Occupying top-of-mind awareness among property insurers,fraudulent water mitigation claims are on the rise nationwide.

They are viewed as major concerns in many regions, includingSouth Florida, where insurers fear fraudsters could destroy theHomeowners' insurance market by driving up rates, forcing theindustry beyond the financial reach of most residents.

Some home insurance executives say rates across South Floridaare expected to rise by 6% or more this year, largely because of asignificant hike in non-catastrophe claims — a majority of themwater loss claims that are inflated by unscrupulous watermitigation companies.

This is not to imply that all water mitigation companies areengaging in fraudulent activity. A majority of them act fairly andhonestly. However, the old-school approach taken by many insurerstoward fighting fraudulent enterprises, coupled with their relianceon government being able and willing to fix the problem, allowsunscrupulous companies to charge excessive fees, bill for servicesthat were not rendered, and charge for equipment that was neverused.

In fact, many of these companies pay “finder's fees” toplumbers, contractors — even insurance agents — generating false orinflated claims through an entire network of fraud. Many fraudulentwater mitigation companies create, or are part of, verysophisticated fraud networks. It's no longer a case of just dealingwith occasional problematic “mom and pop” businesses, so the oldway of combatting this fraud no longer is an effectivesolution.

Complicating matters, it's often difficult to determine fairpayment for each water damage claim. There is no scientific modelin use to calculate water mitigation costs, as there is for windstorm damage estimates.

Many in the insurance industry view the Assignment of Benefitsas the primary culprit in the escalation of water mitigation fraud.The provision enables an insured to enter into a contract thatdirectly transfers all rights to the insurance benefits regardingwater damage to the water mitigation company, including the filingof a lawsuit against the insurer to collect those benefits.

Over the course of several years, the industry has sought toreduce the problem by restricting the right to assign post-lossbenefits. Legislative relief is not a viable option as it is both alengthy and uncertain process. Beyond that, rarely, if ever, doesgovernment regulation stop a bad person from committing insurancefraud.

Additionally, courts have ruled against any infringement ofcontracts they consider legal and that have been accepted as legalcontracts for more than 100 years. Opponents of legislation arguethere is no substantive proof that AOBs cause fraud.

So, what's an insurance company to do?

• First, re-direct the focus. Assignment of Benefits (AOB)provisions are not the problem — fraudulent companies are and theywill continue to exist and submit fraudulent claims with or withoutany restrictions on the assignment of benefits. Carriers shouldstop trying to fight fraud by eliminating AOBs and, instead,identify the companies that consistently submit fraudulent claims,then focus on stopping the problem at its source.

• Start by examining which companies have the largest financialimpact on the carrier. Bigger doesn't necessarily mean bad, butthey should start where the stakes are highest if they hope to keepthe bottom line from bleeding money. Then, find those high-impactcompanies that have been shown to submit inflated claims onprevious occasions, or who conveniently dispose of damaged pipes,preventing inspection of the actual damage, and focus their effortson those companies.

• Identify suspect water mitigation claims early and develop anefficient internal structure to collect and distribute information.Insurers need to develop standard operating procedures thatfacilitate early contact with the insureds to authenticate theextent of damages and to verify work performed by water mitigationcompanies.

• Develop standard questions for recorded statements by adjustersin order to determine the number of days mitigation actuallyoccurred on site, confirm how many employees and machines wereused, and how often they were checked.

• Assign specific in-house and field adjusters to investigatethese claims so they are sure to follow proper protocols; arebetter able to identify trends, associations with plumbers andother contractors; and all relevant information is efficientlyshared up and down the chain of command.

Insurance companies and their investigators also must recognizethat mitigation companies don't work alone. Identifying thefraudulent mitigation company is like uncovering just the tip of aniceberg. In most cases, active fraud participation extends beyondthe mitigation company to a much larger network — everyone fromrebuild contractors and plumbers, to public adjusters and eveninsurance agents. Many unscrupulous mitigation companies payfinder's fees to plumbers and insurance agents for profitablereferrals — passing on that expense to the insurer.

For example, a plumber who replaces leaky pipes can easily earnfour times or more what he made on the job by telling the customerthere could be unseen water damage. If the customer is worried andwants the area checked out, the plumber recommends the mitigationcompany paying him the finder's fee. That company could then billthe insured's carrier for work that didn't need to be done, or forwork that was never even done.

Insurers must understand that to successfully combat fraudulentwater mitigation claims they must identify and investigate theserelationships, as well as eliminate the entire network.

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Carriers need to demonstrate concrete evidence that fraudhas been committed and exactly how much that fraud is costingindividual consumers. (Photo: iStock)

How do you identify a network of operatives in a watermitigation scam? A performance trend analysis may be the solution.Simply put, it's doing a thorough examination of everyone andeverything involved in the mitigation and restoration.

• Review all the documents associated with the claim. Carefullyexamine all businesses and service people involved — how many timeshas that person or group of people been involved in a series ofclaims? Do the same people collaborate on mitigations more oftenthan can be attributed to coincidence? Are their bills higher thanmost others?

• Look for trends or commonalities that suggest intent. Compilethe information gathered from these investigatory forays to createa playbook for future cases. That way, you'll know what to lookfor, and what you may need to know even before you enter thediscovery phase of a case.

• Use all evidence of trends to convince a judge or a jury thatsomething the water mitigation company characterizes as a mistake,actually is a pattern and practice of the company with the intentto deceive the insurer and collect insurance benefits to which theyare not entitled.

And just as you must identify all of the players in a mitigationfraud network before launching an investigation, you must attackthem all when litigating the case. There are two good reasons forthis.

First, like a multi-headed monster, cutting off one part of adamage mitigation network leaves the rest to continue the fraud,while the one damaged grows back. Second, there might not be enoughevidence to file against the mitigation company or the head of thering. However, by aggressively pursuing everyone involved in thefraud, you may be able to get that evidence from someone else inthe scheme.

It may be possible to find a back door inside the ring'soperation that provides access to hidden information and providesthe ammunition to take down the leader. It may also be possible tocultivate a valuable confidential informant who can provide insideinformation on additional scams.

A win-win in the battle against fraud

Also, examine all claims in the aggregate, rather than just theone case under consideration. Seek out examples that show thecompany in the client's claim, which used restoration business “X”or plumber “Y,” used those same vendors in multiple other cases —particularly if one or more of those claims were deemed fraudulent.Finding a pattern of complicity that extends well beyondcoincidence may help point the way to fraud.

Be judicious, but take certain cases to court. That accomplishestwo things. It forces the mitigation companies to prove a loss iscovered, and that their charges are reasonable. It alsodemonstrates to them, and others, that the company is willing tostand up to fraud and won't make payments on inflated claims. Manytimes those fraudulent companies will stop targeting your companyand focus their efforts elsewhere — such as on carriers that do notscrutinize fraudulent claims as closely.

The time has passed for carriers or the industry to just yell“fraud!” and expect action. They need to demonstrate concreteevidence that fraud has been committed and exactly how much thatfraud is costing individual consumers. Only then will it bepossible to put a crimp in fraudulent mitigation claims, and onlythen will lawmakers be willing to take up legislation that helpscurb such criminal activity.

Brian S. Tenzer, Esq., is a partner atGoldstein Law Group in Fort Lauderdale, Fla.

Related: 10 red flags that could signal a fraudulent Autoclaim