Roofing Deductible Assistance Programs: Diagram of a Scheme Issues, Challenges, and Recommendations

Please be advised that this is an excerpt from 

Dallas BBB's report on Deductible Fraud from August 2012

 Purpose

On June 13, 2012, North Texas residents were pelted by a hailstormwhich is estimated to eventually cost insurers a record $2 billion in insuredlosses. The previous hail damage recordwithin the State of Texas was $1.1 billioncaused by the 1995Fort Worth Mayfest Storm.

For months after the 2012 storm, residents in the hardest hit areas found themselves peltedonce more by more roofing contractor advertising than they hadever seen.

Each ad had its own unique leadingpitch.  Some promoted their “66 years of experience.” Others promoted their “lifetime warranty.”  A riskierfewskirted the line of insurance fraud by touting “Free Roofs-Call For Details” and“Ask Us How YourDeductible isCovered.”

The practice is called “deductible assistance” by some and “deductible fraud” by others. Depending on who youask, the practice is illegal or, at best, deceptive. This point is highlydebated within the roofing industry andrarely complained about by the consumers that might financially benefit in theshort term.

It isbelieved that soaring homeowner’s insurance deductibles may play a significant role in the popularity and prevalence of such programs in recent years. According to the Wall Street Journal, Texas homeowners pay the highest insurance premiums in the country, and in the lastfew years, wind and hail damage deductible have shown a dramaticincrease as well.

This increase came with a deductible model change which switched from monetary-based deductibles to percentage-based deductibles. Specifically, manyhomeowners recently found that their wind and hail deductibles which may have beenas low as $500 was replaced with a new deductible between 1% and 5% of the value of their home. On a $250,000 home, that could account for a massive increase.

As it is one ofthe BBB’s primary missions to set standards which promote marketplace trust, this investigation’s purpose is to understand the currentfunctioning model of deductible assistance programs used by roofing contractors in North Texas, as wellas identify the regulatory challenges and criticisms.

Defining the Scheme

Roofing Deductible

For the purpose of this investigation, the term “deductible” refers to the agreement in which an insured home owner consents to share the financialresponsibility of a contractually-agreed portion of a claimed loss. In the State of Texas, this amount is often expressed as a percentage of the value of the home.

For example, a 1% roof deductible on a $150,000home would be $1,500. Therefore, the consumer would share the cost of a roof loss foran amount of $1,500.

The defined principle of an “insurance deductible” is that, by sharing the cost with the insured, insurers are able to reduce their overheadcosts, which could result in lower monthlyfees, or premiums, chargedto their customers.

The Sales Advantage

For decades, some roofers have offered deductible assistance or reimbursement programs in an attempt to gain customers from competitors that would otherwise collect the owed deductible.

These programs are offered to the detriment of both insurers that are over-charged, as described below, and competitors that feel the act of covering deductibles is unethical or illegal.

Veiled Insurance Fraud?

If a roofer charges acustomer $8,500 and that customer,in return, bills their insurance company $10,000 with a fake receipt, that consumer can end up in hot water for insurance fraud. Simply put, theinsurance company is over-charged by thecustomer.

Noting the above scenario, the average consumer may have a general understandingof overt insurance fraud (i.e. theconsumer financially gained an advantage by lying to theirinsurance company), and theymayeven agree that the fraud is unethical. However,deductible assistance programs are frequently convoluted enough to confuse even savvy consumers that participate in a scheme which usually results in a loss to the insurer, which is identicalto the overt insurance fraud described above.

Advertising Reimbursement Scheme

Although there are numerous variations of deductible assistance programs, the most common reportedin the Dallas area is the “advertising reimbursement” model.

In the advertising reimbursement model, a roofing contractor will bill the consumer for the full replacement value cost (RVC) ofthe roof, the maximum amount that the insurance company has agreed to pay, regardless of the actual replacement cost. The roofer will then adjust the final price in an amount equivalent to the customer’s deductible by using a “change order form.”  In return,the customer agrees to advertise for the roofingcontractor bydisplaying a sign in their front yard.

In the end, the customer doesn’t have to come out of pocket to pay their deductible, and the insurerwill receive a bill which ishigher than the actual cost to replace the roof. In short, the insurer foots the deductible costs.

Purveyors of this model defend that the advertising agreementconstitutes a second agreement and side-steps issues pertaining to insurance fraud. Though, in reality, the insurer is overcharged in the same spirit as a consumerthat counterfeits a receipt. The only real difference is that, in the advertising reimbursement model, a consumerdisplays a $1 sign in their yard.

Legal Considerations

The most frequent argument expressed by those that oppose deductible assistance programs is that the practice appears to be illegal.

Section 27.02 of Texas’Business & Commerce Code states, in part, that:

(a)  A person who sellsgoods or services commits an offense if:

(1)   the person advertises or promises to provide the good or service and to pay:

(A)   all or part of any applicable insurance deductible; or

(B)   a rebate in an amount equal to all or part of any applicable insurance deductible;

However, in 1990,Texas Attorney General Jim Maddox provided an opinion which differentiates betweena person advertising that they will “pay a deductible” and one who advertises that they will “waive a deductible.”

Specifically, the opinion indicated that “declining to seek payment of all or part of the deductible is technically not the same as “pay[ing] all or part of any applicable insurance deductible.”

The opinion does indicate that “waiving” a deductible is the type of transaction that comes under the spirit of the section and accomplishes the same as rebating the amountof the deductible.

Nevertheless, a “technical” loophole exists. Roofers cannot advertisethat they will pay or rebate an insured’s deductible, but waiving adeductible is not an offense under section 27.02.

Victims

Identifying likely victims is an important step when considering the negative impact of a particular business model on the marketplace.

It would be short-sighted to believe that insurance companies are the only true victims in deductible fraud schemes. The insurers may have the most immediate impact. However, in a simplified context,itis easy to understand that higher payout costs are eventually passed right back to the insured through increased premiums.

Additionally, there are still roofingcontractors that struggle to compete in a marketplace full of deductible assistance programs. So, those contractors that refuse to offer suchdeductible programs,based on the spiritof the law, can find themselves to be victims of the modelas well.

Recommendation

Although the BBB has been unableto find any recent regulatory action taken within the State ofTexas against perpetrators of deductible assistance programs,the BBB recommends that roofing contractors and consumers alike exercise caution in participating in such programs.

These programs walk along a very fuzzy line of insurance fraud, and neitherroofer nor consumer would want to be held liable for such serious allegations.