Mold Insurance Fraud Could Spread Nationwide

Mold Insurance Fraud Could Spread Nationwide

Criminal schemes to milk Texas insurers for millions of dollars in phony mold and water damage claims are spreading faster than fungus in a petri dish, and will soon be a multistate problem, investigators and carriers warn.

“We expect this to become a nationwide problem,” said Jerry Johns, president of the Austin-based Southwestern Insurance Information Service, which represents the majority of the states property-casualty insurers.

Mr. Johns discussed mold-fraud problems as plea discussions were underway in Houston for a seven-member group under federal indictment for a fraud scheme said to have scammed $7 million from 17 insurers over six years.

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

In many mold fraud cases, Mr. Johns said, homes have had doors and windows sealed up to create a warm environment that cooks up mold. SIIS cannot state that such “cooking” of homes is commonplace, “but we can say with a large degree of certainty that it 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 license requirements or standard best practices for mold remediators, whose bills account for a large portion of such claims.

Claims involving water and mold damage in Texas during 2000 and 2001 amounted to more than $1 billion for homeowners losses and loss adjustment expenses, according to the Texas Department of Insurance. Many of those claims are long-tail, and regulators have heard “horror stories” about contractors doing remediation work that drags on for months, said Lee Jones, a Texas department representative.

Concern about remediation practices led Texas Insurance Commissioner Jose Montemayor earlier this year to order an investigation. Dennis Pompa, deputy commissioner and chief investigator, said probes are underway into “suspected fraud related to mold claims,” which he could not detail, although he did discuss the activities of the accused Houston-based ring.

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

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

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

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

Mr. Staples and his group, acting as contractor remediators, would then generate false invoices to be given to insurers, and pay other persons to generate fake documents that went to insurers, the grand 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 Indemnity Company, Heartland Insurance Group, Scottsdale, State Farm, Texas Farm Bureau, Mt. Vernon, Republic, Heartland Lloyds, Horace Mann, Kemper, and Prudential Property and Casualty.

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

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

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

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

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

Mold remediation fraud, according to Mr. Johns, frequently involves repairs that are not made at all, or for which inflated rates are listed. Scams involve charging for water extraction units that either are not used or employed for much less time than is charged for, he said.

In Texas–where heavy billboard advertising advises consumers about mold remediation, and where there has been major publicity about “cooking” houses–the state is “at the epicenter” of a mold epidemic, Mr. Johns said, predicting that “the things going on here are going to spread countrywide.”

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

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

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