Insurance Scam Artists Feed Off Building Projects

The president of a fraud detection and risk management firm, who previously gained prominence investigating public construction fraud, warns that insurers and their clients are losing vast sums on private building project scams.

The losses, said Thomas D. Thacher, president and chief executive officer of New York-based Thacher Associates, could be avoided if insurers and risk managers were more proactive in vetting contractors.

According to his company's research, fraud in excess of $1 billion occurs annually within the construction industry, and of that, tens of millions relate to insurance fraud. The firm says this is a conservative estimate, noting that construction insurance fraud involves surety bonds, workers' compensation, general liability, wrap-up insurance and broker-related fraud.

By doing advance checking, "in the long run, they [insurers] would save enormous amounts of money," said Mr. Thacher, who formerly served as vice president and inspector general of the New York City School Construction Authority.

In particular, he discussed the fraudulent activities that can victimize projects where all contractors on the job are insured by owner-controlled insurance policies (OCIP) providing wraparound coverage.

One of the ways in which project developers can be hurt, he said, is that contractors may put in injury claims for workers who are actually hurt on another job site where they have workers employed.

Frequently, noted Mr. Thacher, it is difficult to track the comings and goings of everyone on a large construction site, and preventing such scams involves careful monitoring and examination of sign-in sheets. "It's an intense investigative piece," he said. Often, he added, there is no checking of certificates of insurance.

Turning from workers' comp and liability to surety issues, he said that when it turns out there is a failure of a contractor's performance bond, the burden then falls on the project's insurer.

As evidence that insurers are failing to look closely enough at contractors, Mr. Thacher said that during his time with the School Construction Authority, the agency was able to debar 290 contractors--and of that group, "every one had a surety bond."

The debarred contractors were kept off the job for a myriad number of reasons, including organized-crime ties, fraudulent activity, environmental violations and other criminal activity, as well as prevailing wage-law violations.

In general, Mr. Thacher said carriers' claims departments would favor advance screening of contractors with which they run into problems, but the underwriting side of the business is so cost-conscious that "you don't have insurers doing this kind of integrity vetting."

Another misdeed involving contractors his firm has noticed is that they may quietly substitute a second-tier subcontractor so insubstantial the address of the subcontractor is a vacant lot. Project owners, he said, need to have good controls and risk management that does checking for fraud and job-site monitoring.

Highlighting a different kind of fraudulent activity, Mr. Thacher noted that one of the most common scams related to construction risk is for a small company to set itself up as a surety firm, with little or no resources to pay claims--just a "legal department. Claims are routinely denied, and then fought by in-house lawyers, according to Mr. Thacher.