The State Fire Marshall’s office and Division of Insurance Fraud have just completed their joint investigation of the infamous “Case of the Yellow Hammer”. Public Adjuster, Jorge Espinosa, used a yellow hammer on the floor in Angela Frye’s kitchen to inflate her small grease fire (and thus his fee) into a $70,000 fraud against Federal National Insurance Company.
What made the case noteworthy isn’t what Espinosa did on this occasion–it fit with what was going on generally at the time according to a 2010 DFS (Department of Financial Services) report.
Rather, it stood out as a prototype of how politics can create moral hazards that gradually deteriorate society. That’s what happened after the 04/05 storms when lawmakers ignored sound insurance principles implementing a prohibition against the “hold back” of claim payments for losses involving replacement cost. (See NOTE #1)
It also stood out because Espinosa was, himself, the quintessential moral hazard. After shooting an unarmed teenager in the back three times, he left the Miami-Dade police force to start Global Adjusting, Inc. His bully’s reputation served him well as police reports show he and his cohorts intimidated claimants into hiring their firm by referencing the shooting or by lifting their shirts to reveal sidearms, or both. These thugs had quickly learned how to exhume the pot of gold lawmakers unwittingly buried at the front of the rainbow–potential clients could now collect the full amount of a claim without having to spend the money on repairs. And this meant they also had money to pay a public adjuster.
To be clear…the “Yellow Hammer” case isn’t about public adjusters. In fairness, several groups, including The Florida Association of Public Insurance Adjusters (FAPIA) work hard to rid their profession of such characters. The case, however, is instructive–showing the consequences of casting aside basic insurance principles in favor of political expediency. (See NOTE #2 below)
In this case, Espinosa and a “trusted employee” arrived at Angela Frye’s home where a small kitchen fire had occurred only the day before. They explained to her that she (and thus they) could collect much more “IF” just a single tile had also been damaged. Seeing no such damage, Espinosa smashed the floor with a frying pan, then with a yellow hammer, and cloaked his display with a cover story about a dropped plate–amount of the no hold back replacement cost claim…about $70,000. Actual covered damage…something less than $9,000.
Value of the moral hazard…$61,000!
At the time, without a “hold back” provision, cases like this proliferated threatening to engulf the entire home insurance mechanism. The general pattern was so widespread DFS formed a task force specifically to address suspicious kitchen fires. (See NOTE #3 below).
Thankfully there’s light at the end of this very dark tunnel. DFS has handed the case back to Miami-Dade police officials for prosecution and the legislature has repealed it’s ill-advised “hold back” prohibition.
Two things are still left to be done, however.
First, Dade County must be as thorough in prosecuting as the DFS has been in investigating. Espinosa and others like him must be punished to the full extent of the law.
Second, we must all learn from this episode, especially lawmakers.
Insurance isn’t as simple as making sure every loss is rewarded…it’s about making sure people are made whole again–no better, no worse!
NOTE #1: Realizing the insidious nature of its error, the legislature repealed its prohibition against replacement cost hold back in 2011. It was the result of escalating frequency and severity which, in just two years, yielded deterioration in pure premium (the amount needed just to pay claims) of over 65%. There were no storms during this time period.
NOTE #2: The number of suspicious insurance claims linked to home arson more than doubled in Florida between fiscal years 2007-2011. They were mostly in south Florida and according to DFS, 28 cases were reported in fiscal year 2010 in Dade, Broward and Palm Beach counties.
NOTE #3: After a spike in kitchen fire losses executives at Citizens alerted the State Fire Marshall’s office. The Bureau of Fraud reviewed both carrier and Citizens claims and found alarming similarities, including: the involvement of public adjusters, the geographic area of the occurrence, demographics, and the time of day the fires occurred.
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