Estimates for insurance fraud in the U.S. total more than $80 billion per year, according to the Coalition Against Insurance Fraud. While there are no official industry estimates about what percentage of that total can be attributed to homeowners’ insurance fraud, a 2013 study by the National Insurance Crime Bureau (NICB) showed that homeowners’ insurance ranked second (behind personal auto) for the top five types of insurance with the most questionable claims (claims with one or more indicators of possible fraud). In addition, the Insurance Research Council (IRC) reported in 2013 that 24 percent of Americans believe it’s acceptable to increase an insurance claim by a small amount to make up for their deductibles.
Unfortunately, this environment continues to place pressure on the insurance industry to persist in its efforts to expose and eradicate fraudulent claims. Ultimately, all stakeholders pay for the huge cost of insurance fraud, from consumers to insurance companies to those who support and work with insurers, including temporary housing providers. So what can we do to address the issue?
Temporary housing providers can partner with claims handlers and adjusters to offer support with fraud associated with the additional living expense (ALE) portion of a homeowner’s claim. In fact, housing providers often are called on to assist with fact-finding and provide key data for ALE claims lawsuits.
Consequently, strong communication, collaboration, and feedback are crucial for adjusters and temporary housing providers as they work with policyholders who submit claims to use their ALE coverage.
Easing the Risk of Misunderstandings
ALE claims can be complicated because payments are not made upfront like many other coverages. The majority of these claims are paid out on an as-incurred cost basis—that is, for expenses policyholders incur to maintain their households’ normal standard of living while their homes are being repaired. In addition, ALE dollars usually are the first paid under a homeowners’ policy because the money is needed for immediate necessities like clothing, meals, and temporary housing.
ALE coverage occurs under Coverage D/Loss of Use and covers additional costs of living incurred by a policyholder temporarily displaced from his residence because of a loss. On average, ALE reimbursement is approximately 20 percent of the insurance that covers the dwelling.
The temporary housing portion of ALE coverage typically provides for additional living expenses or fair rental value if a loss covered by the policy makes the policyholder’s residence uninhabitable. An additional living expense is any necessary increase in living expenses incurred so the policyholder’s household can maintain its normal standard of living. Fair rental value occurs under Coverage D/Loss of Use and covers compensation to a policyholder for an average short-term rental based on comparable rents of a similar residence and rental of similar furnishings while the dwelling is not fit to use.
When it comes to additional living expenses, homeowners often misunderstand what ALE actually covers and can unintentionally misrepresent expenses. These types of expenses usually include meals out; clothing and toiletry purchases; daycare costs for children; and expenses related to pet care.
Most adjusters agree that every claim is different and helping a policyholder understand “reasonable” costs can sometimes fall into a grey area. This makes clear communication a top priority.
“If policyholders are misinformed about ALE coverage, they might start spending money and making assumptions that can get them into trouble,” says Brian Rinehart, senior adjuster with Military Housing Adjusters (MHA) and a former adjuster with Travelers Insurance. “As an adjuster, you need to explain to a policyholder that ALE is for things they need, not things they want.”
Consider a family of four that has been displaced from their home because of a flood and, subsequently, eats most of their meals at restaurants, which would typically be a covered expense. However, the policyholder believes he can be reimbursed for a family birthday dinner at a restaurant that includes eight additional family members. That is not covered.
While some policyholders inadvertently make mistakes, others knowingly commit ALE fraud in several ways. One common example is staying with friends or family, yet producing a fabricated lease agreement to allow the friend or family member to collect a large amount of rent for a small amount of space.
In another instance, a policyholder may attempt to inflate the value of a claim. For example, a family’s home is hit by a storm that only damages the roof and shingles. However, the homeowner also claims the siding is damaged, even though the damage occurred well before the storm. While this is specific to damages being overstated, it heavily affects the ALE portion of his claim because they are now out of the home longer than anticipated.
More subtle examples of fraud include:
- A policyholder who buys toiletries at Target, but claims she shops at a more upscale store, like Nordstrom or Saks 5th Avenue.
- A policyholder boards his pet at a standard boarding facility before the home loss, but then switches to an upscale/exclusive facility as part of his ALE claim.
- A family eats out one Friday per month at a family friendly, economic restaurant, but while waiting for their home to be repaired, they eat out every week at upscale restaurants.
How to Obtain Accurate Answers
Experience, training, and the right resources are vital to helping adjusters recognize the red flags associated with fraudulent ALE claims.
During general training, most adjusters learn that recognizing fraud often starts with “following the paper trail,” and tracking a policyholder’s receipts. While most policyholders are compliant and law-abiding, there are some who, unfortunately, commit fraud using technology to try to alter records. Many adjusters learn that paying attention to details like date/time stamps and store locations on receipts can provide clues that fraudulent activity might be occurring. For example, if a policyholder regularly submits dinner receipts for a family of four, then starts submitting multiple receipts for the same date but varying times, that’s a clear indication that the claim requires further scrutiny. Consequently, seemingly little things, like receipts, can become very important evidence in pursuing a fraud case.
In addition, most insurance companies employ a special investigation unit with members specifically trained to check out suspicious activities. Part of their investigation may include a background check of a policyholder, which might reveal telling details, like high frequency of past claims activity or an unstable financial record.
For reference and help, many companies provide their adjusters with reference materials and contact information for key industry associations and groups, like the NICB and the Coalition Against Insurance Fraud.
“Grange has a strategic alliance with the NICB, so our claims staff has access to resources that help them identify potentially fraudulent activity,” says CLM Fellow Ken Kozek, vice president of claims, Grange Insurance. “We also work closely with an ALE company to ensure that we’re paying covered losses accurately. At the end of the day, it’s all about being prepared, having the right training resources available, and having open communication between our associates and our ALE vendor.”
Adjusters also agree that simply using common sense and asking questions to verify claims details will tell them everything they need to further investigate an ALE claim for fraud. They must walk a fine line between offering a “healthy curiosity” about the legitimacy of a claim and making sure the ALE reimbursement is paid out in a timely fashion, though. That balancing act is especially challenging when a policyholder is uprooted from his home and needs items to live right away. In some instances, a policyholder may not have access to a credit card and needs the ALE reimbursement immediately. Or policyholders may face damages to their credit if their ALE reimbursement arrives after their credit card payments are due.
Adjusters must understand how personal and emotional an ALE claim can be for a policyholder and do their best to manage claims in a timely manner.
Bringing in Reinforcements
Temporary housing providers can deliver backup assistance to adjusters managing ALE claims. When insurance companies hire experienced housing providers, they can reinforce the information that the adjuster shares with a policyholder about their ALE coverage and limits.
In the case of severe losses, such as a fire that leaves a home uninhabitable, managing the ALE portion of the policy becomes more urgent because some costs need to be incurred immediately. With so much to focus on, adjusters often turn to temporary housing providers to deliver immediate relief for a policyholder by finding an emergency hotel room or rental property and then handling all the billing.
Temporary housing providers also can help by:
- Identifying and tracking the total ALE dollars available for housing.
- Tracking ALE any time an extension is made.
- Keeping the housing end-date open to accommodate extensions as needed.
- Providing shorter vacate notices to allow for unexpected circumstances.
- Notifying the adjuster when the policy is within $5,000 of the ALE limit.
- Obtaining records upfront for any initial ALE payouts to the policyholder from the adjuster to ensure those payouts are included in the total ALE calculation.
In addition, experienced housing providers can provide an initial cost comparison between a temporary apartment, a home, or a hotel to identify potential cost savings on an ALE policy. Many times, policyholders are comfortable in hotels with premium services, including housekeeping, free breakfast, and room service. However, these amenities typically are not “like, kind, and quality” when compared to a policyholder’s usual living situation. These added hotel amenities rapidly drive up costs.
The typical breakeven point for the costs between a hotel stay and placing a policyholder in a furnished apartment is 18 days. If a policyholder needs housing past that point—typically for 30 days or more—then a furnished apartment offers significant cost savings.
Qualified temporary housing providers also complete an initial counseling session with policyholders to identify their needs. They can provide an accurate fair market value of a policyholder’s home, based on its true size and amenities, to avoid an unnecessary or fraudulent payout. This is completed by obtaining any relevant research and data on a loss address through the ALE policy, through public records, and by using real estate websites like Zillow and Trulia. Information is validated with the adjuster to ensure options offered are like, kind, and quality. Providers want to ensure a policyholder isn’t getting ALE coverage for a rental home worth $500,000 if the loss address is valued at $200,000, and vice versa. The same due diligence holds true for providing fair rental value to policyholders who rent versus owning their homes.
Partnering with a seasoned and reputable ALE housing vendor can help an insurance company substantially reduce the opportunity for dishonest policyholders to submit fraudulent leases and pocket the money while living somewhere else. Temporary housing providers handle the billing and typically pay landlords directly for the rent, bypassing any direct policyholder involvement.
Claims handlers and adjusters regularly manage many claims at once while keeping track of hundreds of details, big and small. They understand how important it is to ensure that policyholders receive their ALE payments as quickly as possible. With a plate full of responsibilities, they look forward to receiving assistance, whether it is to keep the claims process running smoothly or to spot red flags that may lead to a fraudulent claim.
“It’s great to involve temporary housing companies in the ALE portion of a claim because it takes the burden off both the homeowner and the adjuster,” Rinehart says. “It lets adjusters focus on other issues to resolve the claim as quickly as possible so the family can get back to their normal life.”