Mold Insurance Fraud Could SpreadNationwide

Criminal schemes to milk Texas insurers formillions of dollars in phony mold and water damage claims arespreading faster than fungus in a petri dish, and will soon be amultistate problem, investigators and carriers warn.

“We expect this to become a nationwide problem,” said JerryJohns, president of the Austin-based Southwestern InsuranceInformation Service, which represents the majority of the statesproperty-casualty insurers.

Mr. Johns discussed mold-fraud problems as plea discussions wereunderway in Houston for a seven-member group under federalindictment for a fraud scheme said to have scammed $7 million from17 insurers over six years.

The conspiracy, according to investigators, left dozens of homesin a soggy, mold-covered condition after the plotters cracked waterpipes and turned on garden hoses to create damage claims.

In many mold fraud cases, Mr. Johns said, homes have had doorsand windows sealed up to create a warm environment that cooks upmold. SIIS cannot state that such “cooking” of homes iscommonplace, “but we can say with a large degree of certainty thatit is done often. We feel that it is being done throughout Texas,”said Mr. Johns.

A key component of the problem, he noted, is a lack of licenserequirements or standard best practices for mold remediators, whosebills account for a large portion of such claims.

Claims involving water and mold damage in Texas during 2000 and2001 amounted to more than $1 billion for homeowners losses andloss adjustment expenses, according to the Texas Department ofInsurance. Many of those claims are long-tail, and regulators haveheard “horror stories” about contractors doing remediation workthat drags on for months, said Lee Jones, a Texas departmentrepresentative.

Concern about remediation practices led Texas InsuranceCommissioner Jose Montemayor earlier this year to order aninvestigation. Dennis Pompa, deputy commissioner and chiefinvestigator, said probes are underway into “suspected fraudrelated to mold claims,” which he could not detail, although he diddiscuss the activities of the accused Houston-based ring.

While the case involved a water damage focus, Mr. Pompa notedthat “weve seen videos the adjusters took of these homes. As thecameras panned, we could clearly see mold on the walls.”

Mr. Pompa said he believed water damage claims might have goneunchallenged because adjusters wanted to avoid expensive moldclaims. According to Mr. Johns, adjusters fearing multi-milliondollar lawsuits where mold is involved “do everything possible toavoid the potential for litigation.”

The federal grand jury in Houston identified a local areacontractor–Johnny Duane Staples, of Baytown, Texas–as heading agroup involving his relatives and associates. Between January 1996and June 26, 2002, the seven-member group took varying roles ashomeowners or remediators, it was charged.

As described in the indictment, the group would generally buy atwo-story home in a residential neighborhood that they would occupyfor a time. Generally on a weekend they would remove most of thegood furnishings and replace them with cheaper items. Mr. Pompasaid the windows would be covered with sheets and the house wouldbe left to soak for eight-to-10 days, and then a damage reportwould be made.

Mr. Staples and his group, acting as contractor remediators,would then generate false invoices to be given to insurers, and payother persons to generate fake documents that went to insurers, thegrand jury charged. Their activities led to charges of conspiracy,mail fraud and money laundering.

Insurers named as victims included Allstate, Farmers Group,Farmers Mutual Protective Association, General Star IndemnityCompany, Heartland Insurance Group, Scottsdale, State Farm, TexasFarm Bureau, Mt. Vernon, Republic, Heartland Lloyds, Horace Mann,Kemper, and Prudential Property and Casualty.

Mr. Staples' attorney, Gerald Fry, said the group including hisclient is being accused of lodging 54 false claims worth $7million. The case is set for trial on Sept. 16, according toAssistant U.S. Attorney Mary Jane Harmon. But Mr. Fry said thatdiscussions with prosecutors were taking place concerning apossible plea arrangement.

Mr. Pompa said that homes in water damage and mold schemes weretypically insured for $150,000. In addition to getting paid for thereplacement of furniture and appliances, scammers collected forliving expenses, and insurers were charged two or three times whatpeople were actually paying, he added. With a house worth $100,000,“an insurer could end up paying two or three times the cost of ahome,” said Mr. Johns.

Industry representatives in Houston said claims adjusters arehard-pressed to deal with a blizzard of voluminous mold claims.Investigators, they said, are finding remediators who offer tocheck homes for mold sometimes either aggravate existing moldconditions after convincing residents to leave, or put mold wherethere never was any.

Remediators have their own testers who inspect the work, andfrequently the finding is, “Oops, still got mold–have to go to workagain,” industry officials said.

Price-gouging contractors, they said, will charge insurers fivetimes the norm for building materials, and hundreds of dollars forprotective bio-hazard “moon suits” made of paper.

Mold remediation fraud, according to Mr. Johns, frequentlyinvolves repairs that are not made at all, or for which inflatedrates are listed. Scams involve charging for water extraction unitsthat either are not used or employed for much less time than ischarged for, he said.

In Texas–where heavy billboard advertising advises consumersabout mold remediation, and where there has been major publicityabout “cooking” houses–the state is “at the epicenter” of a moldepidemic, Mr. Johns said, predicting that “the things going on hereare going to spread countrywide.”

He said his group is uncertain how much fraud involvesremediators, but with no licensing involved or standards, “it opensthe door to mold removal not being done properly.”

Mr. Pompa said that a few months ago, he made a point ofbringing up the issue of fake water and mold claims at a session ofthe National Association of Insurance Commissioners Antifraud TaskForce. “I dont believe the people here [in Texas] are so unique inthemselves that this is the only place in the country it could behappening, ” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 9, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.