Contractor fraud is when individual contractors or firms engage in illegal practices when hired to repair, renovate or (re)build residential properties. It is also known as "home improvement scams". An example is a roofing contractor shows up at your door unannounced and proceeds to tell you that your roof has damage after a weather event. They offer to replace the roof at a low price, and state that your insurance company will pay for the roof replacement. The contractor then performs shoddy work or disappears, often after collecting a deposit from the unsuspecting consumer.
In Florida particularly, some contractors will take an "Assignment of Benefits" for the homeowner's insurance proceeds, and will file litigation if the insurer does not pay the inflated "cost of repairs". Such litigation has been rampant in Florida adding to an already increasing homeowners' insurance crisis in the state.
Contractor fraud also encompasses shoddy work, use of substandard materials, escalating the project costs, and over-billing. The consumer often ends up in many cases being defrauded twice because not only can they lose a significant amount to the fraudster, the inferior repair work can cause damage to previously undamaged part of the house, and a legitimate contractor will have to be hired to repair the shoddy workmanship or bring the home up to code. Fraud victims are frequently pressured into paying for the work through threats and intimidation.
Common contractor fraud tactics involve asking for substantial amounts of money upfront in advance, low ball offers, excluding key project details, running into "problems" that require additional cash, not obtaining proper permits for the work, and offering or "selling" leftover materials from a previous job.
Before hiring a contractor, homeowners should research the contractor, check references, obtain multiple quotes for the work, require a comprehensive written contract, verify the contractor's licenses and insurance, check warranty coverage, and get receipts of any payments made.
How Does Contractor Fraud Affect The Insurance Industry?
In Florida most acutely, contractor fraud via litigation over the use of the assignment of benefits (AOB) is out of control. A combination of lawyers, roofing and home repair companies and public adjusters have targeted homeowners who suffered weather damage. Homeowners signed over their right to make a claim against their insurer, sometimes unbeknownst to them, under an Assignment of Benefits (AOB). In other cases the holder of the AOB would promise the homeowner a financial incentive to file a claim. If the insurer denied the claim often for overinflated repair costs, then the individual or company that held the AOB would file suit against the insurer.
In 2019 AOB claims in Florida accounted for more than 76% of all homeowners litigation in the United states. Because of their profitability since 2013, of the $15 billion in claims that have been paid out in Florida, 71% went to attorneys fees, 21% for defense costs of insurance companies, and only 8% went to the insured's for their losses. AOB claims have been a driving force in Florida's property insurance woes. Thus far the legislation passed has yet to reign in the number of suits, and fix the market.
While Florida is an extreme example of how contractor fraud affects the insurance industry, it occurs in all states and drives up the cost of property insurance for all.
Christine G. Barlow, CPCU
Christine G. Barlow, CPCU, is Executive Editor of FC&S Expert Coverage Interpretation, a division of National Underwriter Company and ALM. Christine has over thirty years’ experience in the insurance industry, beginning as a claims adjuster then working as an underwriter and underwriting supervisor handling personal lines. Christine regularly presents and moderates webinars on a variety of topics and is an experienced presenter.