Articles on insurance fraud:

Stormy weather ahead for storm-chasing contractors

By Howard Goldblatt & James Quiggle
September 11, 2012
Shady contractors face pressure from consumers, regulators, legislators

JIFA_logoAbstract: Most contractors are honest and ethical, but many exploit homeowners with ruses that cost them and insurance companies thousands of dollars. The cons rise up during routine home improvement or repairs, but most dramatically after natural disasters such as hurricanes, hailstorms and tornadoes. Often the dishonest contractors are incompetent and unlicensed. They typically descend on locales damaged by natural disasters, looking to fleece dazed homeowners. Deceitful contractors might extract a large downpayment, for example but then disappear after doing little work. State and private agencies regularly issue alerts advising consumers about red flags of contractor fraud. Educated homeowners are critical to thwarting this crime. So is state legislation. Six states passed laws this year allowing homeowners to cancel contracts, generally if the insurance company has refused the claim. In recent years, nine states also have made it illegal for contractors to offer inducements such as paying the deductible to gain the business. Tougher licensing also has been a trend in recent years. But above all else, partnerships among all key players in the storm zone must be formed to jointly marshal high-impact consumer education from all angles.


Max Jackson shivered in his roofless home; the Montana winter chill bit hard. He had hired contractor John Mulinski to repair his roof.

Like a barber, Mulinski sheared off the covering but then disappeared with Jackson’s $30,000 downpayment.

Jackson huddled in his roofless home for six weeks. His attic and insulation suffered serious weather damage. He spent $29,000 more to install a new roof and fix the damage, and still had to repair water damage.

Mulinski bilked dozens of trusting homeowners across Montana and other states. He fleeced homeowners and even his own workers out of $1 million in one of Montana’s largest contractor frauds in years, officials say. Mulinski’s business address was an abandoned home with an easy chair, two milk crates and a telephone. He received nearly five years in federal prison in March 2012.

JIFAstory3Back on the East Coast, Precision Builders literally took homes by storm. The firm scouted neighborhoods in New Jersey and Pennsylvania. Sales reps convinced the homeowners that their dwellings were damaged by hail. Insurance would pick up the tab for a new roof or siding, the recruiters promised. The Camden, N.J. firm used screwdrivers to nick shingles or dent siding before insurance adjusters arrived. The firm and its ringleader Domink Sadowski were convicted in Pennsylvania in June 2012. Travelers Insurance also has launched a $1-million civil action against Precision.

Most contractors are honest, but these two poignant cases illustrate a national trend involving contractors who try to defraud homeowners.

No agency compiles definitive statistics, thus leaving large data gaps in understanding the national scope and severity of this crime.

The evidence is anecdotal and inexact. But in composite, it suggests a significant fraud problem exists around the U.S.

  • Contractors ranked No. 3 in a 2011 national consumer complaint survey by the Consumer Federation of America.[1] The consumer-protection group received more than 13,000 complaints about contractors in 2011.

  • Home improvement scams ranked in the top 10 consumer frauds listed by the Better Business Bureau for 2011. [2] Consumer inquiries to the BBB about roofers have ranked No. 1 for five straight years.[3] In fact, nearly 8,200 complaints about roofers were filed with the private consumer agency in 2011.[4]

  • About 9,000 households were affected by contractor fraud after hurricanes Katrina and Rita in 2005, according to a survey by Louisiana State University and others. Nearly 60 percent of surveyed Katrina and Rita victims say they were victimized by contractor fraud.[5]

  • The FTC received more than 13,000 complaints about home repairs, improvement and products in 2011.

  • A Google search of news coverage using the search term “home contractor fraud” revealed more more than 4,500 recent news stories. A general Google search uncovered about 15 million references. Another 129,000 references to insurance departments and contractor fraud are listed. The Google search term “home contractor arrested” uncovered more than 8.2 million references. Even factoring out many false positives, the sheer volume still suggests considerable action involving contractor fraud.

  • Questionable hail damage claims were 28 percent higher during the first half of 2012 than the same period last year, according to the National Insurance Crime Bureau.[6] Flood/water damage was 21 percent higher. Some claims may be homeowner-originated, some may stem from contractors, or both. The subtotals aren’t broken out.

  • State, national and local authorities around the U.S. regularly issue urgent consumer alerts about shady contractors just before and after disasters such as hurricanes, hail, tornadoes, wildfires, floods and simply damaging windstorms. Alerts also are issued locally to cover routine home repairs and remodeling. Any Google search will bear this out.

  • Eight states introduced bills this year enlarging consumer ability to cancel contracts with contractors. Many states have passed other fraud laws in recent years.

    There are diverse kinds of contractor scams, but the Coalition Against Insurance Fraud has identified five of the most-common and potentially damaging to homeowners and their insurance companies:[7]

    Pre-pay. The contractor demands a large cash payment upfront, then disappears after doing little or no work. They also may illicitly require the consumer to pay for bids.

    Shoddy work. The work is low quality, using substandard materials. Homeowners may have to redo the entire job, possibly at their expense.

    Phantom damage. A contractor creates storm damage. Nicking undamaged sidewall or roof shingles with a screwdriver to mimic hail damage is a tactic.

    Inflated damage. Contractors may enlarge holes in a roof to increase their billings. Simply inflating the bill to include more work than was done is another ruse.

    Pay your deductible. Offering to pay the homeowner’s insurance deductible to get their business typically is an attempt to lure the homeowner for fraudulent work.

    “Avoid door-to-door contractors. Honest contractors don’t need to invasively knock on doors to drum up business. The best advice is to politely say, “Thank you” and then close the door.” The damage can be significant: a victim’s homeowner policy may not pay for fraudulent repairs. This could leave a homeowner liable for thousands of dollars in bills. Insurers also are defrauded if the scheme slips through the claims process. The homeowner’s own premiums also might rise. Fixing substandard work can take weeks and thousands of dollars. And more generally, fraudulent claims help raise premiums for all homeowners.

    Contractor fraud is a year-around phenomenon. Dishonest contractors attempt to bilk homeowners seeking routine seasonal fixups such as replacing an aging roof, or remodeling a kitchen.

    But many of the most visible cases surface after disasters. Hurricanes, hail and tornadoes cause widespread home damage. Homes are flooded. Trees smash into roofs. Wind blows entire roofs way. Heavy snow can collapse garages and sunrooms.

    Storm-chasing contractors typically appear in disaster scenes, frequently going door to door for work. Often they are unlicensed drifters from out of state. They may be incompetent, and have few skills other than a knack for exploiting worried homeowners. Even established contractors with local roots have defrauded trusting homeowners.

    They are striking at a point of high vulnerability. Disaster scenes are in states of confusion. Homeowners often are anxious and traumatized. Their homes may be seriously damaged, heirlooms and other possessions often ruined. Victims want to rebuild their lives quickly, and a seemingly competent contractor appears to be a lifeline back to normalcy.

    Elderly homeowners sometimes are targeted. Russell Clayton “PeeWee” Clark allegedly stole thousands of dollars from elderly West Virginia residents. He was unlicensed, officials say. In one case, Clark told Jacqueline Hill that her roof had loose shingles. She gave him more than $2,000 upfront. He removed the shingles, left her roof covered with a tarp and disappeared, prosecutors charge.

    Hill says her home suffered water leakage and mold as a result. Clark has been arrested, and police say he has been bilking homeowners for more than 20 years.

    Repair jobs may be fairly plentiful despite the stagnant economy, thus creating widespread opportunities for dishonest contractors going forward. Some 80 percent of homeowners plan to spend as much or more on repairs in 2012 and 2013 than they did in 2011, says a survey by Principia, a consulting firm in the building products industry. Nearly 38 percent of homeowners say they will spend somewhat more, or a lot more, this year and next.[8]

    Official efforts to combat contractor schemes are varied and widespread. The mere existence of these efforts suggests yet more evidence of an extensive fraud problem.

    Consumer outreach. Alerting consumers how to avoid being scammed is a widespread strategy. Essentially, authorities are empowering homeowners to be the first, and perhaps most important, layer of defense. National, state and local authorities routinely issue consumer alerts about shady contractors before and after disasters such as hurricanes, tornadoes, wildfires, floods and unusually high winds.

    Similar warnings also are issued about routine home fixups and remodeling.

    State insurance departments, Better Business Bureaus, attorneys general, state and local contractor licensing boards, private groups such as the Coalition and even federal agencies such as the FTC also are among the many groups actively alerting consumers. Much of the outreach is aimed locally, by local groups. Some is national, as with the Coalition’s efforts.

    The advice varies, but here are several common themes, which the Coalition also promotes around the U.S. In an example of an alert in consumer- friendly language to best illustrate the appeal, the Coalition urges:[9]

    Avoid door-to-door contractors. Honest contractors don’t need to invasively knock on doors to drum up business. The best advice is to politely say, “Thank you” and then close the door.

    Verify license. Contact your state and local licensing agencies to ensure the contractor is licensed.

    Contact local Better Business Bureau. Does the contractor have a history of complaints? See if the contractor has a positive or negative review by a Better Business Bureau.

    Work with your insurance company & agent. Don’t let the contractor do the talking. If insurance covers the damage, work directly with your insurer to inspect damage, determine what repairs are covered, and how best to get the home repaired as soon as possible.

    Insist on a contract. Have a signed contract specifying exactly what work will be done. Don’t sign a contract with blanks, and make sure it has a start and end date.

    Watch for red flags. No business cards or referrals...P.O. Box instead of a street address...the van looks rundown and has no company name... poor personal appearance...can’t show proof of workers compensation insurance.

    Trust your instincts. If you feel uncomfortable, then back off because something’s probably wrong.

    Know your rights. Under some state laws, homeowners may be allowed to cancel a contract within a few days if they change their mind or have second thoughts about the contractor. Federal law also allows a three-day cooling-off period.

    Actions by regulators, law enforcement, insurance companies and others are large parts of the anti-fraud mix. Some efforts are pre-emptive and some are retroactive. To name just a few:

    Stings. Georgia’s insurance department set up a sting called Operation Hailstorm. Investigators rented a modest house near Tallapoosa, and staked it out with hidden cameras. A licensed home inspector certified that the place was in good condition, and the “repair job” was advertised.

    Ronnie Baker allegedly was luring storm-wracked clients by promising to illicitly hike the contract price to offset the deductible.

    Cameras then allegedly showed Baker telling the “owners” that the house needed a new roof. “Don’t tell them I’m paying your deductible or they’ll just deduct that from us. Legally I can’t do that,” he allegedly told undercover agents.

    A local news station onsite then recorded Baker allegedly digging his finger into shingles and even using a bolt from a TV antenna to damage shingles. He and several other contractors were arrested for hand-damaging roof shingles.[10]

    Civil actions by state officials. The Illinois AG has filed civil suits against four Chicago-area home contractors. The contractor demanded money upfront but never did the repairs, the AG says. One firm caused damage to a couple’s home to bill them for repairs. As a result, their homeowner premiums rose $600 a year. Another contractor disappeared with a $7,400 insurance check, leaving the owner to patch the roof himself.

    Civil suits by homeowners. A Beaumont, Tex. woman hired a contractor. She had paid him $25,000 upfront but he allegedly completed only part of the work. Heavy rains then pummeled the area, and the supposedly repaired parts of her house leaked, she says. She had to pay $15,000 to finish the job, she says.

    Citizen complaints and alert action. Anecdotally, the Coalition has observed that many official cases against suspected contractor fraud begin with complaints by homeowners to regulators, law enforcement, reporters and other officials.

    One consumer went a step farther: a contractor convinced an 81-year-old Dallas woman that he should check out her roof and leaking sun room after he’d knocked on her door and claimed to see problems with a roof vent.

    Suddenly alarmed that she’d let a stranger into her house, she called a friend who is active in the neighborhood’s crime watch program. The friend came out and started writing down the truck’s license number. The startled contractor and his buddy jumped into the truck and sped off.

    Police arrested him at a motel. He had allegedly stolen downpayments from other seniors.

    Nonprofit watchdog. A nonprofit agency focusing solely on educating consumers about contractor fraud and abuse has been founded. Consumer workshops around the U.S., especially in disaster-prone areas, are conducted by the National Center for the Prevention of Home Improvement Fraud. The workshops educate homeowners how to manage the home improvement project, and how to respond if contractors have scammed them. The Center’s website also has considerable advice and other information.

    Legislation & regulation. Statehouses started passing a spate of new contractor laws after Hurricane Katrina swept through the Gulf region in August 2005. Any state (and the District of Columbia) could be hit by a natural disaster, be it a hurricane, tornado, hail storm, tropical storm, wildfire or earthquake. Dishonest contractors still remain such a consistent threat today that empowering homeowners to protect against storm chasers is one of the defining state legislative trends of 2012. A surge of consumer-protection bills passed or were proposed in numerous states as citizen complaints kept mounting.

    Strengthening a homeowner’s ability to cancel contracts is the primary contractor-related trend. Eight states have debated bills allowing consumers to cancel a contract so far this year, and six bills have become law.

    The measures are relatively similar: consumers can dissolve the contract if the insurer denies the claim because the repair is unneeded or fraudulent. Contracts also must display a prominent message informing homeowners of their right to cancel.

    Many contractor measures are clustered in midwest states prone to tornadoes, hail and other storms:

  • Indiana, Nebraska, South Dakota, Colorado and Kentucky enacted cancellation laws. A bill in Tennessee died;

  • Iowa enacted a different law. Consumers can cancel if contractors use inducements to convince consumers to sign (such as offering to pay the deductible), or act as an intermediary with the insurer (i.e., act illegally as an unlicensed adjuster). The state AG’s right to prosecute shady contractors under the state’s consumer-protection law also is clearly confirmed;

  • Georgia proposed requiring contractors to be licensed, but the legislature closed before it could be fully debated.

    Another legislative trend has emerged in recent years: preventing contractors from offering to pay the homeowner’s policy deductible as a lure to win the contract.

    Nine states have made such inducements illegal. Without such protections, trusting consumers could sign contracts with deceitful contractors, thinking the deductible gambit saves them good money. Paying for the deductible involves only a small amount of money for the contractor — normally just a few hundred dollars. The big payoff is getting the job. Once hired, the contractor is free to inflate bills worth thousands of dollars, run off
    with the large downpayment or impose other profitable scams.

    Licensing. About 30 states require contractor licenses, says Angie Whitaker, executive director of the National Association of State Contractors Licensing Agencies (NASCLA). [11] [12] Some agencies, however, solely cover specialty trades such as electricians. State agencies usually require contractors to carry workers compensation, surety bonds and liability coverage. They also have enforcement and consumer-complaint mechanisms.

    About 15 “home rule” states operate solely with local licensing systems, says Whitaker. They leave it to counties, cities and even towns to regulate contractors. New York is one example. But most local agencies don’t have the enforcement powers that state licensing boards do, Whitaker says.

    Several states such as Alaska and Louisiana allow out-of-state licensed contractors to work without in-state licenses because of reciprocity agreements. And Mississippi, a state devastated by Katrina, grants emergency licenses for out-of-state contractors who want to work there after a natural disaster.

    Virginia requires in-state contractors to be licensed, and out-of-state contractors must receive a certificate of authority from the Commonwealth if they want to do repairs in the state. Thus all contractors must pass a minimum test to work repair jobs in Virginia.

    Whatever their approach, contractor laws generally are designed to protect homeowners more than insurers. But insurers are collateral beneficiaries when a law prevents contractors from inflicting thousands of dollars in fraudulent work at a time.

    In a related move, insurance regulators held the first National Tornado Summit in Oklahoma City late this winter to discuss all aspects of dealing with tornadoes. The Coalition gave a presentation discussing the fraud aspects of contractors and how consumers can avoid being victimized.

    Partnerships among all key players in the storm zone must be formed to jointly marshal this education from all angles, the Coalition urged. Insurers, consumer groups and regulators are just some of the players who should be in the mix.

    Public outreach should be a first-tier goal of any such partnership, and timing is everything. Fully informing consumers before a natural disaster strikes is crucial. Early outreach will give homeowners vital time to learn the warning signals of deceitful contractors, and how to keep dishonest operators at arm’s length. Education is much harder during the confusion after a disaster, the Coalition said.

    “We can’t avoid stopping a consumer from being victimized by a storm, but we must teach consumers to avoid being victimized a second time by shady contractors,” the Coalition told the standing-room-only attendees.

    About the authors: Howard Goldblatt is director of government affairs for the Coalition Against Insurance Fraud. James Quiggle is director of communications.


    endNOTES
    [1] 2010 Consumer Complaint Survey Report, Consumer Federation of America, National Association of Consumer Agency Administrators & North American Consumer Protection Investigators, July 27, 2011Utah: 31A-31-102.
    [2] Top 10 Scams of the Year 2011, Better Business Bureau, 2012
    [3] Huge Jump in Inquiries Means Shoppers Are Doing Their Homework, Better Business Bureau, 2012
    [4] Better Business Bureau Complaint Statistics, Better Business Bureau 2012
    [5] Impact of Contractor Fraud on Homeowners Rebuilding After Katrina and Rita, Louisiana State University, 2009
    [6] Forecast Report, National Insurance Crime Bureau, July 26, 2012
    [7] Five Worst Frauds By Home Contractors, news release, Coalition Against Insurance Fraud, May 4, 2012
    [8] Homeowners Expect to Spend More For Home Improvements, Principia, 2012
    [9] Five Worst Frauds By Home Contractors, news release, Coalition Against Insurance Fraud, May 4, 2012
    [10] Officials: Sting shows roofers creating storm damage, WSTV news investigation, Atlanta, Nov. 21, 2011
    [11] Interview with Angie Whittaker, Executive Director, National Association of State Contractors Licensing Agencies, 2012
    [12] List of state licensing agencies, ibid

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