Florida has experienced unprecedented public adjuster involvement in first-party property insurance claims over the last several years. Public adjusters are demanding appraisals on wind losses that are several years old, reporting chipped tile claims, sinkhole claims, plumbing leaks, new claims on old damage -- the list goes on. Two changes to insurance statutes can be at least partially credited with the increased involvement of public adjusters and an associated increase in insurance fraud.
One of the reasons public adjusters have involved themselves in all types of first-party property damage claims is the change that occurred in 2006 to the Replacement Cost Statute 627.7011. The language added to this statute requires homeowners' policy claims with replacement cost coverage to be paid on a replacement cost basis at the time of the loss. Previously (per policy loss settlement provisions), the claim was paid at actual cash value (ACV) until repairs were completed, and the actual repair/replacement cost of the loss was no longer an estimate. This change was brought about after the 2004 wind losses when some insureds complained that they could not get a contractor to effect repairs until they (the contractors) were paid the full replacement cost of the loss. The statute was further changed to include language to the effect that the replacement cost was owed whether the repairs were completed or not.
The Matching Statute 626.9744 also has had far reaching unintended consequences, albeit to a lesser extent. This statute requires homeowners' policies to pay for reasonable repairs or replacement of items in adjoining areas if the damaged items cannot be matched.
Extreme Actions
Public adjusters have taken these statutes and the language they now contain to an extreme. With 627.7011, they estimate or have damage estimated at several times the amount for which the loss could actually be repaired. If the carrier disagrees, appraisal is demanded if the policy has the appraisal language. The usual result of appraisal is that the difference between the two parties is split. If appraisal is not an option, suit is frequently filed against the carrier. Once the claim has been paid, the insured is then free to complete the work himself or seek competitive bidding, and the repairs are completed (if at all) for much less than the amount paid on the claim. Often the mortgagee's collateral interest is jeopardized by the public adjuster (and sometimes the insured) depositing the claim payment check without the mortgagee's endorsement or with a forged mortgagee's endorsement.
A recent example of a small plumbing leak claim resulted in a public adjuster-generated proof of loss in excess of $40,000. The insured completed the repairs for less than $1,000. The mortgage company did not endorse the claim check. This type of fraud has become the focus of a multi-million dollar investigation involving numerous carriers. Florida CFO Alex Sink's Department of Financial Services Division of Insurance Fraud has taken the lead on this investigation with help from other state and federal law enforcement agencies.
The Matching Statute has generated its own genre of losses -- the notorious and ubiquitous "chipped tile" claim. The intent of this statute was not to require replacing every floor tile in the house for one small chip in one of the ceramic tiles. These losses are usually reported by the public adjuster with some imaginative story as to how the tile came to be chipped. It is then claimed that the tile cannot be matched and, if it can, the grout will not match. Demand is made for the tile to be replaced in all rooms that have the same type of tile. If the policy has the appraisal provision, appraisal is demanded if anything less than full replacement of all tile is not paid. If appraisal is not an available option, a lawsuit is. Any type of claim can become a "chipped tile" claim. Examples include kitchen fires (the fire fighter chipped the tile); plumbing leaks (the plumber chipped the tile); and, most often, the insured chipped the tile (the insured dropped a skillet, a tool, a bowling ball, or another object....).
Some of these claims are often as high as $80,000 for replacement of the tile. Once again, the collateral interest of the mortgage company is often circumvented. Repairs (as claimed) are seldom completed. The result of many of this type of claim is that none of the tiles are replaced. The "chipped tile" claim can be pure profit for public adjusters and insureds.
Unintended Profits
The common element associated with both statutes and claims as illustrated is the unintended profit made possible in each case. The solution is to remove the profit motivation created by the statutes. The Replacement Cost Statute wording requiring carriers to pay replacement cost at the time of the loss whether repairs are ever completed or not should be removed and standard policy loss settlement language returned to the statue. The Matching Statute language should be limited to "immediate surrounding area." This language, coupled with the reworded Replacement Cost Statute, will certainly remove the profit motive from "chipped tile" claims. These few changes would effectively remove the profit/fraud motive from the equation when insureds, public adjusters and plaintiff attorneys present homeowner property claims of these scenarios.
The insurance industry has identified these issues and has taken action to address the mortgage companies' collateral interest in first-party property claims. The careful study and revision of both statutes to remove the profit motive is the next step in combating this category of fraud.
If contractors, under catastrophe conditions, will not start wind damage repairs without full payment in advance, the state Legislature should address that situation appropriately and decisively. We have been fortunate in Florida that the wind has not blown since the change to 627.7011. G
Paul M. Leftwich, CPCU, AIC, is president of Leftwich Insurance Consulting & Adjusting. He may be reached at 727-522-3026 or PLeftwich@YLICA.com.
