Mitigating the Fraud Potential in Disaster Claims



Thomas Diana, Esq. and Brian Tenzer, Esq.

Disaster mitigation is a growing, lucrative business.

Where once there were a few major disaster water mitigation companies, now there are scores of smaller enterprises. Unfortunately, a lack of strict oversight and enforceable guidelines enables unscrupulous enterprises to take advantage of these situations. Fraud investigators should be aware of the propensity for these emerging enterprises to inflate damages and charge for work not performed.

“Assignment of benefits” contracts are problematic. To avoid the worry of dealing with mitigation charges, insureds are asked to assign their insurance benefits, which authorize mitigation companies to bypass the insured and bill insurance companies directly. Many insureds don’t know what they are signing, and terms of the contracts are not fully explained to them.

While insurers typically honor invoices that follow applicable industry standards, some mitigation companies inflate their estimates by up to 500 percent. They might use unnecessary equipment, run it longer than required or claim damage is more widespread than it actually is. Consumers ultimately pay for these inflated charges through increased premiums as insurers don’t underwrite for such risks.

Another problem is the lack of prompt notice to carriers. With assignment of benefits in hand, mitigation companies demand payment after the work is completed rather than while work is being performed. Claims should be reported immediately so the carrier has an opportunity to confirm the scope of damage and adjust the loss. However, because courts have validated assignments, insurers often are left with the unenviable choice of either paying inflated claims or undertaking expensive litigation.

This year, insurers sought mitigation relief from the legislature, but lawmakers weren’t swayed by the magnitude of this epidemic and carriers ultimately lost the battle. Another is likely to ensue this coming session. Meanwhile, legal battles in court will continue.

In the interim, carriers could lobby national organizations to enforce mitigation standards to prevent companies from charging whatever they want for unneeded services. Next, the issue must be presented to lawmakers as a consumer-protection measure. Quantify what mitigations should cost versus what they are costing. Then tabulate the expected premium increase resulting therefrom.

Finally, carriers may consider resolving claims through a three-step approach:

  • Utilize appraisal where available. Aggressively dispute unusual and inflated claims.
  • Contact the insured. Verify the extent of damage; how many days mitigation took place; the number of employees and machines used; where machines were placed; and, how often machines were checked. Then compare everything to the invoice.
  • Take certain cases to court, and force the mitigation companies to prove the loss is covered and that their charges are reasonable.

We don’t believe there is much sympathy for unscrupulous mitigation companies. If carriers will try this approach, they just may start derailing overinflated claims.

Brian S. Tenzer is a Partner at Goldstein Law Group in Fort Lauderdale, Florida. He received his Bachelor of Science in Criminology from Florida State University and his law degree from the Sheppard Broad Law Center at Nova Southeastern University. A highly regarded insurance defense attorney, Tenzer serves on the Florida Advisory Committee on Arson Prevention and is a member of the Broward County Bar Association, National Society of Professional Insurance Investigators, National Fire Protection Association and Florida Property & Casualty Insurance Fraud Task Force.

Tom Diana is in his 10th year of legal practice in Florida, focusing his practice on matters related to insurance and construction. He has provided continuing legal education to licensed adjusters, developed guidelines for claims and underwriting departments, drafted approved policy forms, and joined legislative efforts leading to the ratification of Florida Senate Bill 408 in 2011.