPIA website.
The Los Angeles Times article, “Chasing a disaster chaser” stated in part:
The story of Paramount and its founder sheds light on the world of "storm chasers," traveling contractors and insurance adjusters who descend on natural catastrophes, offering to help victims maximize their claims and rebuild. Regulators, fraud investigators and victims' advocates allege that many inflate damage estimates, do unnecessary repair work and take exorbitant cuts from insurance settlements -- or skip town with all of the money.
"Every disaster has them," said Dave Stuart, president of a nonprofit that helps wildfire victims. "They're literally like vultures circling."
Chasing the storm chasers through court can prove a costly, time-consuming and often fruitless exercise.
…
In some cases, homeowners make out well and the victims are insurance companies, which often pay inflated claims rather than spend money on litigation, industry experts say. Policy holders ultimately pay the price in rising premiums.The cost of post-disaster insurance fraud is hard to measure. The Insurance Information Institute, a trade group, estimates that fraud accounts for 10% of all property damage claims, suggesting that the toll from a disaster the size of Katrina could reach billions of dollars.
If you think that article may be unfair, how about this advertisement on the internet at Assured Contractors Expediting Services which claims:
The first step need be done only once with each insurance adjuster. On your first contact you will want to discuss your knowledge of the special procedures unique to structural damage restoration work, specifically those pertinent to fire, water, wind and impact damage. Once you have impressed an adjuster with your knowledge you will be eligible for your first 'trial' job. After that first job, during which you must demonstrate your skills at steps two through six, you will become one of the 'insider' contractors.
At that point, maintaining your relationship with the adjuster will be a simple matter of consistent delivery of quality workmanship and a persistent adherence to reliability and honesty. Caution: it is best that you prepare yourself before approaching any adjuster. An unprepared initial approach is one of the three fatal mistakes made by most contractors who try to break into this line of work. Adjusters, with few exceptions, are exceedingly busy people and are keenly aware that they cannot afford to work with contractors who have no knowledge of this specialized field. Your first opportunity to talk to them may be your last one.
Step two, participation in damage analysis, will occur when you are asked to meet an adjuster at the site of an insured loss. At that time you will want to demonstrate your ability to test appropriate parts of the structure for integrity using non-destructive methods appropriate for the type of damage. Together with the adjuster you will determine what needs repairing or replacement. While on the site, you will want to take extensive notes, listing each item in each room separately, noting the volume of each type of work that needs to be done. This is the first step to developing the detail description of work known in the industry as a scope of work or a 'sheet'. To gain your highest chances of success you will want to write your sheet using the structure and format that is indigenous to the industry (more on this later).
Step three, compiling the repair cost analysis, is merely a matter of assigning a cost to each item on the sheet. Use the pre-approved rates commonly accepted within the industry (see subsequent information on this topic).
Steps 2-5 are unique to each job but, once the formats and formulae are learned, these steps are quite simple to accomplish and only slightly more complex than a normal bidding and contracting process would be. The rewards for the added complexity are a significantly higher profit margin on insurance restoration jobs and a job acquisition rate that is truly phenomenal.
The result is that you work less and make much more money.
…
The standard bidding procedure for most contractors is to calculate the materials, labor, tool rental and sub contractor costs, add a markup to labor to cover the contractor's own salary, add 10% to cover contractor overhead (office, phone, utilities, equipment, etc.) then add 10% for profit. If nothing goes wrong the 10% profit will go into the bank. Usually, however, the profit ends up being more like 6% to 8%. Let's face it, it happens!When a contractor works within the insured damages restoration industry the bidding is done in an entirely different way. There is, within the industry, a set of pre-agreed 'values' for each type of work on a job. The dollar amount that the insurance company is willing to award to a contractor for performance of that type of work is based on a pre-approved rate applied to the volume of work that is needed. The estimating process for insurance work is more detailed than the process used in other types of work. However, once a familiarity with the process has been gained, it becomes much quicker and much simpler to compile an insurance type estimate than to produce a comparable bid using traditional methods. (emphasis added)
While I know many qualified and professional insurance contractors, the insurance contractor field is largely out of control. Many are not only doing construction, but are in the business of adjusting claims and practicing law. How about this advertised service by a North Carolina insurance restoration contractor:
For most North Carolina homeowners, filing homeowner's insurance claims is a rare event. Unfortunately, because individuals don't need to do so often, it's easy to find yourself getting the short end of the deal. After all, if you had to file frequent insurance claims, you'd know what to expect and have the benefit of experience.
At The Roof Maker, we can help handle your insurance claims to help make your storm damaged home like new again. We will work to get the most out of your insurance claim from your insurance company. (emphasis added)
Shouldn’t the contractor be interested in doing the best job for the least amount of cost?
The insurance industry should not be getting “ripped off” by inflated estimates and for construction invoices that are manipulated. While most of my cases have significant disagreements of scope and price, I often wonder how many are caused as a result of adjusters having a siege mentality and underestimating construction scopes and estimates to prepare for the inevitable negotiation often caused by intentionally inflated estimates by insurance contractors. Neither activity is proper.
We are now routinely receiving questions from clients regarding the workmanship and billing by insurance restoration contractors. In the past, our practice has been limited to insurance coverage and claim disputes with the insurance companies and an occasional errors and omission situation with an agent. In the future, it appears we will be getting into insurance restoration practices and construction litigation. Interestingly, I expect counsel for the insurance companies to be doing the same. Both parties to the insurance contract lose when insurance restoration contractors attempt to “game” the system or act as claims and legal representatives of the policyholder.
After 30 years as a property adjuster, I took a career detour and became the national manager for a large restoration company. I figured if I was going to argue cost and methodology it would be smart to have hands on experience.I learned how a 55% gross profit was expected on every job with a net around 28%.
Today, having returned to adjusting large loss, I continuously negotiate pricing but moreover scoping of a loss. The useless drying equipment plus the assorted cleaning of equipment costs amongst other unnecessary charges are but the tip of the iceberg. If insurers routinely performed "process audits" where the best practices and methods to restore properties to pre loss condition were analyzed there would be no need for premium increases.
The restoration business is out of hand and has been for years. What is needed is a wholesale rethinking of how properties get restored and how the insured need not be the victim of the process.
One of the hurricanes Ike victims asked for help. You can see her post here:
"http://www.uspublicadjusters.com/blog/post.cfm/roofers-scam" rel="nofollow">http://www.uspublicadjusters.com/blog/post.cfm/roofers-scam .
I forwarded her note to Texas Department of Insurance staff investigator.
Reply: She needs to make a complaint with Consumer Protection Division if she wants TDI to review her complaint.
I further spoke to Consumer Protection and was told that we do not get involved between contractors and their clients.
Contractors not only negotiate claims but often assign all insurance benefits to their company, no one seems to care.
If I owned Hell and Texas, I would rent out Texas and live in Hell.
Phillip Sheridan
Dimitry,
I love Texas. You are too harsh.
Possibly, the people at TDI are just too overworked or are not working on the right issues. I would suggest you copy and forward them a copy of today's Blog.
Complaining about it is one thing. Teaching others and getting them to follow up is the trick.
Let's see what I can do to motivate you and other public adjusters to follow up on this.
As a general contractor who understands insurance related work projects, on both daily claims, and post-cat markets, I agree that construction contractors that specialize in insurance work should not "inflate" investment costs.
On the other hand, seasoned insurance general contractors can depend on post-cat market investment costs to be "self-inflating", so-to-speak, with material, labor, and overhead costs taking on an unpredictable upward spiral of their own.
For instance, non-insurance funded (roofing work) won can commonly require:
1) A 50% deposit for materials and start-up.
2) And a few days or so later, the other 50% on completion.
In contrast, the (hail/wind damage) type project, funded with insurance dollars involved, can actually work logistically, and commonly, like the following;
1) Insured client hires general contractor for work.
2) Roof damage and necessary materials were not wholly accounted for by adjuster.
3) Meeting with adjuster needs to be scheduled, preferably with client present, so all involved in the structural repairs are on the same page.
4) Adjuster agrees to damage scope and reconstruction scope, but does not agree that a general contractor should include/line item overhead and profit costs.
5) Adjuster claims that the roofing "unit costs" contain roofing contractor and general contractor overhead and profit costs.
6) General contractor knows that the exact construction estimating program construction data the adjuster is using does not support their "unit costs" claim. The experienced GC knows the "unit costs" only contain specialty contractors costs for their employees, with zero mark-up and profit for the specialty and/or general contractor.
7) General contractor (in Texas) knows adjuster is supported by insurer that will hold ground on NOT estimating in a fair market manner, or may "give in" with pressure from the policyholder.
8) Insurer gives in, pays "actual cash value". That (depreciated) sum is sent to mortgage company.
9) Mortgage company wants to send 1/3rd of ACV sum for initial payment on roofing materials and start-up. Client cannot afford actual deposit needed.
10) GC gets on phone to mortgage company claim department representative. Gets appropriate funding schedule in place.
11) Mortgage company want independent inspector/inspection before production starts. Inspector has 10 (business) days before his pictures and report have to be on mortgage company claim department desk.
12) Mortgage company takes 5-7 business days to send out initial funds for roofing system.
13) Check comes, takes time to clear bank.
14) Finally, materials are delivered, and production starts.
15) Mortgage company wants inspection on completed work.
16) Meeting with mortgage inspector is scheduled.
17) Meeting with mortgage inspector takes place.
18) Inspector has 10 (business) days before his pictures and final report have to be on mortgage company claim department desk.
19) Mortgage company takes 5-7 business days to send out final funds for roofing system.
20) Check comes, takes time to clear bank.
So, it is easy to see (to reasonable minds) why insurance work is more costly, and a greater financial risk, to a general/primary contractor, and that insurance work is justifiably higher to cost out than "cash-in-hand" type client work.
It's even easier to see when you have been dealing with the economic realities of insurance related projects for approximately two decades, and 19 post-cat markets.
Adjusters, (and others), should work on the actual reconstruction/contracting end of a post-cat market, and then see if costs are as "inflated" as ones we're led to believe.
After doing so, most would probably go back to what they were doing before...
rogerpoegc@gmail.com
It is not a crime to have a General Contractor work with the insured & insurer on a storm damage loss,however a per insurance type contract is not valid & most salesman "ARE JUST THAT" A PROOF OF LOSS STATEMENTIS ONE STEP General contractors expect the insurance adjuster to do all the work.A estimate needs to be givin to the insured in writing explaining that a agreement to the absolute value of RCV be in writing before commencement starts .All supplements of record must be approved sign by insured.The biggest risk assumb liabilty is water intrustion General contractor has to be there when future problems arise.That is why the profit gross profit margin is 46%.ON GOING RISK.Worker Comp Ect Most Roofing Contractors Don't even have insurance to cover roofing .Most Insurers won't insure them because of the lack of experence or follow.If a G.C is responsable good track record,yes they deserve every penny.