By BreAnn Stephenson
What comes to mind when you think of fraud? Is it the image of a “snake oil” salesman? White collar crime? The Great and Powerful Wizard of OZ? Fool’s gold? Whatever the image, the key definition of fraud involves deception. Cornell Law School defines fraud as “deliberately deceiving someone else with the intent of causing damage.” They go on to say this damage is often financial and that there are many different types of fraud. Indeed, the FBI’s “Common Fraud Schemes” site currently lists 23 different categories of fraud. Today, we are going to address several types of insurance fraud, how fraud affects your real estate investing life and how you can avoid becoming a victim.
Two types of Insurance Fraud: Soft and Hard
Within our American judicial system, fraudulent cases are separated into two main types: hard fraud and soft fraud. In the case of hard fraud, the perpetrator fakes an event in hopes of receiving an insurance payout. In the world of property insurance, hard fraud often comes in the form of arson. Trying to find a way out of a tough financial position, the perpetrator decides to either burn down their property or have someone else do it for them. They then file a claim with their insurer, stating that the house was broken into and burnt down by a thief or vandal.
Soft fraud, on the other hand, involves the exaggeration of a valid claim to increase the monetary benefit. The ways that soft fraud can be committed seem almost endless, from shifting the dates that an incident occurred to who was responsible for the damage, or even just the amount or cost of items damaged or taken, to name a few. These may seem like “white lies,” but they have much larger penalties within our judicial system.
“48 states plus the District of Columbia make insurance fraud a specific crime.” – Coalition Against Insurance Fraud
The Penalty for Insurance Fraud
If a person is caught committing insurance fraud, the consequences can be quite severe. Though soft fraud is considered a misdemeanor in most states, perpetrators could still end up with fines, probation, community service and even jail time. Hard fraud cases, however, are always classified as felonies and will do permanent damage to your public record. Some of the consequences involve major fines and restitution payable to the insurance provider along with a jail sentence appropriate to the crime committed.
How Much Fraud are We Talking Here?
The Coalition Against Insurance Fraud (CAIF) estimates at least $80 Billion in fraudulent claims are made annually in the U.S. This of course includes all lines of insurance (property/casualty, health, life, auto, etc.). This may be a conservative number though, as it is based on reported cases of fraud. Of this $80 Billion, the CAIF estimates that property-casualty fraud equals roughly $34 Billion each year or approximately 10% of property-casualty insurance losses and loss adjustment expenses each year. Think about that, on average, at least one out of every 10 property-casualty claims filed is fraudulent in some way.
Third Parties Who Seek to take Advantage After Your Property is Damaged
Not every opportunist is a bad apple, but there are people looking to take advantage of someone in a vulnerable position. Be sure you pay close attention for those trying to trap you through the following ways:
- Fraud Perpetrated through Assignment of Benefits Contracts
Once signed, an Assignment of Benefits (AOB) transfers the insurance claims rights or benefits of the policy to a third party. An AOB gives that party the authority to file a claim, make repair decisions and collect payments from the insurer without the insured’s further permission. Unfortunately, for most AOB’s there is no “right of rescission”, meaning that once you have relinquished your rights, you cannot change your mind and get them back without going to court. Do you see the problem here? If the person you enter the contract with is not a trustworthy professional, they may take the insurance payout and skip town before making repairs to your property. Even worse? There is nothing your insurance company can do to protect you as they have already settled the claim. They will not pay out again. So again, the only way of recouping those lost funds is by filing a lawsuit against the vendor who did you wrong. Good luck…
A Real Life AOB Horror Story:
Port St. Lucie, FL resident, Natalie Kreiter hired a plumbing company to repair a simple leak in her kitchen. She was then advised by the plumber to hire a water mitigation company to dry her kitchen out. The mitigation company she hired told her the loss would be covered by her insurance company, but she would need to sign an AOB before they would begin work. In addition, they also told her to hire a public adjuster because without one her insurance company would underestimate the necessary work and not pay her claim. In the end, her insurer had no choice but to issue her payment directly to the water mitigation company. This might not have been so bad if they had finished the work, but instead they left the job unfinished and Natalie was left with a torn-up kitchen and no funds to put it back together.
Help Navigating AOB’s:
The state of Florida has a significant AOB abuse problem and has made a variety of resources available which are helpful to Floridians and non-Floridians alike. Learn more about how AOB’s work, the risks of signing one and consumer tips for retaining control of your coverage:
- Public Adjusters Who Commit Fraudulent Acts
You may desire to hire a public adjuster to help you through the claims process, but you will need to do your due diligence prior to hiring them. Their licensing and code of conduct is usually regulated by the state’s insurance department, so make sure they have the proper credentials. You do need to be aware that hiring one comes at a cost, typically 10% or so of any claims settlement you receive. Be cautious if a public adjuster offers additional services outside of working with your insurance company – like setting up the repair process. It may feel like an easy solution to let them organize repairs for you, but they may just run off with your insurance settlement without fixing a thing. Even if your repairs are completed, part of your settlement may go back to the public adjuster as a finder’s fee, or you could end up with sub-par work or inflated construction costs. If they really lack scruples, the adjuster may try to convince you to let them inflate the claim or file additional false claims so that you both can profit, making you equally guilty of fraud.
Real Life Public Adjuster Horror Story:
Orange County, CA public adjuster Jose Villa was sentenced to 10 years in state prison for stealing more than $1.2 Million of fire victims’ insurance payouts. His deceptive plot involved a promise to not only handle the claims process, but also to handle demolition and construction at the victims’ properties after the fires. Instead of using the money to rebuild, however, he ended up pocketing most of the insurance money for himself. This also was not Villa’s first time around the block. He is also serving a concurrent seven-year sentence for another insurance fraud case the year before. In that case, he was convicted of two felony counts each of grand theft by embezzlement and forgery for taking insurance proceeds from other fire victims.
Help Regarding Public Adjusters:
Last year, California Insurance Commissioner Dave Jones sent out a press release reaffirming how public adjusters are to solicit their services. Each state has their own guidelines for what public adjusters are allowed to do, but this press release has some good general advice for consumers:
- Vendors Who Seek Out Victims After a Weather Event or Natural Disaster
In the aftermath of a catastrophic event, be it a large hail storm, hurricane or wildfire, you may find someone knocking on your door a day or two after eager to help you get your insurance payment before your neighbor. However, just because you’ve been through a stressful event doesn’t mean you should forego a thorough vetting process for any contractors you hire. Make sure they are properly licensed and insured and check their references as well. Do not pay someone in full to reserve a spot on their suddenly-busy schedule or agree to a handshake deal instead of a written contract that you have reviewed thoroughly. Always pay in a method that you can track as your insurance company will need that information (and you will want it for your taxes too). Don’t let someone take advantage of you in the chaos following a disaster, otherwise they may be here today and gone tomorrow with your money.
Real Life Post-Hurricane Harvey Horror:
Pearland, TX contractor Pete Vasquez has gained a pretty poor reputation from his customers. Monica Daly paid over $120,000 and is still left with open walls after seven months. There are several other Harvey victims with similar stories that also have pending lawsuits against the contractor. Come to find out Vasquez has a criminal history that includes a prison stint. Vasquez told the local news station that he hasn’t defrauded anyone and plans on giving customers their money back. This tale is just one of hundreds in Houston and other storm-damaged cities.
Help Navigating the Disaster Claims Process:
In the wake of Harvey and Irma, the International Code Council published a news release to help hurricane victims avoid contractor fraud. Their advice is good for any type of weather-related event or natural disaster:
The Cost of Insurance Fraud
One of the main costs of insurance fraud is that it causes insurance rates to rise. The more claims activity an insurer has, the higher their rates will need to be to have the reserves to pay any losses. Padding insurance claims also causes higher payouts, leading to higher rates. Lowering the frequency of fraudulent claims helps you save money on your insurance cost which is just one of many line items on your profit and loss sheet. If the cost of fraud gets too high, carriers may begin pulling out of certain states to preserve their loss ratio and ability to offer competitive rates. Fewer carriers in the marketplace to compete for your business also causes rates to increase.
Aside from increasing insurance rates, fraud can also raise the cost of goods and services. Think about the implications in your own investing life. If your insurance expense goes up, your rents will likely go up as well. Your rent increase may in turn reduce the pool of renters you can choose from. In addition, fighting insurance fraud is a significant expense for federal, state and local governments, which directly affects taxpayer resources. The domino chain of expenses just continues.
The most serious and lasting consequence of fraud is the affect it can have on people’s personal lives. Individuals have been injured or even died because of someone’s willingness to commit fraud. The mental health and social consequences can be just as severe, leading to shame, depression and the dissolution of families.
How to Report Insurance Fraud
Because fraud affects everyone, it is important to know that you can have a positive impact in keeping its affects from reaching your investing life and others in the REI space. Think of it like a neighborhood watch. We would encourage you to report insurance fraud if you see it, and it’s fairly simple to do. Having at least the suspect’s name, the insurance provider and the dates when you think the fraudulent activity took place. The more information you have, the better able authorities will be to investigate. To report fraud, you can contact:
- Your state’s bureau for fraud
- All involved insurance companies
- The National Insurance Crime Bureau
- The Federal Bureau of Investigation (FBI) – contact your local office
- The National Association of Insurance Commissioners
We hope after today’s introduction to the affects of fraud, you will be better equipped to defend yourself and others from becoming a victim. Remember that your insurance agent is standing by to help and to be your advocate when you experience damage at your property. Your insurer is interested in keeping stable, competitive rates for you, so they will be able to serve your insurance needs well into the future too. If we all work together to fight fraud, it’s a winning situation for all involved.