Before the dust even settles from a storm the night before, roofers are out canvassing neighborhoods looking to detect damage—or should we say looking to make damage? Although most storm damage claims submitted are legitimate, in our industry we encounter the occasional opportunistic roofer who seeks to capitalize on a recent storm event whether there is damage to the roofing system or not. Given the rise in roofing claims, it is important to have a functional understanding of the common tricks of the trade that roofers use to create damage or otherwise manipulate the insurance system to their advantage.
Is the Damage Fortuitous or Intentional?
A claims professional’s first step to investigating a new roof loss must be to inspect and evaluate any damage present on the roofing system. In our experience, the most common types of damage identified to shingled roofing systems include wind damage; hail damage; mechanical damage; shingle defect damage, such as blistering; and wear-and-tear damage. Of these five, two are typically covered under a homeowner’s policy (wind and hail); two are typically excluded under the policy (shingle defect and wear-and-tear damage); and one—mechanical damage—could go either way, depending largely on the source of the damage.
Mechanical damage is man-made damage that is either accidental or intentional. It can consist of anything from gouges and scrapes on the shingle surfaces to repair activities and intentional ripping and creasing of the shingle matting. In the fraud context, mechanical damage includes intentionally damaging the shingle with the purpose of simulating storm damage in order to create or inflate the value of a claim. It is important for claims professionals to learn how to identify and distinguish mechanical damage from storm-related damage.
Mechanical damage meant to simulate wind damage is the most frequent type of sham storm damage. One indication of intentional “wind” damage is transfer of the shingle matting. Matting transfer suggests that the shingle above was ripped with force from the shingle below. If the shingle is bonded so strongly so as to create matting transfer with the separation of the shingle below, it is highly unlikely the shingles were separated due to wind-related forces.
Another indication of simulated wind damage is the location of the purportedly wind-damaged shingles. For example, if all of the purportedly wind damaged shingles are grouped together and located in areas of easy access – such as near eaves, dormers, or in valleys – this may indicate mechanical damage meant to simulate wind damage.
Similarly, if torn or partially torn shingle tabs are located next to debonded shingles with no indication of wind damage, this suggests that the partially torn shingle tabs are not the result of wind damage. If wind was strong enough to tear or partially tear the shingle tab, then it probably would have been strong enough to damage the debonded shingles. Moreover, if shingles in areas of stronger wind forces, such as ridge lines, are generally undamaged and shingles in areas of less wind forces, such as valleys, show characteristics of wind damage, then it is possible these damaged shingles are, in actuality, simulated wind damage.
There is no bright-line test to identify intentional mechanical damage meant to simulate wind damage. Instead, claims professionals must consider the damages observed in relation to the condition of the roof as a whole and base their determinations on the totality of the circumstances and their knowledge and experience in the industry.
Though less common, mechanical damage can also be intended to simulate hail damage. A classic characteristic of simulated hail damage includes crushed granules in a circular shape approximately one inch in diameter, similar to the shape of a ball-peen hammer. Granules on shingles are made of hard stone and ceramic granules. A hailstone, on the other hand, is a ball of ice. Generally speaking, a falling hail stone will not have sufficient density and force to crush stone and ceramic granules, but a hammer can.
In addition, simulated hail damage may also appear as circular dings and dents in soft metal roof penetrations, such as vent covers and pipe boots. Oftentimes, mechanically simulated hail damage will follow some sort of routine or pattern when observed on a roofing system. Naturally occurring hail will not have any such pattern or predictability.
Vandalism or Intentional Act
Once it is established that the purported storm damage is actually mechanical damage, a claims professional must evaluate whether the insured may have colluded with the roofer to cause the damage. This can create a tricky situation. If, for example, the roofer acted with the intent to cause damage to the roofing system for the purpose of fraudulently obtaining insurance benefits without the insured’s knowledge, then there still may be coverage as the damage could be considered vandalism. If the carrier pays policy benefits to repair or replace a roof caused by a roofer’s vandalism, then the carrier should obtain an assignment of the insured’s claim against the roofer. With this assignment, the carrier may then try to subrogate against the roofer to recover the benefits it paid related to the roofer’s intentional damage.
Proceed with caution down this avenue, though. In order to subrogate against and recover from the roofer, the carrier must be able to successfully prove that the damage was intentional and not accidental, and that the roofer was the particular source of the damage. Keep in mind that the roofer is not bound by the intentional act provision of the policy. Therefore, there may be coverage for the intentional damage unless there is some evidence to show that the insured conspired with the roofer to procure the damage. However, in instances where the insured has conspired with the roofer to procure the damage, coverage would be excluded under the intentional act exclusion.
In order to evaluate whether the insured may have been involved, the carrier can request documents from the insured, such as correspondence between the insured and the roofer; contracts and other executed documents between the insured and the roofer; bank records from the insured indicating monetary transfers to the roofer; and testimony from the roofer or other witnesses. The carrier may obtain these records using the duties-after-loss provision of the policy. In addition, the carrier may utilize the examination under oath requirement to question insureds regarding the circumstances surrounding the loss and their involvement with the roofer.
Notably, if the carrier can confirm that the storm damage is actually mechanical damage but cannot show that that the damage was intentionally created for the purpose of fraudulently obtaining insurance benefits, then there still may not be coverage for the loss due to the negligent workmanship exclusion. For example, a structural engineer may conclude that the damaged shingles were mechanically creased, but cannot opine as to the purpose, date, and source of the damage. In this instance, the only information that the carrier has is that someone has mishandled the shingles, causing damage to it. This mishandling could be related to prior repairs or inspection activities. Certainly, without evidence indicating otherwise, the carrier is entitled to assume that any mechanical damage was accidentally caused. Thus, this damage could be considered negligent workmanship falling within the negligent workmanship exclusion contained in the policy and there would be no coverage for the loss.
Fair Business Practices Act and Assignment of Benefits
Many states have adopted a Fair Business Practices Act that sets forth certain acts and omissions of businesses that are considered to be deceptive or unfair. Georgia is one such state, and its Fair Business Practices Act also sets forth requirements with which businesses must comply to protect consumers and legitimate business enterprises from unfair or deceptive practices.
Georgia’s Fair Business Practices Act even addresses and prohibits certain behaviors of roofers. Specifically, it prohibits a residential roofer from “represent[ing] or negotiat[ing], or offer[ing] or advertis[ing] to represent or negotiate, on behalf of an owner or possessor of residential real estate on any insurance claim in connection with the repair or replacement of roof systems.”
We also note that such behavior on behalf of a roofer may violate a state’s public adjuster statute. Continuing with Georgia as an example, this state’s public adjuster statute requires any individual acting on behalf of an insured in “negotiating for, or effectuating the settlement of, a claim for loss or damage covered by an insurance contract” to be specifically licensed by the state. Furthermore, intentionally causing damage to the insured’s property would be considered misleading the insured as to the source of the damage, which would violate the act. Violation penalties could include cease-and-desist letters, fines of between $2,000 and $5,000, payment of restitution, and a temporary restraining order or permanent injunction. Under such circumstances, the Attorney General’s Office or the Governor’s Office of Consumer Affairs would prosecute violations. Be familiar with your state’s statutes or other insurance/administrative codes for specifics in your applicable geographic area.
Roofers also frequently try to obtain purported assignments of an insured’s claim in order to pursue the claim with the insurance carrier in its own right without the involvement of the insured. Often, these assignments are presented by the roofer with “form” paperwork, such as the contract for services and the estimate. Rarely does the roofer explain that, by executing the assignment of claim, insureds are giving away all of their rights with respect to the claim, the benefits, and the repairs to their properties. In fact, most insureds are shocked to discover the legal effect of these documents.
For roofers, these assignments are beneficial because it allows them to negotiate directly with carriers regarding claims and to submit inflated and outlandish scopes of work without the insureds being aware. Be cautiously aware of how your state views assignments of claims or assignments of benefits. Looking again to Georgia as an example, these assignments of claims are in direct conflict with state statutes, at least in the context of residential roofing. Moreover, most policies contain a non-assignability provision, which generally state that “interest in the policy may not be transferred without our written consent.” (See, e.g., Williams v. Mayflower and State Farm Fire & Casualty Company v. King Sports.)
Georgia courts have held that these sorts of assignments transfer both a substantive cause of action and a dispute over damages arising from the breach, as seen in Emergency Services 24 Inc. (as Assignee of Charles Johnson, the Assignor) v. Georgia Farm Bureau Mutual Ins. Co. Thus, such assignments change the nature of the insurance contract in violation of the non-assignability provision of the policy. Courts in many other states interpret this provision to prohibit transfer of the policy itself, but do not prohibit assignment of the claim or the costs of services and materials provided, and otherwise permit assignments to vendors and contractors in first party claims. (See, e.g., Bioscience West Inc. a/a/o Elaine Gattus v. Gulfstream Prop. & Cas. Ins. Co. and ASAP Restoration & Construction Inc. a/a/o Suzanne Xasaey v. Tower Hill Signature Ins. Co.). It is therefore imperative to continue to speak with your insured for information on the purported loss or claim, and to review these agreements carefully to determine precisely what is being assigned and whether your state’s laws or policy language prohibit it.
Finally, don’t overlook the back of the roofing contract or assignment agreement. Many of these are pre-printed, multi-copy forms. Often, the copy left with the homeowner contains the terms on the reverse side, which, in some instances, state that in the event the insurance claim is denied, the assignment is void (or some other qualifying or limiting language as to the effect of the assignment as related to the insurance claim). The insurer is likely going to only receive a photocopy of the front side of the contractor’s copy. If you are conducting an interview, recorded statement, or examination under oath of the insured, it is therefore helpful to ask to view the original assignment agreement.
Certainly, in recent years, not only are claims professionals faced with handling an increased number of insurance claims, but also they must deal with increasingly aggressive tactics by certain types of roofers in pursuit of these claims. Unfortunately, these aggressive tactics occasionally include intentionally creating damage or inflating the value of the claim. The tools outlined here will assist claims professionals in addressing and resolving instances when confronted with these aggressive and fraudulent roofing practices.