In Amarillo, Texas, with clipboard, camera and marking chalk in hand, a seasoned insurance company adjuster climbs his ladder onto the roof of an apartment building. He’s looking for hail damage following a recent hailstorm in the area. Examining the composition shingles, he initially notes what appears to be hail damage. But there is something odd about the damage — it is strangely uniform, all about the diameter of a dime, and appears only in the center of each shingle as if by divine intervention.
Investigation of three other buildings in the complex reveals the same oddity — and on both the eastern- and western-facing slopes of each roof, only one of which bears a relationship to the direction of the recent storm. A fifth building in the complex, the management office, shows no signs of hail damage at all.
The property manager reveals all the buildings, except the management office, were recently inspected by a local roofing contractor who encouraged the manager to submit an insurance claim and agreed to complete the necessary repairs for the amount of any insurance recovery. The adjuster has more than a mere suspicion of foul play — he believes the “damage” has been fabricated using a technique known as “dime spinning.”
What must he do?
In Abilene, Texas, an insurance claims manager reviews an engineering report prepared at her request following the insurance company’s receipt of a new hail damage claim. The subject of the report is the gravel-surfaced built-up roof of a 10-year-old commercial warehouse she recently inspected with the engineer. While her observations in the field suggest the roof has been damaged by large hail, the report reveals the hail impact marks on the roof are weathered significantly and likely occurred several years before. Weather data for the reported date of loss suggest no large hail fell at the property.
On a whim, she decides to check the property address in the ISO ClaimSearch database. The database reveals two prior claims for hail damage submitted by the property owner with other insurance companies within the past five years. Despite a requirement in the policy application to provide prior loss history, she also confirms these prior claims were not disclosed in the application. She strongly suspects the property owner is seeking to recover insurance proceeds a third time for the same old property damage.
In McAllen, an independent adjuster pecks away at his calculator as he studies a property damage estimate submitted by a public adjuster for hail damage to the granule-coated modified bitumen roof of a retail center. There is no question the property has significant hail damage — the impact marks are obvious. But his jaw drops when the public adjuster’s estimate totals five times the roof replacement cost stated in the highest of several bids independently obtained from local contractors.
Further inquiry reveals the property is less than a year old, and the total cost of the roof when installed just 12 months before is in line with the contractor bids received. The claims manager is convinced the public adjuster is padding and inflating the insurance claim simply to put additional dollars in someone’s pocket. He advises the insurance company to tender payment consistent with the contractor bids, at which point he will close his file.
But must he take further action?
These claim scenarios, while fictitious (as far as you know), are all too common examples of property insurance fraud. Given the onslaught of hail damage claims in Texas in recent years, similar scenarios are unfortunately playing out with increasing frequency and bravado.
The National Insurance Crime Bureau (NICB) reported the number of hail loss claims filed with insurers increased by 61 percent from Jan. 1, 2006, through March 31, 2010. During the same period, the number of claims referred to NICB for suspected fraud (“questionable claims” or “QCs”) increased by 136 percent. Texas led the way in both categories during this period.
In 2013, the NICB reported a further increase in new hail damage claims by 84 percent from 2010 through 2012, but surprisingly only a modest increase in hail loss QCs during that time. Texas again led all states in both categories during that time period with 320,823 new hail damage losses reported and 1,053 QCs.
So what explains the increase in hail claim losses with no appreciable increase in the number of corresponding QCs in recent years? Could it be those unscrupulous policyholders, roofing contractors, and public adjusters who stand to profit from fraudulent hail claims have suddenly found their scruples? That’s doubtful.
A more likely explanation is that the insurance professionals handling these claims have simply failed to follow through in reporting fraudulent conduct when faced with scenarios like those outlined above. This may be the result of a cost-benefit analysis that suggests negotiating and tendering payment even for questionable claims is often more efficient and cost-effective than fighting them.
As a practical matter, the cost of stopping any particular case of fraud may approach or even exceed the cost of simply paying the fraudulent claim. But in the long term, legitimizing fraudulent hail claims drives up the cost of insurance for everyone.
In addition to the moral duty all insurance professionals owe to the industry and more importantly to their customers to report insurance fraud, the Texas Insurance Code imposes an affirmative legal duty to report fraud or anticipated fraud.
The Texas Department of Insurance first reminded Texas insurance professionals of their duty to report insurance fraud following the 79th Legislature’s enactment of House Bill 2388 almost a decade ago. Texas Insurance Code, Chapter 701.051, was amended effective Sept. 1, 2005, to require a person or entity who makes a determination or reasonably suspects that a fraudulent insurance act has been committed or about to be committed to make a report to the Texas Department of Insurance Fraud Unit no later than the 30th day after making such determination. The full text of this “Duty to Report” requirement reads as follows:
§ 701.051. DUTY TO REPORT
(a) Not later than the 30th day after the date the person makes the determination or reasonably suspects that a fraudulent insurance act has been or is about to be committed in this state, the person:
(1) shall report the information in writing to the insurance fraud unit of the department, in the format prescribed by the fraud unit or by the National Association of Insurance Commissioners; and
(2) may also report the information to another authorized governmental agency.
(b) A report made to the insurance fraud unit constitutes notice to each other authorized governmental agency.
(c) A person who is a member of an organization primarily dedicated to the detection, investigation and prosecution of insurance fraud fully complies with the person's obligations under Subsection (a) by authorizing the organization to report on the person's behalf information required to be reported under Subsection (a). The person retains any liability resulting from the failure of the organization to report in a manner that complies with Subsection (a).
As an incentive to report fraudulent conduct, the Texas Insurance Code also extends immunity to persons who furnish information to various enumerated agencies and organizations regarding suspected, anticipated or completed acts of insurance fraud. Specifically, Chapter 701.052 reads, in relevant part, as follows:
§ 701.052. IMMUNITY FOR FURNISHING INFORMATION RELATING TO A FRAUDULENT INSURANCE ACT
(a) A person is not liable in a civil action, including an action for libel or slander, and a civil action may not be brought against the person, for furnishing information relating to a suspected, anticipated, or completed fraudulent insurance act if the information is provided to:
(1) an authorized governmental agency or the department;
(2) a law enforcement officer or an agent or employee of the officer;
(3) the National Association of Insurance Commissioners or an employee of the association;
(4) a state or federal governmental agency established to detect and prevent fraudulent insurance acts or to regulate the business of insurance or an employee of the agency; or
(5) a special investigative unit of an insurer, including a person who contracts to provide special investigative unit services to the insurer or an employee of the insurer who is responsible for the investigation of suspected fraudulent insurance acts.
(b) A person may furnish information as described in Subsection (a) orally or in writing, including through publishing, disseminating, or filing a bulletin or report.
(c) Subsection (a) does not apply to a person who acts with malice, fraudulent intent, or bad faith.
(d) A person to whom Subsection (a) applies who prevails in a civil action arising from furnishing information as described in Subsection (a) is entitled to attorney's fees and costs.
While reporting insurance professionals enjoy immunity in any civil action if the report of fraud is made in compliance with this provision, the grant of immunity is not applicable where the reporting party acts with malice, fraudulent intent or bad faith. Accordingly, the decision to report fraud certainly cannot be taken lightly or without careful consideration of the evidence, and must be supported by adequate and believable proof of the fraudulent conduct.
This type of qualitative analysis of evidence is not always easy — just ask State Farm. In 2011, a jury awarded a roofing contractor $14.5 million in damages on his slander and defamation counterclaim in a prolonged legal battle State Farm initiated against him for fraud. State Farm alleged the contractor had intentionally damaged the property of numerous policyholders to simulate wind and hail losses. After a six-week trial, despite what State Farm believed to be strong evidence of fraud against the contractor, the jury disagreed.
The State Farm case and the claim scenarios outlined above illustrate the varying types of evidence that must be considered and the degree of difficulty often associated with delineating between outright fraud at one end of the claim spectrum and what could reasonably be perceived as “overzealous pricing” at the other end. Despite this difficulty, insurance professionals must follow through in reporting fraud in the context of hail damage claims.
And in Texas, as in most other states, it’s the law.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Texas Law360 - July 8, 2014