What is Water Mitigation Fraud?
"Is there water mitigation fraud in homeowners insurance and if so, what is it?"
When I received this request, the first question I asked my editor was, “Is there actually enough information to write even an article about this phenomenon?” Surprisingly, the answer has turned out to be a definitive “YES”.
After spending a several hours researching, I discovered an immense trove of information about water mitigation claim fraud practices hammering homeowners’ insurers. The majority of the major problems are plaguing insurers in southern states – especially in Florida and Texas – but northerners are certainly not immune.
A typical homeowner’s insurance policy provides coverage for various claims resulting from water damage. Some examples that may* be covered include accidental discharge or overflow of water or steam from plumbing, heating, air conditioning or appliances; damage from frozen pipes; damage from burst pipes; water damage from roof ice dams; possibly damage resulting from water/sewer/drain backup; possibly limited mold remediation; etc. Standard homeowners policies do NOT provide coverage for flooding nor do they typically cover damage to the leaking appliance or system (e.g. the actual pipe that froze and burst).
*Read your insurance contract. These are examples only.
Language from a standard ISO HO-00-03 10-00 contract has the following Water Damage exclusion:
Water Damage means:
- Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;
- Water or water-borne material which backs up through sewers or drains or which over- flows or is discharged from a sump, sump pump or related equipment; or
- Water or water-borne material below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure;
caused by or resulting from human or animal forces or any act of nature.
Direct loss by fire, explosion or theft resulting from water damage is covered.
So what do I mean by water mitigation fraud, as it relates to homeowner’s insurance and claims? Let me tell you about a water damage loss that actually happened in my home.
It was about 7:00 AM and I had just come back from the morning dog walk. As I came through the front door into the foyer, I heard what at first sounded like a fan running at a high speed. I called out, but my spouse and kids were not downstairs yet. As I stepped further into the front hall, I saw what was causing the noise.
There was water POURING down from the top of the doorway between my den and dining room! It looked like one of those decorative waterfalls you see in fancy hotels and upscale malls. Yes, it is time to PANIC!
Obviously I had a huge problem, so I let the dog go and I bounded up the stairs. That’s when I heard my oldest son yelling. I ran into the bathroom. He was standing in the shower, holding the disconnected showerhead its connecting pipe in his hand. He had a complete a look of shock! And there was water jetting out from the hole in the wall. I not so calmly nor quietly turned the off the water and then ran back downstairs to begin the cleanup process. There was water all over the den and dining room and also in the finished lower level below.
Great story, Jon, but what does that have to do with water mitigation fraud? Patience, I’m getting there!
So what would a “typical” insured do in this situation? Probably one or more of several actions:
- Begin to clean up the water as best that they can.
- Quickly get on the phone and call someone for help.
- Their insurance company
- Their insurance agent
- A plumber
- A company that cleans up from water damage losses
(a water damage repair company / a water mitigation firm)
All of these actions are smart. If you call your insurance company or agent, they will dispatch a water mitigation cleanup firm immediately. (Just remember, though, that once the leak is stopped, you (the homeowner) will be responsible for hiring a plumber to repair the broken shower pipe.)
So let’s say that the first and only thing that came to mind was calling a cleanup company. I quickly Google “Water Mitigation” and call the first website that pops up. Here’s what that site said:
If you're at this website, chances are that there has been a disaster of one kind or another and, large or small, you want the damage repaired quickly, correctly and in the most cost-effective manner. Whatever the cause of the damage, you can count on XYZ, Inc. We have a trained, certified staff with years of restoration experience. We have the equipment and the experience to make things right again.
They must be good. They’re trained. They’re certified. The have equipment. It says so right there on the Internet.
Within 30 minutes a big team from XYZ shows up and immediately begins their water mitigation activities. While they do that, the supervisor sits me down in the kitchen and tells me not to worry – that XYZ will take care of everything and have my house back to normal in no time at all. Whew!
Mr. Supervisor has a bunch of paperwork. He tells me that, other than my all peril deductible, my homeowner insurer will pay for everything except the snapped off pipe plumbing repair. And by the way, he has several “standard contracts” that will require my signature.
One of those contracts is titled “Assignment of Benefits (aka AOB).” Mr. Supervisor explains that by signing this AOB, XYZ Inc. will deal directly with my homeowner insurance company, and neither XYZ nor my insurer will need to bother me. Well gee whiz, that’s handy!
Since I know nothing about insurance and because I’m not a lawyer, I would simply sign all the papers. Certainly this upstanding, found-on-the-Internet company can be trusted to take care of everything. Right?
So this is where water mitigation fraud might begin. It is certainly possible that XYZ is a truly reputable firm. If so, they will efficiently complete their cleanup, report the loss to my insurance company, and get paid a reasonable amount for their work. Everyone ends up happy and whole.
But what if XYZ isn’t particularly reputable? Then this story may not have a happy ending - for you or for your insurance company. Remember, you signed an AOB giving your insurance rights for this claim to XYZ. What you don’t know is that XYZ is doing a ton of unnecessary work and they are charging a significantly higher rate than any reputable company should. Once they have completed the cleanup, they will submit their highly inflated bill directly to the insurer. And if the insurer refuses to pay, XYZ will sue the insurance company AND you directly.
How big an issue is Assignment of Benefits? Well it’s huge in Florida and Texas. Here are several paragraphs from a 2015 article written by David Santiago at The Tampa Tribune.
“Former Florida Insurance Consumer Advocate Robin Westcott warned that the issue (AOB) is driving up homeowners’ insurance rates by about 17 percent annually. In some parts of the state, claims settled with an assignment of benefits form averaged $32,000, nearly triple the amount of claims settled without one...”
“With the insured’s signature, the extraction company moves quickly usually destroying any window of opportunity for the insurer to inspect damage or collect evidence. The insurer is billed $20,000 but knows extractions for a comparable 1500 sq. ft. house typically run about $3,500. It attempts to negotiate. The mitigation company gives ten-day notice and files suit for breach of contract; usually threatening to put a lien on the insured’s property, maybe even to foreclose.
If the carrier defends it is subject to extraordinary attorney fees and court costs, and possibly litigation for contributing to a lien or foreclosure. And so… the insurer pays. And so does everyone else with higher premiums!”
Here is some good advice from another insurance company’s website.
What can policyholders do to prevent AOB fraud?
- The very FIRST thing you should do after experiencing a loss is to call your insurance company. The company can refer a qualified, licensed professional to help you mitigate damages and accurately evaluate your loss.
- Never sign a contract you haven’t read or don’t understand. Call your agent or insurance company if you need help or guidance.
- Ask all contractors if they utilize AOB and for proof of liability & workman’s compensation insurance.
The bottom line is that your Homeowners insurer really wants you to call them first. As an example, here is an Internet home page for another property insurer.
“One call does it all. If a water disaster should suddenly strike, Awesome Insurance customers always know exactly where to turn for trusted, expert help. The toll-free Awesome Insurance Claims Line at 866-555-5555 is available 24 hours a day, 365 days a year, providing claims assistance and also offering the option for an immediate water mitigation company dispatch. Homeowners who are experiencing a true emergency may want to call ABC Emergency Mitigation directly at 800-555-5555. Sometimes the best form of protection is prevention. Water-related issues can often begin slowly and go unnoticed, so ABC Emergency Mitigation also offers free moisture evaluations to Awesome Insurance customers.”
When I had my water loss, I was extremely lucky to have the both the time and knowledge to complete cleanup and water mitigation myself. After a week of fans running throughout my house, all was safe, dry and mold-free. However, I did report the claim to my insurance company immediately, just in case I did require professional help or in case I was unable to dry my carpeting or stained woodwork properly and replacement was needed.
I hope you never have to deal with a water-related homeowner loss, but if you do, I urge you to call your insurance company directly. By doing so you’ll ensure that a water mitigation fraud case doesn’t occur because you signed your claims rights over to someone else.
Jonathan Farris is a retired insurance executive and president of InsuranceRescue Services, LLC, a property & casualty insurance consulting firm based in Madison, Wisconsin. Mr. Farris can be reached at firstname.lastname@example.org or through his website at http://www.InsuranceRescue.com.