FROM Darius H Grimes- CEO Disaster-Smart Consulting Inc
I have assembled the suggestions and comment in sections for easier navigation. I have provided
comments based on points that I would likely have spoken on had I been able to attend. Please consider
the following and let me know if there are any follow-up questions.
COMMENT- Application Fraud, ignorance or willful, by the consumer, by the agent, or both?
Disaster-Smart’s main source of revenue is derived from performing underwriting inspections for
agents, consumers, and insurance companies. We have a good feel for the incentives in play and the
efforts of some to walk a fine line in avoidance of disclosing negatives that would disqualify coverage or
increase premium. Application integrity is an issue that is only solved through a verifiable and
accountable system of verification and inspection. The companies that rely solely on application
information provided by the agent/consumer should not be surprised at the occurrence of nondisclosure or errors and omissions in applications. We have a philosophy “you get what you inspect, not
what you expect.” This is especially true in terms of code compliance, applications for coverage, and risk
identification that may not be even be included as a question on the application. We already know the
limitations of modeling assumptions that can create unexpected financial losses in in a major event or a
series of smaller events. Here are some examples of what we observe in performing inspections for
various different insurance companies in different states.
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Agent asks us to remove a comment or photo that indicates a deficiency that is known to be
excluded in underwriting requirements, e.g. trampolines, diving boards, roof damage,
aluminum wiring, property in poor condition, Stab-Lok electrical panels, galvanized pipe,
PEX, etc. This does not happen frequently but does occur; obviously we do not comply with
these requests
Agent or consumer asks us to reduce or increase the replacement cost to lower their
premium or meet minimum eligibility requirements: again we do not comply with these
requests
Application states there are no underwriting exclusions but our inspections verify dangerous
breed dogs, trampolines, diving boards, wildfire risks, tree risks, and other obvious
underwriting concerns that directly affect premium or eligibility for coverage
On annual reinspections, sometimes we find that previous claims paid for hail or wind
damaged roofs were used for something else and the damaged roof is still in place waiting
for the next storm and claim
On annual reinspections we document new pools, trampolines, large additions, tree houses,
skate board ramps, or other risks either affecting RC, premium, eligibility, or maintenance
and liability concerns
In many cases non-disclosure may be unintentional but it does occur due to changes in the property
conditions the insurer is unaware of because they do not have a verifiable inspection system in place. In
a few cases consumers are being coached on the art of non-disclosure by a few agents who know how
to work the system or know that the insurance company will not inspect the property. We even see
agents filing applications without consulting the insured because they are moving their book of business
to a new company or product. We approached one of our insurance companies about a specific agent
that was regularly turning in applications at 50-70% of ITV and were told they are a Top Tier producer.
So in some cases insurers may even be aware but choose production volume over accuracy in
applications. Manipulation of replacement costs by agents to reduce premiums is a major industry issue
and costing the insurance companies millions in premium while underinsuring properties leaving
homeowners short of the funds to replace. The pressure to lower rates is tremendous in coastal markets
and we do see a handful of bad actors in insureds, agents and even some insurance companies that are
creatively abusing the system to gain market share and lower rates.
The relevant question from my observations of the discussion is, if a company does not perform due
diligence in performing application verification for non-disclosed risks or errors and omissions, does the
additional cost of implementing this practice on each policy exceed any savings it would realize in the
few post claim underwriting cases where claims are denied? If the answer is yes then the regulatory
action needs to be weighed against the impact and potential increases in overall insurance costs for all.
The insurance company’s participating in this discussion state that the practice of post claim
underwriting is reserved only for the most egregious cases and extremely rare or even non-existent.
Therefore it is a valid question as to whether or not we are discussing an industry problem or just a few
bad actors that could be dealt with using other regulatory means by enforcing laws already on the
books? If so then additional regulatory action industry wide would likely trigger increased policy costs or
further limit capacity and competition.
In my opinion the responsibility to perform due diligence in checking applications for non-disclosure or
errors and omissions within 90 days lies with the party who submits or enters the application into the
quote system and the party that issues the policy. If willful intent to defraud on the part of the
consumer or agent is evident there are other remedies already in place. The policy contract is designed
to make the consumer whole in the event of a legitimate and covered loss. Using post claim
underwriting as a vehicle to deny legitimate and covered losses is a practice that suggests bad faith and I
am glad to hear it is not something practiced widely within the industry.
COMMENT- The myth of the Auto Repair Analogy
I have heard the Auto Repair Analogy invoked several times during the course of these discussions. It is a
great sound bite and I fully understand the need to offer simple and easy to understand comparisons.
But, as a remodeling contractor tell me where I can go to buy standardized parts like living rooms,
bedrooms, bathrooms, kitchens, and just install these components into a damaged structure. When a
home experiences a “major collision” we cannot simply put it on a rack, straighten the frame, bang out
the dents, apply fillers, and replace broken or damaged parts with off the shelf parts. Especially after the
homes begin to age and enter maintenance life cycles. Imagine if the auto assembly lines for autos and
the parts they used changed daily and no two cars were ever built on the same production line, this
analogy is closer in comparing homes to autos?
A contractor has to convert raw materials and custom ordered components into finished nonliving and
living areas based on site conditions, access, weather conditions, supply chains, new technologies,
architectural review, regional influences, individual consumer preferences, and building codes that
continually change. A home is more like a hand-built custom car than a Chevy or Ford.
As a resident and contractor in Pensacola, the oldest settlement in the US, our building stock spans 454
years. I would urge caution in oversimplifying the complexities of remodeling and repair due to claims.
COMMENT- Windstorm Deductibles and Unintended Consequences
While this topic was briefly mentioned, the impact of market changes in regards to windstorm
deductibles is an important underlying cause of many claims issues. I also work with the coastal
residents in Alabama and Mississippi where insurance costs are considerably higher than Florida and
they too have adopted windstorm deductibles between 1% and 15%. So the issues that Florida has been
attempting to solve have spread to almost every other coastal state in the US and we are no longer the
ones pioneering the solutions to create competition, capacity and innovation. It cannot be stressed
enough that none of these discussions would be occurring if was not for the risk and resulting property
losses generated by failing to acknowledge the damage that would occur when 50 - 60 years of building
would meet naturally occurring weather events. While Florida leads the nation in adoption of strong
codes and uniform enforcement we still have 70% of our residential structures that remain at risk for
higher than average losses. We will continue to discuss ways to subsidize or regulate reductions in
insurance premiums until we accept the inevitable. In addition, the regulatory environment mentioned
by some at the table is major topic of discussion in other states and Florida is not being used as an
example of what to do, Florida is being used as an example of what not to do. Many of the regulations
and mandatory changes we have adopted to try to maintain or lower premiums have accelerated a loss
of competition, and increased Citizens exposure. I applaud the Consumer Advocate for her awareness of
the impact of new regulation and in providing instruction to the workgroup to be mindful of the impact
of knee jerk post event legislation that generally triggers less competition and eventual cost increases.
Adoption of windstorm deductibles was implemented to reduce insurance costs but we have created a
new form of homeowner, the “functionally underinsured”. This term is being used in other coastal
states to describe the growing number of homeowners that can still afford to pay premiums that have
tripled or quadrupled in the last 5 years but do not have the means to cover their windstorm
deductibles. Another major unintended consequence is that a large CAT loss creates a huge sucking
sound as consumer savings are depleted and consumer debt increases to cover those deductibles. Is it
any wonder that a whole new industry has emerged that seems to be preying on incentives to inflate
claims and take short cuts to reduce the out of pocket impact from high deductibles? So in many ways
we have become our own worst enemy by imposing artificial solutions to reduce premium while
completely ignoring the main issue, we still have approximately the same amount of homes at risk for
higher than average claims and we have moved a major percentage of at risk policies to Citizens.
TOPIC- Mortgage Company Withholding of Funds for Repairs for Loans in Arrears
I have personal experience with with-holding of funds although not from the perspective of being in
arrears. Following Hurricane Ivan I had approximately $30,000 in damage to my home and a $4600
Deductible. My insurance company immediately sent a check made out to me and the mortgage
company. My mortgage company required me to endorse the check and FedEx it to them, which I did.
With demand surge a real issue in 2004, I immediately performed emergency repairs but it was 6
months before I fully completed all repairs, including a new roof which was ½ the total claim
disbursement. Upon final completion of all repairs it took the mortgage company another 90 days to
send out an inspector to release the balance of the claim proceeds. In the meantime I had used credit
cards and my savings account to fund the repairs and roof replacement to avoid paying higher costs the
contractor wanted if he had to wait for his money. So I incurred interest/finance charges and a loss of
capital gains for liquidating investments. My mortgage company dispersed 20% up front which was
about 1/3 of the re-roof cost but refused to disburse any more until they inspected, that 1/3rd was just
enough to replace personal property. The additional interest, fees and loss of capital gains were an
incurred cost not reimbursed by anyone.
RECOMMENDATIONS- Mortgage Company Withholding of Funds for Repairs for Loans in Arrears
The mortgage company has a right to be included in the claims process but not to the extent that it’s
internal policies create unnecessary financial hardship, prevent or slow down. Long delays in
reimbursements increase construction and consumer costs, someone has to bear the debt until
reimbursement occurs.
Banks and mortgage companies should release 20% of the structural damage proceeds along with the
entire amount of personal property loss and any ALE immediately. They could then apply the same
“percentage of completion” methodology using industry recognized certificates for payment and lien
releases that they use in remodeling and new construction loans. This protects the consumer from
unintentional financial harm and utilizes systems already in place. The arbitrary 1/3-1/3-1/3 is not
related to any computation that I am aware of and does not consider the variability of work flow.
Especially, when the damage is isolated to a roof replacement where substantial completion is reached
in days not weeks or months.
An acceptable retainer (10-15%) until final punch-out is certainly appropriate in these cases to protect
the consumer and hold contractors to punch lists. Applying the claim proceeds to principal without the
written consent of the consumer can affect the ability of the consumer to repair the home creating a
hardship for the consumer and resulting in a loss of property value for the home and community. A set
of simple set of tests can be used to determine what to do with the claim proceeds, I am sure the
industry may already be considering something along these lines.
Benefits should not be applied to principal when the owner is still making payments and intends to stay
in the home. If the property is in foreclosure or vacant/abandoned then the mortgage company is the
primary responsible party for determining how to use the funds but, actual application of claims to
principal needs to meet the same rule as withholding of funds mentioned above. Any amount for
personal property, contents, or ALE should be immediately disbursed.
TOPIC- Building Permits and Building Inspections
In 2005 when I actually applied for permits to start the hurricane repairs, we had adopted the FBC 2004
which included the new International Building Code- Existing Buildings Code or FBC-EB. The Existing
Building Code required re-nailing of the roof deck to bring the structure up to code but since the local
building departments decided this was a hardship and should not be enforced my Code and Ordinance
Coverage did not cover the additional cost. It was not until 2007 that the renailing of the deck was
required due to legislative instruction to the Florida Building Commission. I paid for the renailing as well
as the cost to seal the roof deck (SWR) because I did not want to be homeless in the next event if the
roof covering was damaged and the home filled up with water like a bucket. In addition, I received
mitigation credits for upgrading my home along with the new FBC compliant shingle so my motivation
was based on both personal property protection and financial incentives.
I used this real life example because many around the table are making statements that demonstrate
they have an unrealistic expectation of the value of a permit. Building permits are required for certain
types of work and unpermitted work is a serious issue to legitimate contractors who follow the rules and
laws in Florida.
It is imperative that this group and consumers fully understand what permits do and do not do. This is
not meant to be critical of building departments it is meant to explain what your expectations should be.
We would not consider reducing our police and fire department staffs in the current economy lest the
crime rate and fire damage increase but somehow we are quick to reduce budgets and staff in building
departments that are tasked with protecting the life, safety, and general welfare of our communities.
Here are some important considerations about the permitting process and building inspections:
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The Florida Building Code allows a home to receive a Certificate of Occupancy with only a mop
sink, cabinet, and counter top installed in a kitchen but I don’t know many consumers who
would buy that home. So if you are assuming the building inspector will be looking to see if your
fixtures and finishes or granite counter tops are properly installed with a good fit and finish you
should know they are powerless to address items outside their jurisdiction.
Many building departments only charge “permit fees” for work that is judged by the authority
Having Jurisdiction (AHJ) to be non-structural and some even use this for “minor structural”
improvements e.g. storm shutters, replacement of windows, doors, etc. A “permit fee” does
not require an inspection; it does require a plan review of the proposed structural products
used for compliance with the site conditions prior to permit issuance. But there is no guarantee
that the product submitted was the one actually installed. The decrease in building department
funding has increased use of permit fees and contractor self-affirmations to avoid the additional
expense of inspections.
Prior to 2006 most building departments were revenue producing or neutral and did not
require funding from the local tax base. They had Code Enforcement departments and plenty of
inspectors. This is not the case today, building departments are being subsidized by the local tax
base and many have been cut to the point that inspectors are performing more inspections in a
day than their industry standards potentially increasing BCEGS ratings. This has a direct and
immediate effect on the quality of the inspection and how closely an inspector will look at each
job site.
It is the Contractor, not the inspector, who is responsible for the quality of the project and
application of the code in the building process; the role of the building inspector is to insure
they comply with the minimum requirements. The building code is the lowest acceptable quality
in construction or, the minimum requirement and should never be confused or interpreted to be
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some form of quality control or even a check and balance on whether the contractor is avoiding
a future or repetitive claim. The building code addresses life safety not property loss and much
of the discussion we are having about claims are for items outside the jurisdiction of the AHJ,
e.g. water extraction and mold related problems from poor quality workmanship.
Due to an increase in construction litigation manufacturer’s installation instructions have
become detailed engineered documents and are often misunderstood or even ignored based
on Tribal Knowledge (that is the way we have always done it). In a majority of cases involving
product failures, the installation or misapplication and use of the product was the issue not the
product itself. Why is this important to know, if the building departments do not verify proper
installation of the products and the installers and contractors do not read the instructions
because they are not being challenged on the installation then you do not get what you expect
in terms of long term building envelope or product performance and may even be building or
remodeling future claims problems.
I fully support the requirements for permits and as a member and VP of the International Hurricane
Protection Association (IHPA) we were successful in convincing the Florida Building Commission to
require licensure for hurricane shutter installation companies and mandatory permits for installation of
these products since they are structural in nature. The IHPA was the first trade association in the history
of the commission to request mandatory licensure for its industry. Still, some jurisdictions only require a
permit fee and do not inspect these installations.
RECOMMENDATION- Licensing of Remediation and Water Extraction Contractors
I have listened to the discussions concerning contractor warranties and the need for licensing some of
the common trades involved in claim work. What is not discussed is the plethora (credit to Robin) of
laws that already exist to regulate contracting. If the insurance industry thinks a 3-5 year statute of
limitations on damage claims is punitive, try the 15 year statute of limitations contractors and design
professionals are held to in Florida and many other states. I am not complaining but underscoring
comments around the table concerning the number of laws already on the books. The problem with a
lack of licensing was well stated by DBPR, if there is no licensing requirement there is no jurisdiction to
enforce the numerous laws designed to protect consumers from substandard workmanship and
unscrupulous contractors. There are a couple of ways to address this, you could implement new
licensing requirements that could be put in place in maybe 3-5 years or you could simply utilize the tens
of thousands of license holders who are knowledgeable about construction and repairs and very capable
of overseeing the remediation and water extraction companies. Require that a remediation or water
extraction company have a primary qualifier (licensed contractor) that is responsible for the Work, and
then the consumer and the insurance company have recourse. Permits are not required for much of this
type work but if they are and they are not pulled then the contractor is responsible. In addition, several
landmark cases against contractors involving substandard workmanship or misapplication of products
have established that just because the local building department “signed off” it does not alleviate or
even reduce the liability of the contractor.
TOPIC- Right To Repair and Preferred Vendors
The temptation to inflate claims to cover the cost of upgrades is certainly not a new phenomenon but
the pressure to inflate claims or cut corners to make repairs to reduce or eliminate out of pocket
deductibles is a recent trend and I expect it to get worse not better.
I support the option of using preferred vendors; it should be better explained to consumers. But, there
are instances where reducing competition and consumer choice can actually cause a uniform increase in
the cost of repairs. Kind of has a familiar ring to it, are we suggesting that applying that methodology to
contractors would not somehow avoid the same consequences we see from reduced competition and
capacity of our private insurance markets? I have seen comments from some large preferred vendors
that 75% of the claims they service are can be tweaked to be 30% to 40% more profitable if you know
how to itemize the right items and click the right buttons on Xactimate. One other concern with
preferred vendor programs is the threshold for qualification which can be restrictive, intentionally or
unintentionally, unfairly overlooking local quality contractors. An example of this is based on our
personal experience with preferred vendor programs for inspection services. Preferred inspection
companies are usually required to offer statewide coverage to even be considered. That guarantees
consumers will pay more for inspections because the companies that offer statewide service charge
anywhere from 10% to 50% more for the same inspection that is available from a locally qualified
inspection company. This reduces market share for local companies that may offer superior service and
consumer service in favor of making it easy for insurance companies to provide a uniform service that in
many cases only guarantees a lower quality consumer experience and a mediocre but acceptable level
of service.
If insurance companies want to incentivize policyholders to “opt in” for use of preferred vendor
networks they should consider doing this at binding with a reduction in premium. I suspect that the
reason this is not an option offered is that the reduction in premium may not be justified in comparison
to the overall cost of using preferred vendors. With high deductibles and the economic climate creating
"functionally underinsured" folks that don't have the means to come up with deductibles, the free
market may be a better financial fit and offer much more variety in solutions and alternatives. Choice
should always be our main objective, balanced of course by limited and necessary regulation.
TOPIC- Assignment of Benefits
It has been suggested that we should ban use of “Assignment of Benefit” contracts and instead use
"Direction to Pay" contracts. If I understand the issues with "Assignment of Benefits" correctly they are
basically:
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Consumers are signing contracts that they are not fully reading or understanding
The practice at its worst allows contractors to unfairly enrich themselves by consuming all of the
claim and in some cases more
Claims issued include other things like personal property and contents that are being forfeited in
the process
Assigning Benefits is, or may be, a violation of the mortgage contract
Mortgage companies are applying claims to past due mortgage payments
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Insurance companies are being held hostage by litigious suits to pay inflated bills
Contractors are worried they will not be paid without use of this type of contract
Here are some additional thoughts in the discussion. Sometimes “Assignment of Benefits” contracts are
beneficial in large commercial losses to allow the contractor to use all means and methods to restore a
business to avoid loss of use and economic disruption of the company, its employees, upstream and
downstream supply chains, etc.; and especially beneficial in the case of essential services. There are
conditions where these contracts promote quick restoration to avoid additional inconsequential losses
that can rapidly increase claims.
The insurance company has every right to challenge invoices that may exceed its adjusted claim
amounts in these instances, my experience is that they are not afraid and will say no when something is
deemed outside the scope of a covered loss. In fact that was a topic of discussion when we assembled a
roundtable under CA Sean Shaw. I would strongly object to any form of legislation or regulation that
interfered with or promoted/required use of preferred vendors if it is a free market choice by the
consumer I have no objection. I have spent considerable time contemplating the suggestion for a
"cooling off period" and I do not support this recommendation, I am certain most of my peers would
agree. Most consumers want repairs performed quickly and the “cooling off period” would only delay
repairs and increase consumer frustration, especially in a CAT event.
Another consideration is that many consumers shop upgrades when repairing substantial damage from
a CAT event or even water, fire, and smoke damage. This can generally triggers construction contracts
that exceed the claims and some contractors attempt to hide these upgrades in the cost of covered
items. Then there is the practice of, want a new kitchen, let us show you how to replace that old kitchen
by creating a covered loss kitchen fire (Plantains anyone?). There are also other site specific factors that
come into play concerning the habits and preferences of the consumer to allow access or impede
progress in the construction process. Typically preferred vendors are only involved in restoration and
may not have access to products or the skill set to offer upgrades requested by the consumer in the
process. So while they have a place in the options one should consider they may not be allowed or able
to work “outside the box” so to speak. This brings up a question that I think I remember being answered,
who decides what the consumer can do with the reimbursement as long as the structure is, at a
minimum, restored to its primary use and condition?
There are also situations where a consumer may want to act as the Owner/Contractor and perform
certain or all parts of the work themselves using the profit and overhead portion of the claim to offset or
even eliminate out of pocket expense or maybe to get those nice upgrades. Although I would not advise
this for those who have no experience, that freedom of choice in contracting work on your own home is
allowed under the Florida Building Code. As a contractor this is an option I have used and would use
again for my family members, neighbors, friends, and my own home.
RECOMMENDATION- Assignment of Benefits Contracts
Construction contracts are required to contain statutory language that must be included to protect the
rights of the contractor and consumer and make the contract enforceable and binding. Examples would
include "Notice of Lien Rights", "Right to Cure", etc.
Regulating the "Assignment of Benefits" contract to only be binding or enforceable when certain
statutory language is included would be prudent. This is a solution the workgroup has not discussed.
Statutory language should include consideration of the following:
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Providing a clear description of what the consumer is signing it financial impact and their rights
for termination
Limiting "Assignment of Benefits" contracts to only the portions of a claim settlement for which
the contractor shall provide the Work and excluding any right or “Assignment of Benefits" for
items outside the scope including but not limited to portions of claims for personal property,
contents, ALE, etc. This does not ban the practice but does stop bad actors from abusing it and
provides reasonable protection to the consumer.
Require “Assignment of Benefits” contracts to include a cost estimate using industry standards
e.g. lump sum, detailed, unit cost, cost plus, etc. In every case an estimate of the total liability
for signing the contract should be included as part of the “Assignment of Benefits” contract or it
should be ruled unenforceable. Any additional costs should be covered under the normal
approval process of change orders signed and executed by the Owner or their legal
representative. Process and authorization for change orders should be defined in the contract.
I think this course of action addresses all of the concerns by regulating instead of limiting or restricting
the normal course of business of the contractor to bid and negotiate on project costs irrespective of the
amount of the claim.