Robin Westcott’s working group, the Homeowners’ Policy & Claims Bill of Rights Workshop, concluded its deliberations Thursday, July 18th. It was, in my opinion, a thorough and professionally conducted exercise that will yield many helpful recommendations. Hopefully those recommendations will lead to better consumer education first, improved regulatory oversight second, and only if/when absolutely necessary…better laws. You can watch the entire workshop: Day 1; here and Day 2 here.
One topic in need of far greater scrutiny but not included on the agenda is that of exorbitant referral fees paid by water extraction companies to plumbers. I know this sounds picayune, but…it’s not!
In fact, I’m slowly convincing myself this may be the single greatest contributor to non-catastrophic “claim inflation”–more than any other single cause of loss. And, if I’m right, other than the total elimination of fraud it may hold the greatest potential to lower Florida’s property premiums.
In my last blog about unethical roofers, I mentioned water remediation which prompted an email from the owner of a prominent water extraction company in Tampa. He was willing, indeed eager, to speak frankly about the ethical issues plaguing his profession.
In a subsequent phone call he told me he thought water extraction is “…one of the most corrupt businesses in Florida”. Fraudulent and unethical activity apparently occurs via unnecessary repairs, public adjusting without a license and ultimately, the defrauding of insurance companies with “claim inflation” to create windfall profits, eliminate policyholder deductibles and recoup exorbitant referral fees paid to plumbers.
My informant called referral fee’s “kickbacks!” because almost all are re-paid via inflated insurance claims.
Typically, the first phone call after a water leak (from other than a roof or sewer backup) is to a plumber who repairs the leak and opines to the homeowner about hidden water damage, toxic mold, wood rot, whatever. He recommends, then calls, a water extraction company and often within minutes a team arrives with all manner of grown-up equipment–mold detection devices, deep penetrating moisture meters, thermal imaging cameras and lots of drying fans. This is how the referral fee drives up loss “frequency.”
The plumber is often paid on the spot–in cash or, sometimes as a percentage (usually 10%) of the total billed to the insurer. The homeowner signs the extraction company contract, insurance proceeds are assigned, work is completed and the insurance company is presented with an inflated invoice that covers the plumbers referral fee, the policyholders deductible and is often padded to twice that of the insurer’s recommended providers. This is where “severity” is impacted.
According to my caller the going rate for plumber “kickbacks” in the Tampa Bay area is a whopping $1300.
You heard right!
Incredulous that anyone could be paid so much for a phone call, I conducted my own sting operation–calling a half dozen extraction companies, pretending to be a plumber and asking if they paid referral fees and if so “…how much?”
The very first person I spoke with proudly said her company paid $1500. Ironically, she warned that unlike many “unethical competitors” her family owned business reports referral fees to the IRS. I was given an example of one competitor that paid a plumber thirteen separate fees without reporting any to the IRS–neither, I assume, did the plumber.
The further I delved the worse it got. I now have pictures of water extraction trucks with the plumber referral fees painted on the side. I have numerous web addresses, advertisements, YouTube sites…all of which seemed to bear out my informant’s contention that something is horribly rotten in the water extraction racket.
They aren’t licensed (See NOTE #1). They aren’t regulated. Heck…every extraction company I called emoted on the unethical behavior of their competitors!
Check out Citizens SIU (Fraud) Cases of Interest Update which shows nearly 40% (4 out of 10) involved water pipe breaks, plumbers or water extraction companies.
And, it’s all consistent with the ICA workshop discussions revealing that, in a large portion of water claims, no license is required, no permits are issued, no inspections are conducted and the insurer is left with greater water loss “frequency” and “severity” as a result.
Let’s do some math.
Water damage claims are the number one cause of loss across all insurers–approaching 50% of total claims. Using Citizens as a gauge, the 2012 total forecasted payout just for pipe breakage (not weather related roof leaks, or back up of sewers, etc) was in excess of $142,000,000–the average payout exceeds $10,000 per claim. (See NOTE #2 below).
Now, let’s use XYZ Insurance Company as an example. It’s well managed and has 180,000 policies with only 3% (5400) filing claims each year. About half, or 2700, are for water damage. If half of those are from leaking or busted pipes you have 1350 claims with a high likelihood that a plumber and a water extraction company will be called in.
Assuming the claim is inflated by only the amount of the referral fee ($1500) and a deductible of, say… $1000, the insurer starts out $2500 in the hole on 1,350 claims every year for a total annual loss due to fraudulent claim inflation of $3,375,000…minimum!
Using the same assumptions and applying it to all Florida property carriers including Citizens it’s roughly $150 million annually. (See NOTE #3 below). And, again…this doesn’t include the cost of unnecessary services and the rank-and-file up-charging everyone agrees is rampant.
What a mess!
All from referral fees so high they become a moral hazard.
In addition to recommending that the OIR approve insurer form filings reasonably limiting the assignment of benefits, the ICA’s final report needs to include legislative recommendations specifically targeting water extraction. As a minimum, all water extraction companies need to be licensed; permits should be pulled and inspections performed on every job, and…
…all referral fees, to plumbers or anyone else performing insured repair work, should be prohibited or capped at a level low enough to avoid any incentive for “claim inflation.”
NOTE #1: The Department of Business and Professional Regulation licenses contractors and subcontractors but, does not license Water Extraction per se. It’s estimated that about 75% of all water extraction companies have no license whatsoever. A few websites, however, displayed multiple license numbers (4 or more), including: Mold-Related Services, Licensed Contractor, Licensed Plumber and Public Adjuster.
NOTE #2: Numbers were taken from a Citizens report titled “Water Loss Update” presented to the Citizens Claims Committee, November 26, 2012. A chart on page eleven shows a significant decline in public adjuster involvement in water damage claims after the prohibition against replacement cost holdback was repealed. The average claim amount for just plumbing leaks was $10,390. The highest average water claim amount is “Back up of Sewer or Drains” at $16,776 per claim. The third highest water claim, “Accidental Discharge”, averaged $10,098 per claim. The lowest average payout for water damage was for roof leaks at $5,439.
NOTE #3: For convenience (and perhaps a bit of laziness), I made liberal assumptions to come up with the numbers, as follows: Six (6) million property policies in Florida (4 million insured dwellings, 800,000 condo units, 600,000 mobile homes and, some renters policies); assuming a claims frequency of 4% annually you get 240,000 claims–half (120,000) are water claims and if half of those are from leaks or bursting of pipes you have an annual payout, for referral fees and deductible elimination only, that is somewhere in the neighborhood of $150 million.
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