VOLUME XVI, NUMBER 12
December, 2004

SPECIAL HURRICANE FRAUD ISSUE

For over twenty years, Powers, McNalis, Torres & Teebagy has aggressively litigated fraudulent insurance claims for our clients. Our fraud team is made up of insurance litigators and former State Attorneys who have a great deal of experience in the investigation and trial of fraudulent claims. If you have any questions about this area of our practice, contact Andrew Deckert of our fraud team.

In light of the recent hurricanes and troubling articles headlining that FEMA paid $28 million in fraudulent claims, we have changed our usual format for this newsletter to address a few of the many aspects of fraudulent claims. ISO reports that for the third quarter in Florida, insured property loss claims resulting from Hurricanes Charley, Frances, Ivan and Jeanne totaled $17.5 billion. FEMA approved $3.1 billion in federal and state disaster assistance to the nearly 1.18 million storm victims who have applied since Hurricane Charley came ashore. Over 400 public adjusters practiced in Florida prior to the hurricanes, and 400 additional public adjusters applied for licenses after Hurricane Charley. According to industry estimates, fraud costs the property/casualty industry $20 billion per year. All adjusters and carriers should closely examine the claims that they are currently handling as well as the supplemental claims that will most probably be forthcoming. This is not to say that every claim that has been or will be filed should be viewed as a fraudulent claim, it is just a warning about the current environment for insurance claims.

RED FLAGS OF FRAUD

Most fraudulent claims will have one or more “red flags.” Red flags are those things that experience has shown need some further investigation because they typically lead to the potential of a fraudulent claim. After receiving the claim, be sure to contact the retail agent for the insured to determine if there have been any previous claims or any policy changes. Check on the coverages of the policy and policy cancellations. Is the coverage on the property excessive or is there other coverage? Obtain a copy of the application.

If there are any previous claims, obtain all possible information regarding the previous claim(s) to determine if there is any relevance to the current claim. If the claim is a supplemental claim, obtain and carefully review the original claim file. Make sure that any pictures that were taken have been developed and are contained in the file. Any photographs of the property prior to the claim, especially photos from the prior claim, are essential to the investigation of the current claim. Be sure to re-review the coverage for the supplemental as well as the original claim.

Although full documentation of an adjuster’s activities on a file proves to be a challenging task for adjusters responsible for handling a large volume of insurance claims, our experience from Hurricane Andrew shows that a properly documented scope and estimate, and file notes of conversations with the insured about areas of damage, are extremely helpful in warding off later filed fraudulent supplements.

During your initial contact with the insured, the following issues can also be considered red flags regarding the insured:

• Good knowledge of the claim process
• Forceful in attempting to expedite the claim process
• Seeking an unusually fast settlement
• Willing to settle for substantially less than the claim amount if paid quickly
• Threatens if the claim is not paid quickly (a lawsuit, Civil Remedy Notice or a supervisor/insurer)
• Unusual pre-claim inventories prepared, photographed or organized
• Large amounts of cash
• Evasiveness
• No tax returns
• No bank records
• No verification of income
• Financial problems
• Employment problems or uncertain employment
• Frequent changes in residence
• Residence in the process of being sold
• Marital difficulties (Is there an “innocent spouse?”)
• Loses interest in pursuing the claim upon questioning
• The income does not justify the ownership of the property

While we have provided some red flags, it is not designed to be an exhaustive list. Just because some of these are applicable, it does not mean that the claim is fraudulent. What it does mean is that the claim must be reviewed very carefully before any determination of coverage or disbursements are made. If, in your opinion, the claim lacks the ring of truth, then consider demanding a proof, requesting documents, and taking examinations under oath.

THE APPRAISAL PROCESS AND FRAUD

After Hurricane Andrew we all saw huge amounts of claims and equally huge amounts of claim payments. Years after Andrew, however, we saw an astonishing number of “supplemental” claims -- many for amounts several times higher than the original claim. Unscrupulous insureds and their representatives count on the scant information typically contained in a catastrophe claim file.

The common strategy is to notify the carrier that there is a disagreement over the amount of loss (ignoring the passage of time with no objection to the carrier’s evaluation), and demanding an immediate appraisal of the loss. We generally suggest that appraisal be resisted until you have had the opportunity to investigate the claim.

Even if an appraisal demand arises out of the original claim, be sure that you know exactly what the insured’s claim consists of, and that you have fully investigated it (not just by your initial inspection) before you agree to proceed to appraisal. Many appraisal demands are premature since the insured has either never or only recently provided its evaluation of the claim, and the carrier has not had the opportunity to decide whether it agrees or disagrees with it, a precondition to appraisal.

SUPPLEMENTAL CLAIMS AND APPRAISALS

When faced with the supplemental claim or appraisal demand, you should reinspect the property. All reports and photographs should be reviewed prior to the inspection since many supplemental storm claims include prior damage.

Failure to mitigate and/or failure to use the original claim funds to repair the original damage is a common finding in supplemental claims. If the damages are in or around the same areas as the original claim or were obviously caused by the same source (i.e. the same hole in the roof), or might not be a supplement at all, request all documentation regarding the repairs that were done with the original claim disbursement. If the repairs were not performed, there could be a violation of the insured’s Duty After Loss to make reasonable and necessary repairs to protect the property.

Further, there is the probability of fraud or misrepresentation based on: 1) the fact that the insurance company disbursed monies for the repairs and the repairs were not performed; 2) if the supplemental claim includes damages that were encompassed in the original claim (seeking double payment); and 3) misrepresentation in the claim process to the adjuster that repairs were performed when they were not.

COMPLIANCE WITH POLICY CONDITIONS

Immediately send out a certified letter making the request for documents pertaining to repairs and maintenance. The letter should also remind the insured that he must comply with all of the post-loss obligations and reserve all of the insurer’s coverage defenses. It is beneficial to include language in the letter that informs the insured and/or public adjuster that the time to respond to the claim will be tolled until the requested documents are provided.

If the insured represents that the repairs were done but is unable to produce any documents, or cannot recall who performed the work, or does remember but paid for the work in cash, consider retaining the services of an engineer. Note, the insured has now failed to comply with another Duty After Loss: to keep an accurate record of repair expenses. But the sole fact that the insured cannot provide any documentation that the repairs were performed is usually not enough to persuade a jury to deny recovery, even with the before and after photos of the damage and the common sense that we hope is instilled in all reasonable people.

If the engineer is retained, then the report should confirm what repairs if any were performed. After the engineer completes his/her report, or even if you determine it unnecessary to retain an engineer, it is time to conduct the examination under oath of the insured and question him/her about the claim and its circumstances.

IMPROPER APPRAISAL REQUESTS

If at any time during this process the insured and/or public adjuster attempts to invoke the appraisal clause and demands that the insurer name its appraiser, an immediate response in writing must be given. Notify the insured that this is a supplemental claim, and that the insured has failed to comply with his duties after loss in the policy. The manner in which the insured has failed to comply with the duties after loss must be specified, such as the failure to produce the documents, failure to appear for the examination under oath and/or failure to provide a sworn statement in proof of loss. That same paragraph should contain the case cite and holding of United States Fidelity & Guaranty Company v. Romay, 744 So.2d 467 (Fla. 3d DCA 1999), which states that an insured cannot invoke the appraisal clause without first complying with the post-loss obligations.

THE ELUSIVE PROOF OF LOSS AND ITS REJECTION

An additional post-loss obligation that is important but which is often neglected is the sworn statement in proof of loss. Courts hold that an insurer can waive the right to require a proof of loss by acting inconsistently with this requirement. For instance, the requirement can be waived if the claim is denied prior to the request for or production of the proof. Also, courts have found a waiver where the insured provides a substantial amount of documentation, participates in multiple meetings with the independent adjuster and/or answers questions during the examination under oath regarding the matters required in the proof of loss.

The proof of loss can be a strong piece of evidence in court during a fraud case. To prevent the waiver of this policy condition, you must demand the proof be completed, executed and provided prior to the examination under oath.

In many instances, proofs of loss are “rejected” when there is a disagreement regarding the amount of the loss or coverage has not been determined. Rejection of a proof of loss for these reasons is improper. These “rejections” are usually considered denials of the claim by the courts. The only valid reason for the proof of loss to be “rejected” is if it is not technically correct. But be mindful that rejecting a proof of loss because of an immaterial technical ground can have an adverse effect when attempting to explain to a jury during trial the actual reason that it was rejected.

Rejection of the proof to extend the time to conduct and complete an investigation of the claim is not valid. If the proof is received and the investigation has not been completed, send a letter to the insured acknowledging that the proof was received, that the investigation is not complete, and that you cannot accept or reject the proof or the amounts claimed in the proof. If it is decided to reject the proof, return the proof with a letter that explains the exact reasons why the proof is rejected, citing language directly from the policy.

For more complete information on fraud claim handling or any of the topics discussed above, please call Andrew Deckert.