Disaster repair fraud adds billions of dollars to claims costs

Contractor fraud added $4.6 billion to $9.2 billion, or 5% to 10%, to the cost of disaster claims paid by property-casualty insurers in the past year, according to a report released Tuesday by the National Insurance Crime Bureau.

The increased expense has ramifications for mortgage companies as well as insurance providers as it puts upward pressure on premiums at a time when the industry and consumers are facing heightened financial strains.

While profitability from high rates of lending have cushioned mortgage companies and banks from the impact of natural disasters in the past, lower margins on loans and other developments are making cost controls for claims more pressing at a time when servicers are contending with a backlog of distressed homes that may have deteriorated over time. At the same time, consumers are facing increased strain from the rollback of pandemic-related rescue funds and inflation.

“Properties were not being repaired during COVID, then because of the supply chain issues, lumber and labor shortages, it became harder to get things repaired on a timely basis,” said Laura McIntyre, CEO at DIMONT, a division of Metro Public Adjustment. “Now we're seeing the effects of all that and also some borrowers becoming delinquent.”

In lender-placed claims, when a borrower is delinquent and the mortgage company’s coverage is used for repairs, contractors are generally paid through a known network. Those claims may be less susceptible to contractor fraud than to other scams vacant homes may be vulnerable to, such as title theft, she said in an interview.

However, increased contractor fraud may be more likely to occur for homeowner insurance claims that borrowers must coordinate with mortgage companies, which exposes the housing finance industry to risk.

“In Florida, for example, contractor fraud is one element contributing to increasing premiums, insurer insolvency, and consumers scrambling under deadlines to find an insurer to meet mortgage lender requirements,” the NICB report noted.

Risk can be mitigated with an awareness of potential contractor fraud indicators, such an unsolicited offer of services or interpretation of insurance policies, claim of approval by a government entity, a lack of licensing information or referrals, or being asked to pay upfront for preferable treatment, NICB said.

Lenders tend to count on homeowners insurance to cover contractor risk on plain vanilla loans, but they’re more likely to vet counterparties for some of these fraud indicators if borrowers finance a disaster-related repair with renovation financing or a construction-to-perm loan.

“Here’s what we did: every contractor needed to be validated. You got a copy of the contractor’s license, the contractor must have insurance and needed to have a minimum of three references,” said William Pulido, a senior underwriter at Mbanc, a lender active in these products.